oversight

Review of the Financial Statements of the Guaranteed Student Loan Fund for Fiscal Year Ended June 30, 1976

Published by the Government Accountability Office on 1977-09-22.

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

                                                              /03G 7y


                           DCCUMENT   FESUME

03694' - [B2733969]   (Restricted)

fReview of the Financial Statements of the Guaranteed Student
Loan Fund for Fiscal Year Ended June 30, 1976]. Septeriber 22,
1977. 2 pp. + enclosure (4 pp.).

Rep)ort to Mary Jane Calais, Acting Associate Ccmmissioner,
Office of Education: Office of Guaranteed Student Loans; by
David P. Sorando, Regional Manager, Field Cperatio.ls Div.:
Regional Office (Washington).

Issue Area: Education, Training, arT Employment Programs (1100).
Contact: Field Operations riv.: Regic-ul Offir-- latr.ington).
widget Function: Education, Nanpower, and social Services:
    Hinher Education (502).

          The Guaranteed Student Loan Fund's automated records do
not provide reliabl.e information tc administc-r the program or
necessary, detailed accounting reccrds adequate to support its
financial statements. Findings/Conclusions: Improved collection
procedures to process defaulted student loans to collection,
:eferral for legal action, or termination would -aterially
improve the reliability of the defaulted loans receivable and
accrued interest receivable accounts by removing known
uncollectable amounts from these accounts. Recommendations: The
Office of Guaranteed Student Loans (OGSL) should develop
detailed subsidiary records in support of the claims in process,
insurance premiums receivable, and accrued interest receivable
account balances; develop an allowance for loss rate based on
actual program experience without further delay so that the
allo&ances may be more realistically stated; and base the
estJiated future loss ratii  , ai-tval program experience and
update the rates each year to :ffEct the most recent program
experience. The refunds due: the ,tu4dnts and various
unidentified collections should he reeoved frcm the Office of
Education suspense account and recci:_- ini the proper Fund
aucourts. The report of overdue insurance premiums receivable
should be developed promptly and used in systematic attempts to
collect overdue accounts. (SC)
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                                        l'UNITED
                                             STATES GEIERAL ACCOUNTING OFFICE
J   \?.cr,,,l:.6,. ~.,,j/o-)       ~       WASHINGTON REGOCNAL OFFICE
                                                      FIFTH FLOO'R
                                                 'F3 WEST
                                                       %ReOAD      STREE T
                                            FAI LS CH'i.CI1,   VIRGINIA   22046




                                                                                  22 I- :377
                    Ms. Mary Jane Calais
O                   Acting Associate Commissioner
                    Office of Guarantee  Student Loans
                    Office of Education
                    Department of Health, Education, and Welfare

                    Dear Ms. Calais:

                        We have completed our review of the financial statements
                   of the Guaranteed Student Loan Fund (Fund) for the fiscal year
                   ended June 30, 1976, and the transition quarter ended
                   September 30, 1976.   A congressional report will not be issues
                   until we ccplete the fiscal year 1977 audit. That report will
                   pres.nt thz rnsults of our e:xminations of the Guaranteed
                   Student Loar, u.nd financial statements for .:isoal years 1976
                   and '.977.

                         Enclosur. I. presents certain matters we have identified
                   in this and prior years, which in our v.ew require managem.irt
                   attention. -While we recognize that action on some matters .. rt
                   await i':s:allation of the new management information svste:.,
                   we urgQ tiat action be taken now where possible.    As vou know,
                   many .zeedei improvements in the Fund's operations are closely
                   assreiated with the system's implementation.

                     Considering the results of the audit just completed, we
                anticipate our opinion on the Fund's fiscal years 1976 and 1977
                statements will again be adverse. An overall conclusion basea
               -on this and prior years' audit work is that the Fund's auto-
                mated records do not provide reliable information to administer
                the program nor necessary, detailed accounting records adequate
                to support the financial statements.

                       Our report to the Secretary of Health, Education, and
                  Welfare,"Collection Efforts, Not Keeping Pace with Growing
                  Number of Defaulted Student Loans," B-117604 issued August 11,
                  1977, contains recommendations which are also pertinent to the
                  Guaranteed Student Loan Fund's financial statements.  SDeci-
                  fically improved collection procedures to process defaulted
                  student loans to collection, 'eferral for legal action, or
terminati.n would materially improve the reliability of the
defaulted loans receivable and accrued 4nterest receivable
accounts by removing known uncollectable amounts from these
accounts.

     We would appreciate being advised of any actions taken in
response to the recommendations presented in the enclosure.
We would be happy to meet with you to discuss these matters.
We also would like to express our appreciation for the many
courtesies extended to the staff during the audit.

                                     Sincerely yours,




                                     David P. Sora.o
                                     Regional Hanager

Enclosure




                              2
ENCLOSURE I                                      ENCLOSURE I




NEED TO MAINTAIN SUBSIDIARY RECORDS

     Maintaining subsidiary ledgers and balancing the totals
of these ledgers to control account balances is essential
for good internal control.  Recording transactions in such
a way that they can be readily traced from the originating
documents to summary records and ultimately to the financial
reports is necessary for sound financial management.

     The Office of Guaranteed Student Loans (OGSL) does not
have subsidiary record support for the September 30, 1976,
balance in the claims in process, insurance premiums receiv-
able, and accrued interest receivable accounts. OGSL derived
the claims-in-process balance by using the following formula:
unpaid claims on hand at the beginning of the period plus
claims received minus claims paid.  The insurance premiums
receivable balance was computed from summaries of billings
and collections. A listing of individual premiums receivable
was not maintained.  The accrued interest receivable balance
was estimated by applying an interest factor to the average
loans receivable balance.

     According to OGSL officials, the new management informa-
tion system should provide the necessary subsidiary records
for the insurance premiums receivable account.  The system
will also compute accrued interest and is expected to provide
reliable accrued interest receivable subsidiary records by
the end of fiscal year 1977.

Recommendation

     We recommend that OGSL develop detailed subsidiary
records in support of the claims in process, insurance pre-
miums receivable, and accrued interest receivable account
balances.

LOSS RATES SHOULD BE BASED ON
ACTUAL PROGRAM EXPERIENCE

     The allowance for losnps should reflect that portion of
insured defaulted loans receivable, purchased and accrued
interest on insured loans receivable, and claims in process
which is estimated to be uncollectable.  To most accurately
reflect the uncollectable amount, we continue to believe the
allowance should be derived from actual collection expe-
rience. The allowance should be adjusted annually to reflect
most recent collection experience.



                           -1-
ENCLOSURE I                                       ENCLOSU.E I




      In fiscal year 1976, a 55 percent allowance for loss
rate was used fox defaulted loans. This rate is based on
the experience of the Federal Housing Administration's
Title I Housing Insurance Fund from July 1934 through June
1967.   In our view, the two programs are not sufficiently
similar to justify the expectation of identical loss rates.
In addition, OGSL has used the same loss rates since 1969
with no annual adjustments for program experience, notwith-
standing the enormous program changes that have occurred.
As a result, the allowance for losses may not realistically
reflect actu!l program experience.
     Each year since fiscal year 1973, we have recommended
that OGSL develop an allowance for loss rate based on
actual program experience. Each year OGSL has stated that
these changes would be made. In fiscal year 1973, OGSL
stated that the change would be made by fiscal year 1974 or
fiscal year 1975. In fiscal year 1975, when the changes
still had not been made, OGSL stated the change may be
accomplished by fiscal year 1978. OGSL is now developing
a loss estimation model that is expected to use historical
program data and projected collection data to estimate the
unrecoverable portion of default claims and the related
acrue la   ere i t
          tn        cn.           Cr
                          ^. tAo CCor   dinga,  -_o ar esi
may be ready for use by fiscal year 1978.
Recommendation
     We recommend that OGSL develop an allowance for loss
rate based on actual program experience without further
delay, so that the allowances may be more realistically
stated.

IMPROVEMENTS NEEDED IN                                 :
ESTIMATING FUTURE LOSSES

     The loss rates used in computing the estimated future
loss liability on nondefaulted insured loans should be
based on actual program experience and adjusted annually
to account for the most recent experience. In addition,
the method used to comoute the liability should be consistent
from year to year to allow for meaningful comparison of his-
torical data and highlight any unusual variation in the
account balance.
     OGSL does not have support for the rates used in com-
puting the estimated future loss liability on the fiscal year


                              2
ENCLOSURE I                                      ENCLOSURE I




1976 financial statements. These rates have been carried
forward since 1974 with no adjustment for the 1975 or 1976
activity. Also, OGSL's method of determining the estimated
future less liability has varied each year since fiscal year
1973 when estimated future losses were first reported on the
 :inancial statements. As a result, we were unable to deter-
mine whether the account balance was fairly stated at
September 30, 1976.
Recommendation
      We recommend that OGSL base the estimated future loss
rates on actual program experience and update the rates each
year to reflect the most recent program experience. The
method of computing the rates and calculating the estimated
liability for future losses should be consistent from year to
year.
IMPROPER RECORDING OF UNIDENTIFIED COLLECTIONS

     Prior to March 1976, all unidentified collections and
suspense items of the Fund were recorded in the Office of
Education's (OE) suspense account. Amounts in this account
are not reflected in the Fund's accounts or financial state-
ments. In our fiscal year 1975 report to Congress we noted
that the Fund's cash account is understated by the amount in
the OE suspense account. We suggested that unidentified CGSL
collections be recorded in the accounts of the Fund.
     Beginning in the third quarter of fiscal year 1976,
OGSL began applying all unidentified collections to the
Fund appropriation. While this action constitutes a needed
improvement, over $977,000 of OGSL collections still remained
in the OE suspense account at September 30, 1976, and thus
not included in the financial statements.
     A large portion of OGSL collections remaining in the
OE suspense account, almost $800,000, consists of a refund
from a bank received ty OGSL in trust for students of a
proprietary school. We understand OGSL is currently consid-
ering methods to distribute the refund to the students.

     The remainder in OE's suspense account--over $184,000--
consists of collections that did not contain enough informa-
tion to determine which defaulted loan accounts should be
credited. Approximately, $11,000 of this amount was pl- ed



                              -3
ENCLOSURE I                                       Ei'LOSURE i




in the account in fiscal year 1974, while approximately
$150,000 of fiscal year 1975 collections still remain in this
account.  Over $23,000 was placed in the suspense account
during fiscal year 1976.

     Since last year's audit, few OGSL items have been
removed from OE's suspense account. As of September 30,
1976, only $1,195 of the Fund's items in the suspense account
as of January 1976 had been removed.   In addition, a review
of OGSL's records for the first 7 months of fiscal year 1977
showed that no items had been removed.

Recommendation

     We recommend that the refund due the student:; and var-
ious unicentified collcctions be removed from the OE suspense
account and recorded in proper Fund accounts.

NEED FOR FOLLOWUP COLLECTION ACTION ON
OVERDUE INSURANCE PREhIUMS RECEIVABLE

     OGSL bills a lender for insurance premiums due and des
not attempt further collection if payment isn'  recei ed.
Previously, a contractor created a delinquent insurance
premiums receivable report and followup billing letters for
delinquent accounts. However, these two services were
discontinued when a new contractor was selected in S.:oaember
1975. Consequently, no followup collection action has been
taken since these services were stopped.  Good business
practice would require that delinquent accounts be subject
to vigorous collection attempts.
     We estimate over $250,000 of insurance premiums billed
during or before September 1976 remained uncollected as of
April 8, 1977. With an effective system to identify and
collect these overdue receivables, many should have been
collected or for the older items written off as uncollectable
before now. An OGSL official told us a system to report
delinquent insurance premiums is under development.
Recommendation
     We recommend that the report of overdue insurance pre-
miums receivable be developed promptly and used in systematic
attempts to collect overdue accounts.




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