oversight

Academy Pacific Business & Travel College Eligibility to Participate in Title IV Programs.

Published by the Department of Education, Office of Inspector General on 1998-12-21.

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

             Academy Pacific Business & Travel College
            Eligibility To Participate In Title IV Programs




                                 FINAL AUDIT REPORT




                                          Audit Control Number
                                                A0980023
                                             December 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.
                      U.S. DEPARTMENT OF EDUCATION
                              Office of Inspector General
                                 801 I Street, Suite 219
                                Sacramento, CA 95814




MEMORANDUM
DATE:          December 21, 1998

TO:            Mr. Greg Woods
               Chief Operating Officer
               Office of Student Financial Assistance Programs

FROM:          Regional Inspector General for Audit
               Region IX

SUBJECT:       FINAL AUDIT REPORT
               “Academy Pacific Business & Travel College Eligibility To Participate
               In Title IV Programs.”
               ED Audit Control No. A0980023

Attached is our subject audit report presenting our finding and recommendations resulting from our
audit of Academy Pacific Business & Travel 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 finding 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
                                             Table of Contents


                                                                                                                                     Page

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

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

       Academy Pacific
       Failed to Meet the 85 Percent Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

       Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

       Academy Pacific’s Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

       OIG Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Other Matters             . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Background             . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Purpose and Methodology                             . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Statement on Management Controls                                          . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Attachment - Academy Pacific’s Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
                                  Executive Summary

Academy Pacific Business & Travel College (Academy Pacific), a proprietary institution located in
Los Angeles, California, did not qualify as an eligible institution for participation in the Title IV
Student Financial Assistance Programs. The 1992 reauthorization of the Higher Education Act
(HEA), added a provision to the Act requiring that a proprietary institution must derive at least
15 percent of its revenues from non-Title IV sources to participate in Title IV programs. This
requirement is referred to as the 85 Percent Rule. That is, no more than 85 percent of a proprietary
school’s revenues, generated from tuition, fees and other institutional charges for eligible programs,
may be derived from Title IV Programs.

Academy Pacific received only 12.41 percent of its revenues from non-Title IV sources during the
fiscal year ended December 31, 1995. As a result, the institution was ineligible to participate in the
Title IV programs as of January 1, 1996. Academy Pacific also failed to meet the 85 Percent Rule
in its fiscal years ended December 31, 1996 and 1997.

In the notes to its financial statements, Academy Pacific had reported to the U.S. Department of
Education that it met the 85 Percent Rule. However, we found that Academy Pacific had improperly
included amounts for institutional scholarships, institutional matching contributions and institutional
loans when calculating its percentages. These amounts did not represent non-Title IV cash revenue
received by the institution. We also concluded that the validity of the institutional scholarships was
questionable.

We recommend that the Chief Operating Officer for the Office of Student Financial Assistance
Programs (OSFAP) take emergency action to terminate participation of Academy Pacific in the Title
IV programs. The Chief Operating Officer should also require that Academy Pacific return Federal
grants received and ensure that the Department is made whole for Federally-guaranteed and Federal
Direct loans disbursed since January 1, 1996. As of May 31, 1998, Academy Pacific had received
$1,935,364 in grants and disbursed $4,714,324 of loans for periods after the institution became
ineligible.

Academy Pacific did not agree with our finding and recommendations. In its response to the draft
report, the institution explained its rationale for including institutional scholarship and matching
contribution amounts in the 85 Percent Rule calculation. The explanation and information contained
in the Academy Pacific’s response did not change our conclusions.




ED-OIG                                    ACN A0980023                                          Page 1
                                              Audit Results

We concluded that Academy Pacific had not derived 15 percent of its revenues from non-Title IV
sources during its fiscal years ended December 31, 1995, 1996 and 1997. Academy Pacific had
calculated its percentage of revenues from Title IV programs and reported the percentage in its
financial statements. However, the percentage of Title IV revenues was understated because
Academy Pacific had improperly included institutional scholarships, institutional matching
contributions and institutional loan principal as non-Title IV revenue in its 85 Percent Rule
calculation.



Academy Pacific Failed to Meet the 85 Percent Rule


As of January 1, 1996, Academy Pacific did not qualify as an eligible proprietary institution of higher
education because revenues from Title IV programs exceeded 85 percent of revenues. The 1992
reauthorization of the Higher Education Act (HEA), added a provision to the Act that states “the
term ‘proprietary institution of higher education’means a school . . . which has at least 15 percent
of its revenues from sources that are not derived from [HEA, Title IV] funds . . . .”1 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.”

Academy Pacific’s receipts from non-Title IV sources were less than 15 percent of its revenues.
The following table summarizes our analysis of revenues for Academy Pacific. The amounts shown
are for Academy Pacific’s fiscal years ending December 31.




         1
          This provision was contained in HEA Section 481(b)(6). The 1998 Amendments to the HEA, which were
enacted on October 7, 1998, changed this provision to require that a proprietary institution has at least 10 percent of
revenue from non-Title IV sources.

ED-OIG                                           ACN A0980023                                                  Page 2
Table 1. OIG’s Computation of Academy Pacific’s Percentage of Non-Title IV Funds. Academy
Pacific did not have sufficient non-Title IV revenues to meet the 15 percent minimum.

                                                         Academy Pacific Business & Travel College
                                                  1995                      1996                     1997
 Title IV Receipts                                  $2,562,241                 $2,177,383            $3,157,647
 Non-Title IV Receipts                                $362,968                  $284,759               $186,463
 Total Revenue (Cash Basis)                         $2,925,209                 $2,462,142            $3,344,110
 Non-Title IV Funds as a
 Percent of Total Revenue                                12.41%                    11.57%                   5.58%


Table 1 shows that the non-Title IV revenues represented less than 15 percent of Academy Pacific’s
total revenues for 1995, 1996 and 1997. The 85 Percent Rule became effective on July 1, 1995.
Therefore, the institution was ineligible to receive Title IV funds as of January 1, 1996 (the first day
after its fiscal year end).

The non-Title IV receipts shown in Table 1 are comprised of amounts that Academy Pacific identified
as cash received from individual students payments, a Job Training Partnership Act program and a
Vocational Rehabilitation program. We did not perform audit tests to confirm these receipts. Such
test were not necessary to support our conclusions since the total of the amounts identified were
below the 15 percent level required by the HEA.

Academy Pacific improperly included amounts in its 85 Percent Rule calculations which did not
represent non-Title IV cash received. When Academy Pacific calculated its percentage of revenues
from Title IV sources, it improperly included its institutional scholarships, institutional matching
contributions, and institutional loan principal as non-Title IV revenues. The inclusion of these items
gave the impression that Academy Pacific met the 85 Percent Rule, when, as noted in the previous
section, they had not met the requirement. The following table shows the amounts that Academy
Pacific included in its computations:




ED-OIG                                         ACN A0980023                                                 Page 3
Table 2. Academy Pacific’s Computation of Percentage of Non-Title IV Funds. The inclusion
of the institutional scholarships, institutional matching contributions, and institutional loan principal gave the
impression that Academy Pacific met the 85 Percent Rule.

                                                          Academy Pacific Business & Travel College
                                                      1995                     1996                      1997

 Title IV Revenue                                        $2,562,241               $2,177,383              $3,157,647

 Other Revenue:

 Individual Student Payments                             $ 261,318                $ 188,866               $ 163,460

 Scholarships                                                212,110                  106,453                308,586

 Institutional Matching Contributions                         41,520                   27,669                    71,263

 Institutional Loan Principal                                  -0-                     22,324                    64,173

 Vocational Rehabilitation Program                           101,650                   67,700                    18,053

 Job Training Partnership Act Program                          -0-                     28,193                     4,950

      Total Other Revenue                                $ 616,598                $ 441,205               $ 630,485

 Total Revenue (Title IV and Other)                      $3,178,839               $2,618,588              $3,788,132
 Other Revenue as a
 Percent of Total Revenue                                    19.40%                   16.85%                 16.64%



Amounts used in the 85 Percent Rule calculation must represent actual cash received. In the
regulations (34 CFR Section 600.5(d)(2)(i)), the Department specified that the amounts to be used
in the calculation are Title IV funds and revenues received by the institution during the fiscal year.
Thus, the regulations required that the amounts used in the formula represent actual amounts
received. The accounting method that recognizes revenues when amounts are received is referred
to as cash-basis accounting.2

When the regulations covering the 85 Percent Rule were issued on April 29, 1994, the Department
clarified that revenues must be reported on a cash-basis method in both the numerator and
denominator of the formula. In the Analysis of Comments and Changes section of the Final Rule,
the Secretary stated that:

         “... 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.”

Also, the Analysis of Comments and Changes section of the Final Rule stated the Department’s
position on including institutional scholarships and institutional loans as revenue.


         2
          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 A0980023                                                     Page 4
         “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 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.”

Institutional scholarship amounts included in Academy Pacific’s calculations do not represent
cash received and the validity of the scholarships is questionable. During the enrollment process,
the student signs a retail installment contract with Academy Pacific. The contract shows the school’s
tuition charges and the student’s method of payment. Academy Pacific students may pay the tuition
with a combination of anticipated Title IV funds3 and non-Title IV funds such as cash payments from
students, the Vocational Rehabilitation Program and the Job Training Partnership Program. If the
amount of Title IV funds and non-Title IV cash payments are not sufficient to cover the tuition,
Academy Pacific notes on the contract that the balance (unmet need) is covered by an institutional
loan. Academy Pacific defines “unmet need” as the amount of the tuition not covered by anticipated
Title IV funds and non-Title IV cash payments, including anticipated student cash payments. The
terms of the institutional loan are specified on the retail installment contract. At the time of our
review, 230 students who had enrolled during calendar year 1997 had completed their educational
programs. Of these 230 students, 58 students had an “unmet need.” All 58 students had institutional
loans for the amount of their “unmet need.”

Students with an “unmet need” are informed at the time of enrollment that they may receive an
institutional scholarship in the amount of the institutional loan. A scholarship form is completed that
shows the scholarship amount and the requirement that the student must complete their educational
programs with at least a 3.0 grade point average and attend at least 90 percent of classes to be eligible
for the scholarship.

We concluded that Academy Pacific’s institutional scholarships had no value under a cash-basis
method of accounting. When students complete their educational programs, Academy Pacific records
a credit in the student accounts for the amount of the institutional loans.4 These transactions involved
no receipt or disbursement of cash.




         3
        Funds from Pell Grants, Direct Loans, Federal Family Education Loans (subsidized and unsubsidized),
PLUS Loans, Perkins Loans, Supplemental Educational Opportunity Grants and Federal Work Study.

         4
          If the student made any payments on the institutional loan after graduation school, Academy Pacific credits
the student account for the original amount of the loan and reimburses the student for the payments that they have
made.

ED-OIG                                           ACN A0980023                                                      Page 5
Also, Academy Pacific did not have an external source of scholarship funds. The cash-basis of
accounting recognizes revenues when cash is received and recognizes expenses when cash is paid
out.5 Since the scholarship credits involved no receipt or payment of cash, the scholarship credits had
no value under a cash basis method of accounting. Academy Pacific should not have included
scholarship credits in its 85 Percent Rule calculations.

We also question the validity of Academy Pacific’s scholarship program. Academy Pacific’s Financial
Aid Administrator informed us that the school has not followed the scholarship policy outlined on the
scholarship form. Since 1994, Academy Pacific’s President has authorized a scholarship credit for
all students with an “unmet need” who complete their educational programs, regardless of the
student’s grade point average and attendance record. Of the 58 students with “unmet need” who
completed their educational programs in calendar year 1997, 38 had met the school’s scholarship
requirements and received a scholarship credit. The remaining 20 student with “unmet need”
completed their programs but did not meet the school’s scholarship requirements. These 20 students
also received a scholarship credit or were scheduled to receive the credit.6 By not following its
policy, Academy Pacific’s scholarship program may no longer be a valid program.

Institutional matching contributions do not represent cash received. Institutional matching
contributions are Academy Pacific’s own funds that it was required to make available to students
under the College Work Study (CWS), Supplemental Educational Opportunity Grant (SEOG) and
Perkins Loan programs. These matching contributions are derived from checks being issued from
one of the school’s accounts and deposited into another school account. The matching contributions
represent cash transfers between institution accounts, but they are not revenue. Revenues are the
inflows of assets resulting from the sale of products or the rendering of services to customers.7
Academy Pacific included institutional matching contributions for the SEOG and Perkins Loan
Programs in its 85 Percent Rule calculation. The matching contributions should not have been
included in the calculation.

Institutional loan principal amounts do not represent cash received. The institutional loan principal
amounts represent the portion of the loan that the school has earned by providing educational services
to the students. As mentioned earlier, cash-basis accounting recognizes revenue when cash is
received rather than when services are provided. Therefore, the institutional loan principal amounts
should not have been included in the 85 Percent Rule calculation. Amounts actually paid by students
on the school’s institutional loans were included in the individual student payments amounts shown
in Table 2.




         5
             Hermanson, Roger H., ed. 1992. Accounting Principles, Homewood, IL: Richard D. Irwin, Inc.
         6
          Academy Pacific included the scholarship amounts for students who received credit as well as those who
were scheduled to receive credit in the 85 Percent Rule calculation for its fiscal year ended December 31, 1997.

         7
             Hermanson, Roger H., ed. 1992. Accounting Principles, Homewood, IL: Richard D. Irwin, Inc.

ED-OIG                                          ACN A0980023                                              Page 6
Academy Pacific was ineligible for Title IV funds it received since January 1, 1996. Institutions
that fail to satisfy the 85 Percent Rule lose their eligibility to participate in Title IV programs on the
last day of the fiscal year covering the period that the institution failed to meet the requirement.
Because it did not meet the 85 Percent Rule for its fiscal year ended December 31, 1995, Academy
Pacific lost its eligibility to participate on January 1, 1996. The following table shows the amounts
of Title IV funds that, as of May 31, 1998, Academy Pacific had received since its loss of eligibility.8

Table 3. Title IV Funds Received By Academy Pacific After January 1, 1996. Academy Pacific
received over $6.6 million in Title IV program funds after it became ineligible to participate in those programs.


                                                    Academy Pacific Business & Travel College
 Title IV Sources
                                          Fiscal Year Ended      Fiscal Year Ended       January 1           Total
                                          December 31,1996       December 31,1997         through
                                                                                        May 31, 1998

 Pell Grants                                         $552,396               $805,584          $311,332    $1,669,312

 SEOGs                                                100,278                139,838            25,936       266,052

     Total Grants                                    $652,674               $945,422          $337,268    $1,935,364

 Stafford Loans (subsidized)                          497,416                980,413           394,019     1,871,848

 Stafford Loans (unsubsidized)                        565,112                872,450           416,810     1,854,372

 PLUS Loans                                           171,565                253,449             -0-         425,014

 Direct Subsidized Loans                              175,815                     519            -0-         176,334

 Direct PLUS Loans                                     77,862                  -0-             169,318       247,180

 Perkins Loans                                         30,850                101,240             7,487       139,577

      Total Loans 9                                $1,518,620             $2,208,071          $987,634    $4,714,325

 Total Title IV Funds                              $2,171,294             $3,153,493        $1,324,902    $6,649,689




           8
               The grant and loan amounts shown in Table 3 are the total of funds disbursed as shown by Academy Pacific
records.

           9
          Academy Pacific also received Title IV funds from the Federal Work Study (FWS) program which were not
included in this table.

ED-OIG                                             ACN A0980023                                                Page 7
Recommendations

We recommend that the Chief Operating Officer for OSFAP:

1.       Initiate emergency action to terminate the participation of Academy Pacific in Title IV
         programs.

2.       Require that Academy Pacific return Pell grant and SEOG funds received after January 1,
         1996. As of May 31, 1998, Academy Pacific’s records showed that those grant funds total
         $1,935,364.

3.       Ensure that the Department is made whole for loans disbursed by Academy Pacific since
         January 1, 1996. The amount recovered to make the Department whole should include the
         interest and special allowances incurred on those loans. Academy Pacific records show that,
         as of May 31, 1998, the school had disbursed a total of $4,714,325 of such loans.

Academy Pacific’s Comments

In its response to our report, Academy Pacific stated that the institution had made a good faith effort
to comply with the 85 Percent Rule regulations. It noted that nowhere in the Federal regulations are
the words “cash basis” mentioned, except in the Analysis of Comments and Changes section of the
Final Rule. Academy Pacific expressed its opinion on cash basis accounting and cited accounting
procedures described in Departmental publications from which the Academy concluded that the
Department acknowledged “tuition waivers” as an exception within cash basis of accounting.

Academy Pacific stated that, after reading the Analysis section on institutional scholarships and
loans, it concluded that its own scholarships and the principle on its loans met the requirements for
inclusion in the 85 Percent Rule calculations. The Academy explained that since the scholarship and
loan funds are by definition institutional in their source, the commonly accepted procedure of a
“tuition waiver” to post the student’s account seemed logical. As additional support for its position,
Academy Pacific also referred to a statement signed by one of the Department’s Senior Program
Specialist. The Academy stated that its policy of awarding additional scholarships at the end of the
fiscal year is clearly stated in its written scholarship policy.

Academy Pacific explained that its decision to include matching funds for Perkins Loans and SEOG
was made after consulting with its Certified Public Accountant and professional associations.
According to the Academy, all were in agreement that since the regulations stated only that the funds
were not to be included as Federal revenue, it was logical that they belonged as school revenue. The
Academy stated that Departmental policies do not contain a statement that matching funds are not
to be included at all in the 85 Percent Rule calculation.




ED-OIG                                    ACN A0980023                                          Page 8
OIG Response

The Academy Pacific’s comments did not change our position. As we noted earlier, the Federal
regulations specifically state that the amounts used in the calculation are Title IV funds and revenues
“received by” the institution during the fiscal year. The accounting method that recognizes revenues
when received is the cash basis method.

The SFA publications cited in Academy Pacific’s response regarding the reporting of tuition waivers
are not applicable to the 85 Percent Rule. Even if the instructions in those publications were
applicable, the scholarship amounts could not be included in the 85 Percent Rule calculation. The
HEA provision which enacted the 85 Percent Rule and the Federal regulations that implemented the
Rule are both explicit — “revenue” derived from non-Title IV sources is to be used in the 85 Percent
Rule calculation. Tuition waivers are not revenue to the institution.

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
of the entity’s ongoing major or central operations.” 10

Academy Pacific’s awarding of scholarships (tuition waivers) did not provide inflows of cash or other
assets. Therefore, the scholarships do not meet the FASB’s definition of revenue. In fact, when
Academy Pacific recorded a scholarship credit in student accounts, the transaction reduced rather
than increased its expected cash inflows (student balances due).

The Analysis section on institutional scholarships and loans does not provide justification for including
Academy Pacific’s scholarship credits as non-Title IV revenue. The Academy had no external source
of scholarship funds. The scholarship credits involved no receipt or payment of cash and, thus, had
no value under a cash basis method of accounting. Our conclusion that no value was received by the
institution is further supported by the facts that Academy Pacific did not report the scholarships as
revenue to the Internal Revenue Service on its 1997 tax return. The statement signed by the U.S.
Department of Education official was merely a restatement of a portion of the Analysis section.

Academy Pacific’s Scholarship Policy identifies five specific criteria for consideration in the
scholarship program, including a grade average of 3.0 or higher and an attendance percentage of 90
or higher. An Academy Pacific official informed us that school has not followed the scholarship policy
outlined on the scholarship form. Since 1994, Academy Pacific’s President has authorized a
scholarship credit for all students with an “unmet need” who complete their educational programs
regardless of the student’s grade point average or attendance record. At the end of each year the


         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 A0980023                                              Page 9
school provides a statement to their Independent Public Accountant (IPA) for inclusion in the financial
statements that states that a scholarship will be given to all students who graduated during that year.


There is no need for Federal regulations covering the 85 Percent Rule to specifically address matching
contributions. Institutional matching contributions do not meet the FASB definition of revenue. The
matching contributions represent solely cash transfers between institutional accounts. The transfers
do not result in inflows of cash or other assets to the institution.




ED-OIG                                    ACN A0980023                                        Page 10
                                        Other Matters

During our fieldwork, we met with representatives of the Certified Public Accountant (CPA) firm that
reviewed Academy Pacific’s financial statements for fiscal years ended December 31, 1996 and 1997.
 Our purpose was to obtain information on the extent of the CPA firm’s review of amounts included
in Academy Pacific’s 85 Percent Rule calculation and its basis for concluding that the calculation was
properly performed by the institution.

The CPA firm representative explained that his review included tracing scholarship amounts used in
the 85 Percent Rule calculation to the institution’s general ledger. The CPA firm believed that it was
proper to include the scholarship amounts since Academy Pacific does not give scholarships to all
students. The CPA firm used information contained in the product available from EDTECH, Inc
(called Toolkit PLUS) for guidance on the requirements of the 85 Percent Rule. The EDTECH
product included the statement that “institutions will use a cash basis of accounting for both Title IV,
HEA program funds and revenues.” As noted in our report, Academy Pacific’s scholarships had no
value under cash-basis accounting.




ED-OIG                                    ACN A0980023                                         Page 11
                                          Background

Academy Pacific Business & Travel College (Academy Pacific) was founded in 1948 and currently
operates as a proprietary institution located in Los Angeles, California. Academy Pacific is accredited
by the Accrediting Commission of Career Schools and Colleges of Technology. The institution offers
vocational programs in Flight Attendant and Travel-Tourism Management.

During the period January 1, 1995 through May 31, 1998, Academy Pacific received about
$9.2 million in Title IV funds from the following programs: Pell Grant Program, Federal Supplemental
Educational Opportunity Grant Program, Federal Family Education Loan Program, William D. Ford
Federal Direct Loan Program and Federal Perkins Loan Program. Academy Pacific also participated
in the Federal Work Study Program.




ED-OIG                                    ACN A0980023                                        Page 12
                               Purpose and Methodology


The objective of our audit was to determine whether Academy Pacific derived at least 15 percent of
its revenues from non-Title IV sources and properly reported its 85 Percent Rule percentage in its
financial statements and if applicable, to the U.S. Department of Education.

To accomplish our objective, we obtained background information about the institution. We reviewed
selected Academy Pacific’s student files and Departmental records. We reviewed Academy Pacific’s
corporate financial statements and the most recent Student Financial Assistance (SFA) audit reports
prepared by its Certified Public Accountant. We also conducted interviews with Academy Pacific
officials and staff. Additionally, we confirmed that the institution used the 85 Percent Rule formula
specified in the regulations and reported its 85 Percent Rule percentage in its financial statements.

To achieve our audit objective, we performed an analysis of and used information extracted from
Academy Pacific’s student account ledgers which are maintained on a computerized database.
Information from student account ledgers that we used as a basis for an audit conclusion was
confirmed with other sources, such as institutional bank statements and student records. We used data
extracted from the Department’s National Student Loan Data System (NSLDS) and reports generated
from the Department’s Postsecondary Education Participants System (PEPS) for background
information purposes.

Our audit covered the institution’s fiscal year ending December 31, 1997. After determining that
Academy Pacific did not meet the 85 Percent Rule in fiscal year 1997, we expanded our scope to
include the fiscal years ended December 31, 1995 and 1996. We performed fieldwork at Academy
Pacific from May 14, 1998 through June 5, 1998. Additional work was completed in the Long Beach
office through July 1, 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 A0980023                                       Page 13
                        Statement on Management Controls


As part of the review, we assessed Academy Pacific’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 management controls related to the institution’s
calculation and reporting of its percentage of revenues from non-Title IV sources as required by the
85 Percent Rule.

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 in the procedures used to calculate the percentage. These
weaknesses are discussed in the Audit Results section of this report.




ED-OIG                                    ACN A0980023                                          Page 14
               Attachment
         Academy Pacific’s Response




ED-OIG          ACN A0980023          Page 15
ED-OIG   ACN A0980023   Page 16
ED-OIG   ACN A0980023   Page 17
                                Report Distribution List
                               Audit Control No. A0980023

Auditee
      Ms. Marsha Toy, President                                                   1
      Academy Pacific Business & Travel College
      1777 North Vine Street
      Los Angeles CA 90028-5218

Action Official
       Mr. Greg Woods                                                             4
       Chief Operating Officer
       Office of Student Financial Assistance Programs
       U.S. Department of Education
       400 Maryland Ave., SW
       Regional Office Building 3, Room 4004
       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
      San Francisco Team Area Case Director                                       1

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

                      Audit Staff:

           Joel Schoen, Auditor-In-Charge, CGFM
                         Joseph Tong
Mona Samuels-Sego, Long Beach Oversight, MBA, CFE, CGFM
   Gloria Pilotti, Regional Inspector General, CPA, CGFM

             Information Technology Staff:

                      Gary Forbort

             Advisory & Assistance Staff:

                 Patrick Howard, Director