December 11, 2003

**CONTROL NUMBER**

**ED-OIG****/A05-D0020**

Mr. Rome Alexander, Executive Director

The Alexander Institute

235 East 6^th^ Street

St. Paul, MN 55101

Dear Mr. Alexander:

This **Final Audit Report** presents the results of our audit of the
administration of the Federal Pell Grant (Pell) program by The Alexander
Institute (Institute) during the period September 28, 2000, through June
30, 2003. Our objective was to determine whether the Institute
administered this program in accordance with Title IV of the Higher
Education Act of 1965, as amended (HEA), and selected program
regulations.

Our audit identified serious deficiencies in the Institute\'s
administration of the Pell program**.** The Institute did not have (1)
an adequate system of records to account for Pell funds or document
students\' eligibility to receive Pell funds, and (2) written polices
and procedures for administering the program. Based on these
deficiencies, we have concluded that the Institute cannot adequately
administer the Pell program. These deficiencies were previously
identified during various audits and reviews by the Institute\'s
independent public accountant, accrediting agency, State licensing
agency, and Federal Student Aid (FSA). The Institute asserted in its
corrective action plans to the compliance audits that these deficiencies
were corrected. However, our audit disclosed that the Institute did not
correct the deficiencies. (See the Attachment for deficiencies
identified in prior audits and reviews and the Institute's assertions of
corrective action.)

We are recommending that the Chief Operating Officer for FSA instruct
the Institute to conduct a complete file review and document each
disbursement made during the audit period. To the extent the Institute
cannot document a disbursement, it should refund the amount disbursed,
up to \$1,718,869, which represents all Pell funds it received from
September 28, 2000, through June 30, 2003.

We provided a draft of the report to the Institute. The Institute did
not submit any comments. Subsequent to the issuance of our draft report,
the Administrative Actions and Appeals Division of FSA sent a notice
imposing an emergency action and initiating a termination action against
the Institute, based on its loss of accreditation. As a result of the
initiation of a termination action against the Institute, we eliminated
our recommendation that the Chief Operating Officer deny the
Institute\'s application to renew its provisional certification and our
recommendation that the Chief Operating Officer take appropriate 34
C.F.R. Subpart G action.

**AUDIT RESULTS**

**Finding No. 1 Serious Deficiencies Demonstrate that the Institute
Cannot Administer the Pell Program**

The Institute was not in compliance with the standards of administrative
capability contained in 34 C.F.R. § 668.16, which state that to "begin
and to continue to participate in any Title IV, HEA program, an
institution shall demonstrate to the Secretary that it is capable of
adequately administering that program." The Institute did not have an
adequate system of records or written policies and procedures for
administering the Pell program. In its July 17, 2003, written
representations, the Institute asserted that it cannot state that
material transactions were recorded in the accounting system or that
computer-processed data presents fairly the administration of the Pell
program. Also, the Institute awarded and disbursed Pell funds based on
credit hours that were not calculated in accordance with the
regulations. From September 28, 2000, through June 30, 2003, the
Institute received Pell funds totaling \$1,718,869. Because the
Institute could not account for Pell funds or document its students'
eligibility to receive Pell funds, we are recommending that it refund up
to \$1,718,869.

**Inadequate System of Records**

Contrary to assertions it made to resolve prior audits, the Institute
did not have a system of records that adequately accounted for Pell
funds or documented students\' eligibility for the Pell funds received.
The records either were missing, incomplete, or contained conflicting
data. The regulations at 34 C.F.R §668.16(d) specify that an institution
is administratively capable if, among other requirements, it
"\[e\]stablishes and maintains records required under this part and the
individual Title IV, HEA program regulations . . . . ." The records
requirements for participating institutions are contained in 34 C.F.R. §
668.24. Among other requirements, an institution shall:

-   "document -- Its disbursement and delivery of Title IV, HEA program
    funds." (34 C.F.R. § 668.24(a)(6))

-   "establish and maintain on a current basis -- Financial records that
    reflect each HEA, Title IV transaction . . ." (34 C.F.R. §
    668.24(b)(2)(i))

-   "maintain\... Documentation of each student's or parent borrower's
    eligibility for Title IV, HEA program funds . . . ." (34 C.F.R. §
    668.24(c)(1)(iii))

*[Records did not adequately document Pell disbursements]{.underline}*.
For the 2000-2001 and 2001-2002 award years, the Institute could not
adequately document Pell disbursements to individual students. According
to the Institute, the original student account cards were either missing
or incomplete. The Institute reconstructed the student account cards for
the two years. However, it could not determine the specific Pell
disbursement dates, so it recorded the disbursements by quarter. Our
audit identified inaccuracies in the reconstructed account cards.
Therefore, we could not rely on these records. The fiscal year 2000 and
2001 compliance audits reported a similar finding.

According to the U.S. Department of Education's (Department) records,
the Institute drew down \$63,673 more for the 2000-2001 and 2001-2002
award years than Institute records indicated it had disbursed to
students. In 2003, the FSA Office of the Chief Financial Officer placed
a hold on the Institute's Pell funds. According to an Institute
official, FSA put the hold on the funds because the Institute has a
liability of about \$30,000 based on its 2001 compliance audit in
addition to being unable to support the full amount of Pell funds drawn
down.

*[Student records did not document eligibility for Pell funds
received]{.underline}*. The Institute did not maintain records for the
2000-2001, 2001-2002, and 2002-2003 award years that adequately
documented student eligibility, student Pell award calculations and
disbursements, student refund calculations, and return of funds. We
randomly selected 45[^1] students for our file review, 15 from each of
the three award years. We identified one or more document deficiencies
for each student. The deficiencies, which primarily related to
statements of account and academic transcripts, consisted of missing
documents or documents that contained partial or conflicting data. We
found that data in the student statements of account did not always
agree with data in the academic transcripts, and data in those records
did not always agree with data in the National Student Loan Data System.
Based on the 100 percent error rate, we concluded that the Institute had
a systemic problem, and we could not rely on the student records. The
Minnesota Higher Education Services Office cited this deficiency in its
fiscal year 2002 audit of State grant payments for individual students.

**Lack of Written Policies and Procedures**

The regulations at 34 C.F.R. § 668.16(b)(4) provide that an institution
is considered to have administrative capability if, among other
requirements, the institution "\[h\]as written procedures for or written
information indicating the responsibilities of the various offices with
respect to the approval, disbursement, and delivery of Title IV, HEA
program assistance . . . ." The Institute did not have written polices
and procedures that described responsibilities for the approval,
disbursement, and delivery of Pell funds.

The Institute supposedly implemented policies and procedures in response
to prior audit findings. The Institute provided us with a binder that it
claimed contained its policies and procedures for administering the Pell
program. Our review disclosed that the binder actually contained the
policies and procedures for a different institution. The manual was
written for an institution that was on a semester-based academic year
and participated in the loan programs. The Institute offered its
programs on a quarter-based academic year and participated only in the
Pell program. The manual refers to offices and positions that the
Institute did not maintain, and included forms, with the other
institution\'s letterhead, that the Institute did not use. The Institute
made no modifications to the policies and procedures to fit its academic
year or program participation.

#### Not in Compliance with the Clock/Credit Hour Conversion Requirements

The Institute calculated Pell awards based on credit hours approved by
its accrediting agency and State licensing agency. Those credit hours
were not calculated in accordance with the Department\'s regulations at
34 C.F.R. § 668.8(l) and were overstated for Title IV purposes.
According to the Institute\'s catalog, the Medical Assistant, Medical
Administrative Assistant, and Medical Transcription programs were 59,
40, and 43 credit hours consisting of 996, 600, and 660 clock hours of
instruction, respectively. Based on the credit hour formula in 34 C.F.R.

§ 668.8(l), a quarter hour must include at least 20 hours of instruction
unless, per 34 C.F.R.

§ 668.8(c)(1), the program is at least two years in length and provides
an associate, bachelor\'s, or professional degree. After applying the
formula, the Institute\'s programs were only 49 (rounded downward), 30,
and 33 credits, respectively. As a result, the Institute calculated Pell
awards based on overstated credit hours and overawarded Pell to
students.

**Recommendations**

We recommend that the Chief Operating Officer for FSA

1.  instruct the Institute to perform a complete file review and
    document each disbursement to each student for the 2000-2001,
    2001-2002, and 2002-2003 award years. The Institute must document an
    Institutional Student Information Record for each student, each
    student\'s enrollment status for each payment period, and the
    student\'s attendance at each course making up the student\'s
    enrollment status during that payment period. Failure to properly
    document a disbursement would result in a liability, which could
    total \$1,718,869, that must be repaid.

**BACKGROUND**

The Institute is a proprietary school with campuses in Minneapolis and
St. Paul, Minnesota. During the audit period, the Institute offered
Medical Assistant, Medical Administrative Assistant, and Medical
Transcription diploma programs. The Department granted it provisional
certification to participate in the Title IV, HEA programs on September
28, 2000. The provisional certification expired September 30, 2003.
Although the Institute was eligible to participate in all Title IV, HEA
programs, it chose to participate only in the Pell program. The
Accrediting Bureau of Health Education Schools accredited the Institute,
and the Minnesota Higher Education Services Office licensed it. During
the period September 28, 2000, through June 30, 2003, the Institute
received \$1,718,869 of Pell funds.

**OBJECTIVE, SCOPE, AND METHODOLOGY**

The objective of our audit was to determine whether the Institute
administered the Pell program in accordance with the HEA and selected
program regulations during the period September 28, 2000, through June
30, 2003. Specifically, we attempted to evaluate

\(1\) institutional and program eligibility, (2) cash management and
financial responsibility, and (3) selected administrative and compliance
requirements. The selected administrative and compliance requirements
included student eligibility, Pell award calculations and disbursements,
and return of funds and overpayments.

To accomplish our audit objective, we

1\. reviewed the Institute\'s written polices and procedures, course
catalog, accounting records, student financial assistance and academic
files, student account cards, academic transcripts, attendance records,
and bank records;

2\. reviewed the financial statement and compliance audit reports for
the six-month period ended December 31, 2000, and year ended December
31, 2001, and the corresponding compliance and 90/10 computation work
papers;

3\. reviewed FSA, State, and accrediting agency documents;

4\. reviewed Department data from the Postsecondary Education
Participants System, Grants Administration and Payments System, and
National Student Loan Data System;

5\. reviewed 43 randomly selected student files (15 of 124 Pell
recipients for the 2000-2001 award year, 13[^2] of 252 Pell recipients
for the 2001-2002 award year, and 15 of 278 Pell recipients for the
2002-2003 award year); and

6\. interviewed Institute, FSA, State licensing agency, and accrediting
agency officials.

We conducted our fieldwork at the Institute\'s administrative office in
St. Paul, Minnesota, from April 9, 2003, through July 15, 2003, and made
a site visit to the Minneapolis campus on April 23, 2003. We discussed
the results of our audit with Institute officials on July 17, 2003.

We asked the Institute to provide written representations concerning the
competence of the evidence we obtained (paragraph 6.55 of the government
audit standards, 1994 revision; paragraph 7.54 of the 2003 revision).
The Institute could not provide these representations; therefore, a
scope limitation exists. Although the July 17, 2003, representations
included a confirmation that no current employee deliberately or
fraudulently adversely influenced administration of the Pell program,
the Institute did not make that same confirmation for former employees
involved in program administration during the audit period. The
representations stated that, for various reasons, the Institute provided
us incorrect information. In addition, the representations asserted that
the Institute cannot state that material transactions have been properly
recorded in the accounting records, and it cannot state that
computer-processed data provided to us fairly presents the Pell program.
Subject to the scope limitation described above, our audit was performed
in accordance with generally accepted government auditing standards
appropriate to the scope of our audit.

**STATEMENT ON MANAGEMENT CONTROLS**

As part of our audit, we did not assess the adequacy of the Institute\'s
management control structure applicable to its Pell program to determine
the nature, extent, and timing of our testing. Instead, we relied on
substantive testing of financial aid, academic, and accounting records.
Our review of student files disclosed significant noncompliance with
federal regulations that led us to believe material weaknesses existed
in the Institute\'s controls over the Pell program. These weaknesses and
their effects are fully discussed in the AUDIT RESULTS section of this
report.

**ADMINISTRATIVE MATTERS**

Statements that managerial practices need improvements, as well as other
conclusions and recommendations in this report, represent the opinions
of the Office of Inspector General. Determinations of corrective action
to be taken will be made by the appropriate Department officials.

If you have 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 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, Mail Stop 5132

Washington, DC 20202

It is the Department's policy 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.

> Sincerely,

/s/

## Richard J. Dowd

## Regional Inspector General

## for Audit

## **PRIOR AUDITS AND REVIEWS**

**DEFICIENCIES REPORTED AND CORRECTIVE ACTION INDICATED**

## Since beginning its participation in the Title IV programs, the Institute has had a history of noncompliance and financial problems.

-   The Institute\'s independent public accountant issued an adverse
    opinion on its fiscal year 2000 and 2001 compliance audits. Both
    audits disclosed material noncompliance, citing a lack of
    administrative capability and the lack of an audit trail for Pell
    program funds. The Institute agreed with the findings in both
    reports. As of August 6, 2003, the Department had not received the
    Institute's compliance audit for 2002, which was due June 30, 2003.

> The Institute stated in its corrective action plan to the 2000 and
> 2001 compliance audits that these deficiencies had been corrected. In
> response to the administrative capability finding, the Institute
> stated all policies, procedures, and internal controls had been
> implemented. In response to the audit trail finding, the Institute
> stated it took action so that adequate audit trails were recorded for
> disbursement of Pell funds by keeping records via both batch and
> individual student accounting records for receipt and disbursement of
> Pell funds. As indicated in the AUDIT RESULTS section of this report,
> the stated corrective action has not occurred.

-   The Institute's financial statement audits for fiscal year 2000 and
    2001 included a going concern note.

-   Based on the financial statements, FSA calculated a composite score
    of negative 1.0 for fiscal year 2000, and negative 0.13 for fiscal
    year 2001. As a result, FSA requested a Letter of Credit equal to 20
    percent of the Institute's Title IV funding or \$140,000.

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-   The Minnesota Higher Education Services Office (MHESO) audited the
    Institute twice. The first audit had four findings. The second audit
    had eight findings. MHESO expanded the second audit due to the large
    number of exceptions relating to academic transcripts and statements
    of accounts. This audit included findings that constitute a lack of
    capability to administer the program.

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-   The Accrediting Bureau of Health Education Schools (ABHES) performed
    one review of the Institute in 2003. ABHES notified the Institute on
    July 22, 2003, that its accreditation was being withdrawn, subject
    to the right to appeal. Some of the ABHES findings are:

1\. The Institute does not demonstrate that students complete their
programs.

2\. Management does not demonstrate ethical and responsible practices.

> 3\. The Institute does not evidence compliance with all local, State,
> and federal laws.

4\. The Institute does not demonstrate that it takes responsibility for
its recruiting representatives, and does not ensure they act in an
ethical and responsible manner.

5\. The Institute does not make refunds within 30 days of the determined
withdrawal date.

6\. ABHES has not approved all the Institute\'s programs.

7\. The St. Paul campus faculty does not consist of qualified
individuals.

8\. The physical plant and equipment are not appropriate, and do not
comply with all local, State, and federal safety requirements.

-   FSA conducted two program reviews. The first program review included
    a finding on lack of administrative capability. The second program
    review, which did not cite a lack of administrative capability, did
    include five findings.

[^1]: We reviewed 43 student files; 15 of 124 Pell recipients for the
    2000-2001 award year, 13 of 252 Pell recipients for the 2001-2002
    award year, and 15 of 278 Pell recipients for the 2002-2003 award
    year. The Institute could not locate files for 2 students selected
    from the 2001-2002 award year. We consider the missing files as a
    missing document deficiency.

[^2]: We selected 15 students for file review. However, the Institute
    could not locate files for 2 students. We consider the missing files
    as a missing document deficiency.