oversight

Associated Technical College Eligibility of Institutions to Participate in Title IV Programs and Others Issues.

Published by the Department of Education, Office of Inspector General on 1998-09-09.

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

                      Associated Technical College
                Eligibility of Institutions to Participate in
                   Title IV Programs and Other Issues




                                 FINAL AUDIT REPORT




                                          Audit Control Number
                                                A0970015
                                            September 1998




Our mission is to promote the efficient                      U.S. Department of Education
and effective use of taxpayer dollars                        Office of Inspector General
in support of American education                             Sacramento, California
                                 NOTICE
Statements that financial and/or managerial practices need improvement or
recommendations that costs questioned be refunded or unsupported costs be
adequately supported, and recommendations for the better use of funds, as well
as other conclusions and recommendations in this report, represent the opinions
of the Office of Inspector General. Determinations on these matters will be
made by the appropriate Education Department officials.
                                         Table of Contents

                                                                                                                                 Page

Executive Summary                 ...................................................1

Audit Results        ..........................................................2

     Two of Three Freestanding Campuses
     Failed to Meet the 85 Percent Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

             Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
             ATC’s Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
             OIG Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

     Use of Institutional Scholarships and Loans
     Resulted in Understated Refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

             Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
             ATC’s Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
             OIG Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

     ATC Lacked Adequate Record Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . 11

             Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
             ATC’s Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
             OIG Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Other Matters         . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Background         . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Purpose and Methodology                         . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Statement on Management Controls                                      . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Attachment -
  Associated Technical College’s Response to the Report                                                            . . . . . . . . . 19
                                  Executive Summary


Associated Technical College (ATC) did not meet Federal requirements for participation in Title IV
Student Financial Assistance Programs at two of its three institutions. Also, ATC did not comply with
certain provisions of the Higher Education Act (HEA) and Federal regulations in its administration
of the Federal Pell Grant Program.

   #     ATC’s Los Angeles and San Diego campuses did not qualify as eligible proprietary
         institutions of higher education because revenues from Title IV programs exceeded 85
         percent of campus revenues. Under the HEA, proprietary institutions must derive at least 15
         percent of their revenues from non-Title IV sources to participate in Title IV programs. ATC
         improperly included institutional scholarships when determining its non-Title IV revenues.
         As a result, ATC concluded that all its campuses met the 85 percent requirement when, in
         fact, two of the three campuses had not met the requirement.

   #     ATC overstated its actual tuition costs when calculating student refunds. As a result, ATC
         understated the refunds due to the Pell Grant Program for students who dropped from the
         institutions.

   #     ATC lacked adequate record maintenance. Student files for 51 of 145 selected students were
         not made available at the time of our review. In addition, ATC could not readily provide us
         with supporting documentation on cash revenues for the Anaheim campus and receivables for
         all campuses. ATC’s failure to provide this information indicates that it may not have the
         necessary administrative capability to participate in Title IV Programs.

We recommend that the Assistant Secretary for Postsecondary Education take emergency action to
terminate participation of the Los Angeles and San Diego campuses in the Title IV programs. The
Assistant Secretary should also require that ATC return the $8.6 million received by the two
campuses after July 1, 1995, the date that the campuses became ineligible under the 85 percent rule.
In addition, ATC should identify and return any additional refund amounts due for students who
dropped from the Anaheim campus during the period July 1, 1995 to present. The report also
includes procedural recommendations for the Anaheim institution.

In its comments on the draft report, ATC did not agree with the facts and recommendations
presented. However, it did express willingness to improving its record keeping system. The full text
of ATC’s response is included as an Attachment to this report.




ED-OIG                                    ACN A0970015                                        Page 1
                                                         Audit Results

We concluded that ATC administered the Pell Grant Program in accordance with the Higher
Education Act (HEA) provisions covering use of professional judgement in determining award
amounts. However, ATC did not comply with HEA provisions and Federal regulations covering
institutional eligibility and refunds. We also found that ATC lacked adequate record maintenance.



Two of Three Freestanding Campuses
Failed to Meet the 85 Percent Rule


As of July 1, 1995, ATC’s Los Angeles and San Diego campuses did not qualify as eligible
proprietary institutions of higher education because revenues from Title IV programs exceeded 85
percent of campus revenues. The HEA, Section 481(b) states “the term ‘proprietary institution of
higher education’means a school . . .(6) which has at least 15 percent of its revenues from sources
that are not derived from [HEA, Title IV] funds . . . .” This institutional eligibility requirement is
codified in Title 34 of the Code of Federal Regulations (CFR), Section 600.5 (a)(8). The regulations
also provide the formula for assessing whether an institution has satisfied the requirement and specify
that amounts used in the formula must be received by the institution during its fiscal year.
Specifically, 34 CFR Section 600.5(d)(2)(i), states that “...the title IV, HEA program funds included
in the numerator and the revenue included in the denominator are the amount of title IV, HEA
program funds and revenues received by the institution during the institution’s last complete fiscal
year.”

ATC’s Los Angeles and San Diego campuses cash receipts from non-Title IV sources were less
than 15 percent of campus revenues. The following table summarizes our analysis of revenues for
ATC’s three campuses. The amounts shown are for ATC’s fiscal years ending December 31.

Table 1. OIG’s Computation of ATC’s Percentage of Non-Title IV Funds. Two of ATC’s campuses
did not have non-Title IV revenues that meet the 15 percent minimum.

                             Los Angeles                              San Diego                            Anaheim
 Campus
                 1994            1995       1996           1994        1995        1996        1994         1995         1996
 Title IV       $5,427,454     $4,520,606   $2,244,062     $743,349     $544,202   $479,284    $922,175      $788,560     $507,519
 Funds

 Cash             445,284        404,137      202,155       100,626       84,035     50,495     419,606       289,001      250,939

 Total          $5,872,738     $4,924,743   $2,446,217     $843,975     $628,237   $529,779   $1,341,781    $1,077,561    $758,458
 Revenue

 Non-Title IV
 Funds
 as a Percent
                  8%             8%           8%           12%          13%        10%         31%           27%          33%
 of Total
 Revenue




ED-OIG                                                    ACN A0970015                                                    Page 2
Table 1 shows that the non-Title IV revenues for the Los Angeles and San Diego campuses
represented less than 15 percent of the total revenues. The 85 Percent Rule became enforceable on
July 1, 1995. Therefore, the two campuses were ineligible to receive Title IV funds as of that date.

ATC provided the cash amounts shown in Table 1 and supporting documents related to the amount
shown for the Anaheim campus for the year ended December 31, 1994. Our review of the supporting
documents disclosed that ATC’s bank accounts confirmed about $388,000 in cash deposits from non-
Title IV sources during calendar year 1994. While this amount was less than the $419,606 of cash
revenue shown in Table 1, the $388,000 was sufficient for the Anaheim campus to meet the 85
Percent Rule. The difference was primarily due to ATC’s failure to provide support for certain cash
receipt amounts.

ATC was unable to readily make available supporting documentation for Anaheim’s cash receipts for
calendar years 1995 and 1996. Therefore, we were unable to confirm that the Anaheim campus met
the 85 Percent Rule in those two years. Audit tests to confirm cash receipts shown for the Los
Angeles and San Diego campuses were not necessary. For those campuses, ATC showed cash
amounts from non-Title IV sources that were below the 15 percent level required by the HEA.

ATC improperly included institutional scholarships when calculating its non-Title IV funds
percentage. When ATC calculated its percentage of revenues from non-Title IV sources, it
improperly included its conditional institutional scholarships in the calculation. ATC’s institutional
scholarships had no value under a cash-basis method of accounting and its institutional scholarships
and loans artificially inflated institutional charges. The inclusion of the institutional scholarships gave
the impression that all ATC campuses met the 85 Percent Rule, when, as noted in the previous
section, two of the three campuses had not met the requirement.1

The following table shows the percentages that resulted from ATC’s computations with the inclusion
of institutional scholarships as a source of non-Title IV revenue:




         1
             We also found that ATC used a composite percentage that it calculated by combining the revenue
amounts for each campus. While ATC prepares financial statements that consolidate the financial information for
the three campuses, it should have considered the campuses individually for assessing compliance with the 85
Percent Rule. The campuses receive Title IV funds under separate Office of Postsecondary Education (OPE)
numbers and program participation agreements and submitted separate packages for recertification of their
eligibility for Title IV funds.

ED-OIG                                        ACN A0970015                                               Page 3
Table 2. ATC’s Computation of Percentage of Non-Title IV Funds. The inclusion of the institutional
scholarships gave the impression that all ATC campuses meet the 85 Percent Rule.


 Campus
                              Los Angeles                              San Diego                             Anaheim

                   1994           1995        1996         1994         1995         1996       1994           1995        1996
 Title IV        $5,304,488     $4,825,697   $2,562,145    $976,839      $857,090    $535,507    $710,385      $726,414     $509,778
 Funds2

 Cash              445,284        404,137      202,155      100,626        84,035      50,495     419,606       289,001      250,939

 Scholarships     2,281,023       752,088     1,639,905      93,662        85,097     128,611     316,080        42,943       81,730

 Total           $8,030,795     $5,981,922   $4,404,205   $1,171,127    $1,026,222   $714,613   $1,446,071    $1,058,358    $842,447
 Revenue

 Other
 Revenue
 as a Percent
                  34%            19%          42%          17%           16%         25%         51%           31%          39%
 of Total
 Revenue




When the regulations covering the 85 Percent Rule were issued on April 29, 1994, the Department
stated its position on including institutional scholarships and institutional loans as revenue. In the
Analysis of Comments and Changes section of the Final Rule, the Secretary stated that:

            “An institution is not prohibited from including institutional charges that were paid [emphasis
            added] by institutional scholarships and institutional loans as revenue . . . provided that the
            scholarships and loans are valid and not just a part of a scheme to artificially inflate an institution’s
            tuition and fee charges. For this purpose, the Secretary does not consider institutional loans to be
            real unless such loans are routinely repaid by the student borrowers. The Secretary does not
            consider institutional scholarships to be valid if every student receives such a scholarship so that
            no student ever pays the claimed tuition and fee charges . . . In this connection, the Secretary will
            scrutinize institutions that raise their tuition and fee charges to avoid the 85 percent rule but can
            show no actual payment of those additional charges, or payment through ‘artificial’institutional
            scholarships and loans.”

Also, the Analysis of Comments and Changes section of the Final Rule clarifies that revenues must
be reported on a cash-basis method in the numerator and denominator of the formula for calculating
the non-Title IV funds percentage of total revenues:

            “... since institutions must report and account for title IV, HEA program funds on a cash basis, the
            institution must also account for revenue in the denominator on a cash basis. Under a cash basis
            of accounting, the institution reports revenues on the date that the revenues are actually received.”

ATC awards students who are eligible to receive Title IV funds with an institutional scholarship, an
institutional loan, or both. During the enrollment process, ATC prepares a Retail Installment Contract
that shows the school’s tuition charges and method of payment. Typically, the method of payment




            2
           ATC’s controller could not reconcile the differences between Title IV fund amounts shown in Tables 1
and 2. Table 1 uses Title IV fund amounts that we extracted from the school’s Federal Cash Transactions Reports
(SF-272s). According to ATC’s controller, the amounts used in Table 2 represent deposits of Title IV funds shown
on the institution’s bank statements.

ED-OIG                                                    ACN A0970015                                                      Page 4
includes either an institutional loan or scholarship. The amount of the loan or scholarship is usually
the difference between the listed institutional charges and the amount of funds that the student may
receive from Title IV programs, and minimal cash payments anticipated from the student.

If the student is awarded an institutional loan, he/she signs a promissory note for the amount of the
loan.3 Institutional scholarship documents are also prepared during the enrollment process, i.e.
students must complete their educational program as a condition to receive a scholarship. At the time
the institutional loans and scholarships are awarded, neither the loan nor the scholarship is recorded
on the student’s account.

When the student completes his/her educational program, ATC records a credit (tuition reversal) in
the students account for the scholarship amount. If the student has an institutional loan, ATC marks
on the promissory note that the loan was paid with the scholarship. If the student withdraws prior
to completing their educational program, the scholarship is “forfeited” and the student is left with a
balance due on his/her account.4

ATC did not have an external source for loan and scholarship funds nor did it maintain its own funds
in a separate account for loan or scholarship purposes. Amounts collected on its institutional loans
were included in cash amounts shown in Tables 1 and 2.

The institutional scholarships should not have been included as non-Title IV Revenue in the 85
Percent Rule calculation.

   #     ATC’s institutional scholarships have no value under a cash-basis method of accounting.
         ATC students who are awarded scholarships do not receive credit in their student accounts
         until after completion of their educational programs. The credit is applied by reversing the
         tuition charges by the amount of the scholarship. This tuition reversal involves no receipt,
         disbursement or transfer of funds between ATC’s cash accounts. In fact, since ATC
         maintains its accounting records on a cash basis, no entry is made in ATC’s accounting books
         for the tuition reversal recorded in the student account. In cash-basis accounting, a
         transaction is not recorded into the account books until cash is received or paid.5 Therefore,
         no revenue is “received” when ATC makes a tuition reversal.




         3
            The loan terms state that repayment of the loan shall begin 30 days from the date that the student
completes or withdraws from his/her educational program. Payments will be made in monthly installments of no
less than $50 and an interest rate will be charged at the rate of 10 percent per annum on the unpaid balance.
Interest charges will start upon the student’s completion or withdrawal from his/her program. The promissory note
states that information concerning the amount of this loan and its repayment will be reported to a national credit
bureau if payments fall more than 120 days past due.

         4
          For students who have withdrawn, the school must apply the appropriate refund policy to determine
whether a refund is due to the student or Title IV program. Students may not have a balance owed on their student
account after application of the refund amount.

         5
             Horngren, Charles T. and Walter T. Harrison, Jr., ed. 1989. Accounting. Englewood Cliffs: Prentice
Hall.

ED-OIG                                           ACN A0970015                                               Page 5
   #     Almost all ATC’s students who are eligible to receive Title IV funds are awarded an
         institutional scholarship, an institutional loan, or both. We found that ATC awarded
         scholarships and/or loans to 99.7 percent of Title IV students attending the Los Angeles
         campus and 93 percent of Title IV students attending the San Diego campus.6

   #     ATC appears to expend little effort on collecting outstanding student account balances.
         According to an ATC school official, a letter is sent to students who have left the school
         without completing their educational programs.7 The only evidence that ATC could provide
         of this process were copies of the form letters sent to students. ATC had no written
         procedures covering its collection process.

         While the form letters mention collection agencies, a school official informed us that the
         school does not use a collection agency to assist in collection of the loans. ATC makes no
         effort to locate students who have moved without leaving a forwarding address. The school
         official responsible for the collection process stated that collecting on loans was a low
         priority. Our review of student accounts found that 81 percent of San Diego students and 87
         percent of Los Angeles students who had outstanding balances at the time they completed or
         dropped had not made subsequent payments on their accounts.8

Based on the above findings, we concluded that ATC’s institutional scholarships had no value under
a cash-basis method of accounting and the scholarships and loans had been used to artificially inflate
institutional charges. Therefore, ATC should not have included scholarship amounts in its 85 Percent
Rule calculations.




         6
           These percentages are based on a review of a statistical sample of students for the Los Angeles campus
and all students for the San Diego campus who received Title IV Pell funds during the calendar year 1996. The 93
percent for the San Diego campus is comprised of the 91 percent of students whose Retail Installment Contracts
show an institutional loan and the 2 percent of students whose Student Tuition Statements show an institutional
scholarship covering a portion of tuition charges. The 99.7 percent for the Los Angeles campus is comprised of
49.2 percent institutional loans and 50.5 percent institutional scholarships, respectively. Details on the sampling
methodology are provided in the “Purpose and Methodology” section of this report.

         7
          The letter encourages the student to return to the school and also informs the students that the balance
owed on their student account will be due if the student does not return. We were told that if the student does not
respond, a second letter is sent within 30 to 60 day. Additional letters are sent about every 60 days.

         8
           A total of 161 San Diego students and 158 Los Angeles students included in our review had outstanding
balances due at the time they completed or dropped from their course. These students owed $100,166 and
$186,079, respectively. As of February 1998, ATC’s student accounts showed cash receipts applied toward these
balances for 31 of the San Diego students and 20 of the Los Angeles students. The cash receipts totaled $5,764
and $2,693, respectively. Details on the sampling methodology are provided in the “Purpose and Methodology”
section of this report.

ED-OIG                                          ACN A0970015                                                 Page 6
Recommendations

We recommend that the Assistant Secretary for Postsecondary Education initiate emergency action
to terminate the participation of ATC’s Los Angeles and San Diego campuses in Title IV programs.
 Also, the Assistant Secretary should require that ATC:

   #     Return the Title IV funds received by the Los Angeles and San Diego campuses after July 1,
         1995. During the period July 1, 1995 through February 1998, the Los Angeles and San
         Diego campuses received $7.0 million and $1.6 million in Title IV funds, respectively.

   #     Provide documentation to support non-Title IV cash revenue amounts used in the 85 Percent
         Rule calculations for the Anaheim campus for periods after December 31, 1994.

   #     Exclude its institutional scholarships and any other non-cash credits to the student accounts
         from its 85 Percent Rule calculations.

ATC Comments

ATC disagreed with our conclusion that its institutional scholarships had no value under the
cash-basis method of accounting. ATC stated that our conclusion was based upon a narrow
interpretation of “cash-basis” which was both arbitrary and restrictive. ATC provided citations from
accounting literature from which it concluded that “cash basis” refers to the time when transactions
are recognized as income or expense rather than defining the means of payment or type of income.
ATC asserted that its method for recording institutional scholarships using a book entry rather than
a physical exchange of cash has no bearing on the issue of whether those scholarships have any value.
In addition, it stated that the funds for the scholarship program come from ATC schools’ parent
company and are recognized as income by each free-standing campus.

OIG Response

The accounting literature cited by ATC supports rather than disputes our conclusion that their
institutional scholarships should not be counted as cash revenue. ATC provided the following quote
from an accounting textbook: “Accounting for revenues on a cash basis means that . . . no record
of revenue is made in the accounts until cash is received.” This statement is consistent with the
accounting textbook citations used in the report. That is, cash basis accounting recognizes revenue
at the point cash is received.9

The Financial Accounting Standards Board (FASB) provides a definition of revenue in its Statement
of Financial Accounting Concepts No. 6. The FASB defines revenues as “inflows or other
enhancements of assets of an entity or settlements of its liabilities (or combination of both) from
delivering or producing goods, rendering services or other activities that constitute the entities
ongoing major or central operations.” The FASB Statement also states that “Revenues represent
actual or expected cash inflows (or the equivalent) that have occurred or will eventuate as a result



         9
          In contrast, the accrual basis of accounting recognizes revenue when sales are made or services are
performed, regardless of when cash is received.

ED-OIG                                         ACN A0970015                                                Page 7
of the entity’s ongoing major or central operations.”10 ATC’s awarding of scholarships did not
provide inflows of cash. In fact, when ATC recorded a scholarship credit (tuition reversal) in
student accounts, the transaction reduced rather than increased its expected cash inflows (student
balances due). Neither did ATC receive property or services from the student when the scholarship
was awarded to the student. Our conclusion that no value was received by the institution is further
supported by the facts that ATC did not report the scholarship amounts as revenue to the Internal
Revenue Service on its 1995 and 1996 tax forms and did not record the scholarship transactions in
its accounting records.

The effect of the scholarship program was a reduction in tuition revenue. The American Institute of
Certified Public Accountants (AICPA) has issued an Industry Audit Guide for Audits of Colleges and
Universities that are not-for-profit organizations. According to the AICPA audit guide, institutional
scholarships and fellowships are expenditures for the college or university issuing them.
ATC’s statement that “funds for the scholarship program come from the ATC schools’ parent
company” is unsupported. Our review found no evidence that Diversified Education Company
transferred funds to the three institutions for scholarships. Even if such transfers occurred, the
transfers of cash between a parent company and its subsidiaries would not meet the definition of
revenue.




         10
            FASB’s Statement of Financial Accounting Standards No. 95 defines “cash equivalents” as short-term,
highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity
that they present insignificant risk of changes in value because of changes in interest rates.

ED-OIG                                        ACN A0970015                                               Page 8
Use of Institutional Scholarships and Loans
Resulted in Understated Refunds


As mentioned in the prior section, we concluded that ATC’s institutional scholarships and loans had
been used to artificially inflate institutional charges. As a result, the actual amount of tuition used in
refund calculations was overstated and Pell refunds due to the Department were understated.

When students drop from school, an institution must refund any amount paid for tuition that is
allocable to the uncompleted portion of the enrollment period. Title 34 CFR, Section 668.22(b)
requires that an institution have a fair and equitable refund policy. The refund should be at least the
largest amount under applicable state law, specific refund requirements established by the school’s
accrediting agency, or pro rata refund calculated.

As shown by the following formula, the tuition charge is a key factor in determining the refund
amount. (The formulas were simplified to highlight the role of the tuition charge in calculating
refunds.)

            Units Completed           X Tuition Charge = Tuition Earned
         Units in Enrolled Period

         Tuition Paid - Tuition Earned = Refund Amount (or Balance Due From Student)

ATC understated refund amounts due to the Pell Grant Program when it included in its tuition
charges, the amounts covered by contingent scholarships or institutional loans. The institutional
scholarship and loan amounts should not be considered part of the tuition cost.

As part of our audit, we reviewed refund calculations for 65 students who enrolled and withdrew
during the period July 1, 1995 through June 30, 1997.11 ATC understated the refund amounts for
52 of the 65 students as a result of using an inflated tuition charge. The refunds for these 52 students
were understated by $21,041.




         11
           We selected a random sample of 115 students from the 1,150 students who withdrew from ATC during
Pell award years 1995-96 and 1996-97. At the time we reviewed the refund calculations, ATC was able to provide
us with student files for only 74 of the 115 students. Of the 74 students, 65 students received Student Financial
Aid funds. Subsequent to completion of our review of refund calculations, ATC located 28 of the previously
unlocated files.

ED-OIG                                        ACN A0970015                                                Page 9
Recommendations

The Assistant Secretary for Postsecondary Education should require ATC:

   #     Revise its procedures to ensure that actual school tuition (exclusive of institutional
         scholarships and loans) are used in refund calculations.

   #     Recalculate the refunds due for Anaheim campus students who dropped during the period
         July 1, 1995 to present using the revised procedures and return any additional amounts due
         to the Pell Grant program. We have not recommended that refunds be recalculated for the
         Los Angeles and San Diego campuses since the entire amount that these campuses received
         is recommended for recovery under a previous finding in this report.


ATC’s Comments

ATC stated that their institutional loans are valid instruments of indebtedness and their institutional
scholarships are valid and legitimate and were appropriately applied to the cost of tuition. It claimed
that the Certified Public Accountant firm which certifies Diversified’s financial statements recognized
the validity of the loans. ATC also stated that it makes appropriate efforts to collect on every loan
and that no law or regulations required a particular level of collections for loans.


OIG Response

ATC’s comments did not change our conclusion. As we reported in the previous finding, the
Department does not consider institutional scholarships to be valid if every student receives such a
scholarship. The Department does not consider institutional loans to be real unless such loans are
routinely repaid by the student borrower. Our review found that ATC awarded either institutional
scholarships or loans to 99.7 percent of Title IV students attending the Los Angeles campus and 93
percent of Title IV students attending the San Diego campus. Our review of student accounts found
that 81 percent of San Diego students and 87 percent of Los Angeles students who had outstanding
balances at the time they completed or dropped had not made subsequent payments on their accounts.


ATC provided no additional documentation to support its statement that “it makes appropriate efforts
to collect on each and every loan.” We agree that there is no law or regulation mandating a particular
level of collections. However, the Department has set a collection standard for the loans to be
considered real -- that is, the loans are routinely repaid by the student borrowers.




ED-OIG                                    ACN A0970015                                         Page 10
ATC Lacked Adequate Record Maintenance


ATC did not maintain its student and financial records in an organized and readily available manner.
We were unable to locate student files for 35 percent of the students selected for review in our audit.
Also, ATC could not readily provide us with the necessary financial records to confirm cash amounts
and receivables.

Federal regulations require that an institution maintain required records in a systematically organized
manner and make its records readily available for review (34 CFR 668.24(d)(1) and (2)).

ATC’s lack of adequate record maintenance can affect its ability to participate in Title IV Programs.
Title 34 CFR Section 668.16 states that “To begin and to continue to participate in any Title IV,
HEA program, an institution shall demonstrate to the Secretary that the institution is capable of
adequately administering that program....” One standard of administrative capability is that the
institution “Establishes and maintains records required under this part and the individual Title IV,
HEA program regulations.”

Student Files for 51 of 145 selected students were not made available at the time of our review.
As part of our review of refund calculations and professional judgement actions, we selected random
samples of students for the three ATC campuses. With the assistance of ATC’s financial aid
personnel, we attempted to locate the student files in the institution’s filing system. The financial aid
personnel were unable to locate files for 41 of the 115 students in our refund sample and 10 of 30 in
our professional judgement sample, or about 35 percent of the student files. Subsequent to the
completion of our refund and professional judgement reviews, ATC found 32 of the 51 previously
unlocated files. At this time, ATC has not provided us with the remaining 19 student files.

Since ATC could not provide us with the files, we have no assurance that ATC maintained complete
records for the 19 students and that Title IV funds were used appropriately. We were able to locate
sufficient alternative documentation or information to provide us with a reasonable level of assurance
that 12 of the 19 students were eligible to receive Pell Grant funds. ATC needs to implement the
steps necessary to establish and maintain a reliable file management system.

Support for financial data was not readily available. ATC could not readily provide us with the
necessary financial records to confirm cash amounts and receivables.

   #     ATC did not provide us with supporting documentation for non-Title IV cash revenues for
         the Anaheim campus for the years ending December 31, 1995 and 1996. The school’s
         controller stated that ATC does not currently prepare reports on cash revenues and a search
         of ATC records to provide support for the non-Title IV cash receipts would take months.




ED-OIG                                     ACN A0970015                                          Page 11
   #     ATC could not readily provide us with a current list of its tuition receivables and student loan
         receivables. ATC reported tuition and student notes receivables of $3 million in its financial
         statements for fiscal year ended December 31, 1996. According to the controller, a
         receivables list is only prepared at the end of each fiscal year. At that time, the controller
         reviews each student account with a balance due to ascertain the amount to be used in
         preparing the financial statements. Our analysis of ATC’s student account ledgers identified
         that, as of December 31, 1996, student balances due totaling over $24 million. The difference
         is primarily explained by ATC’s practice of maintaining student ledger accounts on its file that
         cover about a 10-year period and not formally “writing off” outstanding balances without
         payment activity.

   #     ATC’s student account ledgers were of limited use because non-cash transactions were coded
         as cash transactions and cash payments received from students could not be readily traced to
         specific bank deposits. We also found that the computerized database used to maintain the
         student account ledgers contained transactions with invalid or missing student social security
         numbers. The social security numbers are needed to link transactions, such as cash payments,
         to individual student accounts.

The availability of documentation on cash revenues and receivables impacted our ability to determine
the proportion of receivables collected each year and assess the validity of ATC’s collection activities.
Also, the availability of supporting documentation impacted our ability to confirm the Anaheim
campus’compliance with the 85 Percent Rule in fiscal years ended December 31, 1995 and 1996.

Recommendations

The Assistant Secretary for Postsecondary Education should require ATC:

   #     Implement the steps necessary to establish and maintain a reliable file management system.

   #     Revise its record keeping system to ensure that supporting documentation for cash revenue
         and receivable amounts can be located within a reasonable time frame.

ATC’s Comments

ATC agreed that the auditors were unable to locate student files in its storage cabinets, but stated that
its employees were able to subsequently locate the student files for them. ATC claimed that ATC’s
ability to provide the requested information in a timely manner was impacted by the volume and type
of financial information requested by the auditors and that only one employee was available to
compile the information. ATC also stated that no law or regulation exists that dictates the specific
method of producing financial data. However, ATC stated it would review the report’s
recommendations to consider whether systems changes are warranted and feasible.




ED-OIG                                     ACN A0970015                                          Page 12
OIG Response

We are encouraged by ATC’s comment regarding plans to explore improvements in its record
keeping systems. However, overall ATC’s comments did not change our conclusion. The regulations
state that an institution must maintain required records in a systematically organized manner and make
its records readily available for review.




ED-OIG                                    ACN A0970015                                        Page 13
                                       Other Matters


During our fieldwork at ATC, we reviewed the institution’s supporting data for student placement
rates. The California State law requires that 70 percent or more of the students who completed the
course within a specified period shall have obtained employment. The employment must start within
six months after completing the course. The occupations or job titles related to their employment
must be related to the employment goal of the course. If an institution fails to meet this standard,
state approval to operate can be revoked.

ATC did not have reliable support for the claimed placement rate of 72 percent for the Anaheim
campus for fiscal year 1995. We found that students were counted as successfully placed when the
student was not placed at all. We did not review supporting documentation for the Anaheim campus
placement rate for fiscal year 1996 and the placement rates for the other two campuses for fiscal years
1995 and 1996 because the claimed rates were below the required 70 percent. We notified the State
of California, Bureau for Private Postsecondary and Vocational Education of ATC’s noncompliance
with the State statute.

                                     * * * * * * * * *

As part of our fieldwork, we met with a representative of the Certified Public Accountant (CPA) firm
that reviewed ATC’s financial statements for fiscal years ended December 31, 1995 and 1996. Our
purpose was to obtain information on the extent of the CPA firm’s review of amounts included in
ATC’s 85 Percent Rule calculation and its basis for concluding that the calculation was properly
performed by the institution.

The CPA firm’s representative explained that he performed the 85 Percent Rule calculation based on
information distributed by a consultant of the California Association of Private Postsecondary
Schools. The information consisted of an excerpt from an interpretation of the Analysis of Comments
and Changes section of the Final rule. The excerpt did not cover the portion of the Analysis of
Comments and Changes section which clarified that the revenue amounts used in the 85 Percent Rule
calculation must be on a “cash basis of accounting.”




ED-OIG                                    ACN A0970015                                         Page 14
                                          Background


ATC was founded in 1967 and became a division of Diversified Education Company on
January 1, 1975. ATC’s institutions are accredited by the Accrediting Commission of Career
Schools and Colleges of Technology. Vocational programs offered include medical assistance,
microcomputer technology, and telecommunications.

ATC operates three freestanding, proprietary institutions located in Los Angeles, Anaheim and San
Diego, California. Each campus receives Title IV funds under separate Office of Postsecondary
Education (OPE) numbers and program participation agreements. The campuses submitted separate
packages for recertification of their eligibility for Title IV funds. A consolidated financial statement
covering the three ATC campuses is prepared under the corporation name of Diversified Education
Company, Inc.

During the period July 1, 1995 through February 23, 1998, ATC’s three campuses received about
$9.5 million Pell Grant Program funds and about $500,000 in Supplemental Educational Opportunity
Grant Program funds. ATC’s campuses receive these funds under the reimbursement method. ATC
institutions lost their eligibility to participate in Title IV student loan programs.




ED-OIG                                    ACN A0970015                                          Page 15
                             Purpose and Methodology

The objective of our audit was to determine whether ATC administered the Pell Grant Program in
accordance with provisions of the Higher Education Act and Federal regulations covering institutional
eligibility and refunds. We also reviewed the institutions’ use of professional judgement in
determining award amounts.

To accomplish our objective, we reviewed ATC’s student files, state licensing and accreditation
documents and ED records. We reviewed ATC’s corporate financial statements and the most recent
SFA audit reports prepared by its Certified Public Accountant. We also conducted interviews with
ATC officials and staff.

To assess ATC’s compliance with refund requirements, we selected a random sample of 115 students
from an ATC provided list of 1,150 students who dropped from its three campuses during Pell award
years 1995-96 and 1996-97. At the time we reviewed the refund calculations, ATC was able to
provide us with student files for only 74 of the 115 students. Of the 74 students, 65 students received
Student Financial Aid funds. We reviewed refund calculations for the 65 students.

To assess the institutions’ use of professional judgement, we selected a random sample of 30
students from a universe of 531 recipients identified from the Pell Grant Recipient and Financial
Management System for Pell award years 1995-96 and 1996-97. The institution had used
professional judgement to determine the amount of the Pell Grant award for the 531 students. At
the time we reviewed the use of professional judgement, ATC was able to provide us with student
files for only 25 of the 30 students. We reviewed the institution’s use of professional judgement for
the 25 students.

We also selected a random sample of 306 students from the 1,193 students at the Los Angeles
campus who received Pell Grant funds during calendar 1996. This sample was used to determine the
percentage of students who were offered institutional scholarships and institutional loans at the time
of enrollment. To determine this percentage for the San Diego students, we reviewed records for all
students who received Pell Grant funds during the period. The records for these 306 Los Angeles
students and the 254 San Diego students were also used to determine the percentage of outstanding
student balances that ATC collected.

To achieve our audit objective, we relied on computer-generated data obtained from the
Postsecondary Education Participants System (PEPS) and the Pell Grant Recipient and Financial
Management System. This data was used for background information purposes and to identify the
universe of Pell Grant recipients used to randomly select our student samples. We performed an
analyses of and used information extracted from ATC’s student account ledgers which are maintained
on a computerized database. As noted in the Audit Results section of this report, the database was
of limited use because transaction codes were not used consistently and transactions could not be




ED-OIG                                    ACN A0970015                                         Page 16
readily traced to supporting documentation. Also, the database contained transactions that could not
be linked to a particular student. When student account ledger information was used in deriving an
audit conclusion, we confirmed the information with other sources, such as institutional bank
statements and physical student records.

We issued SFA Action Memorandum No. 98-02 on November 17, 1997 to alert OPE that two of
ATC’s three campuses failed to meet the 85 Percent Rule.

Our audit covered the period July 1, 1995 through June 30, 1997. We performed fieldwork at ATC’s
main campus from July 28, 1997 through February 12, 1998. Additional work was completed in the
Long Beach office through March 12, 1998. Our audit was performed in accordance with generally
accepted government auditing standards appropriate to the scope of the review described above.




ED-OIG                                   ACN A0970015                                       Page 17
                     Statement on Management Controls

As part of the review, we assessed ATC’s management control structure, as well as its policies,
procedures, and practices applicable to the scope of the audit. The purpose of our review was to
assess the level of control risk for determining the nature, extent, and timing of our substantive tests.
For the purpose of this report, we assessed and classified the significant management controls into
the following categories:

                        --Institutional Eligibility
                        --Cash Management
                        --Student Eligibility
                        --Award Calculations
                        --Refunds

Because of inherent limitations, a study and evaluation made for the limited purposes described above
would not necessarily disclose all material weaknesses in the control structure. However, our
assessment disclosed weaknesses specifically related to the areas of institutional eligibility, refunds
and record keeping. These weaknesses are discussed in the Audit Results section of this report.




ED-OIG                                      ACN A0970015                                         Page 18
                  Attachment

         Associated Technical College’s
             Response to the Report




ED-OIG            ACN A0970015            Page 19
                  OIG AUDIT TEAM

                      Audit Staff:

Mona Samuels-Sego, Auditor-In-Charge, MBA, CFE, CGFM
                    Joel Schoen, CGFM
                        Joseph Tong
                       Philip Guzzo
                 Thomas Roznowski, CGFM
 Gloria Pilotti, Regional Inspector General, CPA, CGFM


             Information Technology Staff:

             Gregory Hayenga, CPA, CISA
                     Gary Forbort

               Advice & Assistance Staff:

               Patrick Howard, Director
                      Lee Greear
                               Report Distribution List
                              Audit Control No. A0970015

Auditee
      Mr. Sam Romano, President                                                   1
      Associated Technical College
      1670 Wilshire Boulevard
      Los Angeles CA 90017

Action Official
       Mr. David Longanecker, Assistant Secretary                                 4
       Office of Postsecondary Education
       U.S. Department of Education
       Regional Office Building, Room 4082
       7th and D Streets, S.W.
       Washington DC 20202

Other ED Offices
      Deputy Assistant Secretary for Student Financial Assistance                 1
      Director, Institutional Participation and Oversight Service                 1
      Director, Accounting and Financial Management Service                       1
      Office of Public Affairs                                                    1
      Area Case Director, San Francisco Team                                      1

Other
        Director, California State Bureau for
            Private Postsecondary and Vocational Education                        1
        Director, Accrediting Commission of Career Schools and Colleges           1

Office of Inspector General
       Acting Inspector General                                                   1
       Acting Deputy Inspector General                                            1
       Assistant Inspector General for Investigations                             1
       Acting Assistant Inspector General for Audit                               1
       Assistant Inspector General for Operations, Eastern Area                   1
       Assistant Inspector General for Operations, Western Area                   1
       Director, Policy, Analysis and Management Services                         1
       Director, Advisory and Assistance Staff for Student Financial Assistance   1
       Regional Inspectors General for Audit                                      1 each
                        U.S. DEPARTMENT OF EDUCATION
                                Office of Inspector General
                                   801 I Street, Suite 219
                                   Sacramento, CA 95814




MEMORANDUM
DATE:          September 9, 1998

TO:            Mr. David A. Longanecker
               Assistant Secretary
               Office Postsecondary Education

FROM:          Regional Inspector General for Audit
               Region IX

SUBJECT:       FINAL AUDIT REPORT
               “Associated Technical College Eligibility of Institutions To Participate in Title IV Programs an
                                                                                                              d
               Other Issues.”
               ED Audit Control No. A0970015

Attached is our subject audit report presenting our findings and recommendations resulting from our audit of
Associated Technical College, Los Angeles, California.

In accordance with the Department’s Audit Resolution Directive, you have been designated as the action official
responsible for the resolution of the findings and recommendations in this report.

If you have any questions or wish to discuss the contents of this report, please contact me at (916) 498-6622. Please
refer to the above audit control number in all correspondence relating to this report.


                                      GLORIA PILOTTI
                                      Regional Inspector General
                                        for Audit

Attachment
                       U.S. DEPARTMENT OF EDUCATION
                              Office of Inspector General
                                 801 I Street, Suite 219
                                 Sacramento, CA 95814




                                              September 9, 1997


Mr. Thomas Fischetti, Director
Accrediting Commission of Career Schools and Colleges
2101 Wilson Boulevard Suite 302
Arlington, VA 22201

Dear Mr. Fischetti:

              *NOTICE OF FINAL INSPECTOR GENERAL AUDIT REPORT*

Re:    “Associated Technical College Eligibility of Institutions To Participate in Title IV Programs and Other
       Issues.” -- ACN: A0970015
       Issued: September 3, 1998


Enclosed is a copy of the above U.S. Department of Education Office of Inspector General final audit report.
We are furnishing this report because it may contain information of interest to you.

If you have any questions concerning the enclosed audit report, please contact me on (916) 498-6622. Thank
you for your interest in this matter.


                                     Sincerely,


                                     GLORIA PILOTTI
                                     Regional Inspector General
                                       for Audit

Enclosure

cc:    Jeanne Van Vlandren, Director, Institutional
        Participation and Oversight Service
                       U.S. DEPARTMENT OF EDUCATION
                               Office of Inspector General
                                  801 I Street, Suite 219
                                  Sacramento, CA 95814




                                        ED Audit Control No. A0970015
                                             September 9, 1998

Mr. Sam Romano, President
Associated Technical College
1670 Wilshire Boulevard
Los Angeles, CA 90017

Dear Mr. Romano,

Enclosed is our report entitled “Associated Technical College Eligibility of Institutions To Participate in Title IV
Programs and Other Issues.” The report incorporates the comments you provided in the response to the draft
audit report. If you have any additional comments or information 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 Department action on this audit:

                       Mr. David A. Longanecker
                       Assistant Secretary
                       Office of Postsecondary Education
                       Regional Office Building
                       7th and D Streets, S.W., Room 4082
                       Washington, D.C. 20202

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 appreciated.

In accordance with the Freedom of Information Act (Public Law 90-23), reports issued to the Department’s
grantees and contractors are made 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.
Mr. Sam Romano, Page 2

Please refer to the above audit control number in all correspondence relating to this report.


                                      Sincerely,


                                      GLORIA PILOTTI
                                      Regional Inspector General
                                        for Audit