PublicationDate: 7/1/95 ChapterNumber: 6 ChapterTitle: Title IV Reporting Requirements SectionNumber: 6 SectionTitle: Audits and Program Reviews PageNumbers: 254-286 6.6 Audits and Program Reviews ED uses several methods to ensure that schools participating in Title IV programs follow correct procedures to award, disburse, and account for federal funds. These methods are also used to monitor schools' compliance with applicable laws and regulations, identify procedural problems, and recommend solutions. 6.6.1 Federal Audits A federal audit is initiated by ED and conducted by ED's Office of Inspector General (OIG). A school may be selected for a federal audit if there is concern about the school's administration of Title IV programs. A federal audit does not satisfy the requirement that a school must have an annual nonfederal audit. 6.6.2 Compliance Audits ((New requirements)) The 1992 reauthorization of the Higher Education Act mandated new compliance and financial audit requirements. These requirements were implemented by final regulations published in the Federal Register on November 29, 1994. ((Annual compliance audit required)) With the new guidelines, all schools and third-party servicers must have an annual nonfederal compliance audit that covers every aspect of the school's or servicer's administration of Title IV programs. A school may not use a third-party servicer's audit in place of its own required audit. (For more information on working with third-party servicers, refer to Chapter 3, Sections Two and Six, of The 1995-96 Federal Student Financial Aid Handbook.) ED is currently working on guidelines for servicer audits. When this guidance is available, schools will be notified. There are two types of audits: - A single audit, where financial and compliance audits are done as one audit. In a single audit, the compliance audit examines all federal programs at the school. A single audit is due to ED within 13 months after the fiscal year that is being audited. - A compliance audit, which covers only Title IV funds. When an institution has a compliance audit, it is required to have a separate, basic, generally-accepted-accounting-principle (GAAP) financial audit. A compliance audit is due to ED within six months after the end of the institution's most recently concluded fiscal year ending on or after the most recently completed award year for which the audit is performed. The method and the type of audit depends on who controls the school: - For-profit institutions must have a compliance audit. The compliance audit is to be conducted in accordance with ED's Audit Guide: Compliance Audits (Attestation Engagements) of the Federal Student Financial Assistance Programs at Participating Institutions. These institutions must also have a basic GAAP financial audit. This is to be done in accordance with procedures detailed in the federal publication Government Auditing Standards and follow generally accepted auditing standards. - Nonprofit institutions must follow Office of Management and Budget (OMB) Circular A-133, "Audits of Institutions of Higher Education and Other Nonprofit Organizations." OMB Circular A- 133 requires a nonprofit institution with federal funding greater than $25,000 to have an audit. A nonprofit institution that receives federal funding of less than $100,000 or from a single source may choose between a single audit or compliance audit (the audit will follow the procedures described for a for-profit institution). OMB is in the process of revising Circular A-133. The revision will establish higher thresholds than are currently in effect. All other institutions must have a single audit. - Public institutions must have an audit that complies with the Single Audit Act (P. L. 98-502) as implemented by OMB Circular A-128, "Audits of State and Local Governments." (The Single Audit Act only applies to state and local governments.) OMB circular A-128 requires a public institution with federal funding greater than $25,000 to have an audit. A public institution that receives federal funding of less than $100,000 can choose a single audit or compliance audit (the audit will follow the procedures described for a for-profit institution). All other institutions must have a single audit. OMB Circular A-128 allows public institutions to meet their audit requirement by having an A-133 audit instead of an A-128 audit. ((Independent auditor required)) An audit must be performed by an independent auditor following generally accepted auditing standards and the standards of the U. S. General Accounting Office (GAO) as set forth in the GAO publication Government Auditing Standards (1994 revision). The auditor or auditing firm used for a compliance audit may be the same one used to audit a school's other fiscal activities. The auditor or firm must, however, be independent of any auditor or firm authorizing a school's expenditure of Title IV program funds. The criteria for independence are given in the just-referenced GAO publication. An audit conducted by a state auditor who meets the criteria for independence satisfies the nonfederal compliance-audit requirement. ((Cooperating with auditor)) A school must make all program, fiscal, and student records available to an auditor. (See section 2.8.) Both the school's financial aid administrator and fiscal officer should be aware of the dates the auditor will be at the school. Representatives from the business and financial aid offices should be on-hand during this period to provide documents and answer questions. ((Submitting an audit report)) A final audit report is prepared by the auditor and submitted to the school. The school must then submit the audit report to ED or ED's representative, as determined by the type of audit. For a single audit (A-128 and A-133), a school must submit two copies of the single audit report, management letter, and corrective action plan (if applicable) to: Federal Audit Clearinghouse Bureau of the Census P. O. Box 5000 Jeffersonville, IN 47199-5000 A copy of the transmittal cover sheet that must be sent with single audits is shown on page 268. For a compliance audit, a school must submit five copies of the audit report, management letter, and corrective action plan (if applicable) to: U.S. Department of Education Office of Postsecondary Education Institutional Participation & Oversight Service Institutional Monitoring Division, Audit Resolution Branch 600 Independence Avenue, SW ROB-3, Room 3919 Washington, DC 20202-5430 The separate basic financial statement audit that must be done if a school has a compliance audit should be mailed to either of the following addresses: U.S. Department of Education Student Financial Assistance Programs c/o Dun and Bradstreet 899 Eaton Avenue Bethlehem, PA 18025-0016 U.S. Department of Education Financial Analysis Branch 600 Independence Avenue, SW Washington, DC 20202-5323 The timing for submitting reports and the information that must be submitted will be determined by the type of audit and the guidance provided. Please review the appropriate guidance for needed information. If the financial statement needs to be submitted, it must be submitted to ED within four months after the fiscal year that is being audited. ((Corrective action plan)) Regardless of the type of audit that has been performed, if there are findings, a school must prepare a corrective action plan (CAP) that addresses the findings included in the audit report. The CAP may be submitted separately to ED's Regional Inspector General for Audit (RIGA), or it may be included with the audit report. ((ED actions resulting from audit report)) It is ED's responsibility, not that of an auditor or audit firm, to determine what action will be taken as a result of an audit report. ED officials review the audit report and the school's CAP (if applicable) to determine what action, if any, is necessary. ED may: - agree with the auditor's findings, - modify the auditor's recommendations, or - request additional information from the school. ((ED access to school records and auditor records)) A school is required to cooperate fully during ED's examination of its audit report. The school must give ED and/or OIG access to any records or other documents needed to review the audit report. In addition, the school's contract with its auditor must specify that the auditor will also give ED and/or OIG access to records and documents related to the audit, including work papers. Access includes the right to: - copy records (including computer records), - examine computer programs and data, and - interview employees without the presence of school officials and without the school's use of a tape recorder. ((Final determination notice)) A school is notified in writing of ED's final determinations. As a result of ED's examination of a school's audit, the school may be required to: - revise its administrative procedures; - provide or reconstruct documentation to establish that expenditures were properly awarded and disbursed; - implement corrective actions to prevent further improper expenditures of federal funds; - repay improperly expended federal funds; or - pay fines or interest or both. ((Repayment of liabilities)) If ED determines that Title IV program funds were expended improperly, the school must repay the funds within 45 days, unless the school has formally appealed the decision. Appeal procedures are given in Subpart H of 34 CFR 668. In addition, if ED determines that Title IV program funds were expended improperly, ED may, in accordance with Subpart G of 34 CFR 668: ((Allowable ED actions)) - take emergency action to withhold a school's Title IV funds, - fine a school up to $25,000 for each statutory or regulatory violation, or - limit, suspend, or terminate a school's eligibility to participate in Title IV programs. Such actions may be taken by ED if: - a school is unable or unwilling to provide access to its records; - there is sufficient evidence that federal funds were intentionally misused or fraudulently expended; - ED has evidence indicating that a school is incapable of administering Title IV programs; or - a school is unable or unwilling to repay improperly expended federal funds. 6.6.3 Program Reviews ((Purposes of program reviews)) In addition to reviewing schools' compliance-audit reports, ED may conduct its own program reviews. One purpose of a program review is similar to that of a compliance audit--to evaluate a school's management of Title IV programs and to ensure compliance with laws and regulations. ((Criteria for selecting schools for review)) In selecting schools for review, ED gives priority to schools that appear to be experiencing fiscal or administrative problems. Criteria include, but are not limited to: - a Federal Family Education Loan (FFEL) Program cohort default rate of more than 25 percent; - an FFEL Program cohort default rate that places the school within the top 25 percent of all FFEL Program default rates; - a default dollar volume that is within the top 25 percent of all FFEL Program schools; - a significant fluctuation in a school's FFEL or Federal Pell Grant Program volume; - problems reported by an accrediting agency or a state agency; - a high student withdrawal rate; - negative reports or complaints from local law enforcement agencies; - complaints or incriminating information from students, parents, or employees; OR - other reasonable suspicion of fraud or abuse at a school. ((Unannounced program reviews)) A school may be notified of an upcoming program review in advance, or the program review may be unannounced. Federal regulations stipulate that ED officials provide a school with a written request for a program review, but regulations do not preclude ED from providing the written request at the same time reviewers arrive at the school. ((School cooperation required)) School personnel must cooperate fully with ED officials before, during, and after a program review. Whether the program review is announced or unannounced, a school is expected to have its records organized and readily available for reviewers, and it may not object to providing access to its records. (See section 6.6.2.) However, because certain school officials might not be immediately available during an unannounced program review, a school may be allowed additional time to submit requested information/responses to review findings. 6.6.3.1 Focus of Program Reviews A program review covers many of the same areas as an audit, including fiscal operations and accounting procedures, as well as a school's compliance with specific Title IV program requirements for student eligibility and awards. Program reviews, however, tend to focus more on regulatory requirements specific to Title IV programs, such as: - student records and admission records, - fund requests and transfers, - records pertaining to due diligence and collecting Federal Perkins Loans, - time sheets and pay rates for the Federal Work-Study (FWS) Program, and - documents supporting a school's Federal Pell Grant and campus- based program reporting. The program review team prepares a written report that is sent to a school within 30 to 60 days of the review. The school is expected to respond to the report to provide additional information or if it disagrees with any of the report's conclusions. When ED has fully considered and evaluated the school's response, ED sends the final program review determination letter to the school. Like an audit, a program review may result in noncompliance findings or in monetary liabilities for a school. ((Some common reasons for findings)) Some common reasons for noncompliance findings include: - unmet consumer-information requirements, - excessive student drop-out or withdrawal rates, - inadequate notification to FFEL Program borrowers about refunds made to lenders, - excessive Federal Perkins Loan Program cohort default rates, and - improperly maintained satisfactory academic progress records. ((Some common reasons for liabilities)) Some common reasons for monetary liabilities include: - incomplete or undocumented verification procedures, - missing or incomplete financial aid transcripts, - undocumented entrance and exit loan-counseling interviews, - inadequately established or monitored satisfactory academic progress standards, - late refunds or unmade refunds, - excess cash on hand from Title IV programs, - inconsistent information in student files, - inadequately maintained accounting records, - improperly constructed student budgets, - ineligible programs or locations, - an undocumented FISAP income grid, - failure to exercise due diligence in collecting Federal Perkins Loans, - records not being maintained as required, and - audit reports not being submitted. ((ED actions resulting from findings)) As a result of program review findings, ED may take emergency action against a school; fine a school for statutory and regulatory violations; or limit, suspend, or terminate a school's participation in Title IV programs, as described in Subpart G of 34 CFR 668. A school may appeal program-review findings as described in Subpart H of 34 CFR 668. 6.6.4 State Postsecondary Review Entities (SPREs) Schools that meet statutory referral criteria may be subject to reviews by State Postsecondary Review Entities (SPREs) under the State Postsecondary Review Program (SPRP). SPRP was established by the 1992 reauthorization of the Higher Education Act and was implemented in final regulations published in the Federal Register on April 29, 1994 (34 CFR 667). ((Funding for SPREs)) ED provides federal funds to each SPRE for performing review functions. If Congress does not appropriate funds for the program, however, states are not required to perform SPRE reviews. ED identifies schools for review and refers them to the appropriate SPRE. The SPRE then reviews the schools to determine their compliance with state standards. If a school fails to meet state standards, the SPRE may prescribe corrective actions or determine that the school should no longer participate in all or some Title IV programs. Schools have the opportunity to challenge the SPRE's findings through due process procedures at the state level. More specific information about SPREs can be found in Chapter 3 of The 1995-96 Federal Student Financial Aid Handbook. 6.6.5 Guaranty Agency Reviews ((Focus of guaranty agency reviews)) Federal Family Education Loan (FFEL) Program regulations require guaranty agencies to conduct program reviews at postsecondary schools. A guaranty agency review is similar to an ED program review. However, a guaranty agency review focuses on how a school meets requirements specific to the FFEL Program, as those loans are made through guaranty agencies. These school requirements include: - certifying loan applications, - maintaining records supporting borrowers' eligibility, - using established procedures for processing and paying loan monies, and - notifying lenders when students change their enrollment status. Additional information about guaranty agency reviews can be found in Chapter 3 of The 1995-96 Federal Student Financial Aid Handbook and in 34 CFR 682.410. 6.6.6 Repayment of Liabilities from an Audit or Program Review ((Program Determination Letter)) An audit or program review may result in liabilities under any of the Title IV programs for a current award year or for prior award years. Such liabilities are reported to a school by ED in a Program Determination Letter (PDL). If the PDL states that the school owes funds to ED, it will give specific steps that the school must take to reimburse ED for improperly spent funds. The institution should carefully follow the instructions in the PDL for reimbursing these funds. ((Billing disallowed funds)) If a school owes payments to ED, a copy of its PDL is also sent to the Accounts Receivable Management Group (ARMG) in ED's Financial Services (FS), where an account receivable is established for the school. A school is also billed for the disallowed amount of funds, accrued interest, and penalties through ED's billing agent. Payment instructions are included with the bill. ((Paying disallowed funds)) If a school owes ED $100,000 or more, it must remit payment through its financial institution by FEDWIRE. If a school owes ED less than $100,000, it must remit payment by check to ED's billing agent. (Additional information about making payments can be found in Chapter 6 of the ED/PMS Recipient's Guide.) A school may not reduce amounts reported as expended on its ED/PMS 272 Report to account for expenditures disallowed as a result of an audit or program review. Any Title IV funds returned for this purpose will not be credited to a school's ED/PMS account and will not reduce the school's cash-on-hand amount in ED/PMS. Unless otherwise directed by the PDL, a school may not attempt to adjust its prior year FISAPs or Federal Pell Grant processed payment information to reflect expenditures disallowed as a result of an audit or program review, nor may it make repayments directly to any Federal Family Education Loan (FFEL) Program lender or to the Direct Loan Servicing Center. ((Penalties for failure to repay disallowed funds)) If a school does not return funds owed ED as a result of an audit or program review, any of the following penalties may occur: - The school may be assessed penalty and administrative charges, as well as accrued interest on any unpaid balance. - The school may be referred to a commercial collection agency and charged the agency's collection costs. - The school may be referred to the U. S. Department of Justice for collection and legal action. - The school may be referred to other government agencies from which it receives funds for administrative offsets. - The school may be reported to credit bureaus. [[Page 266 (chart entitled "Federal Pell Grant Payment Process"), page 267 (form entitled "Single Audit Report Submission Transmittal"), and pages 269-285 (sample documents) are currently unavailable for viewing. Please reference your paper document for additional information.]] |