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**UNITED STATES DEPARTMENT OF EDUCATION**

> **OFFICE OF INSPECTOR GENERAL**

#  61 FORSYTH STREET, ROOM 18T71

**ATLANTA, GEORGIA 30303**

**Telephone: (404) 562-6470 Fax: (404) 562-6509**

November 8, 2004

**[MEMORANDUM]{.underline}**

TO: Theresa S. Shaw

Chief Operating Officer

Federal Student Aid

FROM: J. Wayne Bynum **J. Wayne Bynum**

Regional Inspector General for Audit

Office of Inspector General

SUBJECT: **FINAL AUDIT REPORT**

*Review of Student Enrollment, Professional Judgment Actions, and*

*Dependency Overrides at Salem College*

Control No. ED-OIG/A04-E0003

You have been designated as the action official for the resolution of
the finding and recommendations in the attached final report. We also
provided a copy to the auditee and to your audit liaison officer.

The Office of Inspector General is required to review and approve your
proposed Program Determination Letter (PDL) and the Audit Clearance
Document (ACD) before the PDL is forwarded to the auditee. Our review of
these documents will be handled through the Department's Audit
Accountability and Resolution Tracking System (AARTS).

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 six months from the date
of issuance.

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.

If you have any questions, please contact me at 404‑562‑6477 or
Assistant Regional Inspector General Mary Allen at 404-562-6465.

Enclosure

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**UNITED STATES DEPARTMENT OF EDUCATION**

######## OFFICE OF INSPECTOR GENERAL

# 61 Forsyth Street, Room 18T71

# Atlanta, Georgia 30303

####### 

####### Telephone: (404) 562-6470 Fax: (404) 562-6509

#### November 8, 2004

# Dr. Julianne Still Thrift

President

# Salem Academy and College

601 S. Church St.

Winston-Salem, NC 27108

Dear Dr. Thrift:

This **Final Audit Report**, Control Number A04‑E0003, presents the
results of our *Review of Student Enrollment, Professional Judgment
Actions, and Dependency Overrides at Salem College*. Audit coverage
included the period July 1, 2001, through June 30, 2003 (award years
2001-2002 and 2002-2003). Our objectives were to determine (1) whether
Salem College enrolled as regular students only individuals who have a
high school certificate or its equivalent or are beyond the age of
compulsory school attendance and (2) whether Salem College's use of
professional judgment and dependency override to make adjustments to
estimated family contribution calculations resulted in appropriate
Federal Pell Grant Program (Pell) disbursements to students.

**AUDIT RESULTS**

We did not identify any problems regarding (1) the enrollment as regular
students only individuals who have a high school certificate or its
equivalent or are beyond the age of compulsory school attendance or (2)
the school's use of dependency overrides. However, we did determine that
Salem College did not always maintain adequate supporting documentation
for its professional judgment determinations.

**FINDING No. 1 \-- Salem College Did Not Maintain Adequate Supporting
Documentation**

> **for Professional Judgment Actions**

Salem College did not maintain adequate documentation to support all
professional judgment decisions. This occurred because Salem College did
not always follow established policies and procedures related to
obtaining adequate documentation to support a student\'s claim of a
special circumstance as a means to being granted professional judgment.
As a result, 12 students received \$26,400 in excessive Federal Pell
Grant funds.

The Higher Education Act of 1965, as amended, Section 479A (1998)
states:

> Nothing in this part shall be interpreted as limiting the authority of
> the financial aid administrator, on the basis of adequate
> documentation, to make adjustments on a case-by-case basis to the cost
> of attendance or the values of the data items required to calculate
> the expected student or parent contribution (or both) to allow for
> treatment of an individual eligible applicant with special
> circumstances. However, this authority shall not be construed to
> permit aid administrators to deviate from the contributions expected
> in the absence of special circumstances . . . . Special circumstances
> shall be conditions that differentiate an individual student from a
> class of students rather than conditions that exist across a class of
> students. Adequate documentation for such adjustments shall
> substantiate such special circumstances of individual students.

Salem College used dependency override actions to amend the estimated
family contribution for two Pell Grant recipients during award year
2001-2002 and two Pell Grant recipients during 2002-2003. We reviewed
the financial aid files for these four students and determined that
there was adequate documentation to support the students' claim of a
special circumstance. We also determined that the special circumstance
for the dependency override action was substantiated.

Salem College used professional judgment actions to amend the estimated
family contribution for 76 of its 351 Pell Grant recipients during award
year 2001-2002 and 66 of its 356 Pell Grant recipients during award year
2002-2003.

We reviewed the financial aid files for 64 randomly selected students
who were coded as having received professional judgment actions during
award years 2001-2002 and 2002-2003. We reviewed the files to determine
if there was adequate documentation to substantiate the students' claim
of a special circumstance and of a case-by-case determination that the
special circumstance justified deviating from the expected family
contribution. We found that the documentation in the files was not
adequate to support the professional judgment actions for 12 of the 64
students. Eleven of these 12 student files contained a signed letter or
special request form explaining the special circumstance; however, the
information provided did not substantiate the claimed special
circumstance. For example, the documentation for an individual who
stated he lost his job provided no information about where the
individual worked. Another student file contained a record of a
telephone conversation that the Financial Aid Director had with someone
concerning the student\'s father\'s cutback in work hours; however,
there was insufficient documentation to substantiate the information.
Tables 1.1 and 1.2 below provide additional information regarding the
results of our student file reviews.

**Table 1.1 -- Professional Judgment File Review for 2001-2002**

  --------------------------------------------- -------------- ------------ ----------
  **Reason for Professional Judgment Decision** **Students**   **Adequate   
                                                               Support      
                                                               Maintained   
                                                               in File**    

                                                               ***YES***    ***NO***

  Excessive Medical/Miscellaneous Bills         10             9            1

  Elimination of Child Support or Social        1              1            0
  Security Benefits                                                         

  Student/parent/spouse loss of job or          23             18           5
  reduction in income                                                       

  **TOTAL**                                     **34**         **28**       **6**
  --------------------------------------------- -------------- ------------ ----------

Table 1.2 -- Professional Judgment File Review for 2002-2003

+--------------------------------------------+--------+------+--------+
| #########                                  | **Stud | **   |        |
|                                            | ents** | Adeq |        |
| **Reason for Professional Judgment         |        | uate |        |
| Decision**                                 |        | Sup  |        |
|                                            |        | port |        |
|                                            |        | Ma   |        |
|                                            |        | inta |        |
|                                            |        | ined |        |
|                                            |        | in   |        |
|                                            |        | Fi   |        |
|                                            |        | le** |        |
+--------------------------------------------+--------+------+--------+
|                                            |        | *    | **     |
|                                            |        | **YE | *NO*** |
|                                            |        | S*** |        |
+--------------------------------------------+--------+------+--------+
| Excessive Medical/Miscellaneous Bills      | 9      | 9    | 0      |
+--------------------------------------------+--------+------+--------+
| Separation of parents                      | 1      | 1    | 0      |
+--------------------------------------------+--------+------+--------+
| Elimination of Child Support or Social     | 2      | 1    | 1      |
| Security Benefits                          |        |      |        |
+--------------------------------------------+--------+------+--------+
| Student/parent/spouse loss of job or       | 18     | 13   | 5      |
| reduction in income                        |        |      |        |
+--------------------------------------------+--------+------+--------+
| **TOTAL**                                  | **30** | **   | **6**  |
|                                            |        | 24** |        |
+--------------------------------------------+--------+------+--------+

In summary, Salem College did not maintain adequate supporting
documentation for 12 of the 64 student files reviewed (19 percent).
These 12 students received \$36,050 in Pell Grant funds. As a result of
the unsupported professional judgment actions, the 12 students received
\$26,400 in excessive Pell grant disbursements.

Salem College had written policies and procedures for granting
professional judgment; however, the policies and procedures were not
consistently followed. Students who wished to be considered for special
circumstances were to submit a Special Circumstance or Dependency
Override Request form or a written request. The policy stated that
appropriate documentation, such as a letter of termination from a job or
copies of medical bills not covered by insurance, would help the
Financial Aid Director in making a determination. The policy also stated
that the Financial Aid Director may request additional data depending on
the situation. If the special circumstance was approved, the Financial
Aid Director adjusted key data elements on the students' Free
Application for Federal Student Aid form (e.g., Adjusted Gross Income,
number in household, number in college, etc.). The Financial Aid
Director wrote a brief explanation of the decision and signed and dated
the form. The Financial Aid Director also flagged the Financial Aid
Administrator Adjustment field in EDExpress to indicate the transaction
was based on professional judgment, calculated a new expected family
contribution, reprocessed the aid, and mailed a new award letter to the
student.

**RECOMMENDATIONS**

We recommend that the Chief Operating Officer for Federal Student Aid
require Salem College to-

1.1 Maintain adequate supporting documentation that substantiates a
student's special circumstance and documents the reasons for the
professional judgment actions.

1.2 Refund \$26,400 in Pell Grant funds disbursed as a result of
inadequately documented professional judgment actions.

3.  Perform a 100 percent review of the professional judgment actions
    not included in our audit for award years 2001-2002 and 2002-2003
    through the current period and refund any additional Pell Grants
    disbursed as a result of inadequate support for professional
    judgment actions granted. The Chief Operating Officer should require
    verification of this calculation by the appropriate Case Management
    Team.

**SALEM COLLEGE RESPONSE**

Salem College disagreed with the finding and recommendations (see
attachment). The response stated that the regulation and the *Federal
Student Aid Handbook* does not define or give examples of "adequate
documentation." The financial aid administrator has been given the
authority to make this decision under the realm of professional
judgment. Minimal Federal guidance concerning documentation requirements
has resulted in many different interpretations of the regulation.
Schools such as Salem College act in good faith when interpreting the
regulations. Some students make projections of current year income,
which is an estimate of earnings. Such figures cannot be proven or
verified until the tax year is completed. In 7 of the 12 cases cited in
the report, Salem College's professional judgment decisions were
verified by additional supporting documentation, which proved the
judgments were correct. Salem College disagreed with recommendation
No. 1.2 to refund \$26,400 in Pell Grant funds.

Federal financial aid applicants and parents (where applicable) must
sign a certification statement on the Free Application for Federal
Student Aid (FAFSA) indicating that they can be fined and/or sent to
prison for giving false or misleading information. This certification
holds students and parents liable for the accuracy of the information
provided in conjunction with the financial aid application (i.e., FAFSA
data, verification, professional judgment, etc.). Salem College uses
this certification as the basis for accepting professional judgment
requests.

Recommendation No. 1.3 seeks 100 percent verification of the remaining
professional judgment decisions. Statistical sampling methods indicate
that a 45 percent sample (64 of 142) has a confidence level of
99 percent with a confidence interval of 12. Salem College disagrees
with the recommendation because a confidence level of 99 percent is
extremely high.

**OIG COMMENTS**

Salem College's comments did not lead us to change our finding.
Section 479A of the Higher Education Act of 1965, as amended, prescribes
that adequate documentation must "substantiate" the special
circumstances of individual students. In our review, we looked for
documentation to "substantiate" the circumstances of the student that
would allow a financial aid advisor, on a case-by-case basis, to
conclude that it was reasonable to "deviate from the contributions
expected in the absence of special circumstances." For the 12 students
in question, the notes and/or letters describing the students' special
circumstance did not provide sufficient detail to substantiate the
students' circumstances. None of the notes or letters regarding loss of
income or job provided an employer's name, information on unemployment
compensation, or prospects for additional employment.

The FAFSA certification statement pertains to the information included
in the FAFSA and information that the student/parent will provide at a
later date, if requested, to verify the accuracy of the completed form.
A new FAFSA is not prepared and signed to support a professional
judgment action. The FAFSA certification does not preclude the need to
obtain adequate documentation at the time a student requests a
professional judgment action. The statute requires financial aid
administrators to maintain adequate documentation that substantiate the
special circumstances of the student. In addition, as evident with the
verification process that the Department uses to verify FAFSA
information, the Department does not exclusively rely on the FAFSA
certification statement.

Nineteen percent (12 of 64) of the professional judgment actions that we
reviewed were not substantiated by supporting documentation. Therefore,
it is probable that 27 professional judgment decisions are not
substantiated by documentation (0.19 x 142 professional judgment
decisions). Therefore, we recommend that the remaining 78 professional
judgment decisions (142 decisions less 64 decisions reviewed by OIG) be
reviewed to determine if additional Pell Grants were disbursed without
adequate support for the professional judgment actions granted.

BACKGROUND

Salem College, the 13th oldest college in the Nation, is located in
Winston-Salem, North Carolina. The Moravians started the school in 1772
as a school for girls. In 1890 it became Salem College (Salem Academy
and College). The 57-acre campus is shared with the Academy (a
college/preparatory boarding school for girls in grades 9-12).

Salem College is a private, non-profit, Liberal Arts College for women,
accredited by the Southern Association of Colleges and Schools, the
National Association of Schools of Music, and the North Carolina Board
of Education. Salem College offers degree programs to undergraduate
students and graduate students, and it also offers a Continuing Studies
program and Pre‑professional programs.

Enrollment at Salem College is approximately 1,027 students. Tuition is
currently \$15,500 and room and board is \$8,870. Approximately
70 percent of the institution\'s students receive financial aid from
programs such as Federal Supplemental Educational Opportunity Grants
(FSEOG), Federal Work Study (FWS), Federal Pell Grants (Pell), and
Federal Family Education Loans (FFEL). Salem College received Title IV
funding totaling \$3,693,482 during award year 2001-2002 and \$3,675,401
during award year 2002-2003. The table below provides a breakdown of
Title IV funds received by program.

+---------------+---------+----------+--------+----------+------------+
| # Award Year  | *       | # FSEOG  | *      | **FFEL** | ####       |
|               | *PELL** |          | *FWS** |          |  **Total** |
+---------------+---------+----------+--------+----------+------------+
| 2001-2002     | \$      | \$69,000 | \$     | \$2      | **\$3      |
|               | 774,161 |          | 74,221 | ,776,100 | ,693,482** |
+---------------+---------+----------+--------+----------+------------+
| 2002-2003     | \$      | \$94,044 | \$     | \$2      | **\$3      |
|               | 895,799 |          | 94,699 | ,590,859 | ,675,401** |
+---------------+---------+----------+--------+----------+------------+
| Total by      | \$1,    | \        | \$1    | \$5      | **[\$7,36  |
| Program       | 669,960 | $163,044 | 68,920 | ,366,959 | 8,883]{.un |
|               |         |          |        |          | derline}** |
+---------------+---------+----------+--------+----------+------------+

OBJECTIVES, SCOPE, AND METHODOLOGY

Our audit objectives were to determine (1) whether Salem College
enrolled as regular students only individuals who have a high school
certificate or its equivalent or are beyond the age of compulsory school
attendance and (2) whether Salem College's use of professional judgment
and dependency override to make adjustments to the estimated family
contribution calculations resulted in appropriate Pell Grant
disbursements to students. The scope of our audit included award years
2001-2002 and 2002-2003.

To evaluate institutional eligibility regarding the enrollment of high
school students we-

-   Reviewed the Higher Education Act of 1965, as amended, and
    applicable Title IV regulations.

-   Reviewed the academic files for selected high school students.

-   Reviewed State law regarding the age of compulsory school attendance

-   Reviewed Salem College's policies and procedures regarding the
    enrollment of high school students.

-   Reviewed a written agreement between Salem College and a local
    school board for the enrollment of high school students.

-   Interviewed Salem College officials.

We reviewed the files for the 35 high school students that Salem College
identified as being enrolled at Salem College during the audit period.

To evaluate Salem College's use of professional judgment and dependency
override actions we-

-   Reviewed financial aid files, student ledger cards, and other
    supporting documentation relating to professional judgment and
    dependency override.

-   Reviewed Title IV of the Higher Education Act of 1965, as amended
    (particularly Sections 479A and 480(d)).

-   Reviewed Salem College's OMB Circular A‑133 audit reports for the
    years ended 2002 and 2003.

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-   Reviewed disbursement data, application records, and other student
    related data from the Department's National Student Loan Data System
    (NSLDS) and the Computer Science Corporation.

-   Reviewed Salem College's drawdown and disbursement data using the
    Department's Grants Payment Administration System (GAPS) and
    Postsecondary Education Participants System (PEPS).

-   Interviewed Salem College officials involved in professional
    judgment and dependency override actions.

To evaluate the adequacy of documentation maintained to support
professional judgment actions, we reviewed a random sample of students
who received Pell Grant awards and whose Student Aid Report
(SAR)/Institutional Student Information Record (ISIR) reported comment
code 027 (estimated family contribution adjustment). This code indicates
that professional judgment had been applied. We identified a universe of
351 and 356 students who received Pell Grant funds during award years
2001-2002 and 2002-2003, respectively. Salem College reported
professional judgment decisions for 76 of the 351 Pell recipients in
award year 2001-2002 and 66 of the 356 Pell recipients in award year
2002-2003. Total Pell Grant awards distributed to the students who
received professional judgment actions was \$167,338 for award year
2001-2002 and \$167,950 for award year 2002-2003. To evaluate Salem
College's use of professional judgment actions, we selected a random
sample of 34 student files from award year 2001-2002 and 30 student
files from award year 2002-2003 for review. Total Pell Grant awards
distributed to the sampled students was \$81,350 for award year
2001-2002 and \$81,050 for award year 2002-2003**.**

To evaluate the adequacy of documentation maintained to support
dependency override actions, we reviewed the universe of students who
received Pell Grant awards and whose SAR/ISIR reported comment code 164
(dependency override). This code indicates that a dependency override
had been applied. We found that four students received Pell Grant funds
and dependency overrides during award years 2001-2002 and 2002-2003 (two
in each award year). Total Pell Grant awards distributed to the students
who received dependency override actions was \$7,500 for award year
2001-2002 and \$5,525 for award year 2002-2003. We reviewed all four
dependency override actions.

To evaluate the risk that professional judgment or dependency overrides
were used, but not reported, we selected a random sample of students who
received Pell Grant awards during the audit period and whose SAR/ISIR
did not report the use of professional judgment or dependency override
(i.e., no comment code 027 or 164). We identified a universe of 275
students in award year 2001-2002 and 290 students in award year
2002-2003 whose SARs/ISIRs were not coded as receiving professional
judgment or dependency override. We selected a random sample of 33
students from award year 2001-2002 and 35 students from award year
2002-2003 for review.

During the audit, we relied in part on computer-processed data contained
in Salem College's financial aid processing and disbursement
systems**.** We tested the accuracy and completeness of the data by
comparing Salem College's records to source documents and the data in
the Department's systems. Based on these tests and assessments, we
concluded that the data was sufficiently reliable for use in meeting the
audit objectives**.**

We conducted our audit work during the period March through May 2004,
and held an exit conference with Salem College on August 5, 2004. Our
audit was performed in accordance with generally accepted government
auditing standards appropriate to the scope of the review described
above.

STATEMENT ON INTERNAL CONTROLS

We did not assess Salem College's internal control structure applicable
to its institutional eligibility for participation in Title IV programs
because it was not necessary to achieve our objective related to
institutional eligibility.

As part of our audit, we gained an understanding of the controls over
professional judgment and dependency override determinations. We did not
assess the adequacy of the control structure applicable to the College's
use of professional judgment and dependency overrides to determine the
nature, extent, and timing of our testing. Instead, we relied on
substantive testing of financial aid and accounting records. Our review
of student files disclosed noncompliance with requirements for
professional judgment that led us to believe material weaknesses existed
in the College\'s controls over professional judgment. These weaknesses
and their effects are fully discussed in the AUDIT RESULTS section of
this report.

ADMINISTRATIVE MATTERS

If you have any additional comments or information that you believe may
have a bearing on the resolution of this audit, you should send them
directly to the following Education Department official, who will
consider them before taking final Departmental action on this audit:

Theresa S. Shaw

Chief Operating Officer, Federal Student Aid

U.S. Department of Education

Union Center Plaza

830 First Street, NE, Room 112G1

Washington, DC 20202

It is the policy of the U.S. Department of Education to expedite the
resolution of audits by initiating timely action on the findings and
recommendations contained therein. Therefore, receipt of your comments
within 30 days would be greatly appreciated.

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.

If you have any questions, please call me at 404‑562‑6477 or Assistant
Regional Inspector General Mary Allen at 404‑562‑6465.

> Sincerely,

**J. Wayne Bynum**

> J. Wayne Bynum
>
> Regional Inspector General

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