oversight

Financial Controls Exercised by the Veterans Administration over the Predischarge Education Program

Published by the Government Accountability Office on 1977-12-08.

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

                           DOCUMENT SESUME

 04403 - [B34314699]

(Financial Controls Exercised by the Veterans Administration
over the Predischarge Education Program]. HRD-78-20; B-140300.
December 8, 1977. 9 pp. + 2 enclosures (5 pp.).

Report to Max Cleland, Administratcr of Veterans Affairs,
Veterans Administration; by Gregory J. Ahart, Director, Human
Resources Div.

Issue Area: Fedezally Sponsored or Assisted Education Programs
     (3300) ; Personnel Management arn CoLnensation (300) Federal
    Procurement of Goods and Services (1900).
Contact: Human Resources Div.
Budget rdnction: Veterans Benefits and Servicae: Veterans
    Education, Training, and Rehabilitation (702); National
    Defense: Department of Defense - MilitEry (except
    procurement & contracts) (C31); National Defense: Deper+zent
    of Defense - Procurement 6 Contracts (05:3).
Organizaticn Concerned: Department of Defense.
Congressional. Relevance: House Committee on Veterans' Affairs;
    Senate Committee on Veteians' Affairs.
Authority: Veterans Edu'.-ation and Iraining Amerdment Act of 1970
    (P.L. 91-219). P._. 92-540. P.L. 94-502.

         A review of the financial controls exercised by the
Veterans Administration (VA) ove; the Predischarge Education
Program   (PREP) shored than nirie schools and two consJltants
accumulated an estimated $9.9 million in surplus funds.
Findings/Conclusions: The surpluses, which' represent excess VA
payments over costs incurred after October 1972 when legislation
established reasonable costs as the basis for VA payments to
PREP projects, occurred because VA did not have sufficient
financial contzols to assure that such payments approximated
reasorable costs. The VA should recover the surplus funds; any
unused inventories may be of use tc the Department of Defense
(DOD\ or disposed of according to General Services
Administration procedures.   Recommendations: The VA should:
conduct or provide audits of the nine schools and two
consultants c-AO visited to establish the amount of recoverable
surplus; conauct or provide audits, as appropriate, at the
remaining ?00 schools tr identify whether additional recoverable
surpluses exist; take action to recover those surplus funds that
have beer. identified; and determine if the unused PREP
inventories at Olympic College can be used by DOD for its
military personnel still in training. If PREP resumes a! planned
in 1979, the VA should issue regulations which clearly define
'he types and amounts of PREP costs for which reimbursement will
be made and make appropriate audits of schoo.s' and consultants'
PREP financial records to determine if there is compliance with
appropriate regulations. Before the VA resumes operation oc
eiEP, it should determine, in conjunction with DOD, the need to
participate in this type of program. rf DOD is providing this
type of training, the VA should develbp an appropriate
legislative proposal to remove PREP from VA statutes and
eliminate future VA activities in the program. (SC)
\j:),   ~(/...                  UNITED STATES GENERAL ACCOUNTING OFFICE
                                        WASHINGTON, D.C.   20548


rHUMAN      REISOURCrS
          DIVISION
                         CDO~~~~~~~~~~~~~~~l                              DEC 1977
           B-140300

 °~        The Honorable Max Cleland
           Administrator of Veterans Affairs
           Veterans Admninistration

           Dear Mr. Cleland:

               We have reviewed the financial controls exercised by the
          Veterans Administration !VA) over the Predischarge Education
          Program (PREP). We analyzed the program's financial data at
          nine schools and at the offices of two consultants, who were
          associated with some of these schools, and estimate that they
          accumulated $9.9 million in surplus funds.

                These surpluses represent excess VA payments over cost
           incurred after October 1972, when legislation established
           reasonable cost as the basis for VA payments to PREP projects.
           The surpluses occurred because VA did not have sufficient
           financial controls to assure that such payments approximated
           reasonable costs. We relieve that VA should recover most of
           these surplus funds.

               trA's administration of PREP has ceased but it is sched-
          uled to resume about 1979.   It is possible that if the pro-
          gram resumes as planned, duplication of effort may occur
          between VA's program and similar Department of Defense (DOD;
          programs.

          BACKGROUND

                The Veterans Education and Training Amendment Act of
          1970 (Public Law 91-219) created PREP to provide active duty
          military personnel with courses for a secondary school diploma
          and for prerequisites for postsecondary education. The act
          requii:ed that VA pay PREP participants an educational assist-
          ance allowance equal to (1) the established charge for tui-
          tion, fees, books, and supplies, which the educational in-
          stitution required of nonveterans of similar circumstances
          enrolled in the same or a similar program or (2) $175 per
          month for a full-time course, whichever was less.


                                                                            HRD-78-20
B-14000



     Public Law 92-540 (Oct. 24, 1972) amended the 1970 act
by authorizing VA to reimburse education or training institu-
tions for the reasonable cost of PREP, when they did not have
similar programs. The law also increased the maximum montnly
payment to $220 for PREP Participants.

     Public Law 94-502 (Oct. 15, 1976) prohibited PREP enroll-
ment after October 31, 1976, except for participants in the
Post-Vietnam Era Veterans' Educational Assistance Program,
and then only during the last 6 months of their first enlist-
ment. A VA official informed us that all PREP operations
have now ceased.  The program is not due to resume until
about 1979, when servicemen again become eligible for the
program. At present DOD is funding similar educational pro-
grams to replace PREP for its active duty members.

ACCUMULATED SURPLUSES

     In April 1977 we requested VA's General Counsel to com-
ment on the recoverability of two types of surpluses we found
at the schools reviewed.  (See enc. I.)
     -- PREP payments made by VA in excess of PREP costs And

     -- Unused PREP books, supplies, and equipment retained
        by schools after PREP terminated.

     VA's General Counsel replied in June 1977 that both
types of surpluses were refundable to the extent that they
were accrued after the enactment of Public Law 92-540 and
were the result of applying a fixed rate tc cover reasonable
PREP costs.  (See enc. II.)  VA and school officials informed
us that all nine schools were charging a fixed rate on Octo-
ber 24, 1972; therefore, any surpluses accrued after that
date are refundable.

     Of the nine schools where we identified surpluses, four
had agreements for private consultants to provide many PREP
services. Consultant duties included:

    -- Assisting in obtaining permission to place and main-
       tain educational facilities and personnel on military
       bases and vessels.

    -- Purchasing, warehousing, and furnishing texts, ma-
       terials, and supplies.



                              2
B-140300



     -- Developing programs.

     -- Training administrators and teachers.

     -- Maintaining offices on military bases and naval
        vessels.

     -- Maintaining a complete accounting and financial
        reporting system, including student registration,
        enrollment, and termination data.

     -- Preparing tuition collection, rebate, and refund
        reports.
For these services consultants received up to 85 percent of
VA's PREP payments to the four schools.

     Where consultants were involved, schools were typically
responsible for (1) arranging and maintaining State and VA
approval of the prcgram; (2) maintaining academic tecords,
including course outlines and student transcripts; (3) super-
vising programs to assure maintenance of quality of instruc-
tion, and (4) hiring and compensating instructors.

     Where consultants were not involved, the schools per-
formed all of the duties cited above. The VA General Coun-
sel's office said that since the consultants acted in place
of the school, they may be subject to the same requirements
as the schools; therefore, surpluses accumulated by consult-
ants after October 24, 1972, may also be refundable.

     The following table shows estimated VA payments, costs,
and surpluses of the nine schools and two cons.ltants. Some
of these could not provide us with complete PREP financial
data at the time we completed our fieldwork in Jr:ly 1977.




                               3
B-140300



                                                  Estimated
                                       Payments     Costs      Total
            Schools                    received    incurred   surplus

                                                  (000 omitted)
American Preparatory Institute
   (Killeen, Tex.)                     $ 4,682     $ 4,378    $     304
Barstow Community College
   (Barstow, Calif.)                       221          168          53
Big Bend Community College
   (Moses Lake, Wash.)                  16,549      12,127        4,422
Concordia College
  (Milwaukee, Wis.)                        104           32          72
Ft. Steilacoom Community College
  (Tacoima, Wash.)                       2,832        2,768          64
Gavilan Joint Community College
  District (Gilroy, Calif.)              1,009          782         227
Olympic College
  (Bremerton, Wash.)                    5,619        4,614        1,005
St. Louis£ High School
  (Honolulu, Hawaii)                    2,404        1,318        1,086
San Diego Community College
  District (San Diego, Calif.)          3,400        3,163          237
        Total                          36,820       29,350        7,470
       Consultants

Concordia PREP program
  (Bremerton, Wash.):
    at Concordia                   -    1,263        1,251           12
ModuLearn, Inc. (San Juan
  Capistrano, Calif.):
    at Barstow                            470          261          209
    at Gavilan                          2,004        1,409          595
    at St. Louis                        7,384        5,679        1,705
        Total                          11,121        8,600        2,521
Total for schools and consultants $47,941          $37,950    $9,991
Surpluses at all of these schools, except Olympic College,
represent reported payments received, less costs.  In the
case of Olympic College, howev2r, the surplus also includes




                              4
B-140300



       PREP funds expended for
         non-PREP purposes                    $341,000
       Unused PREP inventories (at cost)       153,000
              Total                           $494,000
     Expenditures for purposes other than PREP but charged
to PREP included such things as TV studio equipment, cameras,
stereo consoles, furniture, athletic equipment, and automotive
testing equipment. Inventory consisted of such things as new
and unused books, test materials, tape recorders, and self-
instructional material.

     VA's General Counsel advised us that since there is
limited opportunity to use such PREP resources, VA would
consider our suggestions on their disposition.

     None of the schools' or consultants' financial records
we reviewed had final financial statements for PREP expendi-
tures. Closeout costs, such as the microfilming of PREP
records and unemployment compensation for terminated PREP
employees, were still being incurred at the time we completed
our fieldwork. We could not accurately calculate these costs,
but consultants' and school officials' estimates indicate that
future closeout costs at all nine schools will not exceed a
total of about $1.4 million. Also, in some cases there were
substantial receivab-'ls aced payables which, in the aggregate,
generally offset each othez but may significantly affect the
surpluses of some individual schools and consultants.

Conclusions

     We believe that VA should recover surplus funds accumu-
lated after October 24, 1972, by schools and consultants par-
ticipating in PREP. Any unused inventories may be of use to
DOD or disposed of according to General Services Administra-
tion procedures.  We believe, however, that there could be a
final VA audit before seeking recovery action because in some
cases, closeout costs, receivables, and payables had not
been settled at the time we completed our fieldwork.  These
transactions should now be substantially so .leted.

     Also since there were about 200 schools involved in PREP,
there may be more surpluses than those we identified. There-
fore, we believe that VA should conduct audits of these
schools, as appropriate, to determine if surpluses exist. We
recognize that it may not be practical to audit all schools.


                              5
B-140300



A decision regarding which schools to audit must be based on
the potential amount of recovery and the audit resources
available. Our experience indicates that a school with ade-
quate financial records can be audited in about 10 staff Gays.

Recommendations

     We recommend that VA

     -- conduct or provide audits of the nine schools and
        two consultants Are visited to establish the amount of
        recoverable surplus,

     -conduct or provide audits, as appropriate, at the
       remaining 200 schools to identify whether additional
       recoverable surpluses exist,

     -- take action to recover those surplus funds that have
        been identified, and

     -- determine if the unused PREP inventories at Olympic
        College, Bremerton, Washington, can be used by DOD for
        its military personnel still in training or disposed
        of under appropriate General Services Administratior
        procedures.

INADEQUATE FINANCIAL CONTROLS

     Surpluses have been accumulated by PREP schools and con-
sultants because VA did not exercise two essential elen:ents
of financial control to assure that payments to schools reim-
bursed them for only reasonable costs.

     Firs+; VA did not issue regulations limiting the types
and amounts of costs that schools and consultants could
charge for providing PREP services. As VA's General Counsel
stated in his June 13, 1977, letter (see enc. II), the intent
of Public Law 92-540 is clear--that payments for PREP should
reimburse schools for reasonable costs incurred, without the
schools incurring either a profit or a loss. Without the
benefit of implementing regulations, schools and consultants
charged their PREP accounts for a variety of types and amounts
of costs.

     Second, a VA official told as that VA did not make audits
of schools' and consultants' financial records to determine if
PREP payments equaled reasonable costs. VA officials told us


                                6
B-3.40300



that as a result, they were unaware of the amount of surpluses
accumulated by some schools and consultants and did not re-
quest refunds.  In the absence of periodic financial audits
and requests for refunds, some school officials and consult-
ants considered the surpluses "earned profits," "a proper
reward for the ris-  involved," or "a surplus that is ours
to keep."

Conclusions

     Significant amounts of surplus funds have been accumu-
lated by PREP schools and consultants because VA has not
(1) issued regulations defining the types and amounts of
PREP costs for which reimbursement could be received and
(2) made audits of schools' and consultants' financial
records to determine if it was reimbursing them only for
reasonable costs.

Recommendations

     If PREP resumes as planned, we recommend that VA

     -- issue regulations which clearly define the types and
        amounts of PREP costs for which reimbursement will be
        made and

     -- make appropriate audits of schools' and consultants'
        PREP financial records to enable VA to (1) determine
        if there is compliance with appropriate regulations
        and (2) take the necessary steps to gain compliance,
        where lacking.

FUTURE OF PREP

     VA's PREP operations have been suspended but are due to
resume about 1979. In the interim DOD received congressional
approval to reprogram about $50 million of its fiscal year
1977 and 1978 appropriations to expand its own high school
completion and remedial education programs to replace PREP.
In some cases DOD is using the same schools that were affili-
ated with VA.

     According to Public Law 94-502, when PREP is again im-
plemented, it will be available only to eligible military per-
sonnel during the last six months of their first enlistment.




                              7
B-140300



     DOD officials informed us that they prefer their military
personnel to receive PREP-type training eArly in their enlist-
ment because it is more beneficial to the armed services.
They, therefore, make this type of training available through-
out the enlistment period.

Conclusion

     If VA resumes PREP as planned, the probability exists
that DOD and VA will be making similar high school completion
and remedial education programs available to military per-
sonnel. DOD prefers its military personnel to not wait until
the last 6 months of their first enlistment to take this
type of training and, therefore, offers it throughout th-
enlistment period.

Recommendations

     We recommend that before VA resumes operation of PREP,
it determine, in conjunction with DOD, the need for it to
participate in this type of program.

     We also recommend that if it is determined that DOD is
providing this type of training, VA develop an appropriate
legislative proposal to remove PREP from VA statutes and
eliminate future VA activities in the program.



     The contents of this report have been discussed with VA's
Office of General Counsel and representatives of the Depart-
ment of Veterans Benefits. Also some of its contents have
been discussed with DOD officials. The comments received
have been considered in preparing this report.

     As you know, section 236 of the Legislative Reorganiza-
tion Act of 1970 requires the head of a Federal agency to
submit a written statement on actions taken on our recommenda-
tions to the House Committee on Government Operations and the
Senate Committee on Governmental Affairs not later than
60 days after the date of the report and to the House and
Senate Committees on Appropriations with the agency's first
request for appropriations made more than 60 days after the
date of this report.




                              8
B-140300



     We are sending copies of thir  eport to the Chairmen of
the House and Senate Committees o.. .ppropriations, House
Committee on Government Operations, Senate Committee on
Governmental Affairs, and House and Setat.e Committees on
Veterans' Affairs; the Director of the Office of Management
and Budget; and the Secretary of Defense.

     We appreciate the cooperation provided by VA officials
during our review.  We will be pleased to meet with your
office to discuss the audit techniques we employed as well
as to provide additional data on the sc hools and consultants
holding surpluses.

                              Sincerely yours,




                              Grego y J Ahart
                              Direco r

Enclosures - 2




                              9
ENCLOSURE I                                                          ENCLOSURE    I



                         UNrrED STATES GE :ERAL ACCOUNTrNG OFFICr
                                 WASHIN~TON,. D.C. 205d


_,,L....__                                                        April 6, 1977



   Mr. Guy H. ) c~ichael, III
   General Counsel
   Vetruns Administration

   Dear Mr. HcMichael:

       During our current survey of VA's Prediseharge Education Program
   (PREP), ve noted instances where schools had (1) used PREP funds for
   non-P'ogram purpose , (2) Program funds and resources after Program
   termination, end (3J earned excessive profits from Program operations.

       We request that you provide us with a statemeut of VA's position
   on recovering such misused and surplus funds and resources. Please
   relate your position to the following areas noted during our survey.

         --Unused geLeral Program funds and contingency fund
           balances.

         -- Excess profits.

         --Program funds and resources used for non-PREP pirposes.

         --Onused PREP re-!u-ces on hand after Prcoram termination,
           i.e. book.*, supplies, vehicles, typewriters, audio-visual
           systems. and other eqipment.

      We havee% saussed the -ecovery o . such resources with Mr. Robert
  Dysland, your Deputy Assistznt. also, we have talked with Mr. John
  Rovsey, Department of Veterans Benefits, regarding relevant PREP
  regulations -and guidelines.

       Inasmuch as our survey is well underuay, we would appreciate it
   if you could provid,: us with VA's position paper as soon as possible.
   If you have any questions, please contact Mr. Thomas A. Quarry at
   389-5287.

                                             Sincerely yours,




                                             Assistant Director

   cc:   Hr. busbee (IAS)
ENCLOSURE II                                                                         ENCLOSURE II


                                VETERANS ADMINISTRATION
                                   OrFicE Ow GUNERML COUNSEL
                                   W SHINGTON. D.C. 20420

                                           June 13, 1977                   wmm.r
                                                                               021
     Mr. George D. Peck
     Assistant Director
     Human Resourrfes Division
     United States General Accounting Office
     Washington, D. C. 20548


     Dear Mr. Peck:
     This will respond to your letter c:. April 6, 1977,
     requesting the views of the Veterans Administration on
     recovery of misused and surplus funds and resources from
     schools who were engaged in Pcedischarge Education Program
     (PREP) education. You specifically ask for our position
     on the following areas:

            1. Unused general Program funds and contingency
            fund balances.

            2. Excess profits.
           .3. Program funds and resources used for non-PREP
            purposes.
            4. Unused PREP resources on hand after Program
            termination, i.e., books, supplies, vehicles,
            typewriters, audio-visual systems, and other
            equipment.
     At the time the PREP program was enacted into law by,
     Public Law 91-219, the Congress prc-.aded a program calling
     for reimburseme,t to the school for the cost of tuition,
     fees, books, and supplies. Under the provisions set forth
     in section 1696(b) of title 38, United States Code, the
     school was not permitted to make charges in excess of the




  "To car/orhim who shall ha   borne the batte, ad/r his widow end his
                                                                   N orphn"-   AIMAAM LINCOLN




                                                 2
ENCLOSURE II                                           ENCLOSURE II


   Mr. George D. Peck
   Washington, D. C.

   established and customary charges for similarly circum-
   stanced nonveterans. The House-Senate conferees, in their'
   report to the House and Senate on H. R. 11959 (House
   Report 91-918, p. 14) stated:

           '"It is the purpose of this new program to
       assist active duty servicemen in preparing for
       their future education and training by providing
       certain remedial and refresher-type training prior
       to the servicemen's discharge from service. This
       program permits the Administrator of Veterans'
       Affairs to make necessary payments directly to the
       serviceman, these payments being intended for reim-
       bursement to the educational institution for the
       cost of tuition, fees, books, and supplies. The
       educational institution is not permitted to make
       charges of the serviceman in excess of established
       and customary charges for similarly circumstanced
       nonveterans. On the other hand, the program
       contemplates that participating educational insti-
       tutions will be able to recoup the full, reasonable
       costs entailed in providing predischarge education
       or training. Although it is recognized that some
       institutions my not generally chatre tuition or
       fees for regular courses, it seems unreasonable
       that such institutions would be expected to provide
       special programs, such as PREP, without charging
       enrolled students appropriately." (Emphasis
       supplied.)
    In the enactment of Public Law 92-540, effective Octo-
    ber 24, 1972, the Congress amended section 1696(b) to
    grant the Administrator, where there was no same program,
    the authority to "establish appropriate rates for tuition
    and fees designed to allow reimbursement for reasonable
    costs for the education and training institution."
    (Emphasis supplied.)

                                                                2




                                 3
ENCLOSURE II                                            ENCLOSURE II


 Mr. George D. Peck
 Washington, D. C.


 With these basic provisions of law in mind, it is our view,
 with respect to your first question, that unused general
 program funds and contingency fund balances are subject to
 refund to the Veterans Administration in the same manner
 as excess profits/surplus accrued after the effective date
 of a "fixed rate" after October 24, 1972, the effective
 date of Pub.ic Law 92-540 cited above. We do believe,
 however, that a reasonable and fair interpretation should
 be applied in determining close-out costs as schools dis-
 continue their programs.

 Concerning excess profits/surplus accrued after October 24,
 1972, ir. th3 operation of programs for which there was a
 "fixed rate," any such moneys shoul, Le refunded to the
 Veterans Administration. The cost determination leading
 to fixed rates was applied after that time to newly estab-
 lished programs or to a request for an increase in a rate
 which had previously been accepted as a "same program."
 (There were approximately 200 schools which offered PREP
 programs.) It is our view that the law all along has
 provided for reimbursement of costs. However, we also
 believe that the intent of the law is clear--no profit, no
 loss.
The reimbursement feature of the law and control as to its
application has been provided in Program Guide 21-1,
Change 197 (Section M-37 dated August 13, 1973), Change 198
(Section M-42 dated September 7, 1973), and Change 208
dated October 31, 1974) (copies enclosed). The efforts of
the Veterans Administration to protect the school against
the contingency of unknown, but allowable expenses, was
covered by Paragraph 13 of Change 208--a 5 percent contin-
gency allowance when surplus funds from a past period were
used as an offset in the rate established for a later
period.




                                                         3




                                 4
ENCLOSURE II                                           ENCLOSURE II



  Mr. George D. Peck
  Washington, D. C.


  We believe that program funds and resources used for non-
  PREP purpose3 should be disallowed to the extent that they
  affected surplus/profit that accrued after the date of a
  "fixed rate," which could be as early as October 24, 1972,
  the date of enactment of Public Law 92-540.
  Unused PREP resources on hand after program termination,
  i.e., books, supplies, vehicles, typewriters, audio-visual
  systems, and other equipment, represent a surplus in the
  same manner as excess profits. Because of limited oppor-
  tunity for use, we would have no objection to such disposi-
  tion as the General Accounting Office finds appropriate.

  We hope that our views on the points you have raised in
  your letter will be helpful to you in your surveys of PREP
  schools.

                             Sinc _ly yours,/




                             GUY H. McMICHAEL III
                             General Counsel




(40666)                           5