September 20, 2005

[ED-OIG/A03F0001]{.underline}

Ms. Theresa S. Shaw

Chief Operating Officer

Federal Student Aid

Union Center Plaza, Rm. 112G1

830 First Street, NE

Washington, DC 20202

Dear Ms. Shaw:

This *Final Audit Report* (Control Number ED-OIG/A03F0001) presents the
results of our audit of the School Eligibility Channel's (SEC) initial
review and quality control review process for electronic submissions of
institutions' financial statements through the Department's eZ-Audit
system.

# BACKGROUND

The School Eligibility Channel (SEC) is one of four principal components
within Federal Student Aid's Application, School Eligibility and
Delivery Services (ASEDS) organization. The SEC administers the process
by which institutions are determined to be eligible to participate in
the federal student financial assistance (SFA) programs and certifies
them for participation. This requires determining whether institutions
meet the regulatory requirements for administrative capability and
financial responsibility.

To provide the Department with the information necessary to evaluate an
institution's financial responsibility, institutions are required to
submit financial information to the Department every year. An
institution must provide this information in the form of audited
financial statements as part of a combined submission that also includes
the institution's compliance audit. Proprietary institutions have six
months from the end of their fiscal year to provide the combined
submission; public and private non-profit institutions have nine months.

The Department provided notice in the Federal Register on May 16, 2003
(Vol. 68, No. 95) of the implementation of a new electronic process for
submitting financial statements and compliance audits to the Department.
The Department's system for this electronic process is the eZ-Audit
system. Institutions are required to submit audits and financial
statements using eZ-Audit for submissions due on or after June 16, 2003.

eZ-Audit is a web-based, single point of submission for financial
statements and compliance audits to the Department. The new application
replaces a manual process and provides a paperless single point of
receipt and access through the web. Institutions are responsible for
entering summary audit and financial data into a web form and attaching
an electronic file or files containing the audits and auditor's reports.
Using the financial data entered by the institution eZ-Audit computes a
composite score. The composite score is an important factor in
determining an institution's financial responsibility under the
regulations. SEC did not use the composite score calculated by eZ-Audit
to evaluate financial responsibility, but had either a case team or the
Document Receipt and Control Center (DRCC) use a worksheet within
eZ-Audit to calculate an "official" composite score.

In response to the approval received from the Office of Management and
Budget (OMB) under the Paperwork Reduction Act, SEC developed an
eZ-Audit quality control process to demonstrate to OMB that the data
utilized by eZ-Audit is valid and reliable. SEC pledged to perform
quality control reviews on 100 percent of the eZ-Audit submissions in
the early stages of eZ-Audit. Based on its analysis of the quality
control data, on September 1, 2004, SEC decided to suspend the 100
percent quality control process. Effective October 1, 2004, SEC
instituted a revised quality control process based on sampling.

AUDIT RESULTS

We found that SEC did not establish and implement procedures that
provide reasonable assurance that all institutions\' required annual
financial statement data was entered accurately in eZ-Audit.
Specifically, we found that SEC did not have adequate internal controls
in place to ensure that all of the detailed financial information
entered by institutions into the eZ-Audit templates was accurate and
reliable. SEC did not utilize the composite scores computed by eZ-Audit,
based on the financial data entered by the institution, in evaluating
financial responsibility.

SEC and DRCC manually input financial data into an eZ-Audit worksheet
that computed the "official" composite score. We also found that the
official composite scores calculated by SEC and DRCC were not always
correct.

In an Interim Audit Memorandum we informed SEC of the following
conditions:

-   A regulatory exclusion, applicable only to private nonprofit
    institutions, of certain Title IV funds from the financial ratio
    calculations was improperly applied to proprietary institutions; and

-   The eZ-Audit system's program incorrectly excluded HEA program
    funds, from "total revenues" in calculating the financial ratios.

SEC took corrective action as a result of our Interim Audit Memorandum.

A draft of this report was provided to Federal Student Aid (FSA). In its
response, FSA indicated that it generally concurred with all of our
findings and recommendations and noted that it has either already
implemented or will be implementing actions to address the issues raised
in the audit's findings. We summarized FSA's response after each finding
and a copy of the complete response is provided as an attachment to this
report.

Finding No. 1 SEC Did Not Have Adequate Internal Controls to Ensure the
Accuracy of eZ-Audit Data Entered by Institutions

SEC did not have adequate internal controls to ensure that the detail
data entered by institutions into the eZ-Audit financial statement
templates was accurate and reliable. This occurred even though
institutional submissions during our audit period were evaluated twice,
once by DRCC and a second time by either the SEC's eZ-Audit Quality
Control (QC) Team or a Case Team. The DRCC, QC Team, and Case Teams
generally did not identify incorrect financial data entered by
institutions. The errors occurred in the eZ-Audit templates for the
balance sheet and income statement of proprietary institutions and the
statement of financial position and statement of activities of private
non-profit institutions.

We reviewed a sample of 28 financial statements submitted during the
period April 1, 2003, through September 30, 2004. We found one or more
incorrect data entries in the eZ-Audit financial statement templates for
all 28 financial statements. We classified an entry to be an incorrect
data entry when there were errors in the amount and/or classification of
an eZ-Audit financial statement template line item. For 25 of the 28
financial statements reviewed, the eZ-Audit financial statement
templates included unverifiable data entries. We classified an entry as
an unverifiable entry when the eZ-Audit financial statement template
line items could not be traced to the audited financial statements. The
following tables show the breakdown of the incorrect and unverifiable
data entries for the 15 proprietary and 13 private non-profit
institutions in our sample.

Analysis of Proprietary Institutions eZ-Audit Financial Statement
Templates

  ---------- -------------- ----------- -------------- ----------- -------------- ----------- --------------
             Balance Sheet                                         Income                     
                                                                   Statement                  

  Number of  Included Both  Included    Included       Correctly   Included       Included    Included
  Reports    Incorrect and  Incorrect   Unverifiable   reflected   Incorrect and  Incorrect   Unverifiable
  Analyzed   Unverifiable   Data        Data Entries   the audited Unverifiable   Data        Data Entries
             Data Entries   Entries                    B/S         Data Entries   Entries     

  15         3              1           1              10          12             1           2
  ---------- -------------- ----------- -------------- ----------- -------------- ----------- --------------

Analysis of Private Non-Profit Institutions eZ-Audit Financial Statement
Templates

  ---------- -------------- ----------- -------------- -------------- ----------- -------------- -----------
             Statement of                              Statement of                              
             Financial                                 Activities                                
             Position                                                                            

  Number of  Included       Included    Included       Included       Included    Included       Correctly
  Reports    Incorrect and  Incorrect   Unverifiable   Incorrect and  Incorrect   Unverifiable   Reflected
  Analyzed   Unverifiable   Data        Data Entries   Unverifiable   Data        Data Entries   the audited
             Data Entries   Entries                    Data Entries   Entries                    SOA

  13         7              4           2              5              5           1              2
  ---------- -------------- ----------- -------------- -------------- ----------- -------------- -----------

During our audit period, DRCC was required to review and compare the
audited financial statements to the financial data entered into the
eZ-Audit financial statement templates by institutions. If the DRCC
determined that there was a data entry error, the submission would be
deemed unacceptable and classified as incomplete.

An SEC official explained that a data entry error was an error in which
"the numbers \[in a financial statement template\] did not add up, e.g.
Total Current Assets on the financial statement are different from the
Total Current Assets on the template." A DRCC official added that, "a
report would only be considered incomplete for a major discrepancy such
as if the totals (Total Assets, Liabilities, Revenues, Expenses) between
the audited financial statements and the templates were not in
agreement." There was no requirement to evaluate the accuracy and
reliability of all the detail line items entered by the institutions. An
incomplete submission would be sent back to the institution for
resolution.

The DRCC also calculated the official composite score for non-flagged
institutional submissions by entering the required data elements into a
composite score worksheet in eZ-Audit. If the DRCC determined that all
amounts in the eZ-Audit financial statement templates were correct but
needed to make a change in the classification or treatment of an item
that impacted the composite score while calculating the official
composite score, it would document the change, flag the submission, and
refer it to a Case Team for review. The DRCC also referred submissions
that were flagged for any other reason to the Case Teams.

Case Teams were responsible for financial analysis of all flagged
financial statement submissions. Case teams reviewed classification or
treatment changes that impacted the official composite score. They did
not evaluate the accuracy or reliability of all the detail line items
entered by the institution.

Financial statement submissions that were not flagged were sent to the
eZ-Audit QC Team, which performed the same review steps as the DRCC.[^1]
Evaluating the accuracy and reliability all of the detail line items was
not part of the eZ-Audit QC Team's procedures. When the eZ-Audit QC Team
identified submissions needing further review and resolution, it
referred them to a Case Team.

SEC's initial review and quality control review procedures for the
electronic submissions of institutions' financial statements through
eZ-Audit did not require the DRCC, the eZ-Audit QC Team, or the Case
Teams to make certain all the line items in the eZ-Audit financial
statement templates were correct. Consequently, SEC cannot ensure the
reliability of all the data in the eZ-Audit financial statement
templates. Further, without reliable data, SEC will be unable to use the
eZ-Audit financial statement template data for the intended benefit of
performing data trending analysis.

SEC explained that:

> The breakout of the \[financial statement figures to the templates\] .
> . . is not relevant to the composite score . . . they are not verified
> as part of the acceptability review. The financial statement
> submissions are not rejected for this reason. . . . where this
> breakdown is material to the calculation of the composite score, the
> case team may request additional information from the institution. The
> financial statement submissions are not rejected for this reason.

We provided the results of our testing to SEC. In response SEC stated
that "\[t\]he information collected on the eZ-Audit template is not
intended for use in determining the composite score for an institution.
All institutions have a ratio analysis completed using the source
financial statements, and this is the official score used by the
Department to determine an institution's financial responsibility."

Pursuant to 5 C.F.R. § 1320.5(d)(1)(iii) "\[t\]o obtain OMB approval of
a collection of information, an agency shall demonstrate that it has
taken every reasonable step to ensure that the proposed collection of
information . . . \[has\] practical utility. The agency shall also seek
to minimize the cost to itself of collecting, processing and using the
information, but shall not do so by means of shifting disproportionate
costs or burdens onto the public."

At 5 C.F.R. § 1320.3(l), practical utility "means the actual, not merely
the theoretical or potential, usefulness of information to or for an
agency, taking into account its accuracy, validity, adequacy, and
reliability . . . ."

The detail line item data entered into the eZ-Audit templates do not
have practical utility as defined by OMB. The data are not accurate and
reliable and are not used by FSA in evaluating institutional financial
responsibility. Requiring institutions to provide information that is
not verified and not used can only be considered a burden on
institutions.

Subsequent to the completion of our audit fieldwork SEC provided
additional documentation regarding the eZ-Audit templates; however, that
information did not change our original conclusions.

Recommendation:

We recommend that the Chief Operating Officer (COO) for Federal Student
Aid (FSA):

1.  Either improve its processes for reviewing institutions eZ-Audit
    financial statement template data to ensure the accuracy and
    reliability of all the data or eliminate the requirement that
    institutions complete the financial statement templates as part of
    the eZ-Audit annual financial statement submission.

FSA's Reply:

FSA concurred with this recommendation. FSA's response states that:

> FSA agrees to improve its processes for reviewing the financial
> statements template data and is currently developing these
> improvements as part of the SEC Standardization project. The updated
> procedures are scheduled to be in place by the end of March 2006. SEC
> currently has a quality control process in place to review the
> acceptability of reviews conducted by the contractor. For non-flagged
> financial statements, FSA selects a statistical sample and tests the
> acceptability reviews previously conducted. Flagged financial
> statements are reviewed by SEC's School Participation Teams. The use
> of the templates facilitates the identification of schools that may
> pose a potential risk to the Federal Student Aid programs. These
> submissions are flagged for review immediately upon receipt.

OIG's Response:

While FSA agrees to improve its process for reviewing financial
statement template data, it does not address the conditions and issues
in the finding. There were two primary conditions identified in the
finding. The first was that institutions could not accurately enter the
detail line item data into the eZ-Audit financial statement templates.
The second was that FSA does not use and does not evaluate the detail
line item data entered by institutions.

While improved processes for reviewing the line item detail entered by
institutions into the eZ-Audit financial statement templates through the
SEC Standardization Project may help to correct institutions' input
errors, it will not address the problem of unverifiable amounts entered
into the detail line items. The unverifiable amounts occur because of
the broad latitude provided for in financial reporting with regard to
account classification. SEC cannot determine the correct amounts for
unverifiable financial statement template line items without extensive
communication with institutions. Unless a common chart of accounts is
required for all institutions, the financial statement template line
items will continue to include unverifiable amounts. FSA does not
explain how the Standardization Project will address this issue.

The quality control process for reviews conducted by SEC's contractor
during our audit period did not require an evaluation of the accuracy of
the detail line items in the eZ-Audit templates. The only change from
the quality control process used during our audit period and the one
currently in place was to replace a 100 percent review of the work
conducted by the contractor with a review of a sample of the work. The
quality control process used by SEC does not address the problem of
errors and unverifiable amounts in the detail line items of the eZ-Audit
templates. In addition, SEC has not established an acceptable error rate
to determine when a 100 percent review would again be required to
correct problems with the contractor's work.

FSA's response is silent on the fact that most of the detail line item
data entered by institutions is not used in evaluating financial
responsibility. Nor does FSA address the fact that the data problems
with the detail line items make it impossible to use the data for any
trend analysis in the future.

Finding No. 2 Institutions' Composite Scores Were Not Calculated
Correctly

Based on our review of a sample of 28 annual financial statements, we
identified 14 institutions where, the eZ-Audit composite score worksheet
screen data fields included incorrect amounts and or missing amounts.

-   For 8 of the 14 institutions the error(s) had no effect on the
    composite score calculation.

-   For 4 of the institutions the error(s) resulted in an incorrect
    composite score calculation; however, there was no effect on the
    composite score scale zone.

-   For 1 institution the error(s) resulted in an incorrect composite
    score calculation and incorrect composite score scale zone.[^2]

-   For 1 institution we were unable to properly calculate the composite
    score due to a generally accepted accounting principles (GAAP)
    violation.[^3]

We also found that for three institutions the eZ-Audit composite score
worksheet screen was not completed, although the eZ-Audit status of the
financial statements was Complete and Archived. [^4]

In order to participate in any of the Title IV, Higher Education Act
(HEA) programs, an institution must demonstrate that it is financially
responsible. An important factor in determining an institution's
financial responsibility status is its composite score. An institution's
composite score is determined by calculating the result of its primary
reserve, equity, and net income ratios (financial ratios). Once a
composite score is calculated, it is measured along a common scale from
negative one to positive three. The composite score could fall within
three composite score scale zones. The composite score scale zones are:

-   1.5 to 3.0 -- Financially responsible without further oversight.

-   1.0 to 1.4 -- "In the Zone." The institution is considered
    financially responsible but additional oversight is required.

-   -1.0 to .9 -- Not financially responsible. The school must submit a
    letter of credit for at least 50 percent of its Title IV funding.
    The school may be permitted to participate under provisional
    certification with a smaller letter of credit, for at least 10
    percent of its Title IV funding.

DRCC staff reviewed institutions' annual financial statements and
completed an eZ-Audit composite score worksheet screen for non-flagged
financial statements. For flagged financial statements, the Case Teams
completed an eZ-Audit composite score worksheet screen. Based on the
input of the financial data in the composite score worksheet screen,
eZ-Audit computed the institution's official composite score.

Although we did not determine the specific cause(s) for the incorrect
data entries on the composite score worksheet screens, they appear to be
the result of errors on the part of the DRCC and or Case Team staff. The
three financial statements that did not have a composite score worksheet
screen completed prior to being processed in eZ-Audit as Complete and
Archived appear to have been inadvertent omissions on the part of the
DRCC and Case Team staff.

Erroneous data fields in the composite score worksheet screens may
result in improper financial responsibility determinations.
Consequently, institutions that are not financially responsible may
continue to participate in the Title IV, HEA programs and Title IV HEA
program funds may be at risk.

Subsequent to the completion of our audit fieldwork, SEC provided
documentation indicating that:

-   A system edit would be implemented in eZ-Audit that will not allow a
    flagged or non-flagged submission to be archived without an ED
    composite score being completed.

-   A report of all submissions flagged and non-flagged that are
    archived in eZ-Audit without an ED composite score has been
    requested. SEC officials explained that the ED composite score would
    be calculated for any submissions listed on the report.

Recommendations:

We recommend that the COO for FSA:

1.  Ensure that the system edit is implemented and verify that the
    eZ-Audit system will not allow a flagged or non-flagged submission
    to be archived without an ED composite score being completed.

2.  Ensure that an official composite score has been calculated for all
    Complete and Archived annual financial statement submissions.

3.  Ensure that DRCC and Case Team staff properly complete the eZ-Audit
    composite score worksheet screen for all proprietary and private
    non-profit institutions.

FSA's Reply:

FSA concurred with these recommendations.

Finding No. 3 Regulatory Exclusion, Applicable Only to Private Nonprofit
Institutions, Was Improperly Applied to Proprietary Institutions

In an Interim Audit Memorandum dated May 17, 2005, we informed SEC that
we had reviewed a total of 39 proprietary institutions with eZ-Audit
composite scores of less than 1.5. We found two instances where SEC
entered the amount of FFEL and Pell Grant funds received, for the fiscal
year, by each institution, in the "HEA Program Funds Revenues" field in
the eZ-Audit composite score worksheet screen. The eZ-Audit system's
program incorrectly excluded the funds, from both "total expenses" and
"total revenues" in calculating the financial ratios.[^5]

The regulations provide that in certain circumstances funds received
under HEA grant programs can be excluded from the composite score
calculation. The regulations at 34 C.F.R. § 668.172(c)(5) specify that
the Secretary ---

> Excludes from the ratio calculation Federal funds provided to an
> institution by the Secretary under programs authorized by the HEA only
> if ---
>
> \(i\) In the notes to the institution's audited financial statement,
> or as a separate attestation, the auditor discloses by name and CFDA
> number, the amount of HEA program funds reported as expenses in the
> Statement of Activities for the fiscal year covered by that audit or
> attestation; and
>
> \(ii\) The institution's composite score, as determined by the
> Secretary, is less than 1.5 before the reported expenses arising from
> those HEA funds are excluded from the ratio calculations.

While the regulation permits the exclusion of HEA program funds from
reported expenses, the regulation does not provide for a corresponding
reduction in revenue.

In the preamble to the final regulations the Secretary explained the
application of this provision in response to a commenter who suggested
eliminating Title IV expenditures from "total expenses." The Secretary
stated that ---

> . . . most Title IV, HEA program funds will not be included in total
> expenses of colleges and universities. For example, payments made to
> those institutions under the Direct Loan, Federal Family Education
> Loan, Federal Pell Grant, and Federal Supplemental Educational
> Opportunity Grant programs are not included in total expenses reported
> on the statement of activities.

The Secretary further stated that ---

> . . . in certain instances sponsored program expenses should be
> excluded from the ratio calculations. The Secretary believes that an
> institution that receives HEA grant program funds, especially those
> associated with programs that strengthen institutions or expand access
> to higher education, should not fail the composite score **solely**
> because of the expenditure of those funds. Therefore, the amount of
> HEA funds that an institution reports as expenses in its Statement of
> Activities for a fiscal year are excluded from the ratio calculations,
> but only if those reported expenses **[alone]{.underline}** are
> responsible for the institution's failure to achieve a composite score
> of 1.5 for that fiscal year.[^6] \[emphasis added\]

Proprietary institutions are not eligible to participate in the HEA
programs that would result in the type of expense that would be
excluded. Both the preamble and the regulation reference the "statement
of activities" which, under Generally Accepted Accounting Principles, is
included in the financial statements of nonprofit institutions.
Proprietary institutions have an income statement.

In its response to the memorandum FSA agreed with the OIG findings and
stated:

> We have identified 16 schools (11 proprietary and five non-profit)
> where the regulatory exclusion was applied and are taking the
> following corrective actions:

-   Immediately issued new/amended Performance Improvement Procedures to
    the School Participation Teams and contractor for properly applying
    the regulatory exclusion -- completed June 1, 2005;

-   Analyzed the 16 affected schools to determine the impact of the
    composite score calculation error -- completed June 8, 2005;

-   Develop action plan for each school -- to be completed by June 16,
    2005; and

-   Initiate system changes to correct worksheet calculation and
    eliminate proprietary schools -- to be completed by June 26, 2005.
    Manual workarounds are in place until the system changes are
    implemented.

On June 16, 2005, FSA provided us with documentation confirming that the
corrective actions had been taken.

FSA's Reply:

FSA concurred with the finding.

OTHER MATTERS

[SEC's Quality Control Process did not ensure that all the eZ-Audit
Financial Statement Information Screens were completed
correctly]{.underline}

We noted an error on the eZ-Audit Financial Statement Information Screen
for 4 of the 30 financial statements reviewed.[^7] On June 1, 2005, we
informed the SEC that in two instances the institutions provided
incorrect auditor information, and in another two instances the
institutions failed to provide the audit opinion type for the financial
statements.

On June 27, 2005, SEC provided the following response regarding these
issues:

> The auditor information is verified and entered in the database at the
> time of resolution by the School Participation Team, if the financial
> statements are flagged, or by the eZ-Audit Team if the financial
> statements are not flagged. The auditor information for these schools
> will be corrected. . . .
>
> The eZ-Audit system has edit checks that do not allow a submission to
> be accepted at all if this field \[opinion type\] is blank. A systems
> error caused the data not to display, however, the data is saved on
> the database. This error was reported and is currently being
> investigated. In these cases the financial statements show that the
> audit opinion was unqualified. The submission summary shows that the
> submission was flagged for other reasons but not for a "qualified"
> opinion therefore, the system is treating this as an unqualified
> opinion.

Subsequent to the completion of our audit fieldwork SEC provided
documentation indicating that:

-   The auditor information for the two schools was corrected.

-   An eZ-Audit production support request had been prepared to ensure
    that the opinion type field data displays properly.

OBJECTIVE, SCOPE AND METHODOLOGY

The objective of our audit was to determine whether FSA's SEC
established and implemented procedures that provide reasonable assurance
that all institutions' required annual financial statement data is
entered accurately in eZ-Audit.

To accomplish our objective, we obtained and analyzed a data file that
SEC provided. This file listed every financial statement report received
through eZ-Audit during the period April 1, 2003, through September 30,
2004. The file included all types of financial statements. We limited
our universe to include 2,490 annual financial statement submissions
that had a status of complete and archived for this period. We randomly
selected and reviewed the eZ-Audit financial statement data for 30
financial statement reports from the universe of 2,490 complete and
archived annual financial statement submissions. The 30 financial
statement reports included:

-   15 proprietary institutions;

-   13 private non-profit institutions; and

-   2 public institutions.

We determined whether the regulatory exclusion of certain Title IV funds
from the financial ratio calculations, applicable only to private
non-profit institutions, was applied properly. To accomplish this we
reviewed eZ-Audit financial statement data for a sample of 50 financial
statement reports randomly selected from the universe of 252 complete
and archived annual financial statement reports, submitted through
eZ-Audit during the period April 1, 2003, through September 30, 2004,
that had a flag reason field of "fail" or "zone."

We reviewed SEC's procedures for the initial review and quality control
reviews of electronic submissions of institutions' financial statements
through the eZ-Audit system. We also interviewed DRCC and SEC personnel
to obtain an understanding of these procedures.

We did not rely on computer-processed data contained in the Department's
eZ-Audit system. However, we determined the universe of eZ-Audit
computer-processed data (for financial statements received through
eZ-Audit during the period April 1, 2003, through September 30, 2004)
was complete. We compared the eZ-Audit data for our sample of 30
financial statement reports to source documents. Therefore, we believe
the data used was adequate for sampling and testing purposes for our
audit objective.

We conducted our on-site fieldwork at SEC's headquarters in Washington,
DC. from November 8, 2004, through November 10, 2004, and from November
15, 2004, through November 16, 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 CONTROL

We have made a study and evaluation of SEC's internal control to ensure
the accuracy of eZ-Audit financial statement data for the period April
1, 2003 through September 30, 2004. Our study and evaluation was
conducted in accordance with Government Auditing Standards.

For the purpose of this report, we assessed and classified the
significant internal control into the following category:

Procedures for the initial review and quality control reviews of
electronic submissions of institutions' financial statements through the
Department's eZ-Audit system.

The management of SEC is responsible for establishing and maintaining
internal control. In fulfilling this responsibility, estimates and
judgments by management are required to assess the expected benefits and
related costs of control procedures. The objective of internal control
over the eZ-Audit system is to provide management with reasonable, but
not absolute, assurance that institutions' eZ-Audit financial statement
data is valid and reliable.

Because of inherent limitations in any internal control structure,
errors or irregularities may occur and not be detected. Also, projection
of any evaluation of the system to future periods is subject to the risk
that procedures may become inadequate because of changes in conditions,
or that the degree of the compliance with the procedures may
deteriorate.

Our assessment disclosed weaknesses in SEC's internal control for the
period April 1, 2003, through September 30, 2004, which, in our opinion,
result in more than a relatively low risk that errors, irregularities
and other inefficiencies may occur resulting in inefficient and/or
ineffective performance. These weaknesses are fully described 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 of Education
officials.

Corrective actions proposed and implemented by your office will be
monitored and tracked through the Department's Audit Accountability and
Resolution Tracking System (AARTS). ED policy requires that you develop
a final corrective action plan (CAP) for our review in the automated
system within 30 days of the issuance of this report. The CAP should set
forth the specific action items, and targeted completion dates,
necessary to implement final corrective actions on the findings and
recommendations contained in this final audit report.

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.

We appreciate the cooperation given us during this review. If you have
any questions, please call Bernard Tadley, Regional Inspector General
for Audit, at 215-656-6279.

/s/

Helen Lew

Assistant Inspector General for Audit

Attachment

Attachment - Auditee's Response

![](media/image1.png){width="0.8965277777777778in"
height="0.8444444444444444in"}

[FEDERAL]{.underline}

[STUDENT AID]{.underline}

*We Help Put America Through School*

CHIEF OPERATING OFFICER

> SEP 12 2005

TO: Bernard Tadley

> Regional Inspector General for Audit

FROM: Theresa S. Shaw

Chief Operating Officer

SUBJECT: Draft Audit Report

> School Eligibility Channel's Review Process for eZ-Audit Financial
> Submissions

ED-OIG/A03-F0001

This is in response to your August 11, 2005 Draft Audit Report. In
general, FSA agrees with the OIG findings and recommendations. The
following responses address the referenced findings and recommendations
in the memorandum.

**Finding 1: School Eligibility Channel (SEC) Did Not Have Adequate
Internal Controls to Ensure the Accuracy of eZ-Audit Data Entered by
Institutions.**

**Recommendation 1.1: Either Improve its processes for reviewing
institutions eZ-Audit financial statement template data to ensure the
accuracy and reliability of all the data or eliminate the requirement
that institutions complete the financial statement templates as part of
the eZ-Audit annual financial statement submission.**

**FSA Response:** FSA agrees to improve its processes for reviewing the
financial statements template data and is currently developing these
improvements as part of the SEC Standardization project. The updated
procedures are scheduled to be in place by the end of March 2006. SEC
currently has a quality control process in place to review the
acceptability of reviews conducted by the contractor. For non-flagged
financial statements, FSA selects a statistical sample and tests the
acceptability reviews previously conducted. Flagged financial statements
are reviewed by SEC's School Participation Teams. The use of the
templates facilitates the identification of schools that may pose a
potential risk to the Federal Student Aid programs. These submissions
are flagged for review immediately upon receipt.

**Finding 2: Institutions' Composite Scores Were Not Calculated
Correctly.**

**Recommendation 2.1: Ensure that the system edit is implemented and
verify that the eZ-Audit system will not allow a flagged or non-flagged
submission to be archived without an ED composite score being
calculated.**

*830 First Street, NE, Washington, DC 20202*

*1-800-4-FED-AID*

*www.studentaid.ed.gov*

**FSA Response:** FSA agrees with the recommendation and will implement
an enhancement to the eZ-Audit system planned for February 24, 2006, as
part of a scheduled eZ-Audit release. Beginning in August 2005, and
until the system edit is implemented a monthly report will be used to
identity submissions where an ED composite score has not been
calculated.

**Recommendation 2.2:** **Ensure that an official composite score has
been calculated for all Complete** an**d Archived annual financial
statement submissions.**

**FSA Response:** FSA agrees with the recommendation and has identified
those financial statement submissions where an ED composite score has
not been calculated. A composite score calculation will be completed for
these submissions by December 31, 2005.

**Recommendation 2.3: Ensure that the Document Receipt and Control
Center (DRCC) and Case Team staff properly complete the eZ-Audit
composite score worksheet screen for all proprietary and private
non-profit institutions.**

**FSA Response:** FSA has a quality control process in place to review
the composite scores completed by the contractor. As errors are
identified, they are communicated to DRCC and documented, and
modifications are made to established procedures as appropriate. As part
of the SEC Standardization project, SEC will be strengthening its
procedures regarding the completion of the composite score worksheets by
the Case Team and DRCC staff and will implement quality control
processes to ensure that the composite score worksheets are properly
completed. This is scheduled for implementation by the end of March
2006.

**Finding 3: Regulatory Exclusion, Applicable Only to Private Nonprofit
Institutions, Was Improperly Applied to Proprietary Institutions.**

**FSA Response:** FSA agreed with the OIG findings and provided
documentation on June 16, 2005, to confirm that corrective actions were
taken.

If you have any questions, you may contact Molly Wyatt, Director,
Integrated Partner Management/eZ-Audit at (202) 377-3358.

cc: Pat Howard

[^1]: During the period April 1, 2003, through June 22, 2004, the
    eZ-Audit QC Team also reviewed flagged financial statement
    submissions.

[^2]: SEC's calculated composite score was -.1 and our calculated
    composite score was 1.5.

[^3]: We noted that in three of the annual financial statements reviewed
    the statement of financial position did not conform to the format
    required by GAAP. As a result, there was insufficient information in
    the financial statements to properly calculate the composite scores.
    For two of the three financial statements we were able to obtain the
    necessary information from the institution and or the CPA firm to
    properly calculate the composite scores.

[^4]: During our review, we notified SEC that the eZ-Audit composite
    score worksheet screens had not been completed for three
    institutions' financial statements. Two of the three institutions
    were identified during our review of the sample of 28 financial
    statements. SEC completed the composite score worksheet screens for
    these two institutions. A third institution's (ABI-Accu Tech
    Business Institute, OPEID 02288900) financial statement, for the
    fiscal year ended May 31, 2003, was identified during our review of
    a sample of 50 institutions with composite scores less than 1.5. Its
    composite score worksheet screen has not yet been completed.

[^5]: Total expenses and total revenues are components of the primary
    reserve and net income ratio calculations, respectively.

[^6]: 62 Fed. Reg. 62,830, 62,845-6 (Nov. 25, 1997).

[^7]: Public institutions are required to complete the eZ-Audit
    Financial Statement Information Screen.