ESS COLLEGE OF BUSINESS’ ADMINISTRATION OF THE TITLE IV STUDENT FINANCIAL ASSISTANCE PROGRAMS FINAL AUDIT REPORT Control Number ED-OIG/A06-A0015 August 2001 Our mission is to promote the efficiency, U.S. Department of Education effectiveness, and integrity of the Office of Inspector General Department’s programs and operations. Dallas, Texas NOTICE Statements that management practices need improvement, as well as other conclusions and recommendations in this report, represent the opinions of the Office of Inspector General. Determination of corrective action to be taken will be made by the appropriate Department of Education officials. In accordance with the Freedom of Information Act (5 U.S.C. §552), reports issued by the Office of Inspector General are available, if requested, to members of the press and general public to the extent information contained therein is not subject to exemptions in the Act. TABLE OF CONTENTS EXECUTIVE SUMMARY............................................................................................................. 1 AUDIT RESULTS .......................................................................................................................... 3 FINDING NUMBER 1 – ESS DID NOT COMPLY WITH THE 90 PERCENT RULE ........... 3 Proprietary Schools Are Required to Generate at Least 10 Percent of Their Revenue from Non-Title IV Sources ................................................................................ 3 ESS Could Not Support Its 90 Percent Rule Calculation.................................................... 4 Institutional Scholarships .................................................................................................... 5 Title IV Funds Received by ESS from June 1, 1999, through May 31, 2000..................... 5 RECOMMENDATIONS ............................................................................................................. 6 ESS’ COMMENTS TO THE DRAFT REPORT AND OIG’s RESPONSE............................... 6 General Comments on the Audit Process............................................................................ 6 Compliance for Fiscal Years 1999 through 2001................................................................ 8 Bookstore Income .............................................................................................................. 8 Apartment Income............................................................................................................... 9 Federal Work-Study .......................................................................................................... 10 Institutional Scholarships .................................................................................................. 10 FINDING NUMBER 2 – ESS LACKED ADMINISTRATIVE CAPABILITY ...................... 11 Failure to Provide Timely Access to Fiscal Records ........................................................ 12 Dependency Overrides Without Adequate Documentation .............................................. 13 Credit Balances Retained Without Students’ Authorization............................................. 14 Apartment Charges Not Included in Refund Calculations................................................ 14 RECOMMENDATIONS ........................................................................................................... 15 ESS’ COMMENTS TO THE DRAFT REPORT AND OIG’s RESPONSE............................. 15 Failure to Maintain Fiscal Records ................................................................................... 15 Dependency Overrides ...................................................................................................... 15 Credit Balances ................................................................................................................. 16 Apartment Charges............................................................................................................ 16 OTHER MATTERS................................................................................................................... 16 Documentation of Loan Cancellation Notifications Not Maintained ............................... 16 Student Ineligible to Receive Federal Pell Grant .............................................................. 17 ESS’ COMMENTS TO THE DRAFT REPORT ...................................................................... 17 SUBSEQUENT EVENTS............................................................................................................. 17 BACKGROUND........................................................................................................................... 17 OBJECTIVE, SCOPE AND METHODOLOGY ......................................................................... 18 STATEMENT ON MANAGEMENT CONTROLS .................................................................... 18 APPENDIX A − Explanation for Amounts in OIG 90 Percent Rule Calculation APPENDIX B − ESS’ Comments to the Draft Audit Report APPENDIX C – Department’s Revocation Letter to ESS ED-OIG-A06-A0015 Page 1 EXECUTIVE SUMMARY ESS College of Business (ESS), located in Dallas, Texas, did not qualify as an eligible institution for participation in the Title IV, Student Financial Assistance programs authorized by the Higher Education Act of 1965, as amended (HEA). ESS was ineligible to participate in the Title IV programs from June 1, 1999, through May 31, 2000, because it received more than 90 percent of its revenue from Title IV sources during its fiscal year ended May 31, 1999. During the ineligible period, ESS received approximately $4.4 million in Title IV funds. After we informed ESS that it had not met the 90 Percent Rule, the school provided us with documents that showed it had awarded institutional scholarships to 132 students. Based on our analysis of the students' files, we determined that only one of the 132 students received a valid institutional scholarship in the fiscal year ended May 31, 1999. We found that ESS lacked administrative capability because it failed to provide timely access to fiscal records, inappropriately disbursed $183,213 of Title IV aid for students without adequately documenting dependency overrides, did not obtain authorization from students to retain Title IV credit balances, and incorrectly classified apartment charges as non-institutional costs for calculating refunds. Pertaining to other matters, we determined that ESS did not maintain documentation of Title IV loan cancellation notifications and disbursed $517 in Federal Pell Grant funds to an ineligible student. Subsequent to the end of our fieldwork, the Department revoked ESS’ provisional certification to participate in the Title IV programs on March 27, 2001. ESS requested reconsideration of that decision, but the request was denied. ESS closed on June 29, 2001. We recommend that the Chief Operating Officer for Student Financial Assistance: 1. Determine whether ESS was in compliance with the 90 Percent Rule for its fiscal year 2000. If ESS was not in compliance, require the institution to return any Title IV funds disbursed after May 31, 2000. 2. Require ESS to return to lenders or the Department $4,439,651 in Title IV funds ($4,379,550 received from June 1, 1999, through May 31, 2000, for failure to meet the 90 Percent Rule, and $60,1011 for failure to document the basis for dependency overrides). 3. Require ESS to perform a 100 percent review of students not included in our audit who had a dependency override or a refund calculation performed, return to lenders or the Department 1 These are unduplicated questioned dollars. ESS disbursed $60,101 of the total questioned amount for our Administrative Capability finding before the school became ineligible on June 1, 1999. The remaining $123,112 ($183,213 less $60,101) were disbursed after ESS became ineligible and are included in our finding on the 90 Percent Rule. ED-OIG-A06-A0015 Page 2 any unallowable Title IV funds disbursed but not recovered through Recommendation 2, and have ESS’ Independent Public Accountant verify the school's review for accuracy. ESS provided narrative comments and five exhibits containing documentation in response to our draft report issued in May 2001. ESS’ narrative comments are included in their entirety in Appendix B. We summarized ESS’ comments and provided our response following each finding. The exhibits have been provided to the Department of Education Action Official. Our analysis of ESS’ comments and the documentation provided to support those comments did not persuade us to change our overall conclusions or recommendations for any of the findings. ED-OIG-A06-A0015 Page 3 AUDIT RESULTS FINDING NUMBER 1 ESS DID NOT COMPLY WITH THE 90 PERCENT RULE ESS did not qualify as an eligible institution for participation in the Title IV, Student Financial Assistance programs, because it received over 90 percent of its revenue from Title IV sources during its fiscal year ended May 31, 1999. As a result, the school was ineligible to participate in the Title IV programs for the period June 1, 1999, through May 31, 2000. ESS disbursed $4,379,550 of Title IV funds during the ineligible period. ESS reported in the notes to its May 31, 1999, audited financial statements that it met the 90 Percent Rule with 79.17 percent of its revenue from Title IV sources. We determined that the school could not support all of the amounts used in the calculation. The calculation included cash revenue from ineligible sources and incorrectly excluded bookstore and apartment cash revenue that should have been included in the calculation. Based on our analysis, ESS received 93.58 percent of its cash revenue from Title IV sources for the period June 1, 1998, through May 31, 1999. Proprietary Schools Are Required to Generate at Least 10 Percent of Their Revenue from Non-Title IV Sources Section 102(b) of the HEA specifies that a proprietary institution of higher education is “a school that . . . has at least 10 percent of the school’s revenues from sources that are not derived from funds provided under title IV, as determined in accordance with regulations prescribed by the Secretary." Conversely, no more than 90 percent of total revenue may be derived from Title IV programs. This institutional eligibility requirement became effective October 1, 1998, and is codified in 34 CFR § 600.5(a)(8). The regulations also provide the formula, at 34 CFR § 600.5(d)(1), for assessing whether an institution has satisfied the requirement. Pursuant to 34 CFR § 600.5(d)(2)(i), amounts used in the formula must be received by the institution during its fiscal year. The formula is as follows: Title IV, HEA program funds the institution used to satisfy tuition, fees, and other institutional charges to students. ————————————————————————————— The sum of revenues generated by the institution from: Tuition, fees, and other institutional charges for students enrolled in eligible programs as defined in 34 CFR [§] 668.8; and activities conducted by the institution, to the extent not included in tuition, fees, and other institutional charges, that are necessary for the education or training of its students who are enrolled in those eligible programs. ED-OIG-A06-A0015 Page 4 ESS Could Not Support Its 90 Percent Rule Calculation ESS’ audited financial statements for its fiscal year ended May 31, 1999, showed that the school met the 90 Percent Rule with 79.17 percent of its revenue from Title IV sources. ESS provided us with the amounts it used in the calculation (see Table). We found that ESS had not maintained records to support all of the amounts. The school’s Chief Executive Officer informed us that after the audited financial statements were issued, she disposed of the school's general ledgers for that fiscal year. We also were unable to determine the accuracy of the calculation from a review of the school’s audited financial statements or the working papers of the Independent Public Accountant who performed the financial statement audit. Because ESS could not support its calculation, we analyzed deposits to and withdrawals from the seven bank accounts that ESS used during its fiscal year ended May 31, 1999, and determined that ESS received 93.58 percent of its revenue from the Title IV programs. The following Table shows ESS’ calculation and our calculation based on the amounts we obtained from the seven bank accounts and other documents. TABLE 90 Percent Rule Calculations for June 1, 1998, through May 31, 1999 ESS Calculation OIG Calculation Title IV Cash Revenue $ 4,249,193 $ 4,142,798 Less: Refunds (547,246) (373,648) Federal Work-Study 0 (22,022) Funds Paid to Students (93,834) (94,507) Bookstore Income (422,132) 0 Apartment Income (366,143) 0 Net Title IV $ 2,819,838 $ 3,652,621 Total Cash Revenue $ 4,736,935 $ 4,483,069 Less: Refunds (547,246) (373,648) Federal Work-Study 0 (22,022) Funds Paid to Students 0 (94,507) Ineligible Revenue 0 (89,696) Accts. Receivable Adjustment (627,979) 0 Net Total $ 3,561,710 $ 3,903,196 Title IV Percentage = Net Title 79.17% 93.58% IV/Net Total See Appendix A for additional information on the amounts included in the table. ED-OIG-A06-A0015 Page 5 Institutional Scholarships After we informed ESS that the school had not met the 90 Percent Rule, ESS provided us with documents that showed the school awarded $169,199 of institutional scholarships to 132 students for its fiscal year ended May 31, 1999. ESS stated that it met the 90 Percent Rule when these institutional scholarships were included in the calculation. ESS had not previously included institutional scholarships in its 90 Percent Rule calculation. The scholarships were not accounted for or disclosed in ESS’ audited financial statements for that year, nor had ESS claimed the scholarships as a business expense for income tax purposes. We reviewed the financial aid and academic files for all 132 students and found that ESS awarded only one of the students a valid institutional scholarship during the fiscal year ended May 31, 1999. ESS waived $5,510 of its tuition charge for this one student based on an agreement with Dallas County under the Workforce Investment Act. ESS granted two other students tuition waivers under the agreement with Dallas County, but not during the fiscal year ended May 31, 1999. In October 1999, the Department announced standards for evaluating institutional scholarships until new regulations became effective on July 1, 2000. The Department stated that it would continue to examine institutions closely to determine whether the institutional loans and scholarships are valid . . . . Institutional scholarships will only be valid for this purpose if a substantial number of the comparable students at the institution are paying the stated institutional charges without receiving scholarships, and the scholarships do not otherwise appear to be artificial transactions. We determined that the remaining 129 students had not received valid institutional scholarships. The scholarships were not supported by ledger entries obtained previously during our fieldwork, were not on authentic scholarship forms, and/or were not consistent with other student information. Title IV Funds Received by ESS from June 1, 1999, through May 31, 2000 Institutions that fail to satisfy the 90 Percent Rule lose their eligibility to participate in the Title IV programs on the last day of the fiscal year covering the period that the institution failed to meet the requirement. As a result, ESS lost its eligibility to participate as of May 31, 1999. ESS received $4,379,550 of Title IV funds ($949,250 in Federal Pell Grant, $51,653 in Federal Supplemental Educational Opportunity Grant [FSEOG], $38,000 in Federal Work-Study [FWS], $1,976,489 in William D. Ford Federal Direct Loan [Direct Loan], and $1,364,158 in Federal Family Education Loan Program [FFELP]) for the period June 1, 1999, through May 31, 2000. ED-OIG-A06-A0015 Page 6 RECOMMENDATIONS We recommend that the Chief Operating Officer for Student Financial Assistance: 1.1 Determine whether ESS was in compliance with the 90 Percent Rule for its fiscal year ended May 31, 2000. If ESS was not in compliance, require the institution to return any Title IV funds disbursed after May 31, 2000. 1.2 Require ESS to return $1,364,158 in FFELP funds to lenders and $3,015,392 in Federal Pell, FSEOG, and Direct Loan funds to the Department that it received from June 1, 1999, through May 31, 2000. ESS’ COMMENTS TO THE DRAFT REPORT AND OIG’s RESPONSE ESS’ comments did not persuade us to change our conclusion that the school did not comply with the 90 Percent Rule for its fiscal year that ended May 31, 1999. The school closed on June 29, 2001, and we dropped the recommendation in our draft report that the Department terminate ESS if the Department determines the school did not comply with the 90 Percent Rule for the fiscal year ended May 31, 2000. We did not change the other recommendations. ESS disagreed with our draft report conclusion and stated that it had complied with the 90 Percent Rule for its fiscal years 1999, 2000, and 2001. ESS provided the following general comments about the audit process and specific comments about why it disagreed with our 90 Percent Rule calculation. Our response follows each of the school’s comments. General Comments on the Audit Process ESS Comments. ESS questioned the “appropriateness of an audit experience that was seriously flawed.” ESS said that the draft report contained a statement that it was pre-decisional and subject to revision and a recommendation that the Department determine if ESS was in compliance with the 90 Percent Rule for its fiscal year 2000 (ESS’ 2000 fiscal year ended May 31, 2000). The school questioned the logic of providing comments to the draft report because “other members of the Department have already decided the issues under consideration and terminated the College’s eligibility to participate in the Title IV, HEA programs.” OIG Response. We disagree that the audit was flawed. ESS’ eligibility was not terminated because the Department determined the school failed to comply with the 90 Percent Rule. The Department’s decision on March 27, 2001, to revoke ESS’ provisional certification to participate in the Title IV programs was made after the Department evaluated the actions and integrity of ESS in its response to our audit inquiries about the school’s compliance with the 90 Percent Rule. The Department concluded from its evaluation that ESS had failed to fulfill its fiduciary responsibilities necessary for continued participation in the Title IV programs. The Department’s letter advising the school that its provisional certification was revoked stated: “ESS intentionally manipulated its student and financial data to attempt to deceive the ED-OIG-A06-A0015 Page 7 Department into believing that ESS complied with the so-called ‘90-10 rule’.” The revocation letter is included in its entirety in Appendix C. Our audit of ESS’ 90 Percent Rule calculation covered only the school’s fiscal year that ended May 31, 1999. Since we did not review the calculation for the fiscal year that ended May 31, 2000, our draft report conclusion did not address that year. However, we did recommend that the Department determine if ESS complied with the Rule for the 2000 fiscal year. The Department had not made such a determination at the time it revoked ESS’ provisional certification. ESS Comments. ESS also claimed that the draft report “totally ignores the effect of the advice given by the OIG auditor who suggested a search of the files to locate and document institutional scholarships, which could be used to show that the institution was in compliance with the so- called 90 Percent Rule.” ESS listed a series of draft 90 Percent Rule calculations that we had provided to the school during our audit. The school said that the lack of specificity regarding several elements used in the 90 Percent Rule calculation created an impossible situation for institutions attempting to comply with the Rule and that confusing and contradictory statements by the auditor “led the institution to include its scholarships in its 90/10 calculations . . . .” ESS said “it was acting in good faith by identifying scholarship recipients as requested.” OIG Response. ESS could not support its calculation and failed to provide us with accounting records during our audit fieldwork that we could use to perform the calculation. As a result, we had to analyze all the deposits to and withdrawals from seven ESS bank accounts to perform the calculation. To ensure the accuracy of this labor-intensive process, we provided ESS officials with copies of our interim calculations. We requested that ESS review the calculations and provide documentation for any amounts which we had not considered. ESS responded by providing us with documents that showed it awarded almost $170,000 of institutional scholarships to 132 students during the 1999 fiscal year. Based on our review of the scholarship forms and student files, we determined that only one of the 132 students had received a valid institutional scholarship in the 1999 year (two others received valid scholarships but in other years). The remaining 129 students had not received an institutional scholarship of any type in 1999 or any other year. We determined that the scholarship certificates ESS provided were not authentic and that other documents provided had been manipulated to make it appear the students had received the scholarships. We disagree with ESS’ statement that it acted in good faith by providing us with such documents in an attempt to support compliance with the 90 Percent Rule. ESS Comments. ESS contended that the OIG acted in bad faith from January 1 through March 27, 2001, (the provisional certification revocation date) by directing the Department not to provide any Title IV reimbursement to the school. OIG Response. We did not direct the Department to withhold reimbursement to the school. ED-OIG-A06-A0015 Page 8 Compliance for Fiscal Years 1999 through 2001 ESS Comments. ESS contended that it complied with the 90 Percent Rule for fiscal years 1999, 2000, and 2001. ESS provided Exhibits 1 and 2 to support its narrative comments. These exhibits contain calculations prepared by ESS that show the Rule was met for the fiscal year ended May 31, 2000, and for the partial fiscal year period from June 1, 2000, through March 27, 2001. An independent public accountant using agreed-upon procedures verified the amounts used in ESS’ calculations to the general ledger and corresponding bank accounts for the 2000 fiscal year. The accountant made no representation regarding the sufficiency of the procedures and did not express an opinion on compliance. The calculation for the partial 2001 fiscal year contains the typed statement “Prepared by (OIG auditor) 6/21/01” with the word “Formula” handwritten beside the statement. OIG Response. Our audit was limited to ESS’ compliance with the 90 Percent Rule for the fiscal year ended May 31, 1999. ESS’ response to our draft report did not contain any calculations for that year. We did not audit ESS’ compliance with the Rule for either the 2000 or the partial 2001 years. We also did not prepare the calculation contained in Exhibit 2 as indicated by the ESS’ typed statement on the calculation. ESS Comments. ESS stated that its fiscal year 1999 ended on May 31, 1999, and that “the law and guidance in effect at that time is what should be applied and not the law or interpretations in effect on or after July 1, 2000.” OIG Response. We used the statutory and regulatory provisions that were in effect for the school’s 1999 fiscal year. Bookstore Income ESS Comments. ESS stated that it had properly excluded bookstore income from the 90 Percent Rule calculation because the income was not derived from an institutional charge. ESS said the issue in determining if a charge is institutional or non-institutional, as explained in a 1999 Policy Bulletin, is not whether a school actually charged students for books but whether the students had a “real and reasonable opportunity” to purchase books from places other than the school. ESS identified three nearby bookstores and a bookstore on the Internet where it said students could purchase books. ESS also said students were told they could purchase books elsewhere and the students could obtain a cash advance from the school to do so. ESS further stated that “Up to and including the exit audit interview, the OIG auditor accepted these facts . . . . No valid basis exists for this last minute change in position.” OIG Response. The 1999 Policy Bulletin was issued by the Department to provide guidance to schools for classifying institutional charges for refund calculations. ESS followed this guidance by classifying its book charges as institutional charges and including the charges in its refund calculations. We agree with ESS’ classification of the book charges for this purpose. We do not ED-OIG-A06-A0015 Page 9 agree with ESS’ classification of book charges as non-institutional charges and the resultant exclusion of income derived from those charges in its 90 Percent Rule calculation. The 1999 Policy Bulletin explains that: "An institution would not be able to demonstrate that a student had a real and reasonable opportunity to purchase his or her required course materials from alternative sources if one of the following is true: 1. When financial aid is available to the institution for disbursement to the student, the institution does not make those funds available to the student in time to purchase the required material from another vendor before those materials are required for academic purposes; 2. The institution’s practices do not allow or discourage a student (e.g. the use of vouchers that are only good at the campus bookstore or the late disbursement of funds to students to pay for non-institutional costs) from exercising his or her option to purchase the required course materials from another vendor; or 3. The institution has the student sign a statement saying that the student has the option to purchase course material from someplace other then the school, but the institution is unable to document that an option truly existed.” We concluded that students did not have a “real and reasonable” opportunity to purchase books at other locations prior to starting classes. ESS did not make funds available to students prior to class start dates. ESS included book charges in students’ award letters and the students signed vouchers at the school bookstore for the books they needed. The students’ accounts were charged for the purchase price of the books. Our audit work and conclusions are subject to review and revision prior to being finalized. Based on our completed reviews of sample student files and the school’s 90 Percent Rule calculations, we concluded that ESS correctly classified book charges as institutional charges for refund calculations, but incorrectly classified the charges as non-institutional charges for the 90 Percent Rule calculation. Apartment Income ESS Comments. ESS disagreed that apartment charges were institutional charges and that income derived from the charges should be included in the 90 Percent Rule calculation. ESS quoted the 1999 Policy Bulletin on institutional charges and refunds, which states that non- institutional costs include a “charge to the student’s account for room charges that are collected by the school but are ‘passed through’ to an unaffiliated entity . . . .” ESS referred to a program review of the school in which ESS said a Department official determined that the apartment charges were a “pass through” and correctly excluded from refund calculations. OIG Response. We disagree that the apartment charges were a pass-through charge. The 1999 Policy Bulletin states that "all charges for tuition, fees, and room and board (if contracted with ED-OIG-A06-A0015 Page 10 the institution) are always institutional costs.” ESS maintained control of the apartments by entering into lease agreements with selected students and determining the lease charges assessed to the students. ESS set the apartment rental rates with four students being placed in a two- bedroom apartment. Students were required to follow ESS' guidelines, which specified that the school could evict students for cause. ESS did not provide any documentation that the Department’s program review had determined that apartment charges were a “pass-through” charge. Based on our review of the program review report and supporting working papers, we found no evidence that the Department concluded the amounts collected from students for apartment charges met the definition of a pass-through charge. Federal Work-Study ESS Comments. ESS referred to 34 CFR § 600.5(d)(2)(ii) that states: “Title IV, HEA program funds included in the numerator do not include . . . Federal Work Study Program funds.” ESS stated that this regulation did not require schools to exclude FWS from the denominator of the calculation. The school stated that “not until July 1, 2000, was any regulation or rule in place that stated that FWS is to be excluded from the denominator, as well.” OIG Response. Pursuant to 34 CFR § 600.5(d)(1), that was in effect during the period of our audit, schools must include in the numerator only Title IV funds used to satisfy tuition, fees, and other institutional charges to students. This same section states that schools include in the denominator the sum of revenues derived from tuition, fees, and other institutional charges. FWS funds were not used to pay for any tuition, fees, or other institutional charges, and ESS should not have included the funds in either the numerator or denominator of the calculation. Institutional Scholarships ESS Comments. ESS said that we had no basis to challenge the legitimacy of the Career Colleges and Schools of Texas (CCST) and the Career Training Foundation (CTF) scholarship programs. ESS stated: (T)here can be no doubt that ESS actually awarded all of the scholarships that are of issue. The simple issue is whether they can be treated as scholarships awarded for FY 1999 and even if agreement cannot be reached on all scholarship(s) . . . there should be no doubt that some portion of the scholarship revenue can properly be included . . . . This includes, among others, students who enrolled at ESS with scholarship certificates from CCST and CTF that were received and accepted by the College in fiscal year 1999 but as to which ESS did not make the record entry until after the fiscal year ended. ESS said that it believes $70,000 in CCST and CTF scholarships should be included in the calculation. OIG Response. ESS provided no support for the $70,000 of CCST and CTF scholarships that it now claims should be included in the calculation. Based on ESS’ previous claim that it awarded ED-OIG-A06-A0015 Page 11 $161,000 of CCST and CTF scholarships to 129 students and our finding that none of the scholarships were valid, we have no reason to change our conclusion. CCST and CTF began providing scholarship certificates annually to high schools in 1997 and 1998, respectively. High schools are instructed to choose graduating seniors to receive the certificates. Each scholarship is valued at $1,000 when accepted by a participating CCST or CTF school. To receive the scholarship benefit, the high school graduate must enroll in a participating career school and present the scholarship to that school. We are not questioning the legitimacy of the CCST and CTF scholarship programs, but we are questioning the legitimacy of ESS’ claim that it awarded $161,000 (now $70,000) of CCST and CTF scholarships to 129 students. Based on our review of ESS’ files for the 129 students, we determined that none of the students received either a CCST or CTF scholarship. The files for 14 students did not have a copy of the scholarship and the files for 115 students contained a copy of a purported scholarship that was not the actual scholarship form provided by CCST and CTF for high schools to use. We also have other reasons to question the purported scholarships: • 12 students were not high school graduates and were never eligible for the scholarships, • 42 students graduated from Texas high schools before the scholarship program began, • four students were high school graduates from states other than Texas and yet supposedly received CCST scholarships, • eight students have scholarships listed in their married name even though they were single and had their maiden name at the time of their high school graduation, • 61 students had promissory notes in their files signed by the students upon their departure from the school that do not reflect the scholarships, and • 36 students had collection notices in their files that did not consider a CCST or CTF scholarship. FINDING NUMBER 2 ESS LACKED ADMINISTRATIVE CAPABILITY We found that ESS lacked administrative capability when it failed to provide timely access to fiscal records, inappropriately disbursed $183,213 of Title IV aid for students without adequately documenting dependency overrides, did not obtain authorization from students to retain Title IV credit balances, and incorrectly classified apartment charges as non-institutional costs for calculating refunds. Section 498(d) of the HEA authorizes the Secretary to establish administrative capability procedures and requirements for institutions participating in the SFA programs. These ED-OIG-A06-A0015 Page 12 procedures and requirements are codified in 34 CFR § 668.16, which states, among other requirements, that: To begin and to continue to participate in any Title IV, HEA program, an institution shall demonstrate to the Secretary that the institution is capable of adequately administering that program under each of the standards established in this section. The Secretary considers an institution to have that administrative capability if the institution – (a) Administers the Title IV, HEA programs in accordance with all statutory provisions of or applicable to Title IV of the HEA, all applicable regulatory provisions prescribed under that statutory authority, and all applicable special arrangements, agreements, and limitations entered into under the authority of statutes applicable to Title IV of the HEA. Among the administrative capability factors in 34 CFR § 668.16 that should be considered are whether the institution: • establishes and maintains all required records; • shows no evidence of significant problems that affect the institution’s ability to administer the Title IV programs that are identified by oversight agencies; and • does not otherwise appear to lack the ability to administer the Title IV programs competently. Failure to Provide Timely Access to Fiscal Records ESS did not provide timely access to all fiscal records that we requested during our audit fieldwork. Pursuant to 34 CFR § 668.24(b)(2): An institution shall establish and maintain on a current [emphasis added] basis - (i) Financial records that reflect each HEA, title IV program transaction; and (ii) General ledger control accounts and related subsidiary accounts that identify each title IV, HEA program transaction and separate those transactions from all other institutional financial activity. Further, 34 CFR § 668.24(f) states in regard to examination of records: (1) An institution that participates in any title IV, HEA program . . . shall cooperate with . . . the Department of Education’s Inspector General . . . in the conduct of audits, investigations, program reviews, or other reviews authorized by law. (2) The institution . . . must cooperate by – (i) Providing timely access, for examination and copying, to requested records, including but not limited to computerized records . . . and to any pertinent books, documents, papers, or computer programs . . . . ED-OIG-A06-A0015 Page 13 The school’s Chief Executive Officer informed us in August 2000 that after the audited financial statements were issued she disposed of the school's general ledgers for fiscal year 1999. ESS also asserted in a management representation letter to us on September 27, 2000, that all records provided are accurate and complete. However, ESS’ response to our draft report included an exhibit that the school stated was its general ledger for the 1999 fiscal year. ESS did not make this general ledger available to us until almost nine months after our request. Based on our review of the general ledger, we concluded that it could not be used to support the 90 Percent Rule calculation. Dependency Overrides Without Adequate Documentation ESS inappropriately disbursed $183,213 of Title IV aid for students without adequately documenting dependency overrides. ESS used professional judgment in the form of a dependency override for 65 (37 percent) of 175 randomly selected students awarded Title IV aid from July 1, 1998, through May 31, 2000. In testing the use of professional judgement, we expanded our sample from 50 to 175 students. Some students had dependency overrides in more than one award year during that period. In total, ESS performed 77 dependency overrides for the 65 students. We determined that 27 (35 percent) of the 77 dependency overrides were not documented or the documentation ESS obtained did not support that the students were independent. Parent income and asset information was not available for 26 of these 27 dependency overrides. Financial Aid Administrators (FAAs) are allowed by Section 479A of the HEA to, among other things, use their discretion or professional judgment on a case-by-case basis either to increase or decrease one or more of the financial elements used to calculate the Expected Family Contribution or to change a student’s status from dependent to independent. The HEA requires FAAs to adequately document the basis for the professional judgment action and how the action relates to each individual student’s special circumstance. ESS did not have a written policy on dependency overrides. ESS officials explained that the school’s practice was to document dependency overrides by obtaining statements from students that they supported themselves. The FAA told us she was responsible for approving and performing the dependency overrides. ESS admissions representatives, who helped recruit students for the school, were also involved in the process. An ESS admissions representative stated that if parental information was not available for dependent students, he advised them that a dependency override could be performed if they provided a statement that they supported themselves. The admissions representative said that if a student requested assistance, he helped the student complete the statement regarding support and forwarded it to the FAA. ESS agreed that it needed to strengthen its procedures for documenting dependency overrides. After we notified the school of our sample results, the FAA sent a memorandum to the school’s admission representatives that identified procedures for determining when a dependency override is warranted and the documentation required before a dependency override would be approved. The documentation included the tax return of the parent and student, and receipts, cancelled ED-OIG-A06-A0015 Page 14 checks, and other proof of support. We did not determine whether the new procedures were being followed. We determined that ESS disbursed $60,101 of the $183,213 of Title IV funds from July 1, 1998, through May 31, 1999. The remaining $123,112 ($183,213 less $60,101) was disbursed after ESS became ineligible on June 1, 1999, and is included in Finding Number 1. The $60,101 includes $16,272 of Federal Pell Grant, $22,371 of Direct Loan, and $21,458 of FFELP funds. Credit Balances Retained Without Students' Authorization ESS had not obtained written authorization from students to retain credit balances of Title IV funds for over 14 days for nine (18 percent) of 50 sample students in violation of the regulations. ESS maintained these credit balances for an average of 87 days. Under 34 CFR §§ 668.164(d) and (e), an institution may use Title IV funds to satisfy current charges. The regulations explain that an institution may retain Title IV funds to satisfy additional current charges if an appropriate authorization from the student is received. Without an appropriate authorization, the institution is to pay any resulting credit balance directly to the student or parent as soon as possible, but no later than 14 days after the balance occurred. An institution may not require or coerce a student or parent to provide that authorization and must allow them to cancel or modify the authorization at any time [34 CFR § 668.165(b)(2)]. Apartment Charges Not Included in Refund Calculations ESS incorrectly considered apartment charges paid by students to the school as a pass-through expense rather than an institutional charge. As a result, ESS did not include the charges in its refund calculations. Although our sample review of 27 refund calculations did not identify any material refund calculation errors, the potential exists that a material error could occur if all institutional charges are not included in refund calculations. Pursuant to 34 CFR §§ 668.22(c)(1) and (d)(1), institutional charges that need to be considered in refund calculations are tuition, fees, room, board, and other charges assessed to the student by the institution. Room charges that are passed through the institution from an entity that is not under the control of, related to, or affiliated with the institution are not considered institutional charges [34 CFR §§ 668.22(c)(6) and (d)(4)]. The apartment charges are not a pass-through expense because ESS maintained control of the apartments by entering into lease agreements with selected students and determining the lease charges assessed to the students. For its fiscal year ended May 31, 1999, ESS paid apartment complexes $507,133 for a specified number of apartments that the school in turn leased to students for $366,243. ED-OIG-A06-A0015 Page 15 RECOMMENDATIONS We recommend that the Chief Operating Officer for Student Financial Assistance require ESS to: 2.1 Return to lenders or the Department $60,101 ($16,272 in Federal Pell Grant, $22,371 in Direct Loan, and $21,458 in FFELP funds) in Title IV aid disbursed to the students without adequate documentation of dependency overrides. 2.2 Perform a 100 percent review of students not included in our audit who had a dependency override or a refund calculation performed, return to lenders or the Department any unallowable Title IV funds disbursed but not recovered through Recommendation 1.2, and have ESS’s Independent Public Accountant verify the school's review for accuracy. ESS’ COMMENTS TO THE DRAFT REPORT AND OIG’s RESPONSE ESS’ comments did not persuade us to change our conclusion that the school lacked administrative capability. We dropped our recommendation that the Department initiate appropriate administrative action against ESS because the school closed after our draft report was issued. ESS’ comments and our responses follow. Failure to Maintain Fiscal Records ESS Comments. ESS disagreed with this finding. ESS said that, while the month-to-month general ledgers were not available, the general ledger for the entire year was available at the school and at a third-party location. ESS stated that Exhibit 3 to its comments was the school’s entire general ledger for the 1999 fiscal year. OIG Response. We changed our finding to address ESS’ failure to provide timely access to fiscal records. Based on our review of the records provided, we determined that the records could not be used to support ESS’ 90 Percent Rule calculation. Dependency Overrides ESS Comments. ESS stated that the school’s “financial aid administrator used her professional judgment in accordance with the law that allows her discretion . . .” to make adjustments to students’ application data on a case-by-case basis. ESS said that the type and extent of documentation required to support a professional judgment action is left to the financial aid administrator’s discretion and is not specified by law. ESS considered a student’s statement or representation to be adequate documentation for a school to use professional judgment and perform a dependency override. The school said that it had reviewed the dependency overrides we questioned and presented Exhibit 4 as its analysis from that review. ESS said it did not believe an audit of all student files is necessary. ED-OIG-A06-A0015 Page 16 OIG Response. We agree with ESS’ statement that financial aid administrators are allowed by the HEA to use their professional judgment on a case-by-case basis to adjust application data. However, the HEA also requires financial aid administrators to adequately document the basis for each professional judgment action. We do not agree that ESS adequately documented the basis for the dependency overrides. Based on our analysis of the documentation in Exhibit 4 for the 27 dependency overrides, we determined that ESS: (1) agreed that no documentation was available for four overrides, (2) did not respond to eight overrides (ESS said it was unable to locate the students’ files that the OIG had in its possession), (3) provided documentation for a year other than the one we reviewed for six overrides, and (4) provided documentation that did not support the students were independent for nine overrides (we had reviewed the same documentation during our fieldwork). We provided ESS access to all student files that the OIG seized during the execution of a search warrant in December 2000. Credit Balances ESS Comments. ESS said that it believed that it was following the regulations. ESS provided as Exhibit 5 to its comments written authorization forms that the school said it now used. OIG Response. This information does not alter our finding with respect to credit balances. Apartment Charges ESS Comments. ESS disagreed that apartment charges were institutional charges and should have been included in its refund calculations. ESS repeated its assertion that a Department official agreed that apartment charges were a “pass through” and should be excluded. OIG Response. We have addressed ESS’ comments regarding classifying apartment charges under Finding Number 1. ESS provided no additional information in response to this finding that would convince us to change our conclusion. ESS referred to a decision by an administrative law judge which did not in fact contain the quotation attributed by ESS. OTHER MATTERS Documentation of Loan Cancellation Notifications Not Maintained None of the 50 student files sampled contained loan cancellation notifications. ESS informed us that the notifications were issued, but copies of the notifications were not maintained. Pursuant to 34 CFR §§ 668.165(a)(1), (2) and (3), before an institution can disburse Title IV loan funds, the institution must notify the student of the amount of funds the student can expect to receive, and how and when those funds will be disbursed. The regulations state that if the student’s account is credited, the student or parent must be notified so they may cancel all or a ED-OIG-A06-A0015 Page 17 portion of the loan. The notification must be sent no earlier than 30 days before and no later than 30 days after crediting the student's account at the institution. Student Ineligible to Receive Federal Pell Grant During our file review of the 132 students ESS claimed had institutional scholarships, we noted that ESS disbursed a $517 Federal Pell Grant to an ineligible student. The student did not have a high school diploma or its equivalent and had not passed an approved ability-to-benefit (ATB) test. According to 34 CFR § 668.32(e)(1), a student is eligible to receive Title IV assistance if the student has a high school diploma or its recognized equivalent or has received a passing score on an approved independently administered ATB test. ESS’ COMMENTS TO THE DRAFT REPORT Although ESS contended that loan cancellation notifications were sent to all 50 of our sample students, the school provided no support for its statement. ESS did agree to change its procedures for documenting such notifications. ESS also agreed to refund the $517 of Federal Pell Grant funds disbursed to the ineligible student. SUBSEQUENT EVENTS Subsequent to our fieldwork, the Department revoked ESS’ provisional certification to participate in the Title IV programs on March 27, 2001. ESS requested reconsideration of that decision. The Department denied ESS’ request. The school closed on June 29, 2001. BACKGROUND ESS, formerly Executive Secretarial School of Texas, was incorporated in 1961. ESS was a proprietary school located in Dallas, Texas. The school received its initial approval to participate in the Title IV programs in December 1969. Due to its high Federal Perkins Loan Program default rate, the Department provisionally certified the school from October 15, 1999, through June 30, 2001. The Accrediting Council for Independent Colleges and Schools accredited the school. The school offered associate degrees in administrative and legal administrative assisting, and vocational programs in paralegal/legal assisting and executive assisting. ESS closed on June 29, 2001 During the period June 1, 1998, through May 31, 2000, ESS received $8.7 million in Title IV funds (Federal Pell Grants, FSEOG, FWS, Direct Loans and FFELP). ED-OIG-A06-A0015 Page 18 OBJECTIVE, SCOPE AND METHODOLOGY The objective of our audit was to determine whether ESS administered the Title IV programs according to selected aspects of the HEA and regulations. Specifically, we reviewed (1) institutional and program eligibility, and (2) selected compliance requirements relating to administration of the Title IV programs, student eligibility, Title IV disbursements, and refunds. To accomplish our objectives, we obtained and reviewed background information about the school. We reviewed ESS’s 1998 and 1999 audited financial statements and compliance audit reports. We interviewed current ESS personnel and students, state licensing agency officials, Department officials, high school counselors, CCST and CTF officials, and the Independent Public Accountant who prepared the school's 1998 and 1999 audited financial statements and compliance audit reports. We also reviewed the Independent Public Accountant’s working papers for both financial statement audits and the 1998 compliance audit. We applied statistical sampling techniques to the universe of 1,227 students by selecting for review a random sample of 50 students who received Title IV funds from July 1, 1998, through May 31, 2000. To evaluate professional judgment, 125 additional students were randomly selected for review for a total of 175 randomly selected students. We tested the reliability of computerized student records by comparing selected data with source documents such as handwritten attendance rosters and bank statements. For this file review, we concluded that the computerized information was sufficiently reliable for the purposes of our audit. We also obtained data from the National Student Loan Data System (NSLDS). We reviewed 132 student files for students identified by ESS as having received institutional scholarships to evaluate the validity of the institutional scholarships. For this evaluation, we compared the reliability of computerized student ledgers to other documentation. We concluded that we could not rely on the dates institutional scholarships were recorded as being credited to students’ accounts. We obtained and reviewed data applicable to the school from the Department’s NSLDS, Postsecondary Education Participants System, Payment Management System, and Grants Administration and Payment System. We performed our fieldwork from July 17, 2000, through December 19, 2000, at the school’s campus in Dallas, Texas. We conducted an exit meeting on November 8, 2000. The school provided additional information on November 22, 2000, and our last visit to the campus was on December 19, 2000. Our audit was performed in accordance with generally accepted government auditing standards appropriate to the scope of the review described above. STATEMENT ON MANAGEMENT CONTROLS As part of our review, we assessed the system of management controls, policies, procedures, and practices applicable to the institution’s administration of the Title IV programs. We assessed the level of control risk for determining the nature, extent, and timing of our substantive tests. For ED-OIG-A06-A0015 Page 19 the purpose of this report, we assessed and classified the significant controls into the following categories: (1) institutional and program eligibility, (2) student eligibility, (3) Title IV disbursements, and (4) calculation and payment of refunds. Because of inherent limitations, a study and evaluation made for the limited purposes described above would not necessarily disclose all material weaknesses in management controls. However, our assessment disclosed weaknesses in the school’s procedures relating to calculating the 90 Percent Rule, maintaining fiscal records, performing dependency overrides, obtaining authorizations to retain credit balances, and calculating refunds. These weaknesses are discussed in the AUDIT RESULTS section of this report. APPENDIX A Explanation for Amounts in OIG 90 Percent Rule Calculation Title IV Cash We determined Title IV cash revenue by adding all of the total Title IV funds ($4,517,973) Revenue and deposited into ESS's Federal funds bank account less $365,439 of excess cash returned and Total Cash $9,736 of administrative cost reimbursement from the Department. We determined the Revenue total cash revenue amount by adding the Title IV revenue amount to all of the revenue deposited in the other bank accounts for the year. Refunds We determined total refunds by accumulating all Title IV refunds from the ESS bank accounts. The bank accounts contained no non-Title IV refunds. ESS’s Chief Executive Officer said its refund amount also included return of excess cash. We excluded excess cash returned from the total Title IV received by ESS prior to making this adjustment (see previous note). Federal Work- ESS’s Title IV revenue amount was not reduced by the Federal portion of FWS program Study funds. Revenue from the FWS should not be included in the calculation [34 CFR § 600.5 (d)(2)(ii)]. Funds Paid to ESS maintained a separate bank account for funds paid to students. Funds paid to students Students are not used to satisfy tuition, fees, and other institutional charges and should not be included in either the numerator or denominator of the calculation. Based on our analysis of the bank account, we determined that ESS paid students $94,507. ESS deducted $93,834 of funds paid to students from the numerator but not the denominator of its calculation. Bookstore The formula requires that cash revenue from tuition, fees, and other institutional charges Income and for students in eligible programs be included in the calculation. ESS’s bookstore and Apartment apartment charges met the definition of an institutional charge. ESS correctly considered Income bookstore charges as an institutional cost in calculating refunds but incorrectly excluded revenue from those charges from its 90 Percent Rule calculation. We agree with ESS that the bookstore income was from an institutional charge because students did not have a real and reasonable opportunity to purchase the books from another source. For the 22 sample students who began attending during or before ESS’s fiscal year that ended May 31, 1999, the enrollment agreement between ESS and the students always included a charge for books. All of the students obtained books from ESS’s bookstore and ESS credited the students’ accounts with the book charges. None of the students were provided Title IV funds to purchase the books elsewhere. Because ESS incorrectly considered apartment charges to be a pass-through expense and not an institutional cost, it excluded revenue realized by the charges in both its refund and 90 Percent Rule calculations. We determined the costs were not a pass through expense. ESS leased the apartments but maintained control of them by entering into lease agreements with selected students and determining the charges assessed to the students. ESS earned $366,243 of cash revenue from leasing the apartments to students. See Finding Number 2 for a further discussion of apartment charges. Ineligible The $89,696 represents cash revenue from placement fees ($82,150), corporate training, Revenue ($4,538), and vending machine sales ($3,008). The formula does not allow revenue from ineligible Title IV programs. Accounts The ESS adjustment is the difference in the beginning and ending balances of accounts Receivable receivable for the year to convert its accounts from an accrual to a cash basis. No Adjustment adjustment is needed for our calculation because we considered only cash transactions. DISTRIBUTION SCHEDULE Control Number OIG/A06-A0015 Copies Auditee 1 Mr. Steven B. Friedheim, President ESS College of Business Action Official 1 Greg Woods, Chief Operating Officer Student Financial Assistance Department of Education ROB-3, Room 4004 7th and D Streets, SW Washington, DC 20202-5132 Other ED Offices Chief of Staff, Office of the Secretary 1 Deputy Secretary, Office of the Deputy Secretary 1 Under Secretary, Office of the Under Secretary 1 Director, Office of Public Affairs 1 General Manager for Schools, Student Financial Assistance 1 Chief Financial Officer, Student Financial Assistance 1 Director, Case Management and Oversight, Student Financial Assistance 1 Area Case Director, Dallas Case Management Team Case Management and Oversight, Student Financial Assistance 1 General Counsel, Office of the General Counsel 1 Office of Inspector General Inspector General 1 Deputy Inspector General 1 Assistant Inspector General for Analysis and Inspections 1 Assistant Inspector General for Investigation 1 Assistant Inspector General for Audit 1 Deputy Assistant Inspector General for Audit 1 Director, Student Financial Assistance 1 Regional Audit Offices 6 Dallas Regional Office 6 Others Texas Workforce Commission 1 Texas Guaranteed Student Loan Corporation 1 Accrediting Council for Independent Colleges and Schools 1
ESS College of Business' Administration of the Title IV Student Financial Assistance Programs.
Published by the Department of Education, Office of Inspector General on 2001-08-29.
Below is a raw (and likely hideous) rendition of the original report. (PDF)