Abstract 1 Significant Audits and Audit-related Activities (April 1, 1996 September 30, 1996) Note: The amounts reported by auditors for the reports described below are subject to further review and final determination by Department officials. Elementary, Secondary and Other Education Programs "The Tennessee Division of Rehabilitation Services Should Improve Its Administration of Establishment Projects" ACN 04-50201 September 27, 1996 Our audit of the Vocational Rehabilitation program in Tennessee disclosed that about $2.8 million of the $10.8 million spent in 1994 for establishment projects could have been used more effectively and efficiently resulting in services for up to an additional 1,400 eligible vocational rehabilitation clients. Since the State Legislature has not always appropriated sufficient funds, the Division of Rehabilitation Services has used establishment projects to meet matching requirements. Establishment grants establish, develop or improve community rehabilitation programs. The report recommends recovering $367,131 for one establishment project that was not meeting project goals. "The Ohio Rehabilitation Services Commission's Use of Establishment Projects As a Source of Third Party Funding to Meet Federal Matching Requirements May Not Be the Most Efficient and Effective Method of Delivering Services" ACN 04-60004 September 27, 1996 Our audit of the Vocational Rehabilitation program in Ohio disclosed that in 1994, the Rehabilitation Services Com-mission used about $3.3 million in Federal funds to obtain $850,000 in third-party funding through establishment projects. These funds were needed to meet Federal match requirements because the State legislature historically has not appropriated sufficient funds. The report notes that using Federal funds for establishment projects to attract third-party funding may not be the best use of funds because these projects were not always cost effective and some establishment projects may not continue. The report notes that Ohio has taken steps to increase the effectiveness and efficiency of its services. The report recommends that ED monitor these efforts to ensure that these efforts lead to improved services. "The Decline in the Success of California's Vocational Rehabilitation Program Cannot Be Attributed to the Rehabilitation Act Amendments of 1992" ACN 09-53005 July 31, 1996 Our audit disclosed that, since October 1988, the California State Department of Rehabilitation has experienced a long-term drop in its success rate for rehabilitating individuals with disabilities. Because the success rate dropped every year for six straight years, we concluded that the Rehabilitation Amendments of 1992 were not a primary cause of that lowered success. Our audit included a comparison of the success rates of the six largest States in terms of Vocational Rehabilitation fund-ing. As of the end of fiscal year 1995, Texas had the highest success rate and California had the lowest. We are cur-rently reviewing differences in the Texas and California programs in the hope that we can develop ways to improve both California and other State programs. Student Financial Assistance Activities "Review of Post-Default Consolidation Loans and Reserve Fund Uses of The Georgia Higher Education Assistance Corporation" ACN 04-60002 August 2, 1996 Our review found that the Georgia Higher Education Assistance Corporation (GHEAC):  improperly reported defaulted loans paid off through loan consolidation and retained excessive collection costs;  improperly allocated costs in State fiscal year 1995, resulting in improper charges to the guaranty reserve fund; and  did not fully implement its State fiscal year 1996 cost allocation plan. As a result of GHEAC's comments and actions taken on the draft report, our final report recommended that GHEAC review all defaulted loans paid off through consolidation on or after March 29, 1994, and determine if actual collection costs were at least equal to 18.5 percent. If actual costs were less than 18.5 percent and GHEAC retained 18.5 percent, the difference should be remitted to the Department. "Audit of Tennessee Student Assistance Corporation's Reporting of Defaulted Federal Family Education Loan Program Loans Consolidated Under the Federal Consolidation Loan Program" ACN 04-60003 June 21, 1996 Our audit disclosed that the Tennessee Student Assistance Corporation (TSAC) retained monies in excess of the amount allowed to cover collection costs on Federal Consolidated Loan (FCL) payments between April 1993 and September 1995. This occurred because TSAC reported FCL payments as collection payments. We recommended that the Office of Post-secondary Education instruct TSAC to:  refund to ED $1,017,470 of retained FCL payments;  compute and refund the amount of excess FCL funds retained since October 1, 1995;  report the payments received in the consolidation of defaulted loans on its monthly claims report; and  improve its record-keeping capabilities to adequately document its verification of FCL amounts. TSAC disagreed with the finding because it believes the report is based on a misreading of the Higher Education Act and regulations. Under the Department's regulations, guaranty agencies may retain up to 18.5 percent for consolidations, but are allowed to retain 27 percent on collections. "Audit of United Student Aid Funds, Inc.'s Reporting of Defaulted Federal Family Education Loan Program Loans Consolidated Under the Federal Consolidation Loan Program" ACN 05-50009 May 8, 1996 Our audit disclosed that United Student Aid Funds, Inc. (USAF) reported payments received as payoffs from the consolidation of defaulted loans as collections from borrowers and retained amounts in excess of those allowed. We recommended that the Office of Postsecondary Education instruct USAF to:  refund to ED $2.7 million of retained FCL payments for January 1, 1993 to March 28, 1994;  refund to ED $16.4 million for March 29, 1994 to June 30, 1995, or identify the actual amount of collection costs included in the payoff amount received and reported and refund the amount retained that exceeds the allowed collection costs; and  report defaulted loans paid off by consolidation in accordance with the prescribed format included in Dear Colleague Letter 95-G-286. USAF disagreed with the finding because it believes the report is based on opinions and a misreading of the Higher Edu-cation Act and regulations. Under the Department's regulations, guaranty agencies may retain up to 18.5 percent for consolidations, but are allowed to retain 27 percent on collections. "Audit of Delaware Higher Education Loan Program's Reporting of Defaulted Federal Family Education Loan Program Loans Consolidated Under the Federal Consolidation Loan Program"" ACN 05-60007 May 23, 1996 Our audit disclosed that the Delaware Higher Education Loan program (Delaware) reported payments received as payoffs from the consolidation of defaulted loans as collections from borrowers and retained amounts in excess of those allowed. We recommended that the Office of Postsecondary Education (OPE) instruct Delaware to:  refund to ED $30,265 of retained FCL payments for January 1, 1993 to March 28, 1994;  refund to ED $109,008 for March 29, 1994 to June 30, 1995, or identify the actual amount of collection costs included in the payoff amount received and reported and refund the amount retained that exceeds the allowed collection costs; and  report defaulted loans paid off by consolidation in accordance with the prescribed format included in Dear Colleague Letter 95-G-286. A Delaware official stated that Delaware does not object to refunding the $139,273 in questioned costs to the Department. "Audit of Finance Authority of Maine's Reporting of Defaulted Federal Family Education Loan Program Loans Consolidated Under the Federal Consolidation Loan Program" ACN 05-60008 May 23, 1996 Our audit disclosed that Maine reported payments received as payoffs from the consolidation of defaulted loans as collections from borrowers and retained amounts in excess of those allowed. We recommended that OPE instruct Maine to:  refund to ED $143,978 of retained FCL payments for January 1, 1993 to March 28, 1994;  refund to ED $426,812 for March 29, 1994 to June 30, 1995, or identify the actual amount of collection costs included in the payoff amount received and reported and refund the amount retained that exceeds the allowed collections costs: and  report defaulted loans paid off by consolidation in accordance with the prescribed format included in Dear Colleague Letter 95-G-286. Maine objected to the conclusions of the report because it believes that the assessment was based on faulty methodology and that the conclusions are based on opinions or misinterpretations of the Higher Education Act and regulations. "Audit of Iowa College Student Aid Commission's Reporting of Defaulted Federal Family Education Loan Program Loans Consolidated Under the Federal Consolidation Loan Program" ACN 05-60011 June 24, 1996 Our audit disclosed that the Iowa College Student Aid Commission (Iowa) reported payments received as payoffs from the consolidation of defaulted loans as collections from borrowers and retained amounts in excess of those allowed. We recommended that OPE instruct Iowa to:  refund to ED $114,614 of retained FCL payments from January 1, 1993 through March 28, 1994;  refund to ED $901,241 for March 29, 1994 to June 30, 1995, or identify the actual amount of collection costs included in the payoff amount received and reported, and refund the amount retained that exceeded the allowed collection costs; and  report defaulted loans paid off by consolidation in accordance with the prescribed format included in Dear Colleague Letter 95-G-286. In its response, Iowa stated that it does not believe the Higher Education Act or regulations obligate it to repay the amounts cited in the audit report. Under the Department's regulations, guaranty agencies may retain up to 18.5 percent for consolidations, but are allowed to retain 27 percent on collections. "Audit of Colorado Student Loan Program's Administration and Reporting of Defaulted Family Education Loan Program Loans Consolidated Under the Federal Consolidation Loan Program " ACN 07-50004 May 31, 1996 Our audit disclosed that the Colorado Student Loan Program (CSLP) certified as eligible, defaulted student loans that were ineligible for consolidation. The borrowers had not met CSLP's policy for satisfactory repayment arrangement when the loans were certified. CSLP's management attributed the improper certifications to employees' overzealous desire to attain collection goals set by management. Another contributing factor was the lack of adequate internal controls, combined with poor management practices. CSLP consolidated $587,067 in defaulted loans that were not eligible for consolidation and retained $162,032, approximately 27 percent of the consolidation amount, as its due proceeds. CSLP did not agree with the findings and recommendations included in the audit report. The CSLP response stated that the loans were eligible for consolidation because during the time period in question, neither Federal law nor regulation defined satisfactory repayment arrangements. CSLP stated that the cited infractions were exceptions to its unofficial policy, which should not be given the same weight as law or regulation. This period, CSLP and the Department entered into a settlement agreement in which CSLP agreed to pay $187,000 to the Department. "Audit of the Direct Loan Program Administered by Bauder College - Atlanta, Georgia " ACN 04-60146 September 24, 1996 The audit disclosed that the school had generally administered the Direct Loan program and accounted for and expended Direct Loan program funds in accordance with applicable program requirements. However, the auditors identified the following five weaknesses at the school:  Some excess cash existed.  The school has not received acknowledgments of ED's acceptance of submitted Student Status Confirmation Report files.  School records indicated disbursement and adjustment/cancellation date discrepancies.  School records indicated late reconciliations with ED's servicer, AFSA.  Security issues were identified with the school's electronic data transmission system (FEEDS). The institution has taken steps to correct the weaknesses identified above, although we still recommend that ED require Bauder College to continue or implement certain procedural controls. These controls involve the disbursement of funds and return of excess cash, the generation of Student Status Confirmation Reports, the review of loan origination records, student account ledgers, and loan statuses, the correction of software problems, and the security and recovery of data. "The Electronic Data Exchange: A Security Review is Needed" ACN 06-50010 August 19, 1996 Our audit disclosed that the Department had not obtained the required independent security review and formal risk analysis of the Electronic Data Exchange. Revised OMB Circular A-130 requires an independent review of computer security every three years. The Office of Management and Budget recommends that a risk-based approach be used. Existing controls might not prevent an individual or group of individuals from manipulating data on the Electronic Data Exchange and awarding a Federal Pell grant for an ineligible student. We recommended that the Department take a risk-based approach to assess and manage risk and develop adequate security on the Electronic Data Exchange. The Department generally agreed with the recommendation and has started the process of engaging an independent review of security controls. "Cannella School of Hair Design, Chicago, Illinois, Audit of Administration of Student Financial Assistance Programs" ACN 05-60003 August 16, 1996 Our audit disclosed that the Cannella School of Hair Design, Incorporated (Cannella), a chain of cosmetology schools, did not comply with all institutional eligibility requirements or meet the standards of administrative capability contained in the Code of Federal Regulations, and therefore, all Cannella schools are ineligible to participate in the SFA programs authorized by Title IV of the Higher Education Act of 1965, as amended. The Department provided Cannella SFA funds totaling $4,324,440 between July 1, 1994 and March 8, 1996. The Department also provided Cannella an additional $84,180 between May 11, 1994 and June 30, 1994 for two main campuses and one branch which became ineligible on May 11, 1994. We recommended that the Office of Postsecondary Education terminate Cannella's program participation agreements and instruct Cannella to return $4,408,620 and all refunds received after March 8, 1996. No procedural recom- mendations were made. "The Department Should Continue Its Efforts to Improve the Accuracy of Its Student Loan Database" ACN 09-38058 June 14, 1996 Our audit found that a significant number of FFEL program loans that were incorrectly recorded in the Tape Dump re-mained incorrect in the National Student Loan Data System (NSLDS). Inaccurate loan data limits ED's ability to use its database to determine the reasonableness of lender billings for interest and special allowance. It also impairs ED's ability to monitor borrowers. Further, inaccurate loan data submitted by guaranty agencies resulted in the overpayment of loan reinsurance amounts. In its response to our draft report, the Office of Postsecondary Education (OPE) stated that it has taken steps to improve the NSLDS and has plans for additional improvements. OPE agreed with most of our recommendations. Departmental Management Activities "The Report of Independent Accountants on the U.S. Department of Education Fiscal Year 1995 Department-wide Financial Statements" ACN 17-40403 August 16, 1996 The OIG is required by the Chief Financial Officers Act of 1990 (CFO Act) to have an audit performed of certain program financial statements. The Department chose to meet their fiscal year 1995 CFO Act reporting requirements with early implementation of the Government Management Reform Act and the preparation of a Department-wide annual financial statement. The final audit reports were released to the Department for inclusion in the 1995 Accountability Report. Distribution of the Accountability Report will constitute the official distribution of these audit reports. The report of the independent public accountants of Price Waterhouse, LLP, indicated they were not able to express an opinion on the consolidated financial statements primarily because certain amounts related to the Federal Family Education Loan (FFEL) program reported in Education's consolidated financial statements could not be supported by sufficient and reliable accounting information and certain differences between financial statement amounts and underlying accounting records could not be adequately explained. The report on internal controls disclosed material weaknesses and reportable conditions in the internal control structure and its operation. The material weaknesses relate to the following issue areas:  FFEL Program Liability Estimate for Loan Guarantees;  FFEL Program Guaranty Agency Oversight;  FFEL Program Lender Oversight; and  Cash Timely Reconciliations. The reportable conditions relate to the following areas:  Pell and Federal Work-Study Grants Institutional Audits; and  PAS/PMS Systems Disaster Recovery and Security Concerns. The report on compliance with laws and regulations disclosed no instances of non-compliance that are required to be reported. While management agrees with the need to further improve FFEL program data, they believe that the reported FFEL program liability for loan guarantees is reasonable. Management is analyzing the recommendations to determine the best way to proceed toward achieving the desired results before developing a comprehensive corrective action plan. Cooperative Audit Resolution and Oversight Initiative As reported in Semiannual Report #32, CAROI is an intradepartmental team assisted by three States (Florida, Mississippi, and Washington). The goal is to improve education programs and student performance at State and local levels through better use of audits, monitoring and technical assistance. To accomplish this goal, the CAROI team developed four strategies, which are described below along with the team's accomplishments in each area during the reporting period. #1: Create and Maintain Dialogue with States Objective: Work with key parties to address State concerns, remove obstacles to improved program performance, foster new cooperative methods of audit resolution, and avoid recurrence of violations. Accomplishments: The CAROI team made presentations to State and local officials at the first of three regional conferences for the Improving America's Schools Act. The CAROI team is also participating on a White House task force on flexibility and financing issues that is, in part, considering how the CAROI team concept could be used by other Federal agencies. #2: Work with States to Resolve Open Audits or Audits Under Appeal Objective: Work with States to resolve audits from periods covered under prior legislation in a manner that is more consistent with the Improving America's Schools Act, the Goals 2000: Educate America Act, and the School-to-Work Opportunities Act. Accomplishments: The first cooperative audit resolution pilot was completed. As part of a settlement agreement with Florida, Florida and Department officials jointly designed a substitute time distribution system that helped to resolve longstanding audit issues in Florida relating to keeping time distribution records. Florida's substitute system can be adopt-ed by other State and local agencies looking to reduce the burdens of OMB Circular A-87. #3: Improve the Single Audit Process Objective: Ensure that Single Audits focus on the most important issues and concerns in Department of Education programs; and revise the Office of Management and Budget's Compliance Supplement for Education Programs for programs authorized under the Elementary and Secondary Education Act to reflect new flexibility in a manner con- sistent with new education legislation. Accomplishments: The revised compliance supplement for Education programs reauthorized under IASA was issued on June 21, 1996 in time for auditors to refer to it during the first audits of programs authorized under the IASA. #4: Coordinate Audits, Monitoring, and Technical Assistance Objective: Improve program performance through better coordination of audits, Federal monitoring, and Federal technical assistance, while encouraging creativity and flexibility at the State and local level. Accomplishments: The CAROI team worked with members of the OESE on integrated reviews of State Educational agencies. Field Pricing Support Reviews or Preawards During this period, the OIG performed 14 field pricing support reviews or preaward reviews of contract proposals. Our reviews covered contract proposals totaling $2.2 billion for Regional Educational Laboratories, Direct Loan services, and assistance in the review and management of discretionary grant applications. The work was performed to assist the Depart-ment's Grants and Contracts Service (GCS) in negotiating contracts; the scope of each review was defined on a case-by-case basis to conform to the precise needs of GCS. In general, the reviews included determining whether costs proposed by prospective contractors are reasonable, allowable and allocable as set forth under the Department's cost principles, and evaluating the prospective contractor's accounting system. During this period, these reviews identified unsupported costs caused by excessive labor rates and consultant fees. Because a vendor's cost/price proposal may be revised one or more times before award of the contract, the OIG does not track the unsupported cost identified in these reviews.