Audit of Baker University School of Professional and Graduate Study's Administration of the Title IV Student Financial Assistance Programs.

Published by the Department of Education, Office of Inspector General on 2002-09-19.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                              Baker University

                 School of Professional and Graduate Study’s

                          Administration of Title IV

                        Federal Student Aid Programs

                                     FINAL AUDIT REPORT
                                        September 2002

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.                      Kansas City, Missouri Office

             Statements that managerial practices need improvements, as well as other

                           conclusions and recommendations in this report 

           represent the opinions of the Office of Inspector General. Determinations of

 corrective action to be taken will be made by the appropriate Department of Education officials.

          In accordance with 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.


                                      OFFICE OF INSPECTOR GENERAL

                                                     SEP 1 92002
Dr. Daniel M. Lambert, President
Baker Universjty
618 8th Street
P.o. Box 65
Baldwin City, KS 66006-0065

Dear Dr. Lambert:

Attached is oW' report entitled Baker University'S School of Professional and Graduate
Study's Administration of the Title IV Student Financial Assistance Programs (Contro]
No~ ED-OIG/A07-AOO30). The report incorporates the comments you provided jn
response to the draft audit report. If you have any additional comments or infonnation
that you believe may have a bearing on the resolution of this audit, you should send them
directly to the following Education Department official, who will consider them before
taking final Departmental action on the audit:

                          Teresa Shaw, Chief Operation Officer
                          Federal Student Aid
                          Union Center Plaza Building. Room 112Gl
                          830 1st Street, NE
                          Washington, D.C. 20202-5402

Office of Management and Budget Circular A~50 directs Federal agencies to expedite the
resolution of audits by initiating timely action on the findings and recommendations
contained therein. Therefore, receipt of your comments within 30 days would be greatly

In accordance with the Freedom of Infonnation Act (S U.S.C. §552), reports issued to the
Department's grantee and contractors are made available, if requested. to members of the
press and general public to the extent infonnation contained therein is not subject to
ex.emptions in the Act.

                                             Assistant Inspector General
                                               for Audit Services

                            400 l4ARYLAND AVE"    s.w, WASHINGTON. I1.C. 20202.1510 

       Ow'mi8IIiM ill to tm5IUI!I equa.I (KQt.U to> ~ WId to ptrJ~   educoIional_u.ru. ~hout """ Nation. 

                                      Baker University

                        School of Professional and Graduate Study’s

                               Administration of the Title IV

                          Student Financial Assistance Programs

                                        Executive Summary

Baker University (the University) is a private not- for-profit, coeducational, liberal arts institution
affiliated with the United Methodist Church. Our objectives were to determine whether the
University complied with the Higher Education Act (HEA) and applicable regulations pertaining
to (1) the prohibition against the use of incentive payments for recruiting activities, and (2)
course length. We found that:

•		 The University violated the statutory prohibition on the use of incentive payments based on
    success in securing student enrollments. The University contracted with the Institute for
    Professional Development (IPD) to provide recruiting and accounting services for its School
    of Professional and Graduate Studies (SPGS). In accordance with the terms of the contract,
    IPD received payments based on the number of students enrolled in the SPGS programs. In
    addition, IPD paid its recruiters based on the number of students they recruited who enrolled
    in the programs. Because the University did not comply with the HEA and regulations by
    paying incentives to IPD based on success in securing enrollments, the University must
    return $13,612,816 in Federal Stafford loan funds, $257,791 in Pell Grant funds, and $64,688
    in Supplemental Educational Opportunity Grants disbursed on behalf of students who were
    improperly recruited for its SPGS programs.

•		 The University’s academic year for its SPGS programs did not provide the number of
    instructional hours required by the HEA and the regulations. The HEA states that an
    academic year must contain a minimum of 30 weeks of instruction. The regulations for
    programs not using semester, trimester, or quarter systems require a minimum of 12 hours of
    instruction per week. These regulations are commonly known as the 12-Hour Rule. The
    University did not ensure that its SPGS programs provided the required amount of
    instructional time. Because the University’s academic year did not provide the required
    number of instructional hours, the University disbursed funds to students who were not
    eligible for all or part of the funds. We estimated that the University improperly disbursed
    $1,672,276 in Stafford loans, and $108,704 in Pell Grant funds to students in the SPGS
    programs. 1

 The dollars we estimated as improperly disbursed are duplicative of the dollars we determined as improperly
disbursed in the incentive-based payments finding.

ED-OIG                                       A07-A0030		                                                  Page 1
We recommend that the Chief Operating Officer for Federal Student Aid (FSA) require that
Baker University:

    •		 Amend and/or terminate its contractual relationship with IPD to eliminate payments
        based on success in securing student enrollment.

    •		 Establish an academic year for its SPGS programs that satisfies the requirements of the
        12-Hour Rule.

    •		 Return to lenders and the Department $13,935,295 in Title IV funds disbursed to students
        who were improperly recruited.

    •		 Return to lenders and the Department $1,780,980 in Title IV funds that were in excess of
        the amounts the students were entitled as a result of not being in compliance with the 12­
        Hour Rule. 2

The University provided narrative comments in response to our draft report. The University’s
narrative comments are included in their entirety in Attachment 1. The University did not concur
with our findings or recommendations. We summarized the University’s comments and
provided our response following each finding. Our analysis of the University’s comments did
not persuade us to change our overall conclusions or recommendations for any of the findings.

 The amounts identified to be returned are duplicative of the amounts to be returned for students who were
improperly recruited. Only those amounts not returned as a result of our first finding should be returned to lenders
and the Department.

ED-OIG                                         A07-A0030		                                                    Page 2
                                         Audit Results

We determined that the University needed to improve its administration of the Title IV
programs. We found that the University violated the statutory prohibition on the use of incentive
payments for recruiting based on success in securing enrollment when it paid the Institute for
Professional Development a percentage of tuition for students enrolled in its SPGS programs. In
addition, the University’s academic year for its SPGS programs did not provide the required
number of instructional hours as defined in the HEA and the regulations.

Finding No. 1 – The University Contracted With An Organization That Received
Payments Based on the Number of Students Enrolled in SPGS Programs

Baker University entered into a contract with IPD that provided for incentive payments to IPD
based on success in securing enrollment for the SPGS programs. In addition, IPD’s recruiters
received payments based on their success in enrolling students. The Higher Education Act
(HEA) expressly prohibits any type of incentive payment based directly or indirectly on success
in securing enrollments. As a result of incentive payments to IPD, the University is liable for all
Title IV funds awarded to students in the SPGS programs who were improperly recruited from
July 1, 1996, through the present.

Institutions Participating in the Title IV Programs Must Not Provide Payments for
Securing Enrollments
The HEA, Sections 487(a) and 487(a)(20) require that:

     In order to be an eligible institution for the purposes of any program authorized under
     this title, an institution . . . shall . . . enter into a program participation agreement with
     the Secretary. The agreement shall condition the initial and continuing eligibility of
     an institution to participate in a program upon compliance with the following

     . . . The institution will not provide any commission, bonus, or other incentive
     payment based directly or indirectly on success in securing enrollments or financial
     aid to any persons or entities engaged in any student recruiting or admission activities
     or in making decisions regarding the award of student financial assistance. . . .

The regulations at 34 CFR § 668.14(b)(22) codify the statutory prohibition on incentive
payments based on securing enrollment.

ED-OIG                                   A07-A0030                                                Page 3
       By entering into a program participation agreement, an institution agrees that . . .
       [i]t will not provide, nor contract with any entity that provides, any commission,
       bonus, or other incentive payment based directly or indirectly on success in
       securing enrollments or financial aid to any persons or entities engaged in any
       student recruiting or admission activities or in making decisions regarding the
       awarding of student financial assistance.

IPD Received Payments Based on Student Enrollment in SPGS Programs

The University entered into a contract with IPD that provided for incentive payments to IPD
based on success in securing student enrollments for its SPGS programs. The contract stated that
IPD shall:

       •		 Recruit students to enroll in the courses of study in the SPGS programs.
       •		 Provide representatives to recruit students for the programs covered under this
       •		 Provide an average initial enrollment of 16 students per class during each year
           of the contract.
       •		 Be responsible for the preparation of promotional literature.
       •		 Collect, on behalf of Baker University, all tuition and application fees, book and
           material fees, college- level assessment fees, and other fees payable by a student
           and applicable to the programs.
       •		 Maintain the official program accounting books and records.

Book, material, and computer fees were remitted in full to the University. Tuition fees were
divided between the parties on a weekly basis in accordance with the contract as outlined in the
table below. Refunds were paid from the joint account according to these percentages.

      Location     Dates Effective              Programs         Baker             IPD
                    During Audit                               Percentage       Percentage
 Overland Park & 7/1/96 – 6/30/99             BBA, BSM,            60               40
 Topeka Campus                                MSM, MBA,
 Overland Park & 8/25/97 – 6/30/99            AAB                  55               45
 Topeka Campus
 (new       program
 effective 8/25/97)
 Wichita Campus 8/8/97 – 6/30/99              BBA, BSM,            50               50
 (location approved                           MSM, MBA,
 8/8/97)                                      AAB

ED-OIG                                 A07-A0030		                                            Page 4
The University Violated the HEA by Paying IPD Based on Success in Securing
Enrollments for the SPGS Programs Which Resulted in $13,935,295 of Improperly
Disbursed Title IV Funds

Because the University did not comply with the HEA and regulations by paying incentives to
IPD based on success in securing enrollments for its SPGS programs, the University must return
all Title IV funds that were disbursed on behalf of students enrolled in the SPGS programs who
were improperly recruited. Since the University paid incentives for each student enrolled in the
six SPGS programs included in our review, all students in the SPGS programs were improperly
recruited. The University must return all Title IV funding that it disbursed for the SPGS
programs from July 1, 1996, through the present. We determined that the amount of Stafford
loan funds from July 1, 1996, through June 30, 1999, was $13,612,816. In addition, we
determined that the amount of Pell Grant and SEOG funds disbursed for the same period was
$257,791 and $64,688, respectively.

IPD’s Compensation Plan for Recruiters Based Salary and Bonuses on the
Number of Students Enrolled in SPGS Programs
Our review of IPD’s compensation plans for fiscal years 1997-1999 disclosed that IPD provided
incentives to its recruiters through salary levels that were based on the number of students
recruited and enrolled in the programs. Recruiters were assigned a salary within the parameters
of performance guidelines (i.e., knowledge of basic policies and procedures, organization and
communication skills, and working relationships). An annual goal of at least 100 students was
established for each fiscal year (FY), and performance was assessed on a regular basis
throughout the year. Formal evaluations were completed biannually and, after the first six
months of employment, salary was determined on an annual basis. The recruiter’s success in
recruiting students who enrolled in the SPGS programs determined whether the salary was
adjusted upward, downward, or remained the same. In addition, the FY 1997 and 1998
compensation plans called for the payment of bonuses, based on the number of students
recruited. The bonuses increased as the number of students recruited increased, and ranged from
$1,344 for 100-149 students to $29,600 for over 200 students. The FY 1999 plan indicated that
recruiters hired on or after September 1, 1998, who achieved 100 or more starts by the end of the
fiscal year were entitled to a one-time bonus of $1,500.


We recommend that the Chief Operating Officer for FSA require the University to:

1.		 Immediately amend and/or terminate its present contractual relationship with IPD to
     eliminate incentive payments based on student enrollment.

2.		 Return to lenders the Stafford loan funds of $13,612,816 disbursed from July 1, 1996,
     through June 30, 1999. Also, the University should repay the Department the interest
     and special allowance costs incurred on Federally subsidized loans.

ED-OIG                                 A07-A0030		                                           Page 5
3.		 Return to the Department Pell Grant and SEOG funds of $257,791 and $64,688,
     respectively, disbursed from July 1, 1996, through June 30, 1999.

4.		 Determine the amounts of Stafford loan, Pell Grant and SEOG funds improperly
     disbursed since the end of our audit period and return the funds to lenders and the

University Comments and OIG Response

The University did not agree with our conclusions and recommendations. The following is a
summary of the University’s comments and our response to the comments. The full text of the
University’s comments is enclosed.

The Allocation of Revenue Under the IPD Contract Does Not Violate the Incentive
Compensation Rule

The University stated tha t:

   •		 The IPD contract compensates IPD based on the volume of a broad range of professional
       services provided to Baker University, many of which have variable costs dependant on
       the number of students enrolled in the SPGS programs.

   •		 The Incentive Compensation Rule does not apply to the IPD Contract because (1) the
       Department is without legal authority to use the rule as a basis for regulating routine
       contracts for professional, non-enrollment related services; and (2) the rule cannot apply
       to service contracts where the cost of providing services necessarily varies depending on
       the number of students.

   •		 The Department has published no regulations or other public guidance supporting the
       interpretation of revenue-sharing agreements advanced by the OIG and in the Draft Audit
       Report. Indeed, the only public pronouncement from the Department is contrary to the
       position of the OIG.

The IPD Contract Compensates IPD Based on the Volume of a Broad Range of
Professional Services Provided to Baker University

The University stated that IPD performed the following broad range of non-recruitment and non-
enrollment services, all of which are not specifically referenced in the IPD Contract but,
nonetheless occurred pursuant to the contract, at IPD’s expense, regarding the operation of the
SPGS programs:

   •		 Management consulting and training regarding
         o		 program administration and evaluation,
         o		 assessment center organization and management,
         o		 student tracking systems development and implementation,
         o		 student tuition and financial aid accounting,

ED-OIG                                  A07-A0030		                                         Page 6
             o		 marketing research and development,
             o faculty recruitment and assessment, and

             o ongoing curriculum review and revision.

   •		   Academic quality audits and mock accreditation reviews for SPGS programs.
   •		   Administrative support for all SPGS staff.
             o		 Office space for SPGS administration.
             o		 Telephones, copier, and computers for SPGS administrative offices.
             o		 Administrative personnel (receptionist, secretaries, etc) for SPGS administrative
   •		   Acquisition and maintenance of appropriate classroom facilities for SPGS programs.
   •		   Professional development and training activities for University’s financial aid staff,
         student services personnel, and SPGS faculty.
   •		   Feasibility studies concerning potential expansion of SPGS programs.
   •		   Maintenance of accounting records, and financial planning and budgeting, in conjunction
         with the University’s Office of Financial Services.

The OIG ignores the many non-enrollment related services performed by IPD under the contract,
and instead treats the contract as if it covered only recruitment and student accounting functions.
The OIG wrongly implies that recruitment and tuition collections constituted IPD’s only
functions with respect to the SPGS programs.

OIG Response

The OIG did not overlook or ignore the fact that IPD provided other services to Baker University
under the terms of the agreement. In our draft audit report, we acknowledged that IPD provided
additional services, such as accounting. Since it was not within the scope of our audit, we did
not determine the extent of additional services under the agreement that were actually provided
by IPD at the request of Baker University and at IPD’s cost. We did verify that the revenue to
IPD was generated only by its recruitment of students that were successfully enrolled in the
SPGS programs. This constitutes the statutory violation of providing a commission, bonus or
other incentive payment based directly or indirectly on the success in securing enrollment.

While we recognize that IPD logically had to incur expenses to provide the program accounting
services, and any additional services that may have been provided by IPD, these expenses are not
relevant in determining whether the structure of the revenue allocation is a violation of the HEA.
No compensation was to be provided to IPD unless IPD was successful in recruiting students
whose enrollments were secured by the University. The agreement also included a minimum
enrollment guarantee that, if not achieved, would result in a reduction in revenue to be allocated
to IPD, despite other services that might have been provided. This further emphasizes that the
revenue stream is completely generated by, and dependent on, student enrollment.

Baker University does not dispute that the payments it made to IPD were based on a percentage
of the tuition and fees paid by students enrolled in the SPGS programs. Baker University
likewise does not dispute that IPD was responsible for recruiting students. Nor does Baker
University dispute that some portion of the amount it paid to IPD was directly related to IPD’s
success in recruiting students for enrollment in the SPGS programs. Our audit report did not

ED-OIG                                  A07-A0030		                                         Page 7
focus on what other services may have been provided by IPD because once IPD became
responsible for recruiting students, even among other activities, and received compensation from
Baker University based on the number of students enrolled in the program, Baker University was
in violation of the HEA.

The HEA at § 487(a)(20) states:

     The institution will not provide any commission, bonus, or other incentive payment
     based directly or indirectly on success in securing enrollments or financial aid to any
     persons or entities engaged in any student recruiting. . . . [Emphasis added.]

Once recruiting was added to the services to be provided under the contract, compensation based
on enrollment was no longer permitted. IPD had sole responsibility for recruitment and
enrollment, and was paid under the contract only on the basis of its success in securing
enrollment regardless of what other services it may have been providing. Whether or not the
revenue allocation was intended to provide compensation for other services is not relevant since
the allocation violates the law.

Baker University’s response regarding the services performed by IPD does not always agree with
the contract.

We had previously reported that IPD maintained the official accounting records of the program.
In its response, Baker University stated that IPD is also responsible for financial planning and
budgeting. We find no reference to these duties in the contract.

The contract did require IPD to provide all program promotion and advertising. Successful
program promotions, advertising and market research by IPD would have the effect of increasing
its success in securing enrollments for which it was compensated. We had previously included
this in the background section of our report.

Baker University stated that many of the services offered by IPD were highly volume sensitive.
We could only identify three items from the contract that appear to be volume sensitive:
recruiting, marketing, and maintenance of accounting records. The array of consulting services
would not necessarily be volume sensitive.

The Incentive Compensation Rule Does Not Apply to the IPD Contract

The University stated that the Department has no legal authority for using the Incentive
Compensation Rule as a basis for regulating routine contracts for professional, non-enrollment
related services. The Incentive Compensation Rule was intended to prevent schools from using
commissioned salespersons to recruit students, not to regulate business arrangements such as the
one described in the draft audit report, which pay for a wide array of professional services based
on the volume of services received by a higher education institution. The legislative and
regulatory histories clearly emphasize the intent to halt the use of commissioned salespersons as

ED-OIG                                 A07-A0030                                               Page 8
OIG Response

The HEA does not excuse or permit incentive payments depending on the type of contractual
arrangement that creates them. Any incentive payment based directly or indirectly on success in
securing enrollment is prohibited. The contract with IPD included recruiting activities with
compensation determined by success in securing enrollments, on a per student basis.

The Department has Published No Regulation or Other Public Guidance Supporting the
OIG’s Interpretation of the Incentive Compensation Rule to Restrict Routine Revenue
Sharing Arrangements

The University stated that the draft audit report cites no case precedent, regulatory or non-
regulatory guidance, or other legal authority to support the proposition that the allocation of
revenue under the IPD Contract violates the Incentive Compensation Rule. In this case, the
University did not know, and could not have known, that the allocation of revenue in the IPD
Contract would be construed as a violation of the Incentive Compensation Rule, because no such
pronouncement or interpretation had ever been published and disseminated to Title-IV
participating institutions.

OIG Response

The HEA prohibition (§ 487(a)(20)) of incentive payments is clear.

       The institution will not provide any commission, bonus, or other incentive payment
       based directly or indirectly on success in securing enrollments or financial aid to any
       persons or entities engaged in any student recruiting…[Emphasis added.]

The University signed a program participation agreement (PPA) committing it to comply with
the HEA and regulations. The contract clearly indicated that IPD was to be an entity engaged in
student recruiting on behalf of the University. The contract also clearly showed that
compensation to IPD was a percentage of the tuition revenue based on success in securing
student enrollment.

The OIG’s Recommendation – Disallowance of All Title IV Funds Received by the
University for All SPGS Enrollees – Is Unwarranted and Is Inconsistent With Applicable
Law and Regulations

The University stated that the OIG offers neither legal authority nor analysis to justify or explain
why disallowance of all SPGS-related financial aid funding would lawfully, logically, or
reasonably result from the cited noncompliance. In the absence of any OIG statement of reasons,
or other detailed explanation for the extreme sanction, the Unive rsity cannot presently submit
any comprehensive response to the draft audit report’s recommendation.

ED-OIG                                  A07-A0030                                             Page 9
OIG Response

The University incorrectly characterized our recommendation for monetary recovery as a
sanction. We are not proposing that the Unive rsity be fined. We are recommending that the
Department recover funds disbursed in violation of the HEA.

IPD Recruiters’ Salaries Do Not Violate the Incentive Compensation Rule

IPD stated that its compensation plans based recruiter salaries on factors or qualities that are not
solely related to success in securing enrollments. It also stated that the prohibition in §
487(a)(20) did not extend to salaries. Even if salaries were included, IPD stated that salaries
could be based on merit or success in securing enrollment as long as enrollment was not the sole

OIG’s Response

Contrary to IPD’s representation, the compensation plan we reviewed did not include factors
other than enrollment to adjust recruiter salaries. According to the compensation plan,
recruiters’ salary and bonuses were determined annually by how many students they enrolled in
the programs. Annual salary and bonuses would increase, decrease, or remain the same in
accordance with predetermined tables that directly tied students enrolled to particular salary and
bonus amounts. The salary and bonus tables did not include factors other than enrollment. The
requirements of § 487(a)(20) cannot be avoided by labeling improper incentive compensation as
a salary.

ED-OIG                                  A07-A0030                                            Page 10
Finding No. 2 – The University’s Academic Year for Its SPGS Programs Did Not
Provide the Required Number of Instructional Hours

We found that the University did not establish and implement adequate management controls to
support the number of instructional hours to meet the statutory definition of an academic year for
its SPGS programs. The University disbursed Title IV funds to students who were not eligible
for all or part of the funds. We estimated that the University improperly disbursed $1,672,276 in
Stafford loan funds, and $108,704 in Pell Grant funds to its SPGS students. 3

Nonterm Institutions Must Provide a Minimum of 360 Hours of Instructional Time
in an Academic Year
Section 481(a)(2) of the HEA states that the term academic year shall:

      [R]equire a minimum of 30 weeks of instructional time, and, with respect to an
      undergraduate course of study, shall require that during such minimum period of
      instructional time a full- time student is expected to complete at least 24 semester or
      trimester hours or 36 quarter hours at an institution that measures program length in
      credit hours . . . .

The regulations at 34 CFR § 668.2(b) clarify what constitutes a week of instructional

      [T]he Secretary considers a week of instructional time to be any week in which at
      least one day of regularly scheduled instruction, examinations, or preparation for
      examinations occurs . . . . For an educational program using credit hours but not
      using a semester, trimester, or quarter system, the Secretary considers a week of
      instructional time to be any week in which at least 12 hours of regularly scheduled
      instruction, examinations, or preparation for examinations occurs . . . .

These regulations, commonly known as the 12-Hour Rule, require the equivalent of 360
instructional hours per academic year (12 hours per week for 30 weeks). Institutions were
required to comply with the 12-Hour Rule as of July 1, 1995.

In the preamble of the Federal Register dated November 29, 1994, the Secretary explained that
an institution with a program that meets less frequently than 12 hours per week would have to
meet for a sufficient number of weeks to result in the required instructional hours. For example,
if an institution decided to establish an academic year for a program with classes that met for 12
hours per week, the classes would need to be held for 30 weeks to result in 360 hours.

 The dollars we estimated as improperly disbursed are duplicative of the dollars we determined as improperly
disbursed in the incentive-based payments finding.

ED-OIG                                       A07-A0030                                                   Page 11
The University measured its SPGS educational programs in credit hours, but did not use a
semester, trimester, or quarter system. The SPGS programs consisted of a series of courses for
which a student generally received three credit hours per course. The University defined its
academic year as 24 credit hours in 45 weeks. To comply with the 12-Hour Rule, the University
would need to provide 8 hours of instruction per week for each week in its 45-week academic
year to equal 360 hours per year.

The University Did Not Have Adequate Management Controls to Ensure That
Students Received the Required 360 Hours of Instruction For Each Academic Year
Management controls are the policies and procedures adopted and implemented by an
organization to ensure that it meets its goals which, as applicable to this situation, are compliance
with laws and regulations. According to the SPGS Student and Faculty handbooks, students
were required to meet for four hours per week in regular workshops and an additional four hours
per week in study groups. The University counted the study group time for purposes of the 12­
Hour Rule. We determined that the University did not establish and implement adequate
management controls to ensure that study group meetings were regularly scheduled and

It was the University’s policy that an instructor be present at regular classes and maintain
attendance records for the classes. The faculty handbook required the instructor to take
attendance at each class, and forward attendance records to the SPGS office at the end of the
course. Students were required to notify faculty members if they were going to be absent from
class, make arrangements to complete missed assignments, and complete any required make-up
assignments. The University did not apply these policies to study groups. Faculty were not
required to monitor study group attendance. The faculty handbook outlined the following
University policy for attendance: “Under no circumstances may a student miss more than 40
percent of course meeting hours and receive credit for the course.” It further stated that this
policy is not at the discretion of the faculty member. The Director of Academic Records stated
that the policy for study group attendance was at the discretion of the faculty member. The
Director of Academic Records also stated that it was not mandatory for students to tur n in any
type of study group records and if some type of documentation were provided to student services
it was thrown away after the cohort was completed. 4

We statistically selected a sample of 60 student/class combinations from a universe of 14,258
unique student/class combinations. A student/class combination is defined as an SPGS student
and all the study group hours required for each class taken by that student during our audit
period. We found that the University could not provide evidence that the required number of
study group hours were scheduled and occurred for any of the required hours in our sample.
From our sample results, we estimate that the University had no support that study group hours
were scheduled and occurred. Based on our review of the University’s written policies and
procedures, review of study group records, and interviews with University officials, we

    Baker University began collecting study group attendance sheets from students on October 1, 2000.

ED-OIG                                          A07-A0030                                               Page 12
determined that the University did not provide adequate assurance that study groups were
scheduled and occurred to meet the requirements of the 12-Hour Rule.

Failing to Comply With the 12-Hour Rule Resulted in the University Improperly
Disbursing $1,780,980 of Title IV Funds to Its SPGS Students
Because the University did not ensure that study group meetings were actually scheduled and
taking place, the meetings do not qualify for inclusion in the 12-Hour Rule calculation. As a
result, the University-defined academic year of 45 weeks only provided 180 hours of the
required minimum of 360 hours of instructional time (four hours of instruction per week for 45
weeks equals 180 classroom hours). In order to meet the 360-hour requirement, the University’s
academic year would need to be 90 weeks in length. By using an academic year of 45 weeks
rather than 90 weeks for awarding Title IV funds, the University disbursed amounts to students
that exceeded the maximum amounts for an academic year allowed under the Stafford loan and
Pell Grant programs. We estimated that the University improperly disbursed $1,780,980 of Title
IV funds to SPGS students. The students included in this amount had disbursements for Stafford
loans and Pell Grants during our audit period July 1, 1996, through June 30, 1999.

•		 Stafford Loan Limits. 34 CFR § 682.603(d) stipulates that an institution may not
    certify a loan application that would result in a borrower exceeding the maximum
    annual loan amounts specified in 34 CFR § 682.204. We estimated that $1,672,276 in
    Stafford loan disbursements exceeded the annual loan limits.

•		 Pell Grant Maximum. 34 CFR § 690.62(a) specifies that the amount of a student’s
    Pell Grant for an academic year is based upon schedules published by the Secretary for
    each award year. The payment schedule lists the maximum amount a student could
    receive during a full academic year. We estimated that $108,704 in Pell Grant
    disbursements exceeded the maximum amount allowed.

Institutions were required to comply with the 12-Hour Rule as of July 1, 1995. Because the
University’s academic year for its SPGS programs did not meet the requireme nts of the 12-Hour
Rule, the University has improperly disbursed Title IV funds for its students on Stafford loan and
Pell Grants awarded during our audit period July 1, 1996, through June 30, 1999.


We recommend that the Chief Operating Officer for FSA require the University to:

1.		 Immediately develop an academic year for its SPGS programs that satisfies the 12­
     Hour Rule as a condition for continued participation in Title IV programs.

2.		 Return to lenders the Stafford loan funds disbursed that exceeded the loan limits for an
     academic year. We estimated that the amount was $1,672,276 for students who had
     disbursements for loans during the audit period of July 1, 1996, through June 30, 1999.
     Also, the University should repay the interest and special allowance costs incurred on
     Federally subsidized loans.

ED-OIG                                  A07-A0030		                                        Page 13
3.		 Return the Pell Grant funds disbursed to students that exceeded the allowable award for
     an academic year. We estimated that the amount was $108,704 for students who had
     Pell Grants during our audit period of July 1, 1996, through June 30, 1999.

NOTE: The amounts identified to be returned in this finding are duplicative of the amounts to be
returned for students who were improperly recruited. Only those amounts not returned as a
result of our first finding should be returned to lenders and the Department.

University Comments and OIG Response

The University did not agree with our conclusions and recommendations. The following is a
summary of the University’s comments and our response to the comments. The full text of the
University’s comments is enclosed.

The University Has Adequately Documented Its Compliance With the 12-Hour Rule

The University stated that the Department has already concluded that “[t]here is no meaningful
way to measure 12 hours of instruction” for nontraditional education programs like those
questioned by the draft audit report. The University implemented various policies and followed
specific procedures to ensure that the SPGS programs provided the requisite amount of
“regularly scheduled instruction, examinations, or preparation for examinations” required by the
12-Hour Rule. The OIG is now attempting to hold the University accountable to specific
tracking procedures and other documentation rules created through its audit process.

OIG Response

The Report to Congress on the Distance Education Demonstration Programs quoted by the
University refers to distance education classes that allow students to move at their own pace.
Students in the SPGS programs were required to attend weekly study group meetings, which the
University did not consider as homework. The following excerpt from the report expands the
quotation provided by the University to include additional clarifying information.

     It is difficult if not impossible for distance education programs offered in
     nonstandard terms and non-terms to comply with the 12- hour rule. The regulation
     would seem to require that full- time distance education students spend 12 hours per
     week “receiving” instruction. There is no meaningful way to measure 12 hours of
     instruction in a distance education class. Distance education courses are typically
     structured in modules that combine both what [sic] an on-site course might be
     considered instruction and out-of-class work, so the re is no distinction between
     instructional time an[d] ‘homework.’ In addition, when they are given the flexibility
     to move at their own pace, some students will take a shorter time to master the
     material, while others might take longer.

On August 10, 2000, the Department issued a Notice of Proposed Rulemaking (NPRM)
concerning, among other items, changes to the 12-Hour Rule. In the NPRM, the Department

ED-OIG                                 A07-A0030		                                        Page 14
stated, “[i]t was never intended that homework should count as instructional time in determining
whether a program meets the definition of an academic year, since the 12-hour rule was designed
to quantify the in-class component of an academic program.”

We have not established a documentation rule. An institution participating in the Title IV, HEA
programs is required to establish and maintain on a current basis records that document the
eligibility of its programs and its administration of the Title IV programs in accordance with all
applicable requirements (34 CFR § 668.24(a)). The regulations require the University to
document its compliance with the 12-Hour Rule. Our audit procedures included reviewing any
documentation that demonstrated the University’s compliance with the 12-Hour Rule. We did
not require any specific documentation as part of our audit. We found that the available
documentation and the University’s internal control system did not support a conclusion that the
University complied with the 12-Hour Rule.

Study Group Meetings Constitute Instructional Activity

The University stated that the SPGS study group meetings fall within the scope of “regularly
scheduled instruction, examinations, or preparations for examinations.” The regulatory text
confirms this conclusion, stating that “instructional time” excludes “activity not related to class
preparation or examinations.”

OIG Response

We determined that the University did not establish and implement adequate internal controls to
ensure that study group meetings were actually scheduled and occurred as required by the
University. On August 10, 2000, the Department issued a Notice of Proposed Rulemaking
(NPRM) concerning, among other items, changes to the 12-Hour Rule. In the NPRM, the
Department stated, “[i]t was never intended that homework should count as instructional time in
determining whether a program meets the definition of an academic year, since the 12- hour rule
was designed to quantify the in-class component of an academic program.”

Study Group Meetings Were Regularly Scheduled

The University stated that it required students, in the first week of the program, to complete a
“Study Group Constitution” listing the names and addresses of all group members, and typically
stating the day, time, and location of their weekly study group meeting. Several other factors
clearly indicate that the study group meetings were “regular,” “scheduled,” and under the
supervision of University faculty. The specific tasks to be performed and completed by the study
group in a given week were specified in the course module, and all students enrolled in the
course were required to participate in study group activities. Also, each designated study group
session was, by curriculum design, slated to occur between specified meetings with the faculty

OIG Response

During our preliminary work to gain an understanding of the course and cohort structure, we
reviewed 19 study group constitutions. Only 6 of the 19 stated the day, time, and location of the

ED-OIG                                  A07-A0030                                            Page 15
weekly study group meetings. Subsequent to our preliminary work, we conducted a statistical
sample and requested that the University provide study group documentation to support the
required hours in our sample. The University did not provide any study group constitutions to
support these hours. Based on our review of the University’s written policies and procedures,
review of documentation provided, and interviews with University officials, we determined that
the University did not provide adequate assurance that study groups were scheduled to meet the
requirements of the 12-Hour Rule.

The University Adequately Monitored Study Group Meeting Attendance

The University stated that it repeatedly informed students in SPGS programs of the mandatory
nature of study group attendance. In addition, at the end of each SPGS course, students
completed mandatory end-of-course evaluations. These evaluations contain questions regarding
the study group meetings, and specifically regarding the attendance of other study group
members. The OIG either failed to review these evaluations, summarily and wrongly rejected
them as insufficient documentation, or ignored them. After dismissing the course module
statements describing study group projects, failing to consider the study group constitutions,
rejecting the end-of-course evaluations, and ignoring the involvement of Baker faculty and
administrators with study group members, the OIG reaches the conclusion that the University did
not “ensure that study group meetings were regularly scheduled and occurred.” In addition to
demanding an unjustified amount of documentation, the OIG is fundamentally mistaken in its
claim that the University must “ensure” that students attend each occurrence of study groups.
There is simply no statutory or regulatory basis for the OIG’s claim, and the report provides no
legal authority for its broader interpretation of the rule. Rather, all that is required by the 12­
Hour Rule is that study group meetings were “regularly scheduled.”

OIG Response

We are not attempting to establish an attendance requirement. The regulations at 34 CFR §
668.24(a)(3) state:

(a) An institution shall establish and maintain on a current basis, any application for title
    IV, HEA program funds and program records that document –
(3) Its administration of the title IV, HEA programs in accordance with all applicable
    requirements; …

It is incumbent on the University to demonstrate that it is in compliance with the 12-Hour Rule.
We reviewed the student and faculty handbooks, and we held discussions with University
officials to obtain an understanding of the University’s policies and procedures as they related to
the monitoring and oversight of the study teams. Contrary to the University’s assertion, we did
consider the various forms and evaluations.

Study Groups are Part of an Integrated Curriculum Module, and Faculty Members Were
Aware of Which Students Did Not Attend the Study Group Meetings in any Given Week

The University contends the OIG’s position is that an instructor must be present at study team
meetings in order for study teams to count as instructional time under the 12-Hour Rule. The 12­

ED-OIG                                   A07-A0030                                              Page 16
Hour Rule expressly states that time spent in “preparation for examinations” is included in the
overall calculation of instructional activity. Faculty presence is not required when students
prepare for exa minations, nor is it required for the faculty member to assess whether a student
adequately participated in the weekly meetings because the required work is reviewed and

OIG Response

Our objective was to determine whether the University complied with the requirements of the
12-Hour Rule. The University defined its academic year to comply with the 12-Hour Rule, and
this definition required that students attend four hours per week in study groups. Any time that
students spent in preparation for examinations outside of study groups was not applicable to our
review. Our determination that an instructor was not present at study group meetings was a
result of our review of the University’s overall internal control over study groups. If an
instructor had been present at study group meetings, we would have considered this as evidence
of a strong control. Our review of a sample of student/class combinations indicated that students
received passing grades from faculty members without sufficient evidenc e that the study group
hours related to the weekly meetings were scheduled or occurred.

Additional Hours Spent by Students in Preparation for Examinations are Includable Under
the 12-Hour Rule

The University stated that some SPGS courses utilize traditio nal examinations, in addition to the
study group presentations and other weekly graded activities. The draft audit report ignores the
additional hours spent by students in those courses preparing for examinations, although the 12­
Hour Rule explicitly permits time spent in “preparation for examinations” to be counted towards

OIG Response

The University defined its academic year as consisting of 8 hours of instruction per week for 45
weeks. This definition provided the minimum 360 hours of instruction as required by the 12­
Hour Rule. University policy required that four hours per week be spent in classroom workshops
and four hours per week be spent in study group meetings. Whether or not students spent
additional time preparing for exams is not relevant to the University’s definition of an academic
year. On August 10, 2000, the Department issued a Notice of Proposed Rulemaking (NPRM)
concerning, among other items, changes to the 12-Hour Rule. The Department stated that “the
only time spent in ‘preparation for exams’ that could count as instructional time was the
preparation time that some institutions schedule as study days in lieu of scheduled classes
between the end of formal class work and the beginning of final exams.” The SPGS program
had no study days scheduled in lieu of scheduled classes.

There is No Statutory or Regulatory Basis for the OIG’s Requirement That the University
“Ensure That Study Group Meetings Were Taking Place”

The University stated that the 12-Hour Rule requires only a minimum number of “regularly
scheduled” instructional hours. The draft audit report is a far-reaching attempt to expand the rule

ED-OIG                                 A07-A0030                                           Page 17
to require such hours be actually physically attended by every relevant student, and that the
University specifically document each student’s “seat-time” in the study groups. The
Department recognized that a student's academic workload may consist of activities including
"work," "research," and "special studies that the institution considers sufficient." There is no
stated requirement, however, for an institution to specifically document each and every hour
spent by a student on such activities, so long as they are "regularly scheduled." The draft audit
report simply provides no basis in statute, regulation, published guidance, or case law to support
its heightened requirement that the University monitor students’ actual attendance for the
“regularly scheduled instruction” to be counted under the 12-Hour Rule.

OIG Response

The University was required to comply with the HEA and the regulations in effect during our
audit period. The 12-Hour Rule was a regulatory complement to the statutory definition of an
academic year, and the University acknowledged it was required to comply with it. The
University was required to provide 360 hours of instruction in a minimum of 30 weeks. As with
any other regulation, it is the University’s responsibility to demonstrate compliance. In this case
the University must demonstrate that it scheduled the study group hours and that they occurred.
By its own definition of an academic year (which consisted of a mandatory 180 hours of study
group meetings) the University excluded any additional time individual students may have spent
in other activities such as research, independent study, internships, special studies, etc. We
found no evidence that these activities were regularly scheduled.

The 12-Hour Rule is Widely Acknowledged to be Unworkable and Ill-Suited for Non-
Traditional Educational Programs

The University stated that the underlying basis for the 12-Hour Rule and its continued
applicability to the Title IV programs are presently in serious doubt. The HEA requires a
minimum of 30 weeks of instructional time; however, the 12-hour per week requirement was
added by regulatio n and therefore does not have any statutory basis. The appropriateness of the
12-Hour Rule, and the immeasurable burden it has created for institutions, has recently come
under increased scrutiny. The recently introduced Internet Equity and Education Act of 2001
would effectively eliminate the 12-Hour Rule.

OIG Response

The University was required to comply with the HEA and the regulations in effect during our
audit period. The 12-Hour Rule was a regulatory complement to the statutory definition of an
academic year, and the University acknowledged it was required to comply with it. As with any
other regulation, the University must be able to document that it is in compliance. Accordingly,
the University must be able to document that its academic year provided 360 hours of instruction
for full- time students.

ED-OIG                                  A07-A0030                                          Page 18
The Recommended Liability is Based on an Erroneous Methodology and Excludes
Significant Amounts of Time That Count Toward Compliance with the 12-Hour Rule

The University stated the OIG failed to consider that instructional activity includable under the
12-Hour Rule necessarily occurs outside of both the faculty- led classes and the study group
meetings. Although it cannot be, nor is it required by any legal authority to be, monitored and
measured by the University, any calculation under the 12-Hour Rule must presume that students
spent additional time preparing for these examinations and graded activities. That additional
time must be included in any calculation of course length, and the liability recommended by the
draft audit report is therefore based on a faulty methodology.

OIG Response

The University defined its academic year as consisting of a minimum of four hours per week in
classroom workshops, and four hours per week in study group meetings. If individual students
spent additional time in preparation for examinations or homework-type activities, it would not
be relevant to the University’s compliance with the 12-Hour Rule. Students were required to
spend four hours per week in study group meetings. Our review focused on whether the
University had documentation to show that students spent the required four hours per week in
these study group meetings.

ED-OIG                                A07-A0030                                          Page 19

Baker University was founded in 1858. Baker was accredited at the baccalaureate degree level
in 1913. In May 1988, Baker University began a number of new degree programs for working
adults that were united within the School of Professional and Graduate Studies. The SPGS
offered the following degree programs: Master of Liberal Arts (MLA), Bachelor of Business
Administration (BBA), Master of Science in Management (MSM), Master of Business
Administration (MBA), Bachelor of Science in Management (BSM), and the Master of Arts in
Education (MAED). The SPGS also offered the Bridge program, which consisted of general
education courses necessary to prepare students for the BBA program. The Associate of Arts in
Business (AAB) program began in August 1997. On February 1, 1996, the University contracted
with the Institute for Professional Development (IPD) to provide recruiting and accounting
services for certain SPGS programs. Our review covered the BBA, MSM, MBA, BSM, Bridge
and AAB programs. The MLA and MAED programs were not included in the contract, and
were semester-based; therefore, they were not part of our review. In March 1997, the North
Central Association of Colleges and Schools conducted a “focused visit” and concluded the
SPGS was performing satisfactorily in the areas reviewed. The focused visit dealt with two
specific areas: the completion of a financial work-out plan, and a review to ensure the
continuation of academic integrity on all off-campus programs. As of June 2001, the SPGS
served 1,470 students from its classroom and office complex in Overland Park, Kansas, and
small complexes in Topeka and Wichita, Kansas.

The contract stated that IPD was to provide the following services: (i) recruitment of students,
(ii) collection of all tuition and applicable fees, book/material fees, and other fees payable by a
student and applicable to the program, (iii) maintenance of the official accounting records, and
(iv) consulting services in the area of program management as outlined in the contract. The
contract stated that IPD was responsible for preparing promotional literature and providing
recruitment representatives. It further stated that IPD was to assist the University with
compliance with any legal requirements established in the jurisdiction in which the programs and
their related course of study are conducted, in which non-compliance may in any way affect the
programs or course of study. The contract required IPD to recruit an average initial enrollment
of 16 students per class (cohort group) during each year of the contract. Baker University was
not obligated to start any class with an initial enrollment of less than 13 students. The cohort
groups were to meet for four hours per week in classroom instruction and predetermined groups
of four to five students were to meet weekly for four hours of study group sessions. Classes
were to be taken in sequence and generally lasted five weeks.

The University’s responsibilities outlined in the contract included maintaining the academic
records and information on all students enrolled in the program, and determining the
admissibility of all students to the program. The University determined the amount of tuition

ED-OIG                                 A07-A0030                                           Page 20
and fees charged, exercised total jurisdiction over curricula approval, and provided necessary
administrative office space on campus for IPD and Baker University personnel involved in the
administration of the program.

Students enrolled in SPGS programs received assistance under the Federal Stafford Loan
Program, the Federal Pell Grant Program, and the Supplemental Educational Opportunity Grant
Program. The U.S. Department of Education reported a 2.3 percent default rate for Baker
University for fiscal year 1998.

ED-OIG                                A07-A0030                                          Page 21
                       Objectives, Scope, and Methodology

The objectives of the audit were to determine the University’s compliance with the HEA and
Title IV regulations in the areas of recruitment of students and student enrollment, and course
length. We focused our review on the following areas.

   •		 The University’s contract with IPD, and the University’s Program Participation 

       Agreement (PPA) with the Department of Education.

   •		 Required hours of instruction in an academic year.

To accomplish our objectives, we reviewed the University’s policies and procedures for its SPGS
programs, accounting and bank records, and student financial assistance and academic files. We
reviewed the University’s contract with IPD, IPD’s compensation plans for its recruiters, and the
University’s PPA with the Department. We reviewed the most recent single audit reports
prepared by the University’s Certified Public Accountants covering the three fiscal years ended
June 30, 1997, 1998 and 1999. We also reviewed the program review report prepared by
OSFA’s Institutional Participation and Oversight Service for the award years 1993-94 and 1994­
95. We reviewed the most recent report prepared by the University’s accrediting agency. We
interviewed University and IPD management officials and staff. We reviewed documentation
for two statistically selected study groups, and 60 statistically selected student/class
combinations. For the sample of 60, we defined the universe as consisting of 14,258 unique
student/class combinations. To achieve a higher level of sampling precision with a smaller
overall sample size (reduce variability), we stratified the sample of 60 student/class
combinations into three separate stratum consisting of 20 student/class combinations from each
award year during our scope. Our desired confidence level was 90 percent with a precision of +
or – 20 percent (or less). We determined that, if there were 1000 documented hours in the total
population, the probability is 96.8 percent (sampling risk) that we would have found at least one

To achieve the audit objectives we extensively relied on computer processed data contained in
Baker Unive rsity’s POISE system and IPD’s Oracle student account activity system. We used
data from the Department’s National Student Loan Data System (NSLDS) to corroborate the
data obtained from the University. We tested the accuracy, authenticity, and completene ss of the
various data elements by comparing source documents to computer data, and comparing
computer data to source documents. Based on these tests and assessments we concluded the data
are sufficiently reliable to be used in meeting the audit’s objectives.

The audit covered the 1996-97, 1997-98, and 1998-99 award years (July 1, 1996, through June
30, 1999). We performed fieldwork on-site at the University’s offices in Baldwin City and
Overland Park, Kansas, during the periods September 12–15, 2000; September 19, 2000;
December 4, 5, 7, and 20, 2000; and March 26, 2001. We held an exit conference with the

ED-OIG                                 A07-A0030		                                         Page 22
University on August 15, 2001. We conducted the audit in accordance with government auditing
standards appropriate to the scope of review described above.

Methodology Used to Determine the Title IV Funds Improperly Disbursed by the
University for the Commissioned Sales Finding
We identified total disbursements of $13,612,816 in Federal Stafford loan funds, $257,791 in
Pell Grant funds, and $64,688 in Supplement Educational Opportunity Grant (SEOG) funds.
The University provided electronic files containing information on SPGS students who received
disbursements for Stafford loans, SEOG and Pell Grants during our audit period. We used the
information contained in these files and corroborating information extracted from NSLDS to
determine the improperly disbursed funds.

Methodology Used to Determine the Title IV Funds Improperly Disbursed by the
University for the Course Length Finding
The University’s academic year would need to be 90 weeks in length for it to meet the 360-hour
requirement for an academic year. Therefore, the University should not have disbursed Title IV
funds to students during a 90-week academic period that exceeded the maximum annual amounts
for an academic year allowed under the Stafford loan and Pell Grant programs.

Determination of Stafford Loan Disbursements in Excess of Annual Loan Limits. We
determined the eligible disbursements based on the initial grade level and applicable loan limits.
For the two groups described in the following paragraph, we estimated $1,672,276 in Title IV
disbursements that exceed the annual limits.

For the Stafford loan estimates, we analyzed disbursements for two separate groups of students
identified from files provided by the University. For students in each group, we analyzed loan
period start dates and loan disbursements covering a 90-week academic period. The first group
consisted of students who received disbursements for loans with loan start dates during the
period July 1, 1996, through June 30, 1997, and disbursements for loans with loan start dates
during the period July 1, 1997, through June 30, 1998. The second group, which excludes
students included in the first group, consisted of students who received disbursements for loans
with loan start dates during the period July 1, 1997, through June 30, 1998, and disbursements
for loans with loan start dates in the period July 1, 1998, through June 30, 1999.

Pell Grant Disbursements in Excess of Annual Limits. We identified the Pell funds disbursed to
students during our audit period. To determine the amount of Pell funds that a student may
receive during a payment period, institutions without standard terms multiply the maximum
amount shown on schedules published by the Secretary by a specified fraction. The numerator
of the fraction is the number of credit hours in a payment period and the denominator is the
number of credit hours in an academic year. Because the University used the credit hours for a
45-week academic year rather than a 90-week academic year as the denominator, the Pell awards
were overstated by one-half, or 50 percent. Since the University awarded Pell Grant funds to
students according to the number of hours in the ir cohort schedules, and these schedules did not
always consist of 360 instructional hours for an enrollment period, we adjusted the disallowance

ED-OIG                                 A07-A0030                                           Page 23
percentage downward to reflect the actual number of hours in each cohort’s schedule. As a
result, the disallowance percentage varied among cohorts. We estimated $108,704 in Pell
disbursements exceeded the maximum amount allowed.

ED-OIG                                A07-A0030                                        Page 24
                       Statement on Management Controls

As part of our review, we gained an understanding of Baker University’s management control
structure, as well as its policies, procedures, and practices for the School of Professional and
Graduate Studies, as applicable, to the scope of the audit. Our purpose was to assess the level of
control risk for determining the nature, extent, and timing of our substantive tests. We assessed
the significant controls in the following categories:

•   Data Reliability
•   Institutional Eligibility and Student Enrollment
•   Institutional Adherence to the Definition of Academic Year

Because of inherent limitations, a study and evaluation made for the limited purpose described
above would not necessarily disclose all material weaknesses in the management controls.
However, our assessment identified significant management control weaknesses which adversely
affected Baker University’s ability to administer the Title IV programs for its SPGS programs.
These weaknesses included incentive-based payments for student enrollment that violated the
statutory prohibition on commissioned sales, and inadequate control over the amount of time
spent in instruction that violated the 12-Hour Rule. These weaknesses and their effects are
discussed in the Audit Results section of this report.

ED-OIG                                 A07-A0030                                           Page 25
                                          Attachment 1

               Baker University

         Comments on the Draft Report

ED-OIG          A07-A0030                      Page 26
   .   .'	                                  -­         •        1:1 "
                                                                -~,  I'


              \ I \ ()\ U l.:\ I(;llT IUll.\:ERl:

                                                               June 17, 200'

              Mr Kilh.m Allo.,
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              u.s. Departmcnl Qf Education
              Oft,,;~ of 1">1'<"'1", (i~"e,~1
              10220 N hN'UIlYO HIlls BI,-d .. SUIlC 200
              Kansas CIty. 1>10 <H153 - 1367

                         RE : 	     I>r)ft Audit Report : Boker Liu;'-oc. ily 

                                    « '''III ,,,I Nil ",I"" I:U-OII;/ A07-MMHO ) 

              Dc"   ~lr   Allen .

                         Anochcd ple.se find Ihl.:~f U""-~rSl!y '5 re.ponse: to lhe Dr.ft Audit Report
              ,!SUN Qn "lIn] 18, !OO2 b~' the UlU1N Male, lkp~runen l "I' I,du"a'u",. Ollwe of
              1T1<r>o'l:'M r>(>n~rnl . D'H""" of Audit. For . 1I of the r~as<ln' presented 1herem. (he
              UnIversity doe. not CO'''~r wIth lhe hlldillg•• nd Ra;ommo ,,,Jau,,,,, ,"1 fmtlL '" tJ",   oJ.n

                         w~ ~l'pr ~"'4h:
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              Un",=;,y rCscncS III< nghl and opportunu), ,<> respond furth~r to any final rqx>" as m.)
              Ix i,,"cd.

                                                                          Daniel M Lambert

   RAKER UNIV): I(Sln"S RESPO-';SE TO T il E DRAFT ,'Imrr K):"OIlT OF TilE
    U.S. Df."A I(TMHIj'" (IF ED UCATION OfFI CE Of INS".:(TOK G.: i'la: RAL
                             (I 'olltrol Numbu ED-OIGIA01.AOOJOj

         Baker University (th~ ~Umvcrslty:' or "Baker") is a Ilfjvat~, nol·for·prolil.libcr.ll ans
InSlltUlion founded in L858 alld IS lheoldcsi uni~'enily in ~ Slal~ uf KruIsas. 1lIe Unh'U$IIY's
mOlD campus is located in Rald"'ln Cny. Kansu. and it alw nffers adult-learning courses in
Overland Park, Topeka.. ami Wichita, IS well as Lee's SUUlIIIII, MI!i.SOun. Affilialed with the
Unlloo Methodut Church, Ih.. Umv<'11lty eWTmtly Kroes :li'l""xlrnateJy 2300 studenu fmm 28
st~les and 10 fom,"" WUlltru.'S. Baker Uni\'asity is accrt'<liled by the North Central A5SO(:iatlllll
ufCoLleges and Schools, lh~ NUlIOn..1 League for Nun;ing Accrcthung CommisSion, the
Commission on Collegiate Nursmg Educ.cion, the National ASSOCIIIIIOIi of Schools of Music, the
A..,;ociallon of Collegiate Bw;1I1CSS School, IlI!d Programs, and the N~honal Council for
Ace,,,,hllllion of Teacher Cdue.ati<H1. fh" Unwcrsily has eonsi~tently 1IIIIIIItamro very low cohort
default mil'S. whleh have stcadily d«Iined In IttCrlI yean: ).4 percellt In h!iCul Ycar crY")
1991, 2l pen:ent In FY 1998,1lI!d l.8 pt'f"Crnlln FY 1m. Baker ranks """"nd among all private
and pulilte colkgd In Kansas for the I'"reenlol!(: of undergraduale ~tu(lcms IICCcptOO 10 graduate
progmllls, lind ninety-eight percent of liS t<Jllduates an: in a professi"",,1 Job or graduate 5(:hool
"'itbin Sl~ months of graduation.

         The IllII!! Audit Report by the om"., of Inspector General ("OIG") fOl:IISC$ upon federal
$ludent liualJCi~1 aid IUnds ("Title IV funds") ,""--etved by studcnU enrolled '" HlI.kt'l" Uni\-enity' s
School of P",f"""lOnal and Gl"3duate Studi... ("SJ><..iS,. The University 111311'1~lns. COlilracl
with an indt:pellllent outSide Crltity, Ihe Inslltll!" for Professional Dcvelnl'm~~11 ('. !PD") for
various services reluted to SPGS academic pfU)9Ul1IS. The issues rai&ed hy the Draft Audit
Rcpon penDm botll to the "Agn:ernent het"""" Baker University and Ilislillll., fo, Professional
Dc,·cIOlm).,III" (the "JPD Contract'). all,j h.!lhe stfU(turc of the SPGS acadenllc programs in
question ..h., SPGS programs usc a "coh"" modd" of learning in "lied' sm.all groups of
studenu pmgress together through the lIC",lo:nuc program on a eOUl"SC-hy,couTSC basis. The
clll"Ticulum reh o:s on pecr-bascd learning learns, ",..class instruction, indi' idl~11 projects and
group activihCll. "II SPGS courses an: offered III il structured sequence with sl ,,,tenIS completing
onc eollISC al a lime. 1lil0Wing complete focus In O:;lCh topic area.

        The Drnll ""d,t Report first erroneously clmms that the University "violated Ih., sl~ll1tOl)'
prohibition on Ih., II~ of mcenti\'c payments" (the " lnct:nllVe Compcnution Rule") wh.,,, II
comracled with "'1) l>nIt\ Audil Rcpon at 1,3. Basal on Ihl5 eonclU$ion. the OJu It:u,,"nl\!llds
Ihat the U.S. Department of Educalion {the "Dcl'art",enl" or "ED, requir.: Ihe Unil'en;ily In
!"Ctum all Title IV flllMls (hsburscd for the SPGS pmgrn",s between July I, 19% and JUlie lO,
1m. The Draft Audit IIl'pGrt funher cli-ims that ''1h" Unlv<'l"Slty', !lCadcmie year fOf il\ SI'G~
programl dId nol Pfo~uJe n... numbc:-rofin.tructional hoUIS ''''lUlrN'' under ~ so-.::alled 12
Hour Rulc. Id. Following nilS concillSion, the OIG ineofloctly asserts that thc Univcnity
Mr. Wilham Allen
J LIne] 7. 2002
P"g~ 2

m=wardcd Title IV funds to SPGS $tud('rlts. I !)nft Audit R"f'Or1 lit ]. S. The UnivCTSlty
~lr~nLlOI'sly disagrees with both nf these lindings and the 01(1'. n"""'"Dl"IldallOns, for the
reasons set fonh hemn.

        O.; VElOPMENT \Ill II .ATED TilE INC E~"Tln: CC 1\1 I't; NSATION RULE..

         'Ibe University diugr«!' WII h the Oraft Audit Repor1 's 3...._ [lon that the IPO Contract'~
leV~IILle 11110(aliOn provisions vinlat.. the Incentive Compensation Rule In addition. the OIG's
rC!OOlmnmdalion that the University return all Title IV funding disl",r.oed for the SPGS programs
is all nlreme. unjustified, and arbit",n Iy proposed sanction without ~IIppon In applicable law or
regulallOns. Fioally, IPO maintains tl",llts reeruiter salaries do 1101 VIolate the Incentive
Compo:r\llllllOO Rulc.

        A. 	      The A]Jocltion or I-Ic"~nur UDdtr tbe I PO COlli rll,'1       [)O(.'S   NOI Vlolale the
                  lu~nt;'·e CO nlpe" ••I;"u Rule.

         lh~ L}rull Audit Report errone",,~ly clmml that the revenue alloc"tlOn proviSion of the
IPO COlltmct IS prohibited. Thili claim I~ 1",sOO on the OIG's allegation that the contract
"provided ror InceIltl\fe pa}menlS to IPD based on SIICCC$S in $C(uring student enrollments for the
SPGS programs:' IlnIft Audit Report at 3. The Urn>'miry vigorously di&ag/l'eS WIth both the
draft finding ami recommendation, for each of Ih" lollowing reasons;

               • 	 The IPD Contract compeolS3t""lPD based on the volul1l" ofa broad ranlle of
                   profeSSIonal services pmv idecl 10 Baker University, many 11 f wln~h have variable
                   ~"OSIS dependant on the llI.mh.:r of!illidcnts c:nrolled in the SI'(jS programs.
               • 	 i'llelncmtive COmpc1lS3l1OO i!u le docs IIOt apply to the IP[) C'OOlmcl because (I)
                   Ih" Departmenlls wilhrnu ]q;al ~uthonty to usc: the rule as" bnslslor n:gulating
                   TOutme contracts for profession"I, non-cnrollment related &en.ICes; and (2) the rule
                   CIOnnot apply to saviee contructs ".. here the eost of providing ~I«S necessarily
                   vanes dependmg on Ihe: IIl1m""" ofstudents.
               • 	 The Dcpanment has puhh shecl no TCgulation or other public gllul,mce supponing
                   tht interpretation ofr",mue-shanng _gn:ements advanced hy tile Olti 111 the!)nft
                   Audit Rcpon. Indeed, Iho: only public pronouncement rrom tho: lkparnnentlS
                   contrary to the positioll ufthe Ol v.

rOT caeh oftt..: ruregolOg reasons, u discussed III we<:lIer detai] below. the Univeouly
'!Tenuously disag,..,.,,; wnh the Draft Audit Report 's findmgs and recommendations j>l:lt;II",ng to

, AI die OnR I\udn Ropon nom .' pat< I.""" I. \be Till< IV fltodI .. is"", ..... \be 12 II""" Rul< flnd",,"_
oIupI",.~,.~ <If"""""'" """cm:lbt' 1hc
                                  h",.nll"C CUl~ Rill< lit""
Mr. William Allen
June 17.2002
I'''!l:e 3

Ihe IPD Conll3Cl.

                 I, 	   ~   IPO r:""lrnel compcnUles IPD 1n.scd nn Ihl) ~olumc of a broad range
                        ~fe<s'''"IlI5CI'Vlecs provided 10 Baker Univom>lly.

        In lhe present case. IPO poorr""ned lhe following broad range "f tlon-rocrullment and
'H"'.~nrollmcnt 5CJ'Vie~, all of willeh "re not specifically referellceI( '" I hI) /PO Contract but
rHuoelhelC5ll occurrc4 pulluant 10 the ~vnlrnct . • 1 II'D'I expense. regli"hnl: Ihe operalion of the
SI'GS programs:

        • 	 Management consull "'11 mid training regarding:
            " 	 Program adminrslrul,on and evaluation,
                 A$$CSSnlCflt centerlJl'¥lll"zauon and manl£eIllt:nt;
                 Sludent tracking ~)Slc:ms development and iIllJlk-",cn!Ullon:
            " 	 MarkC1 ing rc:seard, lInd management: 

                 Sludcnltuition and fi'~"w:'al aid accounlin;, 

                 Facul!)' ~roitment anti ~I;                

                 Ongoing curriculum Ic;VleW lind revision; 

        • Academic quality audits :IIKI mock KCrCditation reviews rur SI'GS programs;
        • Administrati"e support for 1111 SPGS Ilaff (the majority "r '" tlltb an: Univenity
            faeul!), and personnel): 

            ,    Office space for SPGS rKlmlllr$U'lition; 

            o 	 Tclcphon~, copierll, alld computel'1 for SPGS admllll~I,,'tlvc offices:
                 Admilliltrali,'c pcr.iOIme\ (=cptionist. sccrc:taric:s., o:Ic ) for SPGS administr.r.ti,'e
        • 	 AcqUIsition and mainlell~"cl) ofnppropriate clauroom f:IC,hhes for SI'GS prograno5;
        • 	 I>n:ofcssional devclopmeo'l:ond lllllntni aclivitics for IJn".. crJ;IIY·$ financial aid staff,
            sludcnlservic~ persollnel, and SPGS faculty.
        • 	 Feasibility studies conc"""ng potenlial expansion ofSl'GS program':
        • 	 Mam!cnance of accoun(m" records, and financial plann"'!l lOfld budgeting, in
            conJunclion with the Iln"crsily's Office of Finan<:ial Sen ICes

         llte OIC ignores the many non tm'Ollment related services pcrfof11H,,1 by IPD under Ihe
conlract. IlOd instead treats the cn"lmct us If It covered only recruilmel,l amI ~lud~'I11 occounllng
f""cllon. Sec Draft Audll Report alllagt5 4·~ Thc OIG wrongly implies Ihal recrultmenl and
IUllion collC(1loll$ o;onStm'led [PO', ".. Iy r""",IIOIlS y,;th respect to thc SPGS pn'll,J'l,ms, ,d., when
III foct ll'D performed many and varied r"",-ilnns Olher Ihan r«ruilmelll undcl II, Wlllrnct with
the Univernlly, "II ofwhkh ~ essenllall" Ih~ t;lICCesS oflhe program., In addltl"", the OIG
ienora tltt: r:oo:l lhal the ovcnll coli 10 any ,"etKk" (If proVIding many of Ihr: abo,"c ,;e".. iCC$ "
highly dependent on tho \"olwne required, whldl I.., III IlInt, dependent on the nun,l""" nf
Mr William Allm
June 17,2002
1'''1:11 4

Silidcnu 81 the institutlon. The 11'11 O ..ITlICt Ihereforr simply allocalcs revenues 10 rrlmbune
II'D for addilional servitet: provided 10 lhe URI\"Cnity as il5 demand rOf" f;ef".1t.:s IncTrll$CS.

           Based on an cm)ne(lusly narrow VI"" of IPD's re$JlOnsibililiet: and a sunnnnry rejection
or II", somewhat obvious concep1lhal atkIilton:ll SPGS students creale addiliOl~11 e~penses. Ihe
DraA Audll Repon incorreclly concludcsllml wily wnounts paid by the Univenaly I" 11'0 were III
t<lnsiderHllon for "securing sludent enroll",enlS lor Its SI'GS programs:' and for nil olh~r
fUnctlOIL~ whillsocn'r. Id. The IPD Cont"",l, however. reflecu thai the allocation ofSI-'(jS
re'·.,,'U0<:5 IS bused upon a wide I3nge of nOlH:nrollmcnl related academic and ao.lunmstmllon
funC1llJrul, '" addition to the limited ilems idenl1fied in the Draft Audit Repor1 If the OIG
audihm; umnlcntionally overlooked 1h......., IIlkhhonal !I'D rcsponsibilitie~ in Ih" course of the their
reView, Ihe audit procedUJft WCll: illc<)mplde and thcrcforr flawed. Hnwt:\·t:r. ifthc Dudnon
wen: :.warc ofthesc additional IPO ,;"n,ct'S and chose: to iil'Df'C them, Ihe ])mll Audit Report is
nawed lU u milJ\llCT thai raises qUe!ilinns uboul Ille Impartiality of1he audil process.

         Kcyond liS faillll"C" to cxanllllC th" brulid range of IPD'1i non-enrollm""l related academic
and adlllllllstrall,'c function$, lhe [)nil Alliin Report's rdianee upon ten"," "'~r~ehng-<>ncnled
funclions ~,m'lurly fails 10 demonSlrate any' ,oluuon ofthc Incentive ('omrem;;,llon Rule. IPD
had no authunlY or cootrol with respect to the Um\"crsity's criteria., 5tal\danls. procedures or
dC(;isiolls n:spcc"ng the admission Or enrollment of studcnU. Morea""",.1 w-.... the Uni\'Cf$ity,
and not IPn. Ihal awuded Tille IV funds In those SPGS $tudents p3r1ieipatmg In Ihe fede ..l
student fiTla"~,,.t IIId programs. Accordingly, II'D d,d not and could not Seem" "nfoJimems
Within Ihe l1Iea'''''1: onlle Incentive COmpe"'I:IlIvn Rule The Rule's prohihl1to" ClIlends solely
with respect In I'~)"menls based upon "Sw.:,cAA til secunng enrollments or fillancml md ,. 11lc
prohibition therefure tloeI not apply to IPD, "I"ch could not and did not secure: L~,,,,lImcnll or
financial aid for th~ lJn1\"CTSlIy.

                2.      II.., loccnti\"c Compcma!lon Rule 00n nut apply to the IPO ('.onl"",1

                        "       The Department has nv legal aUlhori1y for using the lu~"nt" c
                                Compensation Rule"" u bam for regulating routine conlT".ocIS 10..
                                professional, nofH.lffilimenl relatoo services.

         SC(;tirlll 4g7(ul uflhe Higher (ducation Act "r 1%5, ail amended (the "HEA "), Illqlll=
inslilutions partlclJl;lhng '" the Title IV programs to ""I"," Into I Program Parllcipalion
Agreement ("PP A') lhat provides for luch institutio!lS 111 c<''''ply "mh • long laWldry list of
TCc!Uirrmenli. The I"L~lIlo:1h ilem on the lisl Iiales:

            The institu"nll "'ll not provide any commission, I~'nlls, or other incenlive
            payment based dm:.,lly or Indireclly on slICe,," ,n sc.;unng enrollmcnu or
            financial aid to allY p"rsons or entilies engaged in any simient recruiting or
Mr WIlliam Allen
June 17, 2002
p,,!;(t! S

                admIssion aclLvitic:s or ill makmg doclSlons          ~ptdmg   the ;lw;u-d Of.hllleni
                tinancial assistanc~.

20 USC' § IO<)4(aX20), The implementing rt!l\ulahoo promulgated by doe Oi:rartmcnt                      In   tum
I1:quira; Tille IV. H£A pmICipa1inil intili.ullu115 LQ Igra: u follows:

                jThc mstltu.ion I w111 not pmvide, nor COOlroct wjlb any ~nll!y .h31
                pro"ldes, any commiuioll, hom,s, ur othcr inccmj\'e payment ~l
                lh/'eICltyor mdirccdy on success III k'CUnng enrollments or financial mll.o
                Hny pcrwnl or emi.ies engaged m ;my s.udcnt KCnIi.ing or a.cimissl(lu
                a~1I VIIICS or 10 making decisions r~II."nhng the awarding of"udenL
                /inane",1 USSIStancc.

34 C.F.R. § 1i6~ 14{b)(22). It is plam from .IIe c'press language of both provi5ions 111;11 Ihe
1l1(:cnt;ve C'nm[ll:nsahon Rule was intended.o pre,,,,,1 schools from using comml~~I""",t
s.ale5~ns In r"';rolt studentS. nol to regulale IK,sIrteSS Irranl\<;TDenlS such as the one .k:so:nbed
In the ~fl Au,hl Report whitb pay for a wide lIrr..y ofprofcsslooal ~itC'S based on Ihe
volume of &cf\ Ices rflt.:ClVed by I higher educa.,,,,, IIISh.U110n. The legisla.ive and regulatnry
histories cleal ty eUlph:lslze the in.ent.o halt .he 11<;0: ne commissioned s.alesperson~ as ""'MII'ers
Congress exlllall""l·

                The confer.,.". IlOle lho. substantial program "hllse has occurred in the
                s.uden. aid pA)grants Wllh I1:spect 10 Ihe uS<! of commlSllioned sales
                fqlrCSCl1'a""'S '11l1:"1'1:fol1: this IcgJsl.uiotl w, II prohibil their usc.

L·onf. R~p. No, 102·(,10, tu2d Cong .• 2d ScSI. 499 (1992). Similarly•• he Secretary's
published commentary on Ihe linal regulation stated:

                lbe Secretary IIl:h~,·t!S thai thi~ provision is lI«.cssary 10 Implement more
                rillid res.riC'IOIIS .10,," were secn in the past 011 .11" pnlenccs of
                "commissioned sah,spmloll5"

W h'tl Rcg. 9539 (February 28, lY'J4) There il simply Mlhing in t!"I..,..leg,slati'·c and
regulntory history 10 support .h" tnc~nhve Compensation Rule as a has,s r<lr lhe Ocpartmcnl'O
regula.e mStltulions' routine bu.~I1""'-~ IlmlfIgcmcots with outside "c",Jur,; where services an:
"",,'melcd for II a SCI ra.e of COIlIllt!'ls;lhon based on the ,'OluRlC of M:f\ 'ces provldt"d. ruth as tile
""nlmel bcI\>.·ccn Baker University ,.mIIPD.'

' NoWoIy, """,oIr""" '" \he ~..._          101(1" pmnmI~nl by ED, _IK'WI 481(_)0(1he IlCA ...."es'.. "'fcrera ...
........... _   ...... Ntoc:olJQftO.t ;""""""'" ond "",,!do   .aU'_
Mr William Allen
June 17,2002
Page 6

                            b          Th.., Incenuve Compensalioll Rul.., c;UUIOI apply 10 Kl'Vice
                                       e.,,,lnleIS where Ihe tOSI of providlllll SCrvlCCS nccessarily varies
                                       dq><:"<lml!: on Ihc number of 1i10001l1S.

          The ""'y ofprofession315Cn'oct:S dellnealed in the IPD Conlrncl, ,md pcrfonned
O\<:~.,nllflgly, demonstralC$ Ihal Ihe pan IlII ullocation of revenues In II'Il d""s IlQI constilute
IIIC,,"I"'Ccompensation attribulahl .. I.., enmllmcnl5, but instead is SlInl,ly lin "'lUltablc paymenl
Inc:charnsm designed 10 a«ount (or Ih.. amounl of ....·m rcquimi ofT}>U In servmg SI'GS
sIUlk."I •. The magnitude of IPO's Vdn<HJS fur>Cl1ons and obligations UI"I~r Ihe contract do:pends
in suhslanllnl pan uJXln how many SI",I~nls enroll in Ihe SPGS prognuns. Ind~...-d. many of the
tasks assl19..,.J 10 [PO by the IPO Contrxt arc lughly volume sensitive. ReclUSe the partics
could nolpn:dlci how many students wouk! enroll, they similarly could not p",..het how much
wo,k Ih" IPIJ contract would enuil Tu occ<>unl for this IlIlcertainly inlhelr bUSIness
arraflgemenl, the 11'0 ContraCI alloeal"" revenue in a m;mner that coml",,,,,,,I,,,, 11'0 on a basis
roughly p!Il1IUcl1O lhc seope and quanhly orlhe I'CQuiml services. IPO 's compensallon is
I,n,,,,,scd on !he full seope of work I" be performed for lhe UnivClSlly, "..,1 00 IPD', success in
ellrolhng ony studenls in lhe SPGS r"ugrams.

         In conlrast,!he QIG wwld ~tly disallow any payment aU"'lg",",,"1 belween an
inslilulion and professional service pmvllier Im,1 n;-llcclS indefinite qu:tntiulOS. Ihlt 1II1crpretaiion
is nawcd 1..... :~lIse Ihe Ineenlive COmpen""llnn Mille applies to individual ~llIpIOyt'C'5 with a f1llite
amounl o( Illtle 111 .... h"h 10 perform joh (UIICI!OIlll. However. for a pmfes.~lUlml services vendor
Ihal will employ more people and buy mO,e ",,"ourecs 10 meet demand 0' ,rn:n:a5e prodW:livily,
there is no filllte tIme fCSOu.rtC as there is Wllh md""ldual employtC$. TIter"r"re, Ir a vendor
expands tilt level oflCl"Viccs under a conlracl whl'fC demand is increasing, as In tillS ease,
providing Ihe '~nJor wilh more 10lal ~ompens;'hon 10 offsel the greater workl'~kl und need for
more employees IS nola ''bonU5~ bUI rather an ""I"ilable compcmation for SC ....·,ct:>I rendered
ll!cse ceonollllc preceplS dictale thallhe [neenl,..., Compensation R..,le can apply nnly 10 Ihe
compensalion of lI~tlVl,h'Hb employed by Ihe 1Il~liluli..,n or the vendor. The rule ~allnol urpl)' 10
paymenls made by an Instllution 10 a ~'endor for p"'f.....~'unal serviccs rendCTed punuanllo
conlracts of in.,",fimte l[uamilies.'

      TIm 1)",/1 Audit RCJXln promOles a slraine.1 "",I unwllmmted eXlension of the 5COpe ~",J
meaning of the h""",I,,'e Compensation Rule far 1"')'lJf1d 115 mcamna and inlml. Congrt:Sli

' The OIC,', in'<rp.. tahCHI <,U'" •   "'''''>u" ...htrehy ,mall   Of   "",d"un .IUd """JIUII~'" C3MOI con.....,. ,",'nk
"""ode "enc\on 10 ...,,' ..."" .x>lcloJ>uIlI """,.':at;". "",,·ITad~iooa! """,.._ I .xh"el y . Y......... Only Iorzcr
""'""_ ..,do r••      __ .."""".. and .".,Jal <apIC;Iy, ...,\I "" .bl< '" df«bVOIy coil", _             ~II""'V"""
01 lup 'luiif)'
Mr W,lllam Aile.
June 17.2002
Page 7

JOUshtlO impolie .. ban on tlte lL<;C "r C(lItUIllllSloncd salespersons or "bounty hun1Cl ~" thaI
secured unquahfied C1\TOllments In l'fUCure un"'amIIUOO financial aid dollan frlr Ihelr ,,",pluy~TS,
In stark eOlUrast. lhis case il1\'ol\'<:$ Inl,,1 compensation lhal was calculated and pal<l ba:>eclupon
Ihe 'lunnuty of professional and adlll"uslmtlve services pcrfonned by a third-pany contractor thaI
eu'relscd no control o\'CTehSibilny r'lf ndmlSSlons or enrollment. Indeed, the ocl ofrecnlltmcnt
al Ruker Univcrsity. whether by Il'D (Of the SPGS prognmS or by othcn< for the remamdcr of the
UllIvel'Slly, is not tantamount tn ""rvilrnent. Therefore, this equital>le husin""" IlITlIllgemC1It
cle;rrly docs not fall '" ithin tlte SCO'l"l uf condutt prohibited by the ~talulrny tnt or Legislative
m4ml. the rtgul;uion or anyolhcr puhlic pronoun«ment by the Dqn.rtlllenL In addItion. the
\j",.emlly·' FY 1999 collort default rate," only 1,8 pereent. This extraordinarily luw default
rale I. c"nc1"~lvc proof that the University d,d nol admit unqualified students ",I" "~S SPGS
programs. rhe Incentive CompcnutJOn Rul ~ h;rs absolutely I'IOIhing \0 do with the v;.rll",,·
revenue-s1",nnl/: agreemenL and the finding SIM 'U Itl be n:tC,nded.

                    J         The D<;panmmt has l'uhhsh"'loo re!!ulation or other public gUl/lance
                              supporting the DIG', mll'rpretauon of the Incmti~ Con1lle"sallOn Rule to
                              reSlnet routine reven..., ."1aIlII1/: nrrangcmenlJ,

          The Drnll A "d,t Rcpon citu no case pr""wrnl, regu latory or non·regulatnry K",,]mlCe. or
other legal authority 10 suppon the proposition that the "IIO(lII.ion of re\'cnue under the 11'1)
COnlT1lCt violates tile hICL'tI1I\'e Compensation Rule. 11115 a1tempt by the DIG 10 erealc and
retroaclively apply a new requorcmen, to Baker I J,,,wrslly mlses serious due process cunccmg
Namely. partie~ Ihat ar~ r~li:ulated by the Dqwtment. or by lilly other administrati~e al/:ency. arc
entitled 10 adequate not,ce of ",hat niles aTe to he "PPhcd to IlKm. In this case. Ih", Um\'erslly
did I'lOl know . and could nOI have known. thallht pllocallon of revenue in the IPI) Contract
would be cn",l ruo.'<i as Bviolation orthe Incent, ve Compenulion Rule. lleCau~c nu such
pronouncmlenl or mtcrprelation had e"er"""n pubhshed and disseminated 10 I ,II~ IV­
panicipating mslllullOlU.' Indeed. for all nftht reasons pn'lIC!Itcd in this &ub"usslOn. Ihis
Universi ty and "'''nyothers lil:.e it reason.ably Itt:hcved thc opposite.' And in fact, Il.~ ",,,,,,,,ned

, Fill .......1"""'Ih' _                         r
                                  tI) \be o&uw><. . . 11>0 DrlII1 Au<!" Report. o.p.. ...... '1 utr",,.J< mode f'noqucm ""bl.. 

• "'.......... Il10,,,..... _ " ' ' ' '... ....,. "'~ WlI!I              I~... a ktta <loI.:d A"",,", 2. :!OIlI. M, 0.,.",
lkI.:cron <If I"" 0 . , . . -   ', "olocy                o.v."""""",
                                                   ODd Dud~""              UII;, .. formeds.:""""      O .... 1c. G!a.. ~ ttuo, " ...
lkp'mn<'n! ;. no! ""pared to "sue li",I.., ~u""'nce "" ""''''''iv, OOmp<IIUboo .. ~, .. umo," Al!1v>o&h ,he
!)"pan",.,,, ""I>or<!u<!Uly prnoonl«l dr.n ,.~"\;o1O!y ........,"""'" ....... m'"i .....01... ""'"''''....n'''' til ...."""oaltd
lI.k"oakmc c"'m""nce. !he ... ,oaOled ~ ~ filled 10 KKh COllS<_. Tu do... the                                   o.,.nmra!         lias
                                            uil'"r..,.. _.
I;o).tA ... f~""'" ,..,10<)' ..".... .... 1Iuo                     cItople ,lit ........... ufdw ",01 vIbn Dnft A,""" RoporI. by
d.. OlG,

, n.. ISWeIo ,~0Ic\I bete,n "" .......... u.. 1/1< .utbo,,'y "r I'D. Ihrnutb ~~ot ,~",,""mt. '"
p<om<>IpIt 'q:ubt..... CO''CnU-g .."..."....sIwua' """''',IIIS beIot,'ftII Til'" tV panocopotms IWb"'....... and .........
...."In. Unhl< ,q:.bnn........t 1hroIO~ thatlon...1<llltrum!ilrabve P"""'"'. ,",'bich ""'Y be: d•• IIC1,~fll bul "'"
<nulied '0 <1« ...,,,,., lh~ rei""''''')' ,nl<'1>K'"'_ "' ",., "' thIS <~ W/I.. """.Io!><d .urnpllt'OIJ.ly by ~'" Ole; "net
Mr, William All.",
June 17,2002
Page 8

below, the Depalllm:"t'~ f\'Ctf\! statements during negotiated rult:mnJlIng \erify the University',
reasonable belief.' W0: further submit !hat the interpre1.atiou 'Mlvaoced by the OIG In the Drall
Audit Report ,~ so 'o:"'oved from a reasonable person'~ u",lcrstandmg of the regulations that the
Universi ty ca""ol h.: dt:t:med 10 have been fairly infom.ed of ""y .such agency perspective,
Imp05ition or a muillmilhon-dollar liability under this .luhlOllS, rctrOlCll\'cly applied policy
Interpretation viol~h'S Ir.lllmonal notions of due process al,,1 h:ISle fill mess be<:ause the Univeuity
did not have adequ~l~ ""I me Ihat ill conduct would be dUI"",1 prohlbllcd

         MOIWVC'T, 10 the    best or Ih" U,m I.'r$lty'l lr::!IOwlwge, despite Ihe CTO""Ko:ncc nationally of
.",,,,,ue $hanng &nd similar tyjl'e 00"lmclu81 undCl'$landingt between higher OOUCll1100
""I II "lIOns and oUlside vendors, nellh~r Ihe IJcpnnmcm 'I Office of PO~!E.eCo",lmy E(]uealion nor
Fc,kr.,1 Siudenl Aid has previously aJ'I.1 ,at the locClltive Compms;tlioo Rule In th.s m!lJUlCT to
any ,rn;lnuI1O!l, and the OIG hu pl'o~,d ..t no Jushfication or legal authority fOf "nr..,,,,,"g ,IS 0 ...."
illl.:<1",1 poltey Intcrpretanon againSI!"" UIIIH'flil1y, Wc respectfully suggest tI~.1 Ihe UIG's
act ,nn ",,,illlTlll)' and capricious because" n:gU llllOry agcney must provide an '''''''tillite
npI31.allu" belorc II treats similarly s;tuah:d panll'S dlfTcrtntly,

                 most significantly, the OIG's apparel)! claim that sharing of tuitiol1 r"o~"I"~ 15 8
per 5C violation nr Ihe !occmivc Compensatio" R Ill~ tonlllcls directly with recent
pronouncancl1t< by the Department On April 17, 2U02,thc Department pre5eTllc:d 3 n"gotll.tcd
rulemak,ng 00111""11",,, " 'lIh draft regulatury ch~");",, that for the first time sinee th" IIngma!
1994 pmlllulW,hon cilll1ficd the official view Ihe prohibi tion's s<:ope. Dlat IImfi provided
specific cUlllpl"" ur"[I)ctivitie5 and arrangem~nt~ that an institution l1Iay carry ""t w.thout
violating" th" proh.b,t,on, ioclliding w,lh rc;po.'Cl to rn'CIluc-sharing:

              Payments to thm! p:ll1ies. ~di"g "Ullun shanng arrangenlell1S, thai
              del".". vnnOIiS S(TViccs to the instilut'on, c"cn if one of the services
              invol""" recrUltmg or admissiOllli ac!" HIes or the ....'IIrlIing of Title IV,
              HEA pmgrnl1l funds...

This clear pronouIlCetll~~lt, whtle not yet an official puo;,\lon ofthc Department, re, eals lhe
Internal policy \ie\\ of those rcspottsibk for a(\minislenng the Title IV progrnml, In!lOrar us the
Department has det""",oed lhat sharing ortuition rCyenlies wllh a third,party Set'Yiec Jlmo"k..
docs not violate the In""nllve Compensation Rule (eve" where the service proyidcr i& cnga!:L,1 ,n
student recruitment act, v,l,es), the OIG has iSllled an aud'i filllllng .pillSl Due. baset;I IIpon

" Ih<r<lote uw~ nQ d"{.."",,< Moreovor, the UIU', pohcym.kinS inllillioe fill< (lll1I,dc U.. ...-upe of IIw> ()(G',
IUthonly w ..... , the [n<pt<_ ('.........1 A<lor 197H, "lucb rteClud<. IIIIReDey &om 1i<1<i"1mII ~,.m    """"''''J!.
        .,01,,,.."..., ""
...."0"'. .              QlG
Mr W,Lham AIICI'l
JUlie 17, 21.102
Page 9

rq;ulalOf)' mlerprelall0rll squarely rejcttcd by the [)qmr1mml

        h" nil uflhe foregoing reasons, Ihe Univers'ly v'gorously dlsagrecs wilh Ihe Draft Aud 'i
Repor1's firlll''W' omd recommendalions with reI;[HlC1 to lhe IPD Contract. We u'l:e Ihe DIG I"
rneind II", .Inon lirw;l'ng and rc<:ommrndatiol1 a".1 lu forego Issuance or any final ~rt, '" It>
delete hulh from any final report,

        K,         'I'b~Ol (;'s Reco mm endation - niswU" .... nec or AU Title IV Fund~ Keet<o..,d
                   by tbe Ullh'crsity ror AU SI'(;S .~ nrolll'l'J _ Is Unwnrantrd and h
                   [neonsLJltnt Wilh Alllllieahle I.ww snd Rcau lilions,

         The I)mtl Audll Rcpon CTrOnC.'OUsly as.'>oI.'f1S al poge S t/utl ''b«ause the Unl\CfSily .h,111,,1
comply w,lh Ihe HEA and regulaliOl'lli by paymg ,nc.,.,UVe5 10 IPO based on success in SOXUIll1g
student c",nlh...,nls for 111 SPGS pl'Oif3ll1s, the Ilmvo:n;,ly mUSI return all Tille IV funds Ih;1I
were disbun;al "" bchslfofsludenlS rnroHed in the SPGS program.:' On these grounds, the
OIG asserts thaI an eJ(;'Jo(geTlllro amounl -- S L),935,295 -- ,,,,, •..,;mllng thl' prmdpal amount of
all Tille IV loans aOBI gnlnls rect,,'oo by SI'GS rnmllecs. ~Id be returnoo \0 ICl'ldtn and to the
U.s, Depanmenl ofl:duc~lIon

         The UnivCfSily slrenuously ubJtt1s \0 Ihc sanclions reeoUlmended by Ihc On"l Audit
Rcpon, First, as has becll p""'lOusLy stated. wc uisagJ« with th.. OIU'i r,ssenion that lhe
nllocation of revenue under Ih.. I PI) ('ontracl constitutes pay,m,nt or proh,b.ted ,ncent;ves 10
 II'D Because the 010 cites th3t Il85oeri,on BS the basis for Ihe reconUlll'mkd recovery of funds.
... e behcvc thaI no recovery or oIhn sanctIons m WarJlI!Itoo, Second, e~en ,fthe OIG's
:.lIegaIlOllS had man, the violall"ns IlSSellOO would nol trigger Ih.. c~lrcmc wholesale
,hS>lllowance thaI is reconlluend",1 l'he OIG offers neither legal ,"ulh"nly nor analysis to justify
ur I!Xplam why disallowance nr all SPGS-n:laloo finarn:ial aid fUOBhng would lawfully, logically,
"" reasonably result from thc e,Il'l1 noncompliance,

         In the absence of any 010 SIIUcmcnl of reasons, or olhcr deluded explanati on, for the
c<lrcmc sancuon, the Universily cunnol presently submit any comprche!ls,,'e response to the
()rull Audit Report's reoom"",,,,lat,ons. We therefore rcsen'e the nglll and opportunity to
r.,,;pond at I lata date, if and when !Ouch B slatcmem is prtsenled. III Ih" meant, me, we offa Ihe
follnwlIIg preliminary Slatcment llf ",,,sons why the recommC!lde<1 MII;:I ,un .s unjuslified and
stM,"ld be deleted from OlIIy final a... hl 'q>Ort'

    • 	 11M: c)ltraoniinary rctOmIllCl .. t.:.1 monellll')' 5.III1Clion - wholC!ial.. disallowance of nearly
        r",,,',,,,n million dollars, reprcsem",g ,.11 freeral funds received lIy sludents enrolled in
        Ihe SI'tJS programs - is facIally IIh,I,,1I')' and capricious because; a) lhe llnlll Audit
        Rq.orl docs nol explain the basiS fOf Ihe n:eommcnd~lion: b) 00 ~talule, regulation, 01'
Mr. WIlham Allen
Jun" 17, 2002
Page 10

       uthI:T published SUldance imposes " 'h"Ics:l1e dIsallowance IN.scd upon viol:nion "fthe
       Inc..nllve Compensation Rulc~ :and c) vaf""IS ED rules and ~edcnlS aniculatc ~ v~nety
       nf lo:sSt:r s,1DCllon,. The recommended r.:cun,1)' of funds should be deleted ]ICC-1 Use Ihe
       Groin A""hl Report docl nOI and canOOI e~pl~," "ny basis fOT a wholesale disallowance of
       aId 10 elIgible $IudcnlS, and because Ihe DIG has 001 COIlSIdcrcd, much 1e$S rejecled ,,"llh
       reas()ns. any ofthe available lesser Iltema! "."".

   • 	 TI,e 1J,,,,,,,,,,"y un(! III SPGS students utilize<! Ihe Tille IV program funds tatgeted hy Ihe
       Olr. r..... ,hs:,lIowl\I1CC ror Ihm la,,·ful inlende.I,,,,TJl".'KS. I.e .• 10 ~y the costs of
       ane",lallce aSl;OCtllcd with these students' eduC<lhon .!be DraA Audit Report prescl11~ ' kl
       (111<111'1/: or ollegllUon 10 Ihe contrary. [1o0r .k"",1 Ils~crt any inslance where Lhe audil
       field",,,,~ revealed that funds "·CK misaPI'I,,:.t or uTU!ttOunted for. even though Lhe OIG
       I1a!; J"M"nled 10 no actual Of presumptive hann suffered by ED or by any Sludall, Ih" I mall
       R"1J<lrL r..commends Ihal Ihe Univel'$lty f~.ay "II thc funds including PrineilJaI IOim
       amn",,'s already ,Ialed fOT repayment by II.., studenls themselves - thai were long S"'~~
       &peI,1 I" n1tJ(:otc [hcsc sludents. The 0 1" can pmol to no 5lalUle, regulalion. or pnllelpt~
       of law 10 suhslmllmle the disallowan<:e soughl Th" UIG has 1101 ~'cn explained why It..,
       Un,,'erslly shou ld repay funds Lha\ were duly Hl'l'hoo 1\> Ihelr la\\"ful inlended purpo~, "r
       expl'"Ile.1 why III\:! Ulllver'9lty should repay loan pntlCl pal Km()\lllt~ thai the students
       themselves WIll 't:I"'y

   • 	 No",here doos Ihe I)rall Audit Report allege or imply Ihnl any tndi vidual SPGS slu<le,,1
       lacked feder:ll ~lud~'t1llin8l1cial aid eliiibilily, ba...... 1 upon allcioo IIOr'lCQrTlpliance ""Ih
       the lneenl;"e ('O...p<.....sallon Rule or witll any otMr T'lle IV requm:mcnl The
       Department·s ~lude"l ehglblilty rules do not include Ihe Inc,,"lIl'c Compaullion Rule as
       a lwde,,' elig""hty rcqUI'I'ml"M1, Accordingly, no basis e" ,I" rnr the DIG to seek or
       recommend wholeulc dis.all.. " "lICe of III federal 51udent (,"aloclul aId fuoos received by
       all SPGS studenl$.

   • 	 Nowhere does Ihe DrJ.fl A,,,I,I K,.,port allege or imply thaL any SI'GS lICademic progranl
       lacked eligibility for Till" IV parttelpalion, based upon 311")\00 noncompliance wilh the
       lneenl,,·e Compensalion Kille or with lilly otlla Title IV r"'lulltl'll£'t1t. The Department's
       program eligibility rules <I" not mcludc the Inccnli,'c COlllpellS:'\l(In Rule as a progmm
       cliglhi/uy requ,,'emelll. Accvnhngly. no basis exists ror the OIG Iv seck or recommend
       \\holesale disallowance of ull 1nle IV funds received by all SI'GS sludcnts

   • 	 The cl('tt1cnts of /TWIIUI"",,,I t'iigihilll)' set forth ill Tille TV an,1 bOos regulations do not
       ",clude [he Incentive Compensation Rule 1.'1 an inslitutional ~hK'b,l!ly requIrement.
       Although Title IV formerly illchllleU Bdtfferent eligibility prMIMon prohibIting tile usc:
       <lr ""mmISSlOncd ulespasons to promolC 1hc availability of r"'I",....1108n5. Con~ss
Mr. William Allen
Junc 17,2002
Pagc I I

      repealed lIIat provision ... hcn ,t t.'R3Ch."d the In«ntivc Compensation Rulc. In fao;l, prIOr
      \0 enacunenl of the Rule. thc ("ong~ ",octed a propos.1llhat would ha"c ",,,,It the Kule
      a component of the definit;o" of m, ~hgJble mstltut,on of higher education . ,\cc""hugly,
      no basis cxists for Lhe Ole; In seck ur =ommcnd "hok~lc diullowaocc of all r...Jcml
      sludcm firutnCial aid funds rece" ..... by all SPGS snidents.

   • 	 Thc Draft Audit Rcpon qllOte~ Tille IV provisions and ED rules that ide"l, fy II,,,
       [ocenll,'C Compensation Rul" as Ihe Iwmncth oftwmty-six mandat[)ry Ie,,,," tu be
       .ncluded in the ill!titutional I'mgnun I'anlcipation Agrttment ("PP A") ... 'Ih Ihe
       Ocpanment. [Iowe"l·o:r. Ihe PI"" leml' collcctively encompau hundrcds "f ""I "lOry und
       regulalory requirements prcocflb",1 undl.'r Title IV of Ihe IlEA. No b3.5;s ,,~.sls 10 suppon
       the OIG's position lIIat an alleged ~loll1hOll of any ofthesc innumer.thle 1'1' A
       reqUlremenls wamuu..s a whok:sal" dlsallo"'ance of all Title IV fullfls .... 11<'ftl no statulory
       or regulatory element of lllst.tul.unal. 'tudent. or program c!i!;ibilily is al .ss.,e. The DTilft
       Audit Rcpon does not idcnt.fy any bus., for such an extreme .Utlclion, ",.. I various ED
       admlDlslrali,'c decISions WI~"'" lhe ~,ew th~ the recommended &ancIKln.S hath
       unreasonable and un...-alTamcd. More specIfically, the KYentecnlh PPA I,,"" reqUlrct
       11ISl1lU1l0ns 10 "eomplele. in a Ilmdy munner and 10 the satisfaction of the Secretary.
       survcys conducted 3.5 pan of tile Inlegmled POSI5CCOndary Educ.ation f);oIu Syslem.·· ~
       14 l" F R.§ 668.14(b). The OIG's pos1l10n ....ould require a total disall"" ~ncc of all Title
        IV f"nds for I violation of thaI ",,,,,slmal requin:rroCllt lfho.... evcr, tm: Ul(j's pos.tion
       ,hffL"I"$ regarding thai I'J>A requirement from its position in Ihi~ C3"". Ihe oro IS 3.5slgning
       ~"ry,"g degrees of significance In Ih~ "I' A requirements. there-hy mOlhfymg a regulatory
       ,;cr.",.." wllMul notice-anti-commcnl ItS requm:d by law.

   * 	 (!i"en the absencc of any     factu~1 allcglll.olU of actual harm 10 Sludenls or the Ocpanmcnl.
      COUI,I",r .... ilh Ihc absence of any h3.~I S for asscning that the Universlly. 115 students. or ;1$
      SP<iS programs ....ere mdigible for Tille IV funds. II .... ould appea.r th;'1 the OIG Sttlcs to
      i"'I........ a wholesale diul1ow;uKc to IHltush Ihe University for l,u"Kln..J noncompliance.
      The Olli cannot lawfully seelc 01 recOlmmcnd punishment;n an audit 'L"J'On

   • 	 TI1<: [)r~n Audit Rcpon in<:~lly anoJ dntllhcally o,·ers\.ltcltl1<: a..."""t of purponcd
       Iiahl hiles Mlm8 out of SPGS Siudenl.,· pan,clpltlOll in the TItle IV l,rog"'lIls by
       errom.""lsly recommending Ihat the U",vc,,,ly be required to repurehase all Stafford and
       PLUS loo"s d,shurscd to such stooenll: The Dnttl Rcpon inexplicably i"K"~
       established rules limiting the scope md quantny of any audit dIAllow;lIlCC5 ufloon funds
       10 the ED's act ,,,,I losses. The Depanmeill 's e:;1I,bhshcd policies and adl1lll"~lnlll"e
       pr«:edent rcqulr~ the application of an act"al Iuss formula thaI takes into ace"",,1
       institutional d"filUlt rates '" ltcu of rcpurch3.<;e ur loll loans. In reconuncOOmg repurchase
       of the face an ...... nl uftbt;,e loans. the Draft Audit I(epon limply igno~s the al;tuHllo"
M, Wilham Allen
June 17.2002
I'i,!!;:e 12


    • 	 Thc Draft Audit Report's 01"'''-'''''' of uny reference to Ihc r>cpartment's long t:StahhshCld
        actoal loss formula. in conjutlcllo" ,,",Ih the unfounded and extreme $.UICtiOtl5 e;tw, IS
        h,ghly unfair to the University bccau.<e the Inst,tutlOn Ius $ucc«dcd in achieving
        extroordmarily low collon default rala< Ii .. lhe lut tllrec yellS. The Univer5ity's rate< fn'
        1i",,,1 years 1997. 1998. and 1999 were 3.4 p~rc~'1II. 23 percent and 1.8 percent.
        '''''IJl:Ctrvely. These rates prove Wt the IUb'(nl1)' und eapnelous disal10wanee figure< set
        fot'lh by u.c, DRfI Audit Report prtlfoulldly e'''f,go:nlle any sanctions that could e,-er
        p"1CIlIl"lly result from Ihe audit. Moreover, the Um,·erslty·s cohon default 11Ites prove
        thai. III threet contrast to enrollment ahu!\eS t"rgd~-.J by Cong:rcu in enacting the Inc""t, v~
        C"'''r<-"flSluton Rule. the University', r~ru'lm""t pnlCllcC5 sufficc to ensure that only
        quahfied , respoRlilble students enroll in U~ p"'u..ms_

        Even wlthuut Ihe benefit ofan O!G explanation seekmg to Justify Iht ~ommendcd
wholesale di.... llowancc. the fon:going prcliminary ,esp"nSl:!i establish that u.c, Draft Audit
Report 's r"wnllntndauon IS ~asonable, utl,,'arr.mt.,.j nnd arb,uwy. The OIG should therefl1re
remove the rllCOmmendauon from any final rq~"l

         C. 	      w."" pou, To the Draft Aud it           H.~ .,url ·s   ASSC'rlk\nJ Wilh Rts pK I 10 I I'll',
                   Inte",.1 S.t:o.,,· Slru clU re.

          The I)r.,!l II lIdll Repon funher r,ue£linlis " ho.1h1.'r JPO's inlernal compenS.1lion "];,,,s
wen: tOnSiAellt ".Ih Ihe Incenlive Compensation Rule. Howe·.er. Baker Univcrsily is unahle lu
IIscl f provide a SflOCoIic response 10 thc OIG's claim IlIlCalrS1.' Ihe oontBCt with IPO speci fiCiI
rcspcdh'c areas of rl:Sl,uos,hllny, The University was rcsl'<.JlIsiblc for maintainin!; the acad1.'III'C
TC(ords of SPGS studellls., nu,long all final determinations un SPGS ~missions. and estabhshwf,
tUlilon and fees for .,mgmms SC'e IPD Contract, pag"" 12 I J TIle.' Unl'·C'rsity also excn;:I'\eI1
C1<clusi\'e iuri$dictioll u~e, cIlmcula contenl and appmval, 3'KI retamed authority over
Instruclional personnel r,,, the SI'GS programs. rd. at pag~ 14. However. [PO was KSPOIISlhl~ tn
·"pay and be r1.'sponsihl~ lilT the cost fOT all SCfVKCIi to be rt:lM~ by IPO under Ihe terms of
[the] A~ml includlUlI hul noI bmlted 10 p3yroll.~ Id. alp"gC" 11

       Bo:.;ausc Ihe subject of 11'1 )'~ mh_	
                                           'mal compensation structu'"" " "Ithlll lhe exclusive
\Iommn of IPO, and not wilhul th" cunlrol of11M: University. ""1.' asked H'I) to prepare a statement
ror mc\usion in this submi&t;ioo 11'1) presented us with the follo"·"'11 ~t,,".'merl!. which is
UlcJudcd In II, entirety as follow. ­

 no. Dr.of, A""" Ropon IIInhrr ..........,.. the- vaJu.: ul"T,1Io: IV flr1Itb .....oded 10 SI'GS __Db b~ '.'1....1111y
fa,'"" 10 <_...... ""Y .""""'.. ,loot ....y ha... b«d ,dUlMlnl r(lll"••ms ..... onrt..J d..
                                                                                          t..ar.an.:n~   bc-c:o.... (lr chaftt'"'
In _ 1 5 ~<Hullm"DI ....1111.
Mr William Allen
June 17,2002
Page 13

                                            •        •       •

           I PO   R«ruit~r   S.larie. I,,, Nul "Iol.IC Th~ ] ncc nlive Compcnn tioll R u I"

        The Draft Audit Report asserts at P:OKc 5 thai IPO compensalion plans "provided
,nc~,"U' cs
          10 its n:cruiters through salary I", "'S Ihat "'en: ba5cd on thc number of'Iudents
recrmted and enrolled in the [SPGS1 program:;" Yet. HI dc$cribing the IPO salary plan, Ihe Ilmfl
1I.~'JlOfI ~Iatcs that "[ r)ccruitcl'li were a".'lgII"... " sIIlal)' wllhHl the pararnclcn of rerfonIl3n""
Kmdchnes (i.c., knowledge of basic poli",.,,; 1100 procedure" organiulion and 0011111111"'<:111>011
skills. and working rcl~tion51111ll!)." Th" gUidelines cited by the OIG arc nol ,,,lated w"
rocnJU('T's 5\lCCCli in 5e'Curill£ Cf)RIlIm""Is e .g., a recnntC1" may exh,bit any or all or Ihe
aforementioned qualities withoul Iccru,III1K:O Ihreshold number ofSludent,. Thus, Ihe nmfl
Aud,' Report ,!self eSlabhshes thai lhe cil~1 Il'll oompcn$lllion plans based re.:ruiler 53la, i~. in
pa,I "" f""Io!"!llh.I arc nol based on ~ucc0:6S in """lInng 1'IIJl)1Imenlll.

         1n th" exlcm thallhe Draft Audit Report .uggcsl' Ihal prO'.'iS'Ons for recruiler Alaries
under II'D oomrensauon plans violate Ihe IIICCIIUYto (""'''ptlIlS-tltlon Rule, Ihal contenlion is
incom::"l ""... contl"lll)' 10 law. As dClailed below, the c,h•.1 pro\"lSlonl regarding recruitC"f Alarie<l
atll fully cons'~ll,"I WIth the governing Sblule and regulallon for each of the following reasll"~

                         The Incentive Compenoat,nn II ule does nol prohibit salary ba!iOl "u
                         succcn in securing cnrnllmc"(,,

       Th" I~.m. "flhe Incenlive Compensalion Rule 00 nol extend 10 -s.alary.- Both Ihe
governmg !iI~1"It: and regulallOn l'lXIuirc a Title IV fl'Ir1 ''''palmg inslitulion 10 a~ Ih31 il w, II
nol provide:

              1A1ny corruruSSlOn. bonus or olhcr irx;entlve p;'ymenl based dirtttiy or
              ind'recl.y on SIlC<'CIi m 5e'Curinl: cmolhn""Is or finan.c:ial aid 10 any
              perS(Jn~    engaged In any studenl Teeru il "'I: u. ndmi'liom activilie$.

20 U.S.c. § 1~(a)(20); .l4l' F R. § 668.14(a)(22). Neither Ih~ :;MUle nor tile regUlation makes
referenee to salary. The lrICL"I"~ Compensauon Rule only extcoob 10 CCTtam - commissionlsJ,"
"bonus[esJ." 0. "other incc"I"~ puymem['1." uch of which an: ..losl,ne1 ftorn s.alal)'.
AU.1)rulllgly. the expresslangual;c und plalll meaning of the Incent"~ Compensation Rulc
~il<:mnes Ihat Ihcsc provisions <In "..I prohJbit an inslillliion from hason!,: mcnute. s.alarics. in
,,1",le or m part, on success in secunng enrollmcnill.
Mr William Allen
June 17. 2002
Page 14

                2. 	      TIle 1"1I,,1"1I'~ hbtoO' of tlw Incenti ve Compensation Rule make!' deur
                          thai "'mgr..ss mtmdcd 10 pennil tttruitcr sal;uics to he ha.",,1 "" m"rit .

        Even if one erroneously IU'e>,,,,,,,,,1 thm Ihe Incenllve Compensallon Rule <:QUId eXle"d I"
eel"(am recruiler "salarics:' COIl!;r"ss mati" clenr m cnacuns the 1992 amendments to th" HFA
Ihnt salary bued on success in 5ecllrlng ",,,,,Ilruellts is nOI prohibited so long as it is 1101 hased
501cly on ,,,,"ess ,n securing enrollmcnu. SJ1eClfically. the ConfCTCtlCe Commin~ thai ."""h"d
the HOIlsc and !knale dilTem1(cs in the 1992 HEA AmlmolimenlJ stated Ihal the slalule doe:; oot
prohlbn salary thai is based on merit. eve" ,r """ .."red. rn pan. by succcss in securing
""rollmenl,. The Commincc', repon slates '" penment pal"(:

            The CQIlferees nole thai subst<ll111al r."gr~m abuse has occul'TCd in the
            studenl aId programs with respect I" Ih",,~ ofoommlSSloned sales
            '''Presentati''es. Thcrcfo~. Ihis legislatm" WIll rrohlblt Ihls usc.
                              II                  ,Ihth
                           I.	                              "I                        Ii
              ,	                              ti                      U
            "um~ of SludMlIS rceruiled. admined. e",nn,,", OJr ,"warded financial ald.

coor f(er 1130. I02d Cong.• 2d Sess. al 499 (1992) (~rnphaslS added). A$ clarified b), the
Co"r""",,,e RcpoI'1. the , Ialut e wu nOI aimed at ",cnl-b;,,oo salaries for recruilers. TIle
ConunrU"" ",<;lead $I0led Ihal the Incenti"e C0l11I""'s:l1 Inn Rule docs nOI prohibit s.alary thai '"
based on ~ucc"ssllli Job pcrfO""aIlce. even i fthat succc.,s IS measured. III part. by success in
$C(u.inS "n",lh",,,,l!;

         Thm, the le~,slal,,'e 1I1S1ory of the Inctnti\'e Cornl",,,,,,,1 Ion Rul e oomDdicts any
$uggeslian in the Oral! IoILlJOfI thaI rceruiter salary may not lie hased on ment. As noted above.
the Dran Report itsel r concedes tbat the: ciled provisions rllr recruiler Sltlanel sct fOl"(h in the IPD
compensation plallS ""hsfy lilesc crileria because: they ha.""" salary 0" a variely of perfOl'lllaflC(:
criteria thal:m: "ul ...lel), related 10 success in KCuri,'K enrollment Accordingl),. the Draft
Report ;ockllOwh:d):"" lhat ,he Clled 11'0 compensalion III,,,," Ik' not !leI rttroiter salaries based
solely on enrollments. Th~ "11",lanlary proviSIons an: \Iu:rero.e consIStent wnlt both Ihe le)(t and
Ille Inlml of the Incentive C'nnlJ>l'llSllllOn Rule.

                3. 	      The Secrelary has nol published any intapret:.hl"' .,fthe InCClltlve
                          Compens:Uln" Rule th81 would prohibit rccruitCl ~:tlan"" based on meri!.

        1bc SCCt'l:lary has not puhlished 3n mtCTprelalion of the [neell'",e CIJl1lpc1lS8l1on Rule
lhal tiphc,,[)' prohibits basing reaull~ 5.1.lanes on success in KCurin8 enrollments. Nellkr Ihe
"once of proposed rulanaking nllr Ih" preMlb1c 10 Ihe final regulaljo"~ ,.. Idress the IlSue of
".'\:I'af)''' ""sed on success io securing ""roliments. 59 Fcd. Reg. 22J4R (Apr 29. 1994); 59 Fed.
Mr, William Allen
June 17.2002
Page 15

Itt"&- 9526 (reb. 28. 1994) AItIM'''i!J1the S«rctary indIcated IlIat he might., at wme pOLnt.
pubhely clanfy ""hal he cons.defN acceptable under the statute and n:gulau<M1 ("""" 59 Fed.Reg. at
'1539). he has not yet done w. Acc()rdmgly. the Secretary hu not puhlishetl any c~phclt
problbnion with respect to rccnute. Slllanes. IIOr any interpretation COlllr.ll)' 10 IhIlt SCI forth in tlte
aforemenlloned COIl{:IUIional Conference Report.

         Ifthc Draft Report is suggesting Ihfilthc Department prohibits r«nuler SI,lunes based in
I"'rt on enrollments. that suggestion IS 'IJCOI"I'eCt. contrary to law. eonltal)' to ",lIonal policy. and
must be reJccted. As de\ailed ah" ..." the Depanmentlwi not publisl,...1 ~uch an Inlerpretation of
lhe lnecntive Compensation Rule, L·OfiSC(juently. there is 110 basis fot the l""n Report's

            If the Department ""'shll.. rt:troacll\'cly enfon;e lhe mterp<d3110n suggesled by the Draft
K<:p(Irt, Its enforeement would he UII I"wlu] because it would cont""'iet I>oth Ihe tClCt of the
IIK;CnllvC Compensation Rule and Ih~ mlent orCongreH. MorCQ\"C'J", III.. Oq"lflmcnt has neVeT
gIVen msmUllons advance notice tl\muKh publlcahon of the inte~tahon set Ii>rlh III me Draft
R~'K>rI_ An oomlniStrah\c agency nt~ gIVe 11M: regu]aled public "fair nollce" of ItS "1:llla1ol)'
inle'l',..,I:ollon9. or II viobtes the due I'mce::s. cJ:IUse oflhc Fifth Amendmenttn tile U S.
COIIS1lIUI,un Accordingly, the Draft Report 's sUl!8csted retro;tCtive tntCl"pretati"tI nf lhe
IncentIve l"ompcnsauon Rule cannot la'" fully be enforced.

        MIlr"""l"T, lhe Draft Report', 5uggesle,] mterpretation with n:spe-ct 10 recn"t.,,- sa]anCli is
premised On un o"erly broad interpretation (lr th" statute !hat is contrary to ralt""ul pohcy. The
Draft Rer.... I ·~ '>ppn)1IC1l would deprive schoob> oflhc abllny!O appropriately cumpensate thm
adrms:;;ion!llll:f1iOnncJ for whal they an: em"luyed 10 do. Specifically. !\Chools "-II"ld be reqU11'Cd
in effect tn 'Kn"re (he employee', ability to r"';I1111 Ilualified studenl$ who aplll Y fur, "Te accepted.
and enroll il1l\Chool The aforementioned \onf"'tmee Repon staled explieilly (h:<1 (h" lneenlll'c
Compe(l$;lllon Ru]e "docs not Imply IhaIthe schools cannot base employee !o<I1"nes on ment"
Conr RL'fJ 030. ] 02d Cong .• 2d Sess. at 499 (I '.1')2). In short. the Draft Rq>ort's IntMpretatioo is
contmry tu the Incentive Compensation Rule, ,ts history. and rationallMllicy, "lid mUSI be

                                             •       •       •
       This Clllldullt:s the 5latcmcnllUppliaJ by 1'1'0 With respect to the portion of the [)",ft
Audit Report focusmg upon IPD's Internal compcnsal..", ",,,"cture
Mr Wilham Allen
J ,,,,~ 17, 2002
l'ag~    16


         The Um,'mlIY demonstrates that Its l)I'(;S progranu fully satisfied Ih.: 12 HOIIr Ruleand
Ihat ~,,~h comphancc is fully and app,opnatdy documentcd. The additional d"cumemllilon
soughl by Ihe OIG (hcreinafkr referred III IllS the "OIG's purponed docwncntatlLlII role") cxceeds
any le~d "fdocumentation required by 1~ apphcable lAalUtes and regulation!l. Atkhuooally. the
re.:omme'llled hablhty is bue1l on an er,ml<:Ous methodology and excludes Slgru fleanl nmounts
oftim~ llwl count toward compliance with Ih.: 12-Hour Rule and dcmonstrllell 1 lack of
fallllilanly "~th the SI'GS provam'.

          A. 	     The Univen lty lias AdfiJuatel}' I)"cumrntcd 115 Co mplian ce ,,-Hb                     th ~
                   12_.lo ur Rule.

        TIle SI'0S programs deliver hi!;ll'qualil y, IlCCrcdllcd educalional conlenl In ml" II
"lifelong lea"","" and other /"IOntradllional sltHlcnlS through two integrated inSlruchnMI
componcnl5. All ShHh.'llls mCC'l once a " 'cd: in larg~ groups with a faculty menltx.r Ii.. four
hours. and again .,,,eli week In smaller "siudy s"'''rs '" The study groups generally C<lIlSl~1 "f no
more than five .t,,<.IenIS. which meet at an Ig,,,,,,I -,,1"-'" location for four houn or oo.Jihonal
llUtroclional actl v,h",,_ BenuK all SPGS I'rogralllS 1I.,lude al lCUI eight hours of instna:UOfl per
week, and the durahon ofthc prognunl il 45 woc,", the UnJ\('T'Sity providcs ~t least 3(~)
Instruclional houn; In 1111 SPGS studenls. Thc Dran Aw.ht Rcpon. however. disallow~ :.11 sludy
group houl'S bccau.<e they liul to satisfy the OIG '~ I,urponed documentation rule. As;, (..-sull. the
OIG claims thai the SPGS provams pro\'ide only one-halfofthc instruclionallime ""'IUlred by
thc 12-llou. Rule.

          The Dep;utl11cnl has alrl'ady concluded thai "1IJhere '5 /"10 meaningful "ay 10 m~lSUn: 12
hours orinstruclion"· for nonlrndmonal education I"ogmms like those questioned hy I h~ DllIn
Audit Repon. As a r<:sull of thIS conclusion, Ihe l)epartrn~111 has recently advocato:d r~nl of
thlS ''lrnworlr.:ablc'' rulc' ;.Ilogdhcr, propo~ iu elrnu""llOn to a ncaoliated rulcmakinK
commmcc carlier Ihis y...r The OIG is /"lOW attempl mg I" hold the Uni\'C!"Sity accounl;,hle 10
specific attendance track lUI( procedurcs and olher docul11enlnUon rules create1l through lh< ;LUdil
procC$$. This action is WIthout any legal justification, a'lll ~t;tnds m stark contrast 10 the h"uh,d
and \'ague regulalory Ku,<.I;IIKC pTO\'idcd by the Dep;utm"nl 10 dale. Desp;te lhe vast confuMOII
(!'tlted by the Dqlanrnenl ""'-HLt this Issue. and contlary 10 lhe erroneous asSCT1ions couhu"",1 m

• u.s_ i.Iq>:I.rtmmt of F~ Offic. of ~ pmc.IXlIL. "RcpJn 10 1.""11'........ llIe Dtuann: Edutabolo
o.rnoo"u~II"" """"'''''~ Ou.,.,. 1001). ., .,.~. 24 Th,. """'" orod Il. <ond ... ,,,,,o; '<11,,,1,,,, the 1~-H(>\f, Rule
and ,,,,,",,Juronol """c. "onal ""'I" ou af.    J,..,,,,,,,,,, ;n Ern'.. <I<:,.U ",rn.
' n.: 5«rtU.ry ufEd••a"on .......... July j 1. 1OO1 In..... C""'"£f"'" ,.... !be: 11·110...- Kwic "bao been <Ion..... 10 

"" .rrwort.oblt r", " .... y "onmllhlinr>rol     145 C.-",. Roc HMM. H6-I66ldo,ly ed. lIel. 10. 2001) 

Mr William Allen
l,me 17, 2002
l'aK~ 17

th" L>rail Alliin Rcpon, 11K UniVCTiity implc"","I",L vunous policies and followed specific
procalu"," to ensure that the SPeS programs p,m "1,,,1 tile rtqUliltC amount of '~gularly
schalul",' mSlmelmn, examinations, or prepamt"'" rur e.lummallonf'l'C\juired by !hc 12·Hnllr
Rule, rubll~ho:d ut 34 C.F.R, § 668,2(b)(2)(iiXH)

                              Study group meetings COfl~htuh' m.lruelionalacli\'ity ,

         The SI'(jS study group mcctiniS fall With", Ihe scupe of''n'gularly Khcdulcd instru<;1 ""',
uamina1ounS,or prl.'pBf'lllon for examinatiol1l," n..: regulalory leXI confirms thlll COl1c1U.~IO",
stating Iho1l "ltlSlructlonaltimc" eJ\cludes ~act lvily nul reLuled 10 cI~ preparation or
examinaliuIIs," 34 CF R § 668,2(b)(2)(iii), imllly"'g Ihul ur,:livily relaled 10 class preparntioll or
examinatiun I~ IlICludcd The study woup mee!1I'g; !:mImI complcung academically rigomllS
projccl'<, le"",,ng COil".; content, and engag"'K on group tasks IIIaI develop and enhanc" "ru"km,
S()1~lIIg ,k 11I~ thm flI\' Inlegral to the 5tudent.~' fII;h,,,vemenl of designated COUT$e OUleo",,,,, Ihe
study &U'"I' '''~''el,"gs arc, therefore, clearly relal",llu cluSS preparalion, and quali fy as
mstructior~11 locl,Vlty under the 11-lloul' Rule."

                    2.        Sludy group      m~ings       were ,"Sul;uly scheduled,

      The ~Wli,ulu'" ItMM''''., for uch SI'GS (Ouu;e e~"f1:s.,'y TetlUlre5 srudenlS 10 a\lend "udy
IVOUP meetings in order 10 discuss C(lIJI'SC malerial, prqlm                   goo",.
                                                                    ~n.gruncnIS, and share
l~arnmg     resources," Each ~1",I~nl IS CX.....~led 10 contribute 10 Ih., oomplchon of all study gmul'
IIss'l!J'Imcnls, which indudt nr,,1 und '" n\ten presenlations, lit Ih~ fIrsl course for all SPGS
programs, faculty informed Ih" students oftlK "udy gmup nloeelmg TetlUlrcmcnts, and presented
wnlten malenals 10 studcnl~ ""leralln& lhis requimnent. TIll: stud""I" In the firsl wee/.: of Ihe
l'rogram, completed a '~tutly Grollp Constilution" lisling th" Italll,,!; lind nddresses of all group
members, and typically staling Ih~ oJ~y, lime, and localion Oflhw "~'I!kly study group m~il1g.
 Ihe facully member for the oou",", collecled each Study (jroul' ('unsUlu!,on and reviewed their
~t>ntems. In all cases. allY P"'I1U!;to.i Jocalion for Jludy b'l'Oul' "1(,t:lmgs mUSI have been conducive
I" Itam'"g,

      Sc\'eral other f3Clor& d ..... rIY Indicate that Ihe study group m"""ngs W~ '''regular,''
""chedulcd," and uoocr th., ""[>eT\ 'Slon of Un iversity faculty, TI,,, sp,,'clfic lasks 10 be performed

"1'bt uI.n Alidll ROf""I """" "'" ..en> 10 dapuI< lIoaI JOUdy gmuro ....... mp ...... ,,!IM ......... uwol activJoy,
"""""... tJM, OIG uc1ad...11 oldie SrGS ""'*1 " ......  "'"'"""'" em... '" 12·11.,... Rule ""....10...... becI.... ,hc-y
f.,IIo ..... 11~ .. OJG'.T"'~ docufneto'- I"k

" l'rornoI"","j  .1>11 itLlmiJolOrl'l "'II.rial., ""'Iud.... ,.",,".~ bruch..-es .nod !he SI'GS .pp!'O;........ ,,,,,,,,,.e.lly
.........uzrd !he Il\IoJy II""" <CNlipOfocm <lr!he SI'GS P"II'_ ..... ilLa,lNdy t""'I' ""'''''''''' ....;aolrl 000"",_ at
.... " ("'" bow1 of each " ... ~ ', 1Of.l1 """.... "".,
Mr William Allen
June 17,2002
I'age 18

IlIld oompleted by the: study group in a gi,·en .. m were specified in the: «lUrK module, and all
~lklc"'l1S enrolled in llie «lUrK were required 10 pnr1lclpll\c in Sludy tp'Oup ilClivitiCll, AI .." "'.... h
dc5'f)mlOO study group session was, hy ~Uf"'.'" h.m de.,gn, slnted to ()(:cur between .<[lCC' fied
"'~"'llflgs WIth the faculty instructor. Dll,mg sllldy group meetings. sludents conlilletal ngoro",
Ie;UII OlSIlIgnmCtus, often prcparinao liJlCCi fial pruJl!CIS Ihal wtl1: praented during the: no:.1 f""nlty·
led worir.5hop, 111 order 10 progress acadal1K:i111y 111 lhe: coune. Finally, Ihe faculty c:xerted
tontml 0""'" Ihe siudy group meetings by rev,,,",on!> und grading the designated team a.'<S'glll"~"t>
an" projects   n.c    study tp'Oup meeting,< W""" II"""fore ''regularly scheduled" as reqUired hy Ih~
12_HoUf ~ 1I1~. and the Draft Audit Rc:port's oonciuslOlL'I 10 the: contnry arc sonlPly WIOIlg.

                l.       The University adequately ",,,,,,tllral study group     meetin~   altcndance

        The: I ;","erslly repeatedly infomJcd students III SP<.iS prognuns of the: mandatory nalUre
ofstudy W""P altendancc. This was p=nted dUflng p.....enrollmenl 1I1formalion sessions,
during the fi,st clHss w,th 8 faculty member. and ":Sl~ted yet ugnm In thc student handbook ,,,d
COUrK calalo»( In add,tlOn. atth. end of each SPGS C<1Ilrse. studenl5 completed mandatOf)' F.lld
of-Course e~31"ahons. These evalual10ns COllt3in queshons regarding the study group meelll'~
and specific;,lIy regard1l1g the anrndance of othe. ~\I'dy ~up mcrnbcl's. The OIG either fa,led
to review thc5" ,,"alu allonl. summarily and wrongly '~J~"'leil them !Ill Insufficient dOl:umenlatinn,
or ig:llOmlthelll

         TI,e DIlIIl Alllht Report also ignores the f:oct thot fuculty and lIafT.pent a great deal "r
time resolving (;0I1n'(;15 w,thm study group membe,.hlll'< I)r pru\~dmg academic di~tioll alld
guidance. For example. ,f. student did not regularly alte"" lhe mandllory >tudy group
meelings. a faculty member would fint intco'c-ne al !he I"qUo:s\ of oIher study group mcmbeq;.
Howcver. ifa $Iudent contmued to nOI al1cnd Ihe weekly IIlcdmg!l, the Uni~ersily'l sludent
services office would adn""lst fl,twcly If<IJ1Sfa- thal student to anOl1ler study group or withdraw
the !ludcnl from the: SPCiS rrogmm ahog<:lher. Afla-dismil'lill1g the counc modulc Slalcmenls
descnblng study group l'....j(:Ct~, fa,hng 10 comidcr the Study Om"I' Consl11ulions. rejectin!: the
I'nd-of-Coursc e~ .. luatioll5...",l'gnunng the involvement of Baht r;,cuhy and ooministrJtors
With study group members.. Ihe OIG reaehes the conclusion that the I l m"'~f5ity did nol "ensure
thaI sludy group mcetin;s wen: ' ..guln,l y scheduled and ()(:curred." Drnfl Audll Report at S.
 11", slatement simply and wrongly ,~readily available evidellce:

          In addllion 10 demanding ",,"njushljed amounl of dOl:umenlat,oll, tbe OIG IS
fundamentilly mislaken 111 iu claHllthal the UnlHnily must "enRlIe~ thai s\lldents .l1end e:ach
~ulTeTlce of Sludy groups. E"ell a><."''''''ng that "rnrure" has a defined "',"'"mg. Ihere is no
,113"".,,- r<.lr the University to "ensulc" '''ch I.llendancc sbort of physic311y cnmpt'lhng students 10
be P'eselU pI nil lime!, If the OIG equal"" "t'fI5ure" With monitoring and o'"""gbt ("'ruch we
comen.lll..: Unl\"cnlty has adequately fulfilled). then the: OIG is using the h,rm "ensure" 111 a
much h,,~1lkr and inappropriate context ThL'I'\lII I'mply no statutory Or '~y,IIIIl(l)ry basis for the
Mr. William Allen
I'a~~   19

01G's cJ;lInl. and the report provideti no legal aUlhonty for liS broader inlCl"prtliltio[l of the n,l~
Iblh."., alllhutlS reqUlrW by the 12-lIour Rule IS IIlal study group meetings were '·u.gularly
~h",I"led:' which they were as d~senbcd alii,,,,. This morc rca!lOnab1c imerprc1aIlOn, track "'!:
the ""Iual I"~I of the regulalion. il consiSlent wllh al"""dnlCnIS 10 Ihe 12-11our Rule that took
e!fcci July I. 2001 The 1"I:\'ised 12·110Uf Rule: requl"'" an IIISlItllUon 10 provide '1 a]t least 12
hour!; of n:gularly scheduled ins11UCtion or C~:rI""~" lOll" or "[.Jfter the last scheduled day " f
c la5~ fm H pllymenl period. at least 12 hour,; {If , Iudy lor final cxarninaliom.·· 34 (' F. R §
668.2(h)(2) (2001). TIle reguJaliOl1 docs not ""1'" n: !he mlnlmum 12 hours of siudy. after III"
tast day nf ckl!>$<!$, to occur under dim;t faculty SUJI"'<'",s,on or for the University 10 sornchuw
docun>entlhllt each and every student aoctually SiUlJitld at leaSI 12 hours during the period
be1"cell clw<.'<eS And e~ar"J. This I'l:vision mak"" "I",.,. IhAt lho focus of the rule, both bef",,, " .... 1
after Ihc ",ylll:.lory Chllllgc, is on whether instrucllomll hme IS "regularly 5Cheduletf' "lid 'Mil Ull
... bet!,er an .115l,tllloon can document that &lude"l~ actually completed twelve houn of
instruclion;ol ""I IVIly III any given '" eek..

                     4         Sillily groups an: part ofan intel:",II,.1 curricu lum moduk. and faculty
                               "",,"ben ""CfC aware or v.ruch studc"l~ did nol 8Uend the l1udy group
                               rnL't:llngs III any !liven week.

           The Draft Audil RCftII<I "Iso retlcclS lhe OIG's purpon ed doc,,"'enI3tlOfl rule in
1'f1f"1"!1l11y requiring the physicalpn::st'f1CC of. fileully member for lII~lruo:lln",,1 lome to eount
In,,"ullis 12-lIour Ruk eompllallc~" HoI>. eyC!", Ihe 12-llour Rule e~!lfe,,;sly 'tales that lime spenl
'" "prepamllon for examinations" is mdudetl III Ihe o\"erall cakulatioll of j nslru~hunal actIVity.
('lo:::lrly the regulation docs not requlrt: 3 (acuity member to be present whene"'t p student studies
'If prepares for examlllation, ill order for such lime 10 be ;'If;luded.

         Likewise, faculty prcscrn;:c dunng S1udy group meetings is not re<jUlr"'-' for the faculty
"""IIIher 10 assess whether a &Iudenl a<J"'lualcly panieipated in the ....eek ly "hilly ~up meetlllgs.
The course module Indlcales thaI sillily I!/IIUP mccungs are devoted 10 Ihe ,j""dopmcnl of group
III<IJlXb ami preparation of pI'l:Se!ltal .."" for the next faculty·led cou''''' wurbhop. These
projllCl~ amI presentations arc ~~'tI alld eompnJ.C pan of each stUdCU\'k fin:'1 gnlde"

" '1Sf'(;Slltudnl" "'''"' ~Ul"'" ro mttt for four boil"          1"" ..'••k in "'S"l•• "'ortsltOp> and .n .dd"",... II..,.,
hows pc.... ~~ HI    .'udyCJ'lU1"      It ........ UftiV''''Iy"' pulic~ wu oho, In in..".,,,,,, b<      1""'"'"       'q:uur <!use<
   bu. Ih< policy f.,. >Iudy V""I' II<ItIIdono< ...... . 1.... <IlK' ........ uf die r.n.1I)" ........btr ~ 0../\ ,,\HIlI K<p<rn 0' S.
Tlo<Y...........u ",er.... ,ptlfy ... m·... ogh1 thol fO<llIty _ _• . - ......           "'tt     <1Udy ~ .. "uk, " ' _
.onw", pc-rfornww:•••n" """"'" <:<pre"          '1a1CmCmJ    In tho otudrul 1t..ndbook 1M 0'...... ~ ...""      th., 'hrdy ,'.,.,p
."......"'" ........rxIill<><}'.

'. -n.. Dorot""'"" .. "'hrtonly batrN r""" .~Ofd<I"A ony "dJK<:-. ... per' ....... Of Mntml ""n ~ <Um<ulwu"
01 .... UBI""",I)" 20 U.s c tUn.. TlItm(ft. II> the ,",,!eN tt., .ud.t ,~ ~_"o ........."                     !tit SI'GS """"'"
CUH ",ulum, ....,h " .."'. ar< plainly bo:y",td the OIG·, .""""" ofout"""'I)",
Mr. William AII~"
June: L7. 2002
Page 20

                S. 	   Ad,hlmn..l1 hoUll s!!(nl by siudenu in prepwlinn rur e\"mllUlllons an.'
                       "'ct.... LahIe under !he 12-llour Rule.

        Somc SPGS oour~es ulll, t.~ Irndmonal ~Jtaminlilions, in addition 1<1 Ihe sludy WOnp
prtscntalions and olher weddy ~n"IM actl\tltles. The Draft Audit Rq)(Ht IK'M""" Ihe uddilional
hours IpCnI by JlOOcnIS in tho!;e L~IU""" prt"plnng for their ClIaminations. although lhe 12·Hour
Rule e~plicidy pcnllllS time spent'" "preparllllOn for eummlitions"lo he rounh!tll'-'"'an\S
oomphancc. The OIG's PUI1)(Hle<1 d"cllltIl'fllaIiOn rule esscnlially requires all c. anllJrqmralion
IU be stricily regulated by the Uni.c.""ty ur slIpcrviscd by a faculty memher, i" Hnh,r for thc lime
to be Included. Decau$(" Illallevd uf sUperviSIon is not required by any legal autl ...·,ly, any
calculation uAder ~ 12-110\11 Rule mus! p~me. by ~ simple f..ctlhc ClIams OCCUITOO, that
, Iudenls in thosc COUlles wom: eltpected 10 spend, and did spend, addilional t,,,,e pn'p.mng for

               6. 	    Thom: is no statutory tlf ~latory basis for the OIG's requ""rnL~lI lIuu lhe
                       Um"n1illy ~rnsure I""t sludy group mt'C:lings wen: taking place."

         rh~ 12 · Hour Rule rc<juires only a milli """n number of ··regularly scheduled"
instrucll"nal OOUTS. As p reviously discUSSCti, Iht I)mfl Audll Rcpon is a far·reaching atll''''pl 10
expanl1lhe mle to requm: SUiCh hou", be act..:.lly phys,cally anended by every relevant SllId"ul,
and that Ihe limverslt y specifically document each "h,tI~r1t', "sesl-lJrnc" in the study gmuflS.
This action hy Ih" OIG ignore, the Dcpill1menl·. rUnT slutcment$ aboul the nature und "'"'I''' "f
Ihe rule. When rrumu1gallng thc n:gulatlon and conSI(h.'nllj!: a vanety of educational conte~1-'"
the Departmeut I.ubhshed the follo,,;ng:

            CQ",m"n/s' One commcntcr observed thai n.. u,y eXlemal degree and adult
            learning l>rllgrum~ lire trying 10 reduce the r1umh~r of tlllYs .pent in the
            classroom. One wmmcnlCT mjUcSled that Iho: s.:.:n:lary Ull h~e the
            divCfSlty an,1 piumilly of the cduc;alion system Ily recogmung the amount
            of lime Ihe SlII,k,,1 ~pcnds in difTcrctll Mllc;ltioual st:Ilmgs
            DlSeU$£lOn TIle Sl.'Cretary agrec' Illat illtem shl!,", cuup"mlJVc education
            programs, iu,lt'pendent study, and OIlier fo"", of regulurly sehcdulcd
            instruction can he ool1SIdcred as pMt of an '11511111""" 's aClIdCfl11e ~"Car.

S9 Fed. Reg. 61148 (NQv. 29, 1'I'14) (emphasis added). Signi ficanlly. Ihe Ocpanmcnl did not use
;' phlllSC such as "actually l'N_ ,d"d Instruction" or "in$llUClion w,th ducuml:'I1tcd attendance" 10
uplmn the scope of the rule . Tl1t)Ctlncem of illc Department was simply ltun educational
p,uy,mJnS, panicularly non-lr~h"o""l. "lifelong \caming" prDgr2lllS H~ I~ SPGS courses 31
,SSue In lhe prc$CT11 audit, havc a nunimum amount of ··regulilrly schalult•., 'nSII\lClioo." In
addll ,"", Ihe Depanment based the 12-H""T Rille on its definilion of a rl,lJ-hme sllldem (sce
Mr William Allen
JUII" 17, 2002
rag" 21

SocIi"" II bc>low) The regulations define a "ru II-lime smdent," in relC'\'llrlt pari, as follow,;

                ,."II-lime Jlllliem: An enrolled stude"l who IS eunymg a full-time
                        I'o'orldoad (olher than by corresJ1'llooence) as determinro by
            Iho: 1115111ullon under a sWldard applicahlo: lu all Sludcntll enrolled in a
            J'3rtlcuhlT cdocillonal program. TIle Klud",,"~ worldoad may include
            any o.,I11I1,,\IIIIOn of (OU=5, work, rciICafch, ur sl.... "~1 Sludl(llhat the
            inillilulion {Ons,ders sufficient to c!auify Ih~ sludtnllIS. ftdl.[imc

34 C.F.R, § tit"ilI.2 (emphasIs addc4); 5« also 34 ("' F.H § 682 200. The cmphasizcd language
dC1T'l(Hl$tralc$ lhe 1>t:p:lf1menfs n:coanition that a studelll '8 lIClIdelnlC worldoad may consi51 "r
IoCI;,,;lies ineluding "00," '"re$Can:h," and "sp«ial 51'kl"::i lhat 1M rttlltitlilion eoruidr;n
sufficient." 11Jele,~ 114.1 btulcd requirement, however, for III' ",51,tuIlOIl 10 sped fitally documellt
each and evcry ho", SI,..",t by a smdcru on such adi"itie!l,~, hmg lIS tltey an.: ''regularly

          The Oran Audit Report ..mrly provide. no basis in StatulO:, le)\lIl"tlOn, pubhshed
gUlduncc, or CaR Jaw to ~ul'lxHl 'l~ h".ghlCnc4 requirement that Ihe I )r" vers,'y monitor studentll'
:ocllLal allcndatJ<:e for the "regularty schcdulcd 1IIluuclion" 10 be counted under the 12.l lour Rule.
Mlx".,,·cr,"'y ancmpt by the OIG I" eS1abhsh ,uch a poltey through II". ""dll consll!"\~S
''''[1'''per Dgeney ruiemakmg and falls ""t~,de the scope of the OlG's alllhnnty 'mder Ihe
l""I"",tol General Act of 1978, which precludes l1li agcney from de1egal"'g ''program operalll\i
rl'$p""slblliIlCll'olO an OlG. See S II S C App J § 8C{b).

        It. 	      The 12-lIour Rul e Is Witlel}' Ad.:nowlfdKfd 10 be Unwnrkabl.o Mod ill-S uited
                   For Nonlraditional Edu[lIliu ..l PrOKrarns.

        The Imdcrlymg buis forthe 12-Hour Kule and III COnlinued arplicalnhly to the Title IV
program. :ore presently m lieriolLs douhl, l'ar1.cularly as applied 10 nontra"iti"n,,1 educational
program~ ""eh PS those offered in tlle U",~=.ty'J Adult and Professional Shkhes prognms,
TIle MlCIion of the Higher Education Act collcI,:nnng 1M mimmum pmod ofOC>ldcmrc lllmuction
fOI Tille IV ehgibility reads:

            I'Ilt.e u:,.m "~adcmic year" s.h~11 rctl"'re a mmimum of 30 weeks IIf
            ",-.lnochonll lime, and wllh ra.pect 10 an undcrgnwiuate course: of study,
            shall requIre lhlt during such minlln,un period of instructional lime a (,,11 ·
            time "I"IIL... t 'I expected to complete at lellst 24 semesler or lrimester IM>"rs
            or 3b quar1er hours at an m5lilUliol1 Ihal m"asures prognm lenb'lh in cred, I
Mr. William All""
June 17. 200Z
Pag¢ 22

20 U.S.C § LO);~.)(2). The ilEA mandates lIollung fur1her reganting W length or structure oh
traditional. r"ur-Y"'lT mShtuuon of hIgher edueallOll'S renod of undergraduate inMruet,,,,, In
regulations i1111'Ie111elll1ng Ihe above IlEA provi~iou. 11O,,~ ... er. the Dcpanmenl created an
additional n:qUlrcrntlll for cdueational programs thaI llSO: crOOI1 hours but thai do not use a
semester. trime!>tt<, 'If '1luLMer system. rOT such program", "Ih" Scerc1ary considers a week or
'nstNCuonalume to he: any'" ""k ,n wllicll at leut 12 hours "f",gulurly scheduled instruction.
examinalions, or prel);lr3tll'" fur exuminalions OCtur:s." 34 C.F. 11 § 668 2(b )(2)(iiXD)." Thi~
re(juir<:mcnl ""as added hy re)';u lanon '" IthOUt any StalutOl)' hasl" und as tile Inspector General
testified 10 Congress. '111h.,..., is 110 [statutory] $pCCificity in '" l13t can be meluded as instruction
for dCIC1l11lnint: an institut,o,,'s ocadeoue ~ar and credit hours fur Ihe a"'-ardmg of [Title IV]

            The appropriateness of the 12· HOllT Rille, and the inLn1eaSumble burden It ~ates for
.nsh!UtlonS that wish to I'm,,, oornphanee. have recently come Ulllk1' IDcreascd scrutiny. In
2UQ I. Ihe conference report In th~ 1lt:pIlr1mcnt'S annual approlJriatiol1s bill mcluded the following
i,I .....'TVat'on

              The confcrccs are aware of OOOC('l'llJ ill Ihe hiihtr educ.~t't)n commu11lty
              abootthe so-called "12 huur rule" and its unsuitability to 'kklress the needs
              of InstitutiolU ofhighe. wucalLon throughout t~ lJallolllhat ~-c non·
              tradilional sluden~ en~alm hfclong Jearnmg. The oonfL!fCt:< bI"C
              concerned about the potent ,," fi>r enonnous paperwork bun!e"< oomg
              placed on institutions of higher ~'<lllcallon in Illeir allempt s t" curnply ""nh
              the 12.hl,mr rule.

Mol'( rc<:entl~, mMl dnnng Ihc course of this an.ht, Congress has considered leglSlitll<nl 10 repeal
the 12·Hour Rul~. The "Internet Eqllity and F..d'Il!:L1ion Act 0[200\" (ItR. 1992), which passed
the Ilouse of Mcpresentahl'cs on October 10. ZOO!, "'ould unifonnly define -W"",k of
IMSlructional "",,," 10 be ". we.:k in ",·hith at lea._1 une day of instruction, exanlln3tnm, or
pl'tparalion for c.all"IlUl1on occurs." tllus negatm!: 1h" rCHulalion crealing the 12 Huur Rule
The bill is a tacit ockno",'lcdgcment of the Oql3l1rncnl', own findings thaI "[t]hCl~ ,< no
meaningful way to mrasurc 12 hours of instrucIL'H'" for courses "typically structured LD modules
that combine h"lh ",hat [traditionally] might he conSidered LDstruttion and oUI--of",I9.-<'< '" uri<. Ii<.!

I, F,• ..mc.lioul ~ lhal""~ ocmL'SIOr. "'...... rcr, Of quar1<1.yotan."'Ib< Sa:rewy COII'....... ..-eot of
...lnIClW>NIl ""'" '" be aD)' ..."~ ID .. t.cb aliuso """ do)' 0( ..,... .", 1Cb<dWcd ."U\oc:tJOII, "''''''''''ILOfI',
",<PO"'I"'" r.... ~ ..IIll""tlOlL. 0<CUlf,. " J4 t:. F.R I (oM lfb)(l)(iil(A)

"T..I,mnny "' I,<IITO''''' l<...... u.s. lJqI>rtmtILT "' ~"""'h"" InIf!«lo.- ticDL"1'!. be,,,,,, """ I! ~ U<>ux of
Roprnen(.:LI'vM ("""""'_ Of! I:.<b.ocallurl ;and .... W..n:fo:n<, Subc""""'ll<'< DO 21" CmtI1f)' <'..........'''VCDnI.
c",",omr"l H R 1'1'l2.!Iot "la!<fD<1 br<rlly ;and Edualliooo Act of 1001 .. (......, 21. 2(01),
Mr William Allen
1'''1:''' 23

Ihl're 'S no d'Slm(1ion betwea. mstolCt,onal '"n" lind 'bornc ,,'ork.'~'· The Uni,ersity 's SI'liS
Cu"",""   modules - combining tnditional, facuity -ial "CIUICS, mandatory "study S10uP" III

"llIeh ~tll(1c111S worked on graded group pmJects, and mdlvldually anigned graded pmJec!" li,ll
" "t. III Ilus category of educational programs. II", SI><.iS programs thereby exemplify Ih~
regulal,,'Y 'hlcnun. erealed by the 12-Houf Rule.

           or I'",IIUIII:.T significance is the Departmenl 's l"u[lOSI,I, dunng negotiated rulemak iug
activities ca.I.". Ihls YCIIf, 10 eliminate the ] 2- Hou. Rul" ,,,nhrely_ Although those rulcmaking
KUions dill ,....1 reac:h a c:onocnsus. the Department ruhhcly ""healed liS diro:t intmtlo repeal
the rl:guiallOn, H"'] H proposed rule i5 OlIIticipated in the F",!,:r:ll ReglSIC1' this summer." We
therefore qll~'Sllun Ihe purpose oflhc DIG applying a ntle Ih"lthe Department itselfcalls
"unworkahl~" Ullit behevcs '5 IOtally unne<.:esnl'y. n.e rm; '5 lmposllloo of unctions for alleged
"iolations of lhe rule II slInllarly without ment, n.e 1 1"'''e~'ly thereforl: objeclJl 10 the issu;mcc
of me Dr.Jft AIUI,! R"POrt concerning the 12-lI ou. Rule, all.llmvmg 10 respond to the DIG at th is
time, when the DCI';'riltltnl IS obviously uocertain about it~ cunlinued applieabilily.

           C. 	     Th e Kec'""",... ndnl UlblllJ)' I. Basal On ,\n I-:rron"","s ,'\Itlhodology and
                    El[clude.' :-'is:nifkMnl AmountS of Time Thai CIIIII,I I\,word Co mplianc e wl lh
                    the 1l_lI our 1/."1.,,

           The OIG fail$ 10 consider thai IllSlruclional activity includahle 1I11l1c:T the 12-Hour Rule
necessarily O((urs outSide of hulh Ihe faculty-icd classes and Ihe study 19"OIiP mCC11Rgs. For
c~ilIllpic. the regulatiol1l'erllllL~ IlI"e sP"''' In "preparation for eX 3l111ll"lmns" 10 be counted. The
OIG's purported documenla"nll rul .. "'Ih.... ,gn<lru this portion of the regu~'llUn, or has wrongly
;ook>pted an Interpretation requiring alll''''panollon to be uri'tly regulated hy Ih" Unl\'CfSlty.
~'I"'r.·lscd by a fl(l,llty member. 0. I~k" phICe In closely-monitored Unl\ emit y r"cllitics.
Stud""",' grodcs fOT SI'GS COUTSe5 are .I"'~nntnoo throl,lgh traditional cxaminaIIO'IS. graded
;",1" .. llIal pretcT1lationl and papers. Voltled group projoclJI. or a eombillaholl IIlI:.'n.'lOf Although il
1:a!I!I0l he, nor 's 11 TCql,lired by any legal ~ulhonly 10 be. monitored and measun:d by Ihl:
UnlVerslly, llny calculation under Ihe 12,HOII' Kuic mUSI presume Ihal studtl'.' spent additional
time IIf~l';tnng for lhl:l( txaminatiOlls 300 graded a.c:li"itics. That additlon,,1 "me must be
;nclutlt:d '" any calculation of COW"IC: ICflgth, anod Ihe liability I'e'CQnuuendcd I>y the !)mit Al,I(\il
Report i5 Iho:reforo based on a faulty methodology

'· U_5. n'I"Q,,,,,,ofEdwll-. OIT~of"""-~ t:duc....... " Kopun 1OC'00Itn"''''' !be 0......."
           n.""m.....1>Of1 Proal.... " (J"".wy 2Mt ~ . , !,"go 14. W/ul. tb< """lOll w llomem .... J mad<: In .pee"'"
I.~.'d ttl "~""n<. ,ducalron"      ,,,,,,sa. "'"        Repon &"'" "" 10 dcf1"" ,ucb lIul1"..,h!;o",,1 rot,..... ,n • nunne, II.., ..
...." ..1.", ,,, , .... <"duc.."",,1 Pf"ll.31, .. ;at ........n ,~;, .old"

" :;c.. I,l.ooICIt ..r H'&h<! t4u<"""" 1LI_IJy N..., ). - Aile, 1.....1 Dcodlocl>, Eduo."'1011 [)e,""""n' Vo..... 10 Rd.,.
Il ·lIuw R~J. It... lf," (A",it 29, 2(02), ~,.<I:abl. online "' ht1\l-,.'<hro,uole,<l>I,vr,..nOOV64nOO204190Ju,h'""
M. Wilham Allen
June \7,2002
1';lge 24

                                           C'01\C 'I ,USION

        h" ;.11 of the foregoing reasons, Baker 1J1lI\'"nnty 'hSRgTeCS with the   ~Iiminal)'  findinf,fl
and r«nlllm~",I"I'u"s SCI fon il in the Draft Audit RellOrI, ""d we urgc thc Office of Inspeetor
General to close I he ,,,,dlt without 11 determination ofl iah,lily_ We reserve the right and
opponunity to rOilIlIlIl! further 10 ilny final !'CpO" as may be 'SSlI"d .

                                                RClipCClfully suhm ,ned,

                                                DAKER UNIVE RSITY
                                                Or. Daniel M, Laruhcrt, I'r"",dent
                        REPORT DISTRIBUTION SCHEDULE

                          Audit Control Number A07-A0030

Auditee                                                            No. of Copies

Dr. Daniel M. Lambert, President                                          1
Baker University
618 8th Street
P.O. Box 65
Baldwin City, KS 66006-0065

Action Official

Teresa Shaw                                                               4
Chief Operating Officer
Federal Student Aid
U.S. Department of Education
Regional Office Building, Room 4004
7th and D Streets, SW
Washington, D.C. 20202

Other ED Officials/Staff (electronic copy)

William D. Hansen, Deputy Secretary                                       1
John Danielson, Chief of Staff                                            1
Eugene Hickok, Under Secretary                                            1
John Gibbons, Director, Communications                                    1
Jack Martin, Chief Financial Officer                                      1
Clay Boothby, DAS, Legislation and Congressional Affairs                  1
Laurie M. Rich, AS, Intergovernmental and Interagency Affairs             1
Philip Maestri, Director, Fin’l Improve. & Post Audit Opns, OCFO          1
Michelle Douglas and Carolyn Adams, OGC (Correspondence Control)          1
L’Wanda Rosemond, General Operations Team                                 1
Charles Miller, Post Audit Group, OCFO                                    1
Headquarters and Regional Audit Managers                                  1 each