oversight

Transparency of Proprietary Schools' Financial Statement Data for Federal Student Aid Programmatic Decisionmaking

Published by the Department of Education, Office of Inspector General on 2013-07-23.

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

                       UNITED STATES DEPARTMENT OF EDUCATION
                             OFFICE OF INSPECTOR GENERAL


                                                                                           AUDIT SERVICES

                                               July 23, 2013

                                                                                          Control Number
                                                                                          ED-OIG/A09L0001


James W. Runcie
Chief Operating Officer
Federal Student Aid
U.S. Department of Education
830 First St., N.E.
Washington, DC 20202

Dear Mr. Runcie:

This final audit report, “Transparency of Proprietary Schools’ Financial Statement Data for
Federal Student Aid Programmatic Decisionmaking,” presents the results of our audit. The
purpose of the audit was to determine whether the audited financial statements submitted by
proprietary schools under Title 34 of the Code of Federal Regulations, Section 668.23 (34 C.F.R.
§ 668.23) included information about the schools’ use of Title IV funds to provide the
transparency needed for U.S. Department of Education (Department) Federal Student Aid (FSA)
officials to make informed decisions about program effectiveness. We reviewed the fiscal year
(FY) 2010 audited financial statements for 521 proprietary schools that disbursed Title IV funds
to students during Federal award year (AY) 2009–2010 1 and the underlying accounting records
for 34 of these schools. We determined that the audited financial statements that proprietary
schools submitted to the Department under 34 C.F.R. § 668.23 generally did not provide
transparent information because the presentation of instruction and marketing expenses was not
consistent across schools. We concluded that the financial information reported by schools is
generally not useful to the Department for purposes of identifying how schools spent their funds
or making meaningful comparisons of financial information across schools participating in the
Title IV, Higher Education Act programs.




                                                  BACKGROUND


Title IV of the Higher Education Act of 1965, as amended (Title IV), authorizes various
programs that provide financial aid to eligible students enrolled in eligible programs at
postsecondary schools. The Title IV programs were established to meet certain economic and
1
    The Federal award year is from July 1 through June 30.

               The Department of Education’s mission is to promote student achievement and preparation for global
                         competitiveness by fostering educational excellence and ensuring equal access.
Final Report
ED-OIG/A09L0001                                                                        Page 2 of 26
social goals of the nation including developing a skilled workforce and providing increased
access to postsecondary education across income groups.

In 1998, FSA was designated as a performance-based organization within the Department
(Section 141(a)(1) of the Higher Education Act of 1965, as amended (HEA)). As a
performance-based organization, FSA is responsible for managing the administrative and
oversight functions supporting the Title IV programs such as (1) collecting, processing, and
transmitting data to students, institutions, lenders, State agencies, and other authorized parties
and (2) ensuring the integrity of the Title IV programs (Sections 141(a)(1) and (b)(2)(A) of the
HEA).

Postsecondary schools include public and private, nonprofit universities and colleges as well as
proprietary schools. Proprietary schools may be owned by publicly traded corporations
(publicly traded schools) or be privately held (privately held schools). However, all proprietary
schools are for-profit entities.

Title IV financial aid is awarded to students, typically in the form of grants or loans. Generally,
a school disburses Title IV funds to students by crediting the student accounts maintained by the
school to pay for institutional charges (for example, tuition and fees). Schools then make any
remaining funds (credit balance) available to the student for costs such as books and supplies, as
well as living expenses.

Title IV Disbursement Information

The Federal investment in Title IV programs for students enrolled at postsecondary schools has
increased significantly in recent years, from about $86 billion in student financial aid
disbursements in AY 2007–2008 to $144 billion disbursed in AY 2011–2012. This represents an
increase in Title IV disbursements of about 68 percent over a 4-year period. During this same
period, the amount of Title IV financial aid disbursed to students enrolled at proprietary schools
increased by about 79 percent. Furthermore, aid disbursed to these students has accounted for a
greater proportion of total Title IV disbursements, increasing from about 19 percent in
AY 2007–2008 to about 21 percent in AY 2011–2012. In AY 2011–2012, students enrolled at
proprietary schools received more than one-fifth of all Title IV funding even though these
students represented only about 11 percent of the total postsecondary student population.

Although financial aid disbursements to students enrolled at both publicly traded and privately
held proprietary schools have grown significantly in recent years, the amount disbursed to
students enrolled at publicly traded schools has increased at a greater rate than privately held
schools. Title IV funds disbursed to students enrolled at publicly traded schools doubled from
AY 2007–2008 to AY 2011–2012 (from $8.9 billion to $17.8 billion), while the Title IV funds
disbursed to students enrolled at privately held schools increased by more than 50 percent during
this same period (from $7.7 billion to $11.8 billion). Table 1 provides detailed Title IV funding
information for AYs 2007–2008 through 2011–2012.
Final Report
ED-OIG/A09L0001                                                                                        Page 3 of 26
Table 1: Proprietary School Student Title IV Financial Aid Disbursements Compared to Total
Title IV Disbursements for AYs 2007–2008 through 2011–2012 (Billions)

Ownership Type                                2007–2008       2008–2009       2009–2010    2010–2011       2011–2012

Publicly Traded                                   $8.9           $15.4           $20.4        $21.4           $17.8
Privately Held                                      7.7             8.5           11.6          12.6            11.8
Proprietary School Totals                         16.6            23.9            32.0          34.0            29.6

All Postsecondary Schools Total                  $85.8          $105.7          $133.1       $145.7          $144.0

Proprietary School Share of Total                 19%             23%             24%          23%             21%
Source: FSA

Many proprietary schools rely extensively on revenues derived from Federal Title IV programs
to fund their operations. The proprietary school 90/10 revenue percentages report submitted to
Congress for FY 2010–2011 showed that about 88 percent of all proprietary schools derived at
least half of their revenue from Title IV programs. 2 The report also showed that more than a
third of all proprietary schools (36 percent) derived at least 80 percent of their revenue from
Title IV programs. Although the 90/10 calculation provides a measure of proprietary schools’
dependence on Title IV revenues, it may understate these schools’ actual dependence on
revenues from all Federal sources. When calculating their Title IV 90/10 percentage, schools are
not required to include revenues from other Federal agencies, such as the U.S. Department of
Defense or Department of Veteran Affairs. These other Federal agencies disburse significant
amounts of financial aid to students enrolled at proprietary schools.

Submission and Review of a School’s Financial Information

All postsecondary schools receiving Title IV funds are required to annually submit audited
financial statements to FSA (34 C.F.R. § 668.23). 3 The financial statements must be prepared on
an accrual basis in accordance with generally accepted accounting principles, be audited by an
independent auditor in accordance with generally accepted government auditing standards, and
meet other applicable guidance. In accordance with generally accepted accounting principles, a
full set of financial statements should include an income statement that reports the revenues

2
  Section 487(d)(4) of the HEA requires the Secretary of Education to annually submit a report to Congress
containing information regarding the amount and percentage of each proprietary school’s revenues derived from
Title IV programs. The 90/10 rule, which was established by the 1998 Amendments to the HEA (P.L. 105-244),
requires proprietary schools to derive at least 10 percent of their revenue from non-Title IV funds. This rule
replaced the 85/15 rule that was authorized by the 1992 HEA Amendments (P.L. 102-325). According to the
Congressional Research Service report, “Institutional Eligibility and the Higher Education Act: Legislative History
of the 90/10 Rule and Its Current Status,” January 19, 2005, supporters of the 85/15 rule argued that the rule was
necessary to stem fraudulent and abusive practices identified at proprietary schools. They also believed that the rule
might restore some market incentives to education because proprietary schools would be unable to charge more than
the amount that students not receiving enough Federal financial aid to pay all of their institutional charges would be
willing to pay.
3
    All regulatory citations are to the July 1, 2010, volume unless otherwise noted.
Final Report
ED-OIG/A09L0001                                                                                     Page 4 of 26
generated and expenses incurred during the accounting period. These principles provide
proprietary schools with the flexibility to aggregate their expenses in a manner that best suits
their business operations.

FSA reviews the financial information presented in the school’s financial statements to
determine whether the school is financially responsible under 34 C.F.R. § 668.171. FSA also
monitors proprietary school compliance with the 90/10 rule using the financial statements—
each school must report its 90/10 percentage in the notes to its financial statements
(34 C.F.R. § 668.23(d)(4)). However, FSA does not review the school’s financial statements
for purposes of identifying how the school spent its revenue.

There are no laws or regulations that stipulate how schools should spend revenues generated
through Title IV programs, even if a particular school is heavily dependent on Title IV funds to
operate its educational programs. However, Congress has recently shown interest in addressing
this issue. For example, a bill introduced in the U.S. Senate in April 2012 would have restricted
postsecondary schools from using revenues derived from Title IV programs for advertising,
marketing, or recruiting purposes (S. 2296, “Protecting Financial Aid for Students and Taxpayers
Act”). 4 As a significant contributor to the ability of proprietary schools to earn revenue and
attract students, the Department has an interest in how schools are serving students as evidenced
through their financial statements.




                                           AUDIT RESULTS


The audited financial statements that proprietary schools submitted to FSA under
34 C.F.R. § 668.23 generally did not provide transparent information because the presentation of
instruction and marketing expenses was not consistent across schools and did not allow for
comparison across schools. The ability to identify the amount spent on instruction is an
important measure because this activity represents the primary mission of all schools. The
amount spent on marketing is important because proprietary schools may devote significant
resources to recruiting and enrolling students and can be indicative of a school’s focus. We
determined that the financial statements submitted by 78 percent of publicly traded schools and
an estimated 58 percent of privately held schools did not present the amounts spent on
instruction and marketing.

We also found that schools varied in terms of how they presented expense information in their
income statements, supplemental schedules, and notes to the financial statements. In addition to
the lack of consistency in the financial statement presentation, the types of costs included within
the expense categories were not consistent across schools. The account aggregation allowed
under financial reporting often leads to inconsistent expense reporting that would not allow for
comparisons across schools and that is generally not useful to the Department, a major financer
of postsecondary education for this sector, in evaluating schools and the Title IV programs.
4
 This bill was re-introduced in the U.S. Senate in March 2013 (S. 528, “Protecting Financial Aid for Students and
Taxpayers Act”).
Final Report
ED-OIG/A09L0001                                                                                       Page 5 of 26

We provided a draft of this report to FSA and the Office of Postsecondary Education (OPE) for
comment. FSA provided comments that also included the views of OPE on
Recommendation 1.1. FSA did not state whether it concurred with our finding and
recommendations. However, FSA described the actions it plans to take to address two of our
recommendations. After reviewing FSA’s response, we modified Recommendations 1.2 and 1.3.
We have summarized the comments and provided our response at the end of the finding. We
have also included the full text of the comments as Attachment 2 to this report.


FINDING – Proprietary Schools’ Financial Statements Did Not
          Present Expense Information Consistently

The audited financial statements that proprietary schools submitted to FSA under
34 C.F.R. § 668.23 generally did not consistently present the amounts they spent on instruction
and marketing. We also found that expense reporting varied among schools in terms of the
number and names of expense categories that schools reported in their income statements and the
types and amount of information presented in the supplemental schedules and notes to their
financial statements. Schools were also inconsistent in terms of the types of costs that they
included within their expense categories, including their instruction and marketing expense
categories. Financial Accounting Standards Board (FASB) Concept Statement No. 8 states, in
part, that information about an organization is more useful if it can be compared with similar
information about other organizations.

Instruction and Marketing Expenses Were Not Presented Consistently

Based on our review of the FY 2010 5 audited financial statements for all 294 publicly traded
schools, we determined that the income statements and accompanying notes to the financial
statements for 78 percent of these schools (230 of 294 schools) did not present the amounts spent
on instruction and marketing. Based on our review of a sample of FY 2010 audited financial
statements submitted by privately held schools (we reviewed statements for 227 of
1,866 privately held schools), we estimate that 58 percent of these schools also did not present
the amounts spent on instruction and marketing in their income statements and accompanying
notes. These schools either provided information on one of the expenses and not the other or did
not provide any information on instruction and marketing expenses at all. As a result, in many
cases, we could not quantify a school’s investment in instructional services or marketing
activities.

In Table 2, we summarize the results of our financial statement reviews in percentage terms by
school ownership type and program length. The percentages for the privately held schools are
estimates based on the results of our financial statement reviews for a stratified random
probability sample of privately held schools. For a discussion of our sampling methodology and
the margin of error for estimates, see the section “Objective, Scope, and Methodology” in this
report.

5
  Not all proprietary schools use the same fiscal year. The schools’ FY 2010 financial statements are those financial
statements with a fiscal year end date in calendar year 2010 (that is, from January 2010 through December 2010).
Final Report
ED-OIG/A09L0001                                                                                       Page 6 of 26

Table 2: Results of OIG Review of Proprietary Schools’ Financial Statements by Ownership Type
and Program Length
                                                                                   Did Not Present Instruction
        School Ownership Type,                  Presented Instruction and
                                                                                      and Marketing Costs
           Program Length                       Marketing Costs (Percent)
                                                                                           (Percent)
 Privately held schools, (a)
                                                            39%                                 61%
 short-term programs (b)
 Privately held schools,
                                                            67                                  33
 4-year degree programs and above (c)
      All Privately Held Schools                            42                                  58
 Publicly traded schools,
                                                            26                                  74
 short-term programs
 Publicly traded schools,
                                                            14                                  86
 4-year degree programs and above
      All Publicly Traded Schools                           22                                  78
 (a) Percentages shown for privately held schools are estimates based on a stratified random probability sample.
 (b) Short-term programs consist of non-degree programs (for example, certificate programs) and 2-year degree
 programs.
 (c) The 4-year degree programs and above consist of bachelor’s, master’s, graduate/professional, and doctorate
 degree programs.


Based on our review of the financial statements for 521 proprietary schools (294 publicly traded
schools and 227 privately held schools), we noted the following—
    •   Privately held schools presented the amounts spent on instruction and marketing more
        often (estimated 42 percent) than publicly traded schools (22 percent).
    •   Privately held schools offering 4-year degree programs and above presented the amounts
        spent on instruction and marketing more often (estimated 67 percent) than privately held
        schools offering short-term programs (estimated 39 percent).
    •   Publicly traded schools offering 4-year degree programs and above presented the
        amounts spent on instruction and marketing less often (14 percent) than publicly traded
        schools offering short-term programs (26 percent).

Proprietary schools disbursed $32 billion of Title IV funds to students in AY 2009–2010.
Overall, we estimate that slightly more than half of this amount ($16.1 billion) was disbursed by
proprietary schools that did not present the amounts spent on instruction and marketing in their
financial statements. As illustrated in Figure 1, about 55 percent of the Title IV funds for
publicly traded schools ($11.2 billion) and an estimated 42 percent of the Title IV funds for
privately held schools ($4.9 billion) were disbursed by schools that did not present the amounts
spent on instruction and marketing.
Final Report
ED-OIG/A09L0001                                                                                        Page 7 of 26
Figure 1: Proportion of AY 2009–2010 Title IV Funds Disbursed by All Proprietary Schools Where
the Amounts Spent on Instruction and Marketing Were Not Presented by Schools (Billions)

  $35.0
                                                                                              $32.0
  $30.0

  $25.0
                             $20.4
  $20.0
                                                                                     $16.1
  $15.0
                    $11.2                                    $11.6
  $10.0
                                                     $4.9
   $5.0

    $-
                   Publicly traded                  Privately held                       Total

                   Funds Disbursed by Schools that Did Not Present the Amounts Spent on
                   Instruction and Marketing
                   Total Funds Disbursed


Note: The $4.9 and $16.1 amounts in Figure 1 are estimates based on the results of our financial statement reviews
for a statistical probability sample of privately held schools. Both estimates have a margin of error of plus or minus
$0.65 billion.

Even though proprietary schools are currently required to annually submit audited financial
statements to FSA, our review of FY 2010 statements for 521 proprietary schools showed that
most schools did not report expense information in sufficient detail to determine how much of
their revenue was spent on instructional services versus other activities such as marketing.
Schools participating in the Title IV programs are not required to report their expenses in a
standardized manner, making it difficult to compare spending information across schools.

Expense Information in the Income Statements, Supplemental Schedules, and Notes to the
Financial Statements Were Not Presented Consistently

Expense reporting also varied among proprietary schools in terms of the number and names of
expense categories that schools reported in their income statements and the types and amount of
information presented in the supplemental schedules and notes to their financial statements. We
did not test whether the schools’ financial statements were prepared in accordance with generally
accepted accounting principles. Therefore, the lack of consistency in expense reporting across
schools, as discussed in this finding, should not be interpreted as a departure from these
principles. Rather, the lack of consistency in the presentation of expenses is the result of the
level of account aggregation allowed in financial statement reporting. A low number of expense
categories indicates a high level of expense aggregation. High levels of expense aggregation can
cause the expense categories to lose their usefulness as measures of how a school is operating.

Number of Expense Categories. The number of expense categories included in the FY 2010
income statements varied across schools. Table 3 summarizes the level of expense aggregation
Final Report
ED-OIG/A09L0001                                                                        Page 8 of 26
in percentage terms by ownership type and range. The percentages for the privately held schools
are estimates based on the results of our financial statement reviews for a statistical probability
sample of privately held schools.

Table 3: Number of Expense Categories Included in FY 2010 Proprietary School Income
Statements by Ownership Type and Range

  Number of Expense     Publicly Traded Schools   Privately Held Schools          Total
  Categories (Range)           (Percent)           (Estimated Percent)     (Estimated Percent)
       2 or fewer                 21%                       3%                    6%
          3–5                     66                       35                    39
          6–9                     12                       24                    22
        10–19                      1                       15                    13
       20 or more                  0                       23                    20
         Total                   100%                     100%                  100%

As shown in Table 3, we estimate that almost half of the proprietary schools included five or
fewer expense categories in their financial statements: 39 percent included between three and
five expense categories and 6 percent reported on two or fewer expense categories. In contrast,
we estimate that 20 percent of schools included 20 or more expense categories in their income
statements. We identified one school that reported only one expense category (“operating
expenses”) in its income statement. Another school reported 218 expense categories in its
income statement. The inconsistent levels of expense reporting in terms of the number of
expense categories make it difficult, if not impossible, for FSA to understand how schools spent
funds or to compare spending across Title IV schools.

Based on our review of income statements for 521 proprietary schools, we noted the following—
   •    Privately held schools generally listed more expense categories in their income
        statements than publicly traded schools.
            o We estimate that 62 percent of privately held schools listed 6 or more expense
                categories in their income statements; only 13 percent of publicly traded schools
                listed at least 6 expense categories.
            o We estimate that 38 percent of privately held schools listed 10 or more expense
                categories in their income statements; only 1 percent of publicly traded schools
                listed at least 10 expense categories.
   •    Although about one-fifth of all publicly traded schools included two or fewer expense
        categories in their income statements, only an estimated 3 percent of privately held
        schools included two or fewer categories.

The number of expense categories included in an income statement was not always indicative of
whether a school presented its instruction and marketing costs. For example, one school that
included only three expense categories in its income statement presented the amounts it spent for
instruction and marketing. In contrast, another school that included more than 20 expense
categories in its income statement did not present the amounts spent on instruction and
marketing.
Final Report
ED-OIG/A09L0001                                                                      Page 9 of 26
Names of Expense Categories. Proprietary schools also differed in how they named the expense
categories presented in their income statements. The following comparisons highlight some of
the reporting differences between schools when presenting instructional services; employee
compensation; and marketing, advertising, and recruiting costs in their income statements.
   •   Instructional Services. Some schools included a separate expense category exclusively
       for instructional services costs and used descriptions such as “instruction,” “education
       expense,” or “instructional costs and services.” Other schools combined instructional
       services costs with other costs in the same expense category and used descriptions such
       as “education services and facilities,” “other educational and operating expenses,” or
       “educational services and other direct costs.”
   •   Employee Compensation. Some schools included a separate expense category for all
       employee compensation costs in their income statements and used descriptions such as
       “salaries and employee benefits,” “personnel and benefits,” or “payroll and related costs.”
       Other schools allocated and reported employee compensation costs based on employee
       function and used descriptions such as “instructional salaries” or “administrative
       salaries.”
   •   Marketing, Advertising, and Recruiting. Some schools combined marketing and
       advertising costs on the income statement. Other schools combined marketing and
       recruiting costs and used descriptions such as “marketing and student acquisition” or
       “admissions and marketing.” Other schools reported each of these costs in separate
       expense categories on the income statement.

Supplemental Schedules and Notes to Financial Statements. The types and amount of
information contained in supplemental schedules and notes to the financial statements varied
among schools and among companies that owned multiple schools (companies). Some schools
and companies chose to include supplemental schedules in their financial statements, while
others did not. These schedules provided additional expense information by expense category,
school, or a combination of both. Furthermore, some schools and companies chose to disclose
expense information in the notes that provided additional detail about school spending, while the
notes for other schools and companies contained limited detail.

The following comparisons highlight some of the specific differences between schools or
companies regarding the types and amount of information presented in the supplemental
schedules and financial statement notes.

   •   Some schools reported the total amount for “selling, general, and administrative
       expenses” exclusively in the income statement section of their financial statements.
       Other schools provided more detailed information about these expenses using
       supplemental schedules.
   •   Some companies reported only consolidated expense information that covered multiple
       schools and other businesses they owned. Other companies reported disaggregated
       expense information for each school and other businesses they owned using supplemental
       schedules.
   •   One school included only one expense category in its income statement: “operating
       expenses.” This school did not use a supplemental schedule to provide additional
Final Report
ED-OIG/A09L0001                                                                                     Page 10 of 26
           information about its operating expenses. In contrast, other schools used supplemental
           schedules to report the underlying costs that comprised their operating expenses.
      •    Some schools that did not separately report their advertising costs in the income
           statement instead reported the amount spent on advertising in the financial statement
           notes. Other schools did not provide any detail on advertising costs.
      •    Some companies with multiple schools that did not separately report their advertising
           costs in the income statement reported only the consolidated advertising expense amount
           in the financial statement notes and did not report individual schools’ advertising costs in
           the notes.

Costs Were Not Consistently Included or Excluded From Expense Categories

In addition to the lack of consistency in financial statement presentation discussed above, we
also found that proprietary schools were inconsistent in terms of what they included or excluded
from their expense categories, including their instruction and marketing categories. We
reviewed the underlying accounting records that support the expense information presented in
the FY 2010 financial statements for 34 proprietary schools (9 publicly traded schools and
25 privately held schools). 6 During our review, we identified several instances where schools
with the same expense category differed in terms of what they included or excluded from that
category. The following comparisons highlight some of these differences.

      •    “Instructional Costs and Services.” One school included costs for promotion, public
           relations, and compensation for teachers, academic support and financial services staff,
           and executives in this category. In contrast, another school excluded promotion and
           public relations costs from this category and included compensation for teachers only.
      •    “Marketing and Advertising.” One school included a portion of its admissions costs in
           this category. Another school reported all of its admissions costs in a different expense
           category (“general and administrative expenses”).
      •    “General and Administrative Expense.” One school included recruiter compensation and
           bad debts in this category. Another school reported these costs in different expense
           categories (“selling and promotional” and “instructional costs and services”).

The inconsistency in what is included in the expense categories used by schools, even when two
schools use the same name for an expense category, further limits the Department’s ability to
know how schools spent their funds or make meaningful comparisons of financial information
across schools participating in the Title IV programs. Although we reviewed the underlying
accounting records for only 34 of 521 schools included in our financial statement review, due to
the nature of financial reporting, it is likely that additional schools in our review whose
accounting records were not examined also classified and reported costs inconsistently.

According to FASB Concept Statement No. 8, information about an organization is more useful
if it can be compared with similar information about other organizations and with similar
information about the same organization for some other period or some other point in time.

6
    These 34 schools were among the 521 proprietary schools included in our financial statement reviews.
Final Report
ED-OIG/A09L0001                                                                      Page 11 of 26
FASB defined comparability as a qualitative characteristic that enables users to identify and
understand similarities in, and differences among, items. For information to be comparable, like
things must look alike and different things must look different. FASB further stated that
although a single economic activity can be “faithfully” represented in multiple ways, the use of
alternative accounting methods for the same economic activity diminishes comparability. One of
the most important reasons that financial reporting standards are needed is to increase the
comparability of reported financial information. FASB also defined consistency, which refers to
the use of the same accounting methods for the same items, either from period to period within
an organization or in a single period across organizations. Consistency helps to achieve the goal
of comparability.

There is no consistency in expense reporting from school to school because schools are not
required to report expenses in a standardized manner. The flexibility provided by generally
accepted accounting principles allows schools to report their expenses in a manner that generally
does not identify the amounts spent on instruction and marketing. As a result, it is nearly
impossible for policymakers, FSA, or other interested parties to assess how the schools spent the
funds derived from Title IV programs or effectively compare spending information across
schools. Given the level of Federal investment in these schools, the Department needs financial
information that is transparent and consistent across participating schools to adequately monitor
their participation in the Title IV programs. This information would also be valuable to
Congress and other decisionmakers. Once this information is available, FSA’s review of
proprietary school spending could help ensure that the Federal funds invested in students’
educational programs are spent in a manner that helps achieve the program results that Congress
intended.


RECOMMENDATIONS

We recommend that the Chief Operating Officer for FSA, in collaboration with the Acting
Assistant Secretary for OPE—

1.1    If proper authority does not exist, work with Congress to obtain the statutory authority to
       establish uniform account classification rules and procedures for all postsecondary
       schools, including proprietary schools.

1.2    Establish uniform account classification rules and procedures for all postsecondary
       schools, including proprietary schools, which would include the creation and use of a
       standard chart of accounts that includes expense classifications that clearly define the
       types of costs to be recorded under each expense account.

1.3    In the interim, determine what detailed financial statement information would provide
       necessary insight into the operations of schools participating in the Title IV programs,
       including expenses reported on a school’s income statement, and develop common
       reporting requirements for that information either through the Department’s National
       Center for Education Statistics or through its regulatory authority.
Final Report
ED-OIG/A09L0001                                                                     Page 12 of 26
FSA and OPE Comments

FSA did not state whether it concurred with our finding and recommendations, but it described
the actions it plans to take to address two of our recommendations. FSA stated that the audited
financial statements that it collects and reviews contain the data necessary to compute schools’
composite scores and to determine the 90/10 ratios and financial responsibility of schools, as
required by legislation and regulation. FSA added that current regulations do not require schools
to provide details on instruction and marketing expenses, and even if schools were to provide
more detailed information, FSA has no authority to use the information for oversight. FSA also
asserted that OIG had recognized that FSA lacked authority to use instruction and marketing
expense data for oversight. FSA stated that although it has the legislative authority to require
schools to provide audited financial statements in a format that it specifies, OPE determined that
regulatory changes through the negotiated rulemaking process would be needed to establish
uniform account classification rules and that it would be at least 2 years before rulemaking
negotiations could begin.

FSA noted that it previously had a detailed standard template in eZ-Audit that was reviewed as
part of a prior OIG audit of the School Eligibility Channel’s procedures for reviews of eZ-Audit
financial statements (ED-OIG/A03F0001). FSA stated that based on OIG’s finding that schools
could not accurately enter detailed line item data into the eZ-Audit templates and because the
reported data were unverifiable, it removed the standard templates from eZ-Audit.

FSA acknowledged that there is interest in learning more about instruction and marketing
expenses and collecting comparable data across different types of schools. FSA stated that the
National Center for Education Statistics (NCES), which collects financial information on schools
through the Integrated Postsecondary Education Data System (IPEDS), recently conducted an
IPEDS technical review on the collection of financial information for for-profit schools. FSA
noted that the review panel suggested that changes be made to the Expenses section on the FASB
forms for for-profit schools and that NCES clarify the instructions for assigning advertising and
marketing expenditures by function. FSA stated that as a result of the panel’s recommendations,
NCES has proposed that the IPEDS data collection forms for for-profit schools be expanded.
FSA added that the proposal is part of a package of proposed changes that, if approved by the
Office of Management and Budget, would go into effect for the 2014–2015 IPEDS data
collection.

Recommendation 1.1: FSA and OPE stated that even though FSA has legislative authority to
require schools to provide audited financial statements in a format that FSA specifies, regulatory
changes would be needed to establish uniform account classification rules. They estimate that
negotiated rulemaking to achieve these regulatory changes would not begin for at least 2 years
given the current regulatory agenda and the research needed to proceed with this initiative.

Recommendation 1.2: FSA stated that once the regulations establishing uniform account
classification rules are published, it would implement appropriate changes to its computer
systems to obtain the expense data.
Final Report
ED-OIG/A09L0001                                                                     Page 13 of 26
Recommendation 1.3: FSA stated that it currently does not have the authority to require schools
to report expense categories in a standardized manner and without standardization the data would
not provide consistent information for useful insight. FSA also said that even if data were
collected, it does not have the authority to use the information for oversight purposes. FSA
acknowledged that the data would be useful for research purposes and informative during
legislative and regulatory efforts. FSA stated that it would review a template that it previously
used to collect data in eZ-Audit and submit comments and recommendations to OPE for use
during the negotiated rulemaking process. FSA added that the OIG could assist with this process
by including a chart of accounts in the OIG Audit Guide and instructing schools on reporting
marketing and recruiting expenses.

OIG Response

We disagree that FSA has no authority to use schools’ expense information for oversight
purposes. Oversight includes not only determining compliance with existing requirements, but
also using available information to target oversight efforts and monitor program effectiveness.
The HEA also charges FSA with developing “[r]ecommendations for legislative and regulatory
changes to improve service to students and their families, and to improve program efficiency and
integrity.” Although we acknowledged that there are currently no compliance requirements
related to the use of Title IV revenue for instructional or marketing purposes, such data would
nevertheless provide important information for oversight purposes. For example, a school with
low instructional expenses could be at higher risk of misrepresenting the nature of its programs
or facilities. Similarly, a school with high marketing expenses could pose a higher risk of paying
incentives to recruiters in violation of the ban on incentive compensation.

Although our audit concentrated on proprietary schools’ expense data to show the effects of
inconsistent reporting, our recommendations apply to all financial statement data for all
postsecondary schools. After reviewing FSA’s and OPE’s response, we modified
Recommendations 1.2 and 1.3 so that the recommendations address all financial statement data,
including expense information.

Recognizing that it could take several years to fully implement Recommendations 1.1 and 1.2,
we included Recommendation 1.3 as an interim action that FSA could take to provide additional
visibility over the operations of schools participating in Title IV programs and provide useful
information as standardized reporting requirements are developed and implemented. FSA
acknowledged that collecting detailed financial statement data “would be useful for research
purposes and to better inform legislative and regulatory efforts….” Because FSA can specify the
format for the audited financial statements that schools must submit annually, we encourage FSA
to implement Recommendation 1.3 by requiring schools to report specific information from their
financial systems that would enhance FSA’s ability to administer Title IV programs. For
example, FSA could require that Title IV credit balance information be reported and use the
information to better ensure that schools had sufficient cash on hand to meet the associated
regulatory requirement. FSA could also require reporting of Title IV refunds payable and
refunds made and use the information in conjunction with retention rates to determine whether a
potential return of Title IV issue may exist at schools.
Final Report
ED-OIG/A09L0001                                                                             Page 14 of 26
As we stated in the report, no laws or regulations mandate how schools should spend revenues
generated through the Title IV programs. However, this statement is not an acknowledgement
that FSA does not have the authority to use the data for oversight, as FSA stated in its response
to Recommendation 1.3. FSA is responsible for ensuring that schools comply with all Title IV
requirements. Using consistent data (for example, instruction and marketing expenses, Title IV
credit balances, Title IV refunds payable and made) across schools to identify potential issues for
program review or other actions would be part of FSA’s oversight authority.

We are not recommending that FSA return to using the eZ-Audit templates to collect financial
statement data. The prior OIG audit report stated the following:

               The unverifiable amounts occur because of the broad latitude provided
               for in financial reporting with regard to account classification. SEC
               [School Eligibility Channel] cannot determine the correct amounts for
               unverifiable financial statement template line items without extensive
               communication with institutions. Unless a common chart of accounts is
               required for all institutions, the financial statement template line items
               will continue to include unverifiable amounts.

The report recommended that FSA either improve its processes for reviewing institutions’
eZ-Audit financial statement template data to ensure the accuracy and reliability of all the data or
eliminate the requirement that institutions complete the financial statement templates as part of
the eZ-Audit annual financial statement submission. FSA chose to eliminate the requirement
that institutions complete the financial statement templates in eZ-Audit.

If the Department requests our assistance during the process of developing and implementing
uniform account classification rules and procedures, including development of a standard chart
of accounts, we will provide assistance to the extent permitted under our independence
standards. The OIG Audit Guide is not the appropriate place for the chart of accounts or
reporting instructions for schools because the guide is for auditors and covers only proprietary
school compliance issues. The uniform account classification rules and procedures would be a
regulatory requirement promulgated by the Secretary and would need to be issued by the
Department.




                                       OTHER MATTER


The establishment of a standard chart of accounts is not a new concept to the Federal
Government. At least one Federal agency, the U.S. Department of Housing and Urban
Development (HUD) has already implemented a standard chart of accounts for its program
participants to use when classifying costs. HUD established this standard chart of accounts more
than 10 years ago for recipients of HUD program funds (public housing authorities and
multifamily program participants) to use for cost classification and accounting purposes.
Although HUD does not require its participants to adopt the standard chart of accounts, it does
require its recipients to report specific expense information and other financial data in a
Final Report
ED-OIG/A09L0001                                                                    Page 15 of 26
standardized way. Specifically, HUD requires its program participants to annually report their
expense information using a HUD-prescribed reporting template, known as the Financial Data
Schedule. The Financial Data Schedule was created to standardize the financial information
reported by thousands of public housing authorities and other participants. HUD uses the
financial information when it conducts assessments of the entities receiving HUD financial
assistance. To assist its program participants, HUD identified the expense information to be
reported on each line of the Financial Data Schedule and provided guidance for determining the
source of the information by cross-referencing HUD’s standardized accounts to each line item of
the schedule.

Although we did not assess the effectiveness of HUD’s standard chart of accounts or reporting
template, we encourage FSA to consult with HUD or other Federal agencies that have developed
a standard chart of accounts or reporting templates for use by program participants. These
agencies may be able to provide valuable information to facilitate the Department’s efforts.




                  OBJECTIVE, SCOPE, AND METHODOLOGY


The objective of our audit was to determine whether the audited financial statements submitted
by proprietary schools under 34 C.F.R. § 668.23 included information about the schools’ use of
Title IV funds to provide the transparency needed for FSA officials to make informed decisions
about program effectiveness. Our review covered the FY 2010 financial statements for all
publicly traded schools and a sample of privately held schools that disbursed Title IV funds to
students during AY 2009–2010. The review also covered the underlying accounting records that
supported the FY 2010 financial statements for 34 proprietary schools. We limited our financial
statement reviews to the expense information presented in the schools’ income statement,
supplemental schedules, and notes to the financial statements, as applicable.

Before meeting with FSA, we researched various Department systems, including IPEDS and
eZ-Audit, to identify the types and quantity of expense information that proprietary schools
report to FSA. IPEDS stores expense data that proprietary schools report annually to the
Department. Schools report their expense data in IPEDS by functional categories, including a
category for instruction. However, we identified the following limitations with the expense data
stored in IPEDS: (1) the expense data is self-reported by the schools and may include estimates;
(2) the instruction category in IPEDS may include certain noninstructional expenses; and
(3) IPEDS does not have a category for proprietary schools to separately report their marketing,
advertising, or recruiting costs. Because of these limitations, we concluded that IPEDS was not a
reliable source of information for our audit. We identified eZ-Audit as the system used by FSA
to annually collect proprietary schools’ audited financial statements. We concluded that eZ-
Audit was the most reliable source of schools’ expense information for our audit.

To gain an understanding of the purposes and intent of the Title IV programs, we reviewed
selected provisions of the HEA and Title IV program information that we obtained from the
Catalog of Federal Domestic Assistance Web site. We also reviewed sections of the 2011–2012
Final Report
ED-OIG/A09L0001                                                                                 Page 16 of 26
FSA Handbook and FSA’s online materials for background reporting purposes. To determine
the Federal Government’s investment in Title IV programs and identify recent trends in Title IV
funding, we reviewed three reports issued by the U.S. Senate Health, Education, Labor and
Pensions Committee 7 and the Department’s Funding Data Summary reports for AYs 2007–2008,
2008–2009, 2009–2010, 2010–2011, and 2011–2012. We also used the Funding Data Summary
reports to identify the ownership type (publicly traded or privately held) for each proprietary
school. We assessed the reliability of the AY 2009–2010 Funding Data Summary report because
we used the disbursements data it contained to estimate disbursements made by schools that did
not present instruction and marketing costs in their income statements. To assess its reliability,
we compared (1) the total Title IV disbursement amount for all schools from the summary report
to the total Title IV disbursement information presented in FSA’s 2010 Annual Report and
(2) Title IV disbursement information for 20 proprietary schools from the summary report to
Title IV disbursement information stored in the Department’s National Student Loan Data
System for these schools. We concluded that the information in the AY 2009–2010 Funding
Data Summary report was reliable for our purposes. We did not assess the reliability of the data
contained in the Funding Data Summary reports for AYs 2007–2008, 2008–2009,
AY 2010–2011, and AY 2011–2012 because we used the information only for background
purposes to show recent trends in Title IV disbursements.

To obtain general background information about FSA and its operations, we reviewed—
    •   FSA’s organizational charts and information from the Department’s Web site that
        described the roles and responsibilities of FSA’s Program Compliance and Risk
        Management units.
    •   FSA’s FY 2010 Annual Report and 5-Year Strategic Plans for FYs 2011–2015 and
        FYs 2012–2016.
    •   Recent reports issued by the U.S. Government Accountability Office and the
        Department’s Office of Inspector General.

To achieve our audit objective, we interviewed various FSA officials and staff working in the
Program Compliance unit (Technical and Business Support Group, School Eligibility Group, and
Performance Improvement and Procedures Group) and the Risk Management unit (Internal
Review Group). We also reviewed—
    •   FASB Concept Statement No. 8, which states, in part, that information about an
        organization is more useful if it can be compared with similar information about other
        organizations.
    •   Government Performance and Results Act of 1993 and its Modernization Act of 2010,
        which require Federal agencies to evaluate the effectiveness of their programs.
    •   Office of Management and Budget’s Open Government Directive, M-10-06, dated
        December 8, 2009, which directs Federal agencies to take specific actions to implement



7
 “Emerging Risk?: An Overview of Growth, Spending, Student Debt and Unanswered Questions in For-Profit
Higher Education,” June 24, 2010; “The Return on the Federal Investment in For-Profit Education: Debt Without a
Diploma,” September 30, 2010; and “Benefitting Whom? For-Profit Education Companies and the Growth of
Military Educational Benefits,” December 8, 2010.
Final Report
ED-OIG/A09L0001                                                                     Page 17 of 26
      the three principles (transparency, participation, and collaboration) that form the
      cornerstone of an open government.
  •   Federal regulations addressing financial responsibility (34 C.F.R. § 668 Subpart L) and
      audit submissions by proprietary schools (34 C.F.R. § 668.23).
  •   FSA’s Financial Analysis procedures and Program Review procedures, with a focus on
      the extent that FSA reviews and analyzes proprietary school spending.
  •   Examples of reports that FSA periodically purchases from third-party entities and may
      use when reviewing information related to proprietary schools. These reports contained
      limited financial statement data as well as information about the schools’ personnel and
      overall financial condition.
  •   Financial statements for 521 of the 2,160 proprietary schools that disbursed Title IV
      funds to students in AY 2009–2010. Collectively, the 521 schools disbursed about
      $26.4 billion of the $32 billion (82 percent) in Title IV funds disbursed by all proprietary
      schools in AY 2009–2010. We reviewed the financial statements for all 294 publicly
      traded schools (100 percent review) and a sample of 227 of 1,866 privately held schools.
      We used the Funding Data Summary report for AY 2009–2010 to identify the universe of
      proprietary schools that disbursed Title IV funds to students during that period. To verify
      that the data were complete, we compared the school count (number of schools) and total
      Title IV disbursement amount from the summary report to comparable information
      presented in FSA’s 2010 Annual Report. We determined that the information in the
      AY 2009–2010 Funding Data Summary report was a complete data set that could be
      relied on for sampling purposes.

      To draw conclusions regarding financial reporting practices of privately held schools, we
      reviewed a stratified random probability sample of 227 schools. We selected our sample
      by five strata defined by each school’s disbursed Title IV dollars and the maximum
      program length offered by each school (see Table 4). Sampling rates varied by stratum to
      allow for conclusions at multiple levels. When presenting estimates in this report, all
      estimates are weighted appropriately for the intended population of privately held schools
      that disbursed Title IV aid in AY 2009–2010.

      Because we followed a probability procedure based on random selections, our sample is
      only one of a large number of samples that we might have drawn. Since each sample
      could have provided different estimates, we express our confidence in the precision of
      our particular sample’s results as a 95 percent confidence interval or a margin of error.
      This is the interval that would contain the actual population value for 95 percent of
      samples we could have drawn. All percentage estimates from the review have margins of
      error of plus or minus 10 percentage points or less at the 95 percent confidence level.
Final Report
ED-OIG/A09L0001                                                                                      Page 18 of 26
         Table 4: Universe of Privately Held Schools and Sample Size, by Stratum
          Stratum                    Characteristics                      Universe           Sample
                       Title IV disbursements in excess of $40
              1                                                                 46              46
                       million
                       Title IV disbursements between $5–40
              2                                                               288               50
                       million, short-term programs
                       Title IV disbursements between $5–40
              3        million, 4-year degree programs and                      90              30
                       above
                       Title IV disbursements less than
              4                                                             1,382               82(a)
                       $5 million, short-term programs
                       Title IV disbursements less than
              5        $5 million, 4-year degree programs and                   60              20
                       above
                           Privately Held Schools Totals                    1,866              228
          (a) One school in our sample of privately held schools did not submit audited
          financial statements to the Department for FY 2010 and therefore, was not reviewed.

    •    Underlying accounting records for 34 proprietary schools (9 publicly traded schools and
         25 privately held schools). We judgmentally selected the 34 proprietary schools based
         primarily on the amount of Title IV funds that the schools disbursed in AY 2009–2010.
         The nine publicly traded schools were owned by two publicly traded corporations. The
         two largest publicly traded schools (in terms of Title IV disbursements) were among the
         nine publicly traded schools selected for the accounting records review. We also took
         into consideration the number of schools owned by the corporation and the staff
         resources available to review the accounting records. In addition, we judgmentally
         selected 25 of the 46 largest privately held schools (in terms of Title IV disbursements)
         for the accounting records review. We reviewed the accounting records for the
         34 proprietary schools to gain a more complete understanding of how the schools spent
         their funds and how they classified and reported their expenses.

For purposes of our financial statement review, we determined that a school’s financial
statements provided transparent information about how the school spent its Title IV funds if the
statements, at a minimum, presented the amounts spent on instruction and marketing activities. 8
In addition, the school’s payroll and related costs must not have been consolidated and reported
in one income statement expense category. The above information could have been reported in
the income statement or one or more supplemental schedules to the income statement, or
disclosed in the notes to the financial statements.

During our financial statement reviews for 521 proprietary schools, we noticed that the number
of expense categories listed in the income statements varied from school to school. To quantify
these variances and summarize this issue, we counted the number of expense categories listed in

8
  For purposes of assessing transparency, a school was not required to present the amounts spent for all three types
of marketing activities (marketing, advertising, and recruiting). If a school presented the amount spent for any of
these three activities, we determined that the marketing portion of the transparency test had been met.
Final Report
ED-OIG/A09L0001                                                                      Page 19 of 26
each school’s income statement and supplemental schedules to the income statement, as
applicable, and reported the results by school ownership type and range (see Table 3). The
results from our stratified sample of 227 privately held schools formed statistical estimates that
we projected across all privately held proprietary schools. Our confidence in these estimates is
expressed in a 95 percent confidence interval or margin of error. All percentage estimates based
on the stratified random sample of privately held schools have margins of error of plus or minus
10 percentage points or less. When counting expense categories, we excluded interest expense,
unusual or periodic expenses (for example, gain or loss on disposal of assets), and any expenses
that did not have a dollar value ($0). We excluded interest expense and the unusual or periodic
expenses because schools were not consistent in how they reported these expenses in their
income statements—some schools reported these expenses as operating expenses, while other
schools did not.

To gain an understanding of how a Federal agency could implement uniform reporting
requirements and establish a standard chart of accounts for its program participants, we reviewed
the following information used by HUD—
   •   HUD’s Guidelines on Reporting and Attestation Requirements of Uniform Financial
       Reporting Standards, May 2002, and Financial Data Schedule Line Definitions and
       Crosswalk Guide, November 9, 2001, which we obtained from an official at HUD’s
       Office of Inspector General.
   •   HUD’s Financial Data Schedule (reporting template) and Chapter 4 of its Public and
       Indian Housing Low-Rent Technical Accounting Guide, 7510.1 (Introduction to the
       HUD Chart of Accounts), which we obtained from HUD’s Web site.

To achieve our audit objective, we relied in large part on the schools’ FY 2010 audited financial
statements stored in the Department’s eZ-Audit system. Schools used their own accounting
software to generate the financial statements. We did not assess the reliability of the schools’
accounting software because the schools’ financial statements were audited by independent
auditors (and received unqualified opinions from these auditors) and accepted by FSA in the
Department’s eZ-Audit system. We determined that the financial statements were sufficiently
reliable for purposes of our audit.

We also relied on computer-processed data provided by the 34 proprietary schools for which we
reviewed underlying accounting records. We determined that the schools’ accounting records
were reliable if the underlying expense detail (general ledger information) provided by the
schools reconciled to the income statement expense categories listed in the schools’ audited
financial statements. We reconciled all 34 schools’ underlying accounting records to the audited
financial statements without exception, and therefore concluded that the computer-processed
data provided by the schools was sufficiently reliable for purposes of our audit. We did not
evaluate the internal control framework at these 34 schools.

We held an entrance conference with Department officials at FSA’s offices in Washington, D.C.,
in June 2011. We performed our audit work at our regional office in Sacramento, CA, from
June 2011 through November 2012. We held an exit briefing with FSA and OPE officials on
November 20, 2012.
Final Report
ED-OIG/A09L0001                                                                      Page 20 of 26
We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
based on our audit objective. We believe that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objective.




                            ADMINISTRATIVE MATTERS


Corrective actions proposed (resolution phase) and implemented (closure phase) by your office
will be monitored and tracked through the Department’s Audit Accountability and Resolution
Tracking System (AARTS). Department policy requires that you develop a final corrective
action plan (CAP) for our review in the automated system within 30 days of the issuance of
this report. The CAP should set forth the specific action items, and targeted completion dates,
necessary to implement final corrective actions on the findings and recommendations
contained in this final audit report.

In accordance with the Inspector General Act of 1978, as amended, the Office of Inspector
General is required to report to Congress twice a year on the audits that remain unresolved
after 6 months from the date of issuance.

Statements that managerial practices need improvement, as well as other conclusions and
recommendations in this report, represent the opinions of the Office of Inspector General.
Determinations of corrective action to be taken will be made by the appropriate Department of
Education officials.

In accordance with the Freedom of Information Act (5 U.S.C. § 552), reports issued by the
Office of Inspector General are available to members of the press and general public to the extent
information contained therein is not subject to exemptions in the Act.

We appreciate the cooperation given to us during this review. If you have any questions, please
call Ray Hendren, Regional Inspector General for Audit, Sacramento Audit Region, at
(916) 930-2399.


                                             Sincerely,

                                             /s/

                                             Patrick J. Howard
                                             Assistant Inspector General for Audit
Final Report
ED-OIG/A09L0001                                Page 21 of 26
Electronic cc:
Dawn Dawson, Audit Liaison Officer, FSA
Janie Funkhouser, Audit Liaison Officer, OPE

Attachments
Final Report
ED-OIG/A09L0001                                                              Page 22 of 26


           Attachment 1: Abbreviations, Acronyms, and Short Forms
                            Used in this Report


AY                             Federal Award Year

C.F.R.                         Code of Federal Regulations

Department                     U.S. Department of Education

FASB                           Financial Accounting Standards Board

FSA                            Federal Student Aid

FY                             Fiscal Year

HEA                            Higher Education Act of 1965, as Amended

HUD                            U.S. Department of Housing and Urban Development

IPEDS                          Integrated Postsecondary Education Data System

NCES                           National Center for Education Statistics

OPE                            Office of Postsecondary Education

Privately held schools         Proprietary Schools That Are Privately Held

Publicly traded schools        Proprietary Schools Owned by Publicly Traded
                               Corporations

Title IV                       Title IV of the Higher Education Act of 1965, as Amended
Final Report
ED-OIG/A09L0001                                                                                                                    Page 23 of 26


                 Attachment 2: FSA and OPE Comments to the Draft Report




Raymond Hendren
Regional Inspector General for Audit
Office of Inspector General
Sacramento Audit Region
501 I Street, Suite 9-200
Sacramento, CA 95814


Dear Mr. Hendren:

SUBJECT:               Response to Draft Audit Report, Transparency of Proprietary Schools’ Financial
                       Statement Data for Federal Student Aid Programmatic Decisionmaking (ED-
                       OIG/A09L0001)

Thank you for providing us with an opportunity to review and respond to the Office of Inspector
General’s (OIG) draft audit report, “Transparency of Proprietary Schools’ Financial Statement
Data for Federal Student Aid Programmatic Decisionmaking.” The audit found that the audited
financial statements that proprietary schools submitted to the Department of Education
(Department) under 34 C.F.R. § 668.23 generally did not provide transparent information
because the presentation of instruction and marketing expenses was not consistent across
schools. The OIG concluded that the financial information reported by schools is generally not
useful to the Department for purposes of identifying how schools spent their funds or making
meaningful comparisons of financial information across schools participating in the Title IV,
Higher Education Act programs.

The audited financial statements that Federal Student Aid (FSA) collects and reviews include the
data necessary to compute composite scores, determine 90/10 ratios 1 and otherwise determine
the financial responsibility of institutions, as required by legislation and regulation. The current
regulations do not require that institutions provide details on instruction and marketing expenses,
and even if institutions were to provide that level of detail, FSA has no authority to use this data
for oversight. In fact, the OIG also recognized that FSA lacked authority to use this data for
oversight, stating that “There are no laws or regulations that stipulate how schools should spend
revenues generated through Title IV programs, even if a particular school is heavily dependent
on Title IV funds to operate its educational programs.” (See page 4 of the OIG Draft Report.)


1
 For a proprietary institution, the institution will derive at least 10 percent of its revenues for each fiscal year from sources other than Title IV,
HEA program funds, 34 CFR 668.14(b)(16).
Final Report
ED-OIG/A09L0001                                                                    Page 24 of 26
Note that FSA had a detailed standard template in eZ-Audit, which was reviewed as part of the
OIG’s 2005 Audit of SEC's Procedures for Reviews of eZ-Audit Financial Statements, ED-
OIG/A03F0001. In that audit, OIG found that institutions could not accurately enter the detail
line item data into the eZ-Audit templates and that the data was unverifiable. Based on that
finding, FSA removed the standard templates from eZ-Audit.

That said, we do understand that there is interest in learning more about instruction and
marketing expenses and collecting comparable data across different types of institutions. The
National Center for Education Statistics (NCES) collects institution financial data through the
Finance component of the Integrated Postsecondary Education Data System (IPEDS) surveys.
NCES recently conducted an IPEDS Technical Review Panel (TRP) #39 on “Improving Finance
Survey Forms for For-Profit Institutions.” See pages. 10 – 11 for a summary of suggested
changes to Expenses on the Financial Accounting Standards Board (FASB) forms for For-Profit
Institutions and page 14 for a specific discussion on collecting data on marketing, advertising,
and student recruitment. The TRP suggested that NCES clarify the instructions for assigning,
advertising and marketing expenditures by function.

The summary of the TRP Meeting is available at https://edsurveys.rti.org/IPEDS_TRP/Default.aspx.

As a result of the TRP recommendations, NCES has proposed that the IPEDS Finance Survey of
For-Profit Institutions be expanded, and that proposal is part of an OMB Clearance package.
Pending OMB approval, these changes would go into effect for the 2014-15 IPEDS data
collection.

Although FSA has legislative authority to require institutions to provide audited financial
statements in a format that we specify, the Office of Postsecondary Education has determined
that regulatory changes through the Negotiated Rulemaking process would be needed to establish
uniform account classification rules. In view of OPE’s current regulatory agenda and the
research needed to proceed with this initiative, they estimate that it will be at least two years
before negotiations with the community could begin.

Our specific response to each recommendation follows in the attachment. Again, we appreciate
the opportunity to review and comment on the draft report.

                                            Sincerely,

                                            /s/

                                            James W. Runcie
                                            Chief Operating Officer
                                            Federal Student Aid

Electronic cc: Chris Vierling, Director, Student Financial Assistance Advisory & Assistance,
OIG

Attachment
Final Report
ED-OIG/A09L0001                                                                      Page 25 of 26
Attachment –Federal Student Aid’s Response to Recommendations
“Transparency of Proprietary Schools’ Financial Statement Data for Federal Student Aid
Programmatic Decisionmaking” (ED-OIG/A09L0001)

Finding: Proprietary Schools’ Financial Statements Did Not Present Expense Information
Consistently.

We recommend that the Chief Operating Officer for FSA, in collaboration with the Acting
Assistant Secretary for Postsecondary Education –

Recommendation # 1.1: If proper authority does not exist, work with Congress to obtain the
statutory authority to establish uniform account classification rules and procedures for all
postsecondary schools, including proprietary schools.

       Federal Student Aid and the Office of Postsecondary Education Response to
       Recommendation #1.1: We have determined that regulatory changes would be needed
       to establish uniform account classification rules. In view of our current regulatory
       agenda and the research needed to proceed with this initiative, we estimate that it will be
       at least two years before negotiations with the community could begin.

Recommendation # 1.2: Establish uniform account classification rules and procedures for all
postsecondary schools, including proprietary schools, which would include the creation and use
of a standard chart of accounts that clearly defines the types of costs to be recorded under each
expense account.

       Federal Student Aid’s Response to Recommendation #1.2: After the regulations are
       published which establish uniform account classification rules, FSA will implement
       appropriate changes to its computer systems to capture this data.

Recommendation #1.3: In the interim, determine what detailed financial statement information
would provide necessary insight into the operations of schools participating in the Title IV
programs and develop common reporting requirements that define the expense categories to be
reported on through the notes to the financial statements.

       Federal Student Aid’s Response to Recommendation #1.3: FSA currently does not
       have the authority to require institutions to report expense categories in a standardized
       manner and, without standardization, the data does not provide consistent information for
       useful insight. In addition, even if the data were to be collected, FSA does not have the
       authority to use the data for oversight. The OIG has acknowledged that FSA lacked
       authority to use this data for oversight, “There are no laws or regulations that stipulate
       how schools should spend revenues generated through Title IV programs, even if a
       particular school is heavily dependent on Title IV funds to operate its educational
       programs.” (See page 4 of the IG Draft Report.) However, the data would be useful for
       research purposes and to better inform legislative and regulatory efforts in this area.

       The OIG could greatly assist this process by including a chart of accounts in its OIG
       Audit Guide and instructing schools on reporting marketing and recruiting expenses.
Final Report
ED-OIG/A09L0001                                                              Page 26 of 26
     FSA will review the previous template used in eZ-audit and submit comments and or
     recommendations to OPE for use in Negotiated Rulemaking.