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  Review of Federal Student Aid's Monitoring of Guaranty Agency
  Compliance with the Establishment of the Federal Fund and the Operating
  Fund

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## FINAL INSPECTION REPORT

![](media/image1.pct)

**ED-OIG/I13H0001**

**September 2007**

+-------------------------+----------------------+---------------------+
| Our mission is to       | !                    | U.S. Department of  |
| promote the efficiency, | [](media/image2.bmp) | Education           |
| effectiveness, and      |                      |                     |
| integrity of the        |                      | Office of Inspector |
| Department\'s programs  |                      | General             |
| and operations.         |                      |                     |
|                         |                      | Washington, DC      |
+-------------------------+----------------------+---------------------+

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.

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.

> ![](media/image3.png){width="0.9in"
> height="0.8604166666666667in"}**UNITED STATES DEPARTMENT OF
> EDUCATION**

OFFICE OF INSPECTOR GENERAL

Evaluation and Inspection Services

#####  {#section .Enclosure-Number}

##### Memorandum {#memorandum .Enclosure-Number}

**TO:** Lawrence Warder

Acting Chief Operating Officer

Federal Student Aid

**FROM:** George A. Rippey

Acting Assistant Inspector General for Audit

**SUBJECT:** Final Inspection Report

Review of Federal Student Aid's Monitoring of Guaranty Agency Compliance
with the Establishment of the Federal Fund and the Operating Fund

Control Number ED-OIG/I13H0001

Attached is the final inspection report that covers the results of our
review of Federal Student Aid's Monitoring of Guaranty Agency Compliance
with the Establishment of the Federal Fund and Operating Fund. We
received your comments to our draft report on August 14, 2007. A copy of
your responses to the draft report in their entirety is attached.

We also received your draft corrective action plan (CAP) with your
response. Corrective actions proposed (resolution phase) and implemented
(closure phase) will be monitored and tracked 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 reports 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 or
your staff have any questions, please contact W. Christian Vierling,
Director, Evaluation and Inspection Services at 202-245-6964.

Enclosure

TABLE OF CONTENTS

[**EXECUTIVE SUMMARY 1**](#__RefHeading___Toc176920528)

[BACKGROUND 3](#__RefHeading___Toc176920529)

[INSPECTION RESULTS 5](#__RefHeading___Toc176920530)

[FINDING -- The Work Performed by FSA on the 27 Guaranty Agencies Not
Audited by OIG Provides No Assurance That the Federal and Operating
Funds Were Established in Compliance with the HEA
5](#finding-the-work-performed-by-fsa-on-the-27-guaranty-agencies-not-audited-by-oig-provides-no-assurance-that-the-federal-and-operating-funds-were-established-in-compliance-with-the-hea)

[RECOMMENDATIONS 17](#__RefHeading___Toc176920532)

[FSA COMMENTS 18](#__RefHeading___Toc176920533)

[OBJECTIVE, SCOPE, AND METHODOLOGY 21](#__RefHeading___Toc176920534)

[ATTACHMENT: FSA RESPONSE TO DRAFT INSPECTION REPORT
22](#__RefHeading___Toc176920535)

[]{#__RefHeading___Toc176920528 .anchor}EXECUTIVE SUMMARY

This report provides the results of our *Review of Federal Student Aid's
Monitoring of Guaranty Agency Compliance with the Establishment of the
Federal Fund and the Operating Fund*. Our inspection objective was to
determine the adequacy of Federal Student Aid's (FSA's) support for its
conclusions concerning the establishment of the Federal Fund and the
Operating Fund at the 27 guaranty agencies not audited by the Office of
Inspector General (OIG).[^1]

FSA provided us with all of the documentation it used to draw its
conclusion that the Federal and Operating Funds were established in
compliance with the Higher Education Act of 1965, as amended by the
Higher Education Amendments of 1998 (enacted on October 7, 1998) (HEA)
and regulations. We found that the work performed by FSA on the 27
guaranty agencies not audited by OIG provides no assurance that the
Federal and Operating Funds were established in compliance with the HEA.
Specifically, we identified the following issues:

A.  FSA's documentation indicates that the liquid assets of the Federal
    Fund were established incorrectly at 16 of the 27 guaranty
    agencies.[^2] Furthermore, FSA's documentation for the other 11
    guaranty agencies does not contain enough information to draw
    conclusions on the establishment of the Federal and Operating Funds.

B.  The work originally performed by Financial Partner Services
    (FPS)[^3] and reviewed by the Corrective Action Plan (CAP)
    Verification Leads[^4] was not sufficient to assess usage fees for
    non-liquid assets, as required by the regulations, at 22 of the 27
    guaranty agencies. For 20 of the 27 guaranty agencies there was no
    evidence of review for questionable purchases.

C.  FPS management assigned CAP Verification Leads to assess the
    sufficiency of their own prior FPS program reviews.

D.  FPS' actions show a lack of consideration for the monitoring
    standard from the Government Accountability Office's (GAO's)
    *Standards for Internal Control in the Federal Government*.

We recommend that the Chief Operating Officer for FSA --

1.  Perform onsite program reviews to examine supporting records for the
    establishment of the Federal and Operating Funds at the 27 guaranty
    agencies not previously reviewed by OIG to ensure that the funds
    were established in accordance with the HEA, as amended, including
    the requirement for the use of the cash basis of accounting.

2.  Ensure that the program reviewers have the requisite accounting
    knowledge to sufficiently evaluate the establishment of the Federal
    and Operating Funds.

3.  Ensure that adequate resources are devoted to perform the program
    reviews, *e.g.,* adequate staff days and travel funds.

4.  In performing the program reviews, identify, quantify, and report as
    erroneous payments any lost revenue to the Federal Fund that
    resulted from the incorrect assessment of usage fees.

5.  In performing the program reviews, identify any improper purchases
    made by guaranty agencies prior to the establishment of the Federal
    and Operating Funds, and require full repayment to the Federal Fund.

On July 3, 2007, we provided FSA with a copy of our draft report for
comment. FSA provided its comments to the report on August 14, 2007. FSA
did not disagree with our inspection results and concurred with all of
our recommendations. We included our response to FSA's comments in the
Report Section titled FSA Comments. A copy of FSA's comments, in their
entirety, is attached to this report.

[]{#__RefHeading___Toc176920529 .anchor}BACKGROUND

The Higher Education Act of 1965, as amended by the Higher Education
Amendments of 1998 (enacted on October 7, 1998) (HEA) required each
guaranty agency to establish a Federal Fund and an Operating Fund within
60 days of enactment.  The final date for establishing these funds was
December 6, 1998.  All funds, securities, and other liquid assets of the
guaranty agency's Federal Family Education Loan (FFEL) program reserve
fund (Reserve Fund) were to be transferred to the Federal Fund, which is
the property of the Federal Government. 

The HEA required a guaranty agency to deposit revenue from specified
sources into the Federal Fund and also specified the limited uses of
Federal Fund assets.  The HEA also specified deposits into the Operating
Fund and the general uses of Operating Fund assets.  Except for funds
transferred from the Federal Fund, the Operating Fund is the property of
the guaranty agency.  If the Operating Fund contains transferred funds
owed to the Federal Fund, those funds may be used only as permitted by
the regulations, which prohibit certain uses of the funds. The
Department issued interim guidance in January and November 1999, and
published regulations relating to the Federal and Operating Funds on
October 29, 1999.

Federal Student Aid's (FSA's) Financial Partners Services (FPS)
conducted technical assistance site visits at guaranty agencies in
fiscal year (FY) 2000 and program reviews during FYs 2001 and 2002.  The
technical assistance site visits provided assistance to the guaranty
agencies in establishing and maintaining the Federal and Operating
Funds.  The program reviews then tested the guaranty agencies'
compliance with the HEA and regulations in these areas.

In July 2003, the Office of Inspector General (OIG) issued an audit
report on the results of nine OIG audits of guaranty agencies\'
compliance with the HEA requirements for the establishment and operation
of the Federal and Operating Funds held by the guaranty agencies.[^5]
The audit showed that of the nine guaranty agencies reviewed, FPS had
completed program reviews at eight; however, FPS had not identified any
of the significant findings reported by OIG.  The audit concluded that
the Department needed to improve its monitoring of guaranty agencies and
recommended that the Department review the 27 guaranty agencies OIG did
not audit to test their establishment of the Federal and Operating
Funds.

In the Corrective Action Plan (CAP) agreed to by OIG and FSA,[^6] FSA
planned to review 18 of the 27 guaranty agencies during FY 2004 and
planned to review the remaining 9 agencies during the following review
cycle. Rather than following the CAP, in 2005 FSA assigned staff to
serve as CAP Verification Leads[^7] and instructed them to "\[e\]xamine
review reports, work papers, and documentation to determine whether the
7 areas \[referred to as CAP Elements[^8]\] identified on the CAP
Verification Cover Sheet have been sufficiently reviewed and addressed
during a prior FP\[S\] Funds, Full-Scope or other Program Review." [^9]
The CAP Verification Leads filled out a separate sheet (CAP Element
Sheet) for each CAP Element describing the documents reviewed and the
work performed to determine whether the CAP Element had been addressed
during a prior FPS program review. For CAP Element 1 (CAP 1):
"Establishment of the Federal Fund," FSA concluded that the Federal and
Operating Funds at all 27 guaranty agencies had been sufficiently
examined during a prior FPS program review and that no additional work
was required.

[]{#__RefHeading___Toc176920530 .anchor}INSPECTION RESULTS

## FINDING -- The Work Performed by FSA on the 27 Guaranty Agencies Not Audited by OIG Provides No Assurance That the Federal and Operating Funds Were Established in Compliance with the HEA {#finding-the-work-performed-by-fsa-on-the-27-guaranty-agencies-not-audited-by-oig-provides-no-assurance-that-the-federal-and-operating-funds-were-established-in-compliance-with-the-hea .RptSubcaption}

Our inspection objective was to determine the adequacy of FSA's support
for its conclusions concerning the establishment of the Federal Fund and
the Operating Fund at the 27 guaranty agencies not audited by OIG. FSA
provided us with all of the documentation used to draw its conclusion
that the Federal and Operating Funds were established in compliance with
the HEA and regulations. During our inspection, we found that the work
performed by FSA on those 27 guaranty agencies provides no assurance
that the Federal and Operating Funds were established in compliance with
the HEA. Specifically, we identified the following issues:

A.  The CAP documentation indicates that the liquid assets of the
    Federal Fund were established incorrectly at 16 of the 27 guaranty
    agencies. [^10] Furthermore, the CAP documentation for the other 11
    guaranty agencies does not contain enough information to draw
    conclusions on the establishment of the Federal and Operating Funds.

B.  The work originally performed by FPS and reviewed by the CAP
    Verification Leads was not sufficient to assess usage fees for
    non-liquid assets as required by the regulations at 22 of the 27
    guaranty agencies. For 20 of the 27 guaranty agencies there was no
    evidence of review for questionable purchases.

C.  FPS management assigned CAP Verification Leads to assess the
    sufficiency of their own prior FPS program reviews.

D.  FPS' actions show a lack of consideration for the monitoring
    standard from the Government Accountability Office's (GAO's)
    *Standards for Internal Control in the Federal Government*.

##### ISSUE A -- The CAP Documentation Indicates That the Liquid Assets of the Federal Fund Were Established Incorrectly at 16 of the 27 Guaranty Agencies. Furthermore, the CAP Documentation for the Other 11 Guaranty Agencies Does Not Contain Enough Information to Draw Conclusions on the Establishment of the Federal and Operating Funds. 

The documentation provided to us by FPS regarding CAP 1: "Establishment
of the Federal Fund" does not support the CAP Verification Leads'
conclusions that the liquid assets of the Federal Fund were established
in compliance with the HEA.

The CAP Verification Leads confirmed that they only determined whether
the establishment of the Federal and Operating Funds was addressed
during prior FPS program reviews, not whether the prior work was
sufficient to determine compliance with the requirements for
establishing the Federal and Operating Funds. The 2003 OIG Audit
determined, however, that the FPS program reviews at eight of the nine
audited guaranty agencies were insufficient to identify problems with
the establishment of the Federal and Operating Funds.

[CAP Documentation Indicates That the Liquid Assets of the Federal Fund
Were Established Incorrectly.]{.underline}

The regulations at 34 CFR § 682.410(a)(3)[^11] require that deposits and
payments to the Reserve Fund be charged using the cash basis of
accounting prior to October 1, 1998.[^12] The HEA provides that the
opening balance of the Federal Fund was to consist of "all funds,
securities and other liquid assets" from the Reserve Fund. Accruals as
of September 30, 1998, should not exist because the Reserve Fund was
based on cash accounting.[^13] The guaranty agency CAP files, however,
indicate that 16 of the 27 guaranty agencies used accruals for
accounting purposes in establishing the liquid assets of the Federal and
Operating Funds.

A previous OIG audit, *California Student Aid Commission's \[CSAC's\]
Administration of the Federal Family Education Loan Program Federal and
Operating Funds*, found that "CSAC reduced the \[Reserve Fund\] balance
by \$7.4 million for EDFUND and other FFEL-related administrative
expenses that were accrued, but not yet paid from reserve funds." For
the 16 guaranty agencies that used accruals, we found no evidence that
all accruals were removed to determine the cash balance of the Federal
Fund on October 1, 1998, and, where accrual accounting was used, that
the detail of the accruals was examined to determine the appropriateness
of assignment to the Federal Fund. Without examining the detail of what
the guaranty agencies were proposing as future uses of Federal Fund
resources, it would be inappropriate for FSA to accept the beginning
balance on an accrual basis.

FSA's CAP files clearly indicate that Guaranty Agency A[^14] incorrectly
used accrual accounting to establish the Federal Fund. Despite the fact
that FPS did not test accounts during the Technical Assistance visit,
the CAP Verification Lead explicitly used the Technical Assistance Trip
Report for this guaranty agency to support the conclusion that the
Federal and Operating Funds had been established correctly. The CAP
Verification Lead used the following quote from the Technical Assistance
Trip Report to support the conclusion in the CAP Element Sheet:

> The opening fund balance for the Federal account was \$82,284,990
> (cash balance \$38,252,064). The opening fund balance for the
> Operating account was \$1,651,708 (cash balance \$16,659,109. The
> difference was used to settle obligations during the 60 day period
> following enactment. These obligations included Collections due ED
> \[Department\], Accounts Payable, etc.). The Restricted/Recall
> obligation was accrued for \$28,881,803. These opening balances were
> as of October 1, 1998. The interest accumulated on the Federal Fund as
> of 9/30/99 was \$342,764.

In this case, both the Federal and Operating Funds were established
using accrual accounting. The statute provides that all liquid assets as
of October 1, 1998, were the property of the Federal government. The
Technical Assistance Trip Report indicates, however, that as of October
1, 1998, the guaranty agency used cash from the Reserve Fund to pay \$16
million in obligations instead of depositing that cash into the Federal
Fund as of October 1, 1998, as required by the HEA. There is no
indication that the guaranty agency borrowed the funds from the Federal
Fund, as provided for in the HEA, and there is no explanation for why
\$16 million in cash was deposited into the Operating Fund and not the
Federal Fund as required.

The Financial Review Report for Guaranty Agency B also indicates that
the Federal Fund was established incorrectly using accrual accounting:

> Total assets transferred to the FSLRF \[Federal Student Loan Reserve
> Fund\] were \$32,879,618 consisting of cash and equivalents of
> \$25,040,329, total receivables of \$4,680,654 and investments in U.S.
> Government Securities \$2,859,342. Total liabilities transferred were
> \$23,890,057 and total fund balances transferred were \$8,989,561.

There is no documentation in the guaranty agency CAP file to support
that FPS program reviewers performed any analysis of the liabilities to
ensure that the liabilities were only for permitted expenses of the
Federal Fund.

The CAP files for the other 14 guaranty agencies in this category also
clearly indicated that they had incorrectly used accrual accounting to
establish the Federal Fund. The documentation provided to us and used by
FPS to draw the conclusion in 2005 that the Federal and Operating Funds
were established correctly did not provide enough information for us to
determine the nature of the accruals. Furthermore, the CAP Verification
Leads were unable to explain why accruals were used to determine the
opening balance or how adjustments were used to correct the opening
balances.

Because the 16 guaranty agencies in this category may have established
the Federal Fund incorrectly, the Federal Fund at each guaranty agency
may be understated. During the previous OIG audits of nine guaranty
agencies, OIG found that the beginning balances of the Federal Fund were
understated by over \$17.8 million. During the FPS program reviews of
the 27 guaranty agencies included in our inspection, FPS only quantified
approximately \$1.1 million in findings related to the establishment of
the Federal and Operating Funds.

[The Documentation Is Insufficient to Draw Conclusions Regarding the
Sufficiency of Prior FPS Program Reviews of the Establishment of the
Federal and Operating Funds.]{.underline}

The guaranty agency CAP files for the remaining 11 guaranty agencies did
not contain sufficient information for the CAP Verification Lead to have
drawn a valid conclusion on the sufficiency of prior FPS program reviews
concerning the establishment of the Federal and Operating Funds. For
four of these guaranty agencies, the CAP Verification Leads concluded on
the CAP 1 Element Sheet that the Federal Fund was sufficiently addressed
during a prior FPS program review. The methodology section, however, on
all four of these CAP 1 Element Sheets states:

> Attempted to locate review reports, element worksheets and back-up
> detail/documentation on Accorde \[Accorde contains the electronic,
> imaged file documents\]. Not all documents could be located as they
> were not properly input at inception of imaging project.

For two of these four, the opening balance of the Federal Fund was not
discussed in any of the documentation used by the CAP Verification Leads
to draw conclusions on the establishment of the Federal and Operating
Funds.

Though the CAP Verification Leads for the remaining seven guaranty
agency CAP files were able to access FPS program review reports and work
papers, the CAP files did not provide sufficient information to draw a
conclusion on the establishment of the Federal and Operating Funds.
There is no indication in any of these guaranty agency files that FPS
sufficiently reviewed the Federal and Operating Funds during a prior FPS
program review.

In the CAP file for Guaranty Agency C, we determined that the opening
balance of the Federal Fund was not discussed in any of the
documentation used by the CAP Verification Lead. Of the documentation
provided in the CAP file, the Financial Review Report describes the
Federal Fund without reference to the beginning balance in 1998:

> During the course of this review, we were able to tie the ED1130 \[ED
> Form 1130: Revised Guaranty Agency Quarterly/Annual Report\] numbers
> for fund balance, income, and expenses to the audited financial
> statements for September 30, 1999. A sample of expenditures from the
> fund was reviewed; all expenditures were for costs properly allocated
> to the Federal Fund.
>
> The agency has not borrowed from the fund.

Two of the seven CAP files report that the Federal Fund was established
on a cash basis; however, FPS' documentation for Guaranty Agency D
contained unexplained adjustments and the documentation for Guaranty
Agency E showed an account receivable on the opening balance of the
Federal Fund. In both of these cases, there is not enough information to
conclude whether these Funds were established correctly.

The last four files do not provide enough information to determine the
procedures the guaranty agency used to establish the Federal and
Operating Funds. We were unable to determine whether the Funds were
established on an accrual or a cash basis. There is also no information
in the files indicating whether FPS sufficiently reviewed the Federal
and Operating Funds during a prior FPS program review.

[CAP Verification Leads Only Verified Whether the Establishment of the
Federal and Operating Funds Had Been Addressed During Prior FPS Program
Reviews, Not Whether the Work Was Sufficient or Whether the Funds Were
Established in Accordance With the HEA.]{.underline}

The CAP procedures instructed the CAP Verification Leads to "\[e\]xamine
the review reports, work papers, and documentation to determine whether
the 7 areas identified on the CAP Verification Cover Sheet have been
**sufficiently** reviewed and addressed during a prior FP\[S\] Funds,
Full-Scope or other Program Review." (Emphasis added.)

The methodology sections for all 27 CAP 1 Element Sheets indicate that
the CAP Verification Leads simply reviewed information in previous FPS
program review reports. Furthermore, the CAP Verification Leads relied
on FPS program reviews that the 2003 OIG Audit found were insufficient
to identify problems with the establishment of the Federal and Operating
Funds.

Interviews with the CAP Verification Leads confirmed that they all only
determined whether the Federal and Operating Funds were addressed during
a prior FPS program review, not whether the prior reviews were
sufficient or whether the establishment was in compliance with the HEA
and regulations. A CAP Verification Lead stated that his role was not to
determine "how well \[the prior work\] was done, just that it was done."
Furthermore, another CAP Verification Lead stated he was mainly putting
data together for the Regional Directors and OIG. This CAP Verification
Lead explained that he did not analyze or evaluate the documentation.

Because CAP Verification Leads did not do new or additional work on the
establishment of the Federal and Operating Funds and relied on prior FPS
program review reports deemed insufficient by the 2003 OIG Audit, they
were not in a position to draw a conclusion on the sufficiency of the
work or to determine that the Federal and Operating Funds were
established in compliance with the HEA. Therefore, FPS used its
resources on work that was not responsive to the 2003 OIG Audit's
findings and recommendations and the work did not contribute to the
determination that the Federal and Operating Funds were established
correctly at the 27 guaranty agencies.

##### ISSUE B -- The Work Originally Performed by FPS and Reviewed by the CAP Verification Leads Was Not Sufficient to Assess Usage Fees for Non-Liquid Assets as Required by the Regulations at 22 of the 27 Guaranty Agencies. For 20 of the 27 Guaranty Agencies There Was No Evidence of Review for Questionable Purchases.

[The FPS Assessment of Usage Fees Was Not Sufficient.]{.underline}

A CAP Verification Lead informed us that a few guaranty agencies made a
"good faith effort" to pay usage fees prior to July 1, 2000. FPS,
however, only required guaranty agencies to pay usage fees after this
date. This action allowed guaranty agencies to use Federal assets for 21
months without compensating the Federal government. Once FPS required
guaranty agencies to pay usage fees, it failed to recognize the fair
market value for assets and only required guaranty agencies to pay usage
fees based on the depreciated value of the assets.[^15]

In many of these cases, the equipment had depreciated below what FPS
considered a nominal value[^16] by July 1, 2000. FPS did not require the
guaranty agencies to pay usage fees when this occurred, even though they
continued to use this equipment. In addition, FPS instructed guaranty
agencies to disaggregate classes of assets and only charged usage fees
on individual assets with a depreciated value greater than \$5,000. This
further reduced the usage fees paid by guaranty agencies.

FPS program reviewers did not calculate usage fees for Federal
non-liquid assets based on the fair market value for the use of the
equipment. Instead, at 22 of the 27 guaranty agencies, FPS program
reviewers only assessed usage fees for items with a depreciated book
value greater than \$5,000 as of July 1, 2000. The General Manager for
FPS drafted a "Dear Partner Letter," dated May 17, 2001, to "provide
guidance to the guaranty agencies concerning the determination and
payment of usage fees on non-liquid assets purchased in whole or in part
with Federal reserve funds." The letter states that effective July 1,
2000, the "Department \[had\] determined that any tangible asset with a
net fair value of \$5,000 or less after June 30, 2000 will be considered
to have nominal value and will be exempt from payment of a usage fee
(net book value may be used to establish net fair value)." There is no
evidence that this draft letter was ever formalized or approved by
Department officials authorized to determine Department policy or that
it was provided to the guaranty agencies. FPS program reviewers,
however, appear to have adhered to the guidelines of this draft letter
and did not require guaranty agencies to pay usage fees prior to July 1,
2000. This practice allowed guaranty agencies to use assets purchased
with Reserve Funds for 21 months without compensating the Federal Fund
and never required guaranty agencies to pay usage fees on fully
depreciated assets that were still in use.

In one example, an FPS program reviewer instructed Guaranty Agency F to
disaggregate equipment on its asset inventory. The FPS program reviewer
wrote that there "\[a\]ppear to be numerous items lumped together. These
need to be split apart in order to determine if individual items/book
value exceeds \$5,000 on 7/1/2000." Disaggregating the inventory and
only requiring usage fees to be paid based on the book value as opposed
to fair usage value allowed the guaranty agency to pay lower usage fees.

In another example, an FPS program reviewer concluded during the
Financial Review of Guaranty Agency A that "according to the
Department's guidance, \[Guaranty Agency A\] may have overpaid its good
faith usage fees to date" because the guaranty agency paid "usage fees
on items until the book value \[was\] -0-." Again, FPS based its
decisions on the book value of assets as opposed to the fair usage
value.

In our final example, an FPS program reviewer also did not require
Guaranty Agency G to pay usage fees on a server purchased in 1997. The
FPS reviewer initially "felt that it still had some value," but the
agency explained that using Generally Accepted Accounting Principles,
the server's book value had depreciated to a nominal value. Although the
guaranty agency still used the server, FPS did not require it to pay
usage fees for this item, which illustrates FPS' use of the book value
rather than the fair usage value.

The Department's practice of considering tangible assets with a book
value of \$5,000 or less, as of July 1, 2000, to have nominal value and
to be exempt from payment of a usage fee does not comply with 34 CFR §
682.420, which states that usage fees are to be based on the net fair
value of *use* and should be applied to the Federal Fund effective
October 1, 1998.

The 2003 OIG Audit described a similar finding regarding FPS'
calculation of usage fees:

> Guaranty agencies have not properly documented federal assets or
> consistently calculated and paid usage fees. The Department has not
> specified how federal ownership of assets should be recorded or how
> usage fees should be calculated. OIG audits reported that two guaranty
> agencies did not adequately identify federal assets, two guaranty
> agencies developed their own usage fee calculation, and one guaranty
> agency did not pay usage fees to its Federal Fund.

FPS' actions with regard to usage fees resulted in guaranty agencies
paying less than required by the regulations, resulting in improper
payments.

[The FPS Review of Questionable Purchases Was Not
Sufficient.]{.underline}

In 20 of the 27 guaranty agency CAP files, there is no evidence that the
CAP Verification Lead or a prior FPS program reviewer examined purchases
prior to October 1, 1998, to ensure that guaranty agencies were not
improperly using Reserve Funds prior to the establishment of the Federal
and Operating Funds.

Two guaranty agency CAP files included charts containing questionable
equipment purchases;[^17] however, there is no evidence that FPS program
reviewers evaluated the purchases for appropriateness. Instead of using
Reserve Funds for necessary and reasonable costs, these purchases
indicate that the guaranty agencies may have timed the execution of
purchases in order to use Reserve Fund assets before the Federal Funds
were established.[^18]

The CAP file for Guaranty Agency F does not provide an explanation for
why the guaranty agency exhibited a significant increase in its monthly
spending prior to the establishment of the Federal Fund. Between
February 1988 and August 1998, the guaranty agency never spent over
\$100,000 on equipment in a single month. During September 1998,
however, the guaranty agency spent \$344,523 on equipment.[^19] Only 4
of the 83 items purchased had an individual purchase price over \$5,000;
as a result, FPS only charged usage fees for these 4 items of equipment.

Guaranty Agency H exhibited questionable spending activity during the
month before the establishment of the Federal Fund (September 1998) that
should have received additional scrutiny from FPS. According to the
Non-Liquid Assets Spreadsheets, which only identified individual assets
with a depreciated book value over \$5,000 as of July 1, 2000, the
guaranty agency spent at least \$1,008,526 on equipment in September
1998. Furthermore, on the day before the establishment, the guaranty
agency spent at least \$790,539 on equipment.[^20] FPS required the
agency to pay usage fees on the equipment identified in the Non-Liquid
Assets Spreadsheet. FPS, however, did not require the guaranty agency to
pay usage fees on equipment it may have purchased that had depreciated
to a book value of \$5,000 by July 1, 2000.

Because FPS reviewers did not evaluate the appropriateness of purchases
prior to the establishment of the Federal Fund, guaranty agencies may
have inappropriately used Reserve Funds resulting in a lower beginning
balance of the Federal Fund.

##### ISSUE C -- FPS Management Assigned CAP Verification Leads to Assess the Sufficiency of Their Own Prior FPS Program Reviews.

FPS assigned CAP verification work to staff that were involved with
previous FPS program reviews. Twenty-five of the 27 CAP 1 Element Sheets
were prepared by CAP Verification Leads who participated in the
Financial Review of the guaranty agency; in 19 cases, the CAP
Verification Leads also served as the lead during the Financial Review.
Additionally, 17 of the CAP 1 Element Sheets were prepared by CAP
Verification Leads who participated in the Technical Assistance Review
of the guaranty agency.

CAP Verification Leads informed us that they were assigned to perform
the CAP verification work for each guaranty agency because they either
served as the liaison for the guaranty agency or they served as the lead
during the Financial Review of the guaranty agency. It appears that when
FPS management delegated the CAP verification workload, it did not
consider that many of the CAP Verification Leads would be in the
position of assessing the sufficiency of their own work.

##### 

##### ISSUE D -- FPS' Actions Show a Lack of Consideration for the Monitoring Standard from the GAO's *Standards for Internal Control in the Federal Government*.

According to the GAO's *Standards for Internal Control in the Federal
Government*, the monitoring internal control standard states that
"\[i\]nternal control monitoring should assess the quality of
performance over time and ensure that the findings of audits and other
reviews are promptly resolved." The standard further states that:

> Managers are to (1) promptly evaluate findings from audits and other
> reviews, including those showing deficiencies and recommendations
> reported by auditors and others who evaluate agencies' operations, (2)
> determine proper actions in response to findings and recommendations
> from audits and reviews, and (3) complete, within established
> timeframes, all actions that correct or otherwise resolve the matters
> brought to management's attention.

In 2004, FPS presented a CAP to OIG that provided for FPS to conduct new
program reviews at the 27 guaranty agencies not previously audited by
OIG. OIG subsequently agreed to the CAP as written in the Audit
Accountability and Resolution Tracking System (AARTS). As of March 9,
2005, FSA had not started the program reviews agreed to by OIG. On that
date, the Inspector General sent a Memorandum to the Chief Operating
Officer of FSA sharing his concerns regarding the process used to
estimate "erroneous payments for the student financial assistance
programs." The memorandum stated:

> My office conducted a series of audits that identified systemic
> problems in the student loan programs. While the sustained liabilities
> for our nine guaranty agency federal/operating fund audits were
> included in the most recent assessment, there are no liabilities for
> the remaining 27 guaranty agencies that were to be reviewed by FSA as
> part of the agreed-upon corrective actions.

After the memo was issued, FSA worked with OIG to develop areas of
concern (seven CAP Elements) in April 2005.

During the May 26, 2005 congressional hearing held before the House
Committee on Government Reform ("Federal Student Loan Programs: Are They
Meeting the Needs of Students and Schools?" Serial Number 109-31. U.S.
Government Printing Office.), the Chief Operating Officer of FSA
responded to Representative William Lacy Clay's inquiry into whether FSA
had plans to review the additional guaranty agencies not audited by OIG:

> We have a work plan to do program reviews and audits of schools,
> lenders, and guaranty agencies, the servicers that participate in the
> programs. Yes, we are focusing in on the guaranty agencies, and our
> oversight of them, and doing onsite reviews. I do not recall off the
> top of my head the specific nine that you are referencing. But yes, we
> do have plans for not only this year, but in 2006 to do onsite reviews
> at guaranty agencies, as well as other participants in the program.

Representative Clay responded:

> Well, I would hope so. Because the fact that \[OIG\] uncovered \$164
> million in abuse in an audit of only a quarter of the guaranty
> agencies\[[^21]\] suggests to me that it would be worthwhile to take a
> deeper look.

On July 26, 2005, the Inspector General sent a Memorandum to the Chief
Financial Officer and provided a copy to the Chief Operating Officer of
FSA. This memorandum conveyed, in part, the Inspector General's
disagreement with FSA's decision to "reverse its corrective action plan
and to not attempt to recover potentially millions in Federal assets" by
not reviewing the guaranty agencies' establishment of the Federal and
Operating Funds. Instead of following the CAP agreed to by OIG, FSA
decided in August 2005, to examine prior FPS program reviews, work
papers, and related documentation, as opposed to conducting new program
reviews of the establishment of the Federal and Operating Funds.

FPS did not follow the CAP that was agreed to by OIG, as required by OMB
Circular A-50: *Audit Followup*.[^22] The actions taken by FPS in
response to the 2003 OIG Audit violate the monitoring internal control
standard because the actions would not ultimately resolve the matters
brought to the attention of FPS management and did not appear to take
into account the deficiencies identified in the 2003 OIG Audit.
Specifically, the methodology used by FPS was flawed, FPS assigned CAP
Verification Leads to assess the sufficiency of their own prior FPS
program reviews, there was a lack of clear direction or involvement from
FSA headquarters management, and not all CAP Verification Leads had the
requisite knowledge of accounting to effectively determine the accuracy
of the establishment of the Federal and Operating Funds.

Rather than following the CAP as originally proposed and agreed to by
OIG as responsive to the audit report, FPS chose to look only at prior
FPS program review reports and some work papers. OIG, however, had
already determined that prior FPS program reviews were insufficient to
identify problems with the establishment of the Federal and Operating
Funds. The OIG audits found that although FPS program reviews had
objectives similar to OIG audits, the FPS program reviews did not
identify significant findings. The OIG audits found that the nine
audited guaranty agencies understated the beginning balances of the
Federal Fund by over \$17.8 million; FPS, however, did not identify
these errors.

Although the CAP Verification Leads were instructed to evaluate whether
the work performed during prior FPS program reviews was sufficient, all
of the CAP Verification Leads we interviewed said that their work was
limited to determining whether the establishment of the Federal and
Operating Funds had been addressed in some manner during prior FPS
program reviews. We found that the documentation used to support their
work would not substantiate a conclusion regarding the sufficiency of
the establishment of the Federal and Operating Funds.

Additionally, the CAP Verification Leads were instructed to use the
*Financial Partners Guaranty Agency Review Guide (Interim),* revised May
5, 2005, and the 2001 *Financial Partners Guaranty Agency Funds Review
Guide* to examine the CAP Elements for sufficiency. The *Financial
Partners Guaranty Agency Review Guide (Interim), revised May 5, 2005*,
does not address the establishment of the Federal and Operating Funds.
The Regional project person for the CAP verification work confirmed that
for CAP Element 1, the CAP Verification Leads should have used the
entire 2001 *Financial Partners Funds Review Guide*, which did address
the establishment of the Federal and Operating Funds*.* None of the CAP
Verification Leads, however, stated that they had used this guide during
their examination of the Federal Fund.

The CAP Verification Leads were assigned to assess the sufficiency of
their own prior FPS program reviews. Headquarters management should have
taken this issue into consideration if it was interested in evaluating
the quality of performance under the internal control standard for
monitoring, particularly since the 2003 OIG Audit found that the
previous FPS program reviews were inadequate.

From our interviews with the CAP Verification Leads and the Regional
Directors, there appears to have been only minimal involvement from FSA
headquarters management. CAP Verification Leads expressed varying levels
of frustration with the lack of information from headquarters during
this work and previous program reviews. Additionally, one CAP
Verification Lead explained that there was no formal training for this
work and that the instructions were provided through telephone calls and
emails.

Once the work was completed in the Regional offices and signed off by
the Regional Directors, there was little further review of the work. The
Regional project person, the individual who provided the work to
headquarters, only tracked the CAP files to determine whether each
Region successfully uploaded the CAP documentation onto their shared
drive. The State Agency Liaison Officer stated that when the CAP
verification work was complete, he did a "spot check, especially in the
areas where they identified additional work." The role of the Director
of Partner Services Group was to ensure that the Regional Directors
signed off on the work and to determine whether the work satisfied the
CAP. The Director stated that she did a "cursory review" by looking at a
sample of the documents, but did not go "line by line." Without a
thorough review, it would not be possible for the Director of Partner
Services Group to determine whether the work satisfied the CAP or
whether the CAP Verification Leads followed the instructions.
Additionally, the work was not evaluated to ensure consistency in
coverage or documentation among the Regions and CAP Verification Leads.

Most FPS program reviewers did not have the accounting background
necessary to review financial documents related to the establishment of
the Federal Fund. A CAP Verification Lead admitted that he would have
needed more of an accounting background during the prior FPS program
reviews to address accruals. Additionally, another CAP Verification Lead
stated that only a few FPS program reviewers have an accounting
background. The CAP Verification Lead stated that it is essential for
program reviewers to be program experts, not accountants. The Director
of Partner Services Group was concerned that the program reviewers do
not have the accounting expertise necessary to perform an in-depth
review of the establishment of the Federal and Operating Funds. The FFEL
program, however, is a complicated financial and accounting intensive
program. To ensure program compliance, a program reviewer would need a
background in accounting.

[This Inspection Reinforces Findings In a Prior OIG Audit Regarding Weak
Internal Controls in FPS.]{.underline}

The 2006 OIG audit, *Review of Financial Partners' Monitoring and
Oversight of Guaranty Agencies, Lenders, and Servicers*, identified
significant weaknesses in FPS' internal controls. OIG found that FSA had
a weak control environment for monitoring and oversight and that FPS
"\[e\]mphasized partnership over compliance in dealing with guaranty
agencies, lenders, and servicers in its mission statement on selected
actions." Our inspection reinforces that FPS emphasized partnership with
the guaranty agency over compliance with Federal Regulations in prior
program reviews.

During the Technical Assistance Review for Guaranty Agency I, the FPS
program reviewers emphasized their role as partners in their dealings
with this guaranty agency. FPS reviewers stated in the Technical
Assistance Trip Report: "We were provided with everything we asked for,
but the staff seemed to be skeptical of our role as a partner." Also,
during an interview, a CAP Verification Lead said that her role as a
liaison for the guaranty agency is to be the "guaranty agency's legs
within the Department."

Additionally, in 13 of the Financial Review Reports at the 27 guaranty
agencies, FPS program reviewers used language that emphasizes their
partnership with the guaranty agencies regarding a finding on
collections interest. FPS expressed regret in each report that it was
"unable to rescind the requirement that interest on the Federal share of
collections be remitted to the Federal Fund effective October 1, 1998."
These statements emphasize that FPS views its relationship with the
guaranty agencies in terms of valuing partnership rather than guaranty
agency compliance.

[]{#__RefHeading___Toc176920532 .anchor}RECOMMENDATIONS

We recommend that the Chief Operating Officer for FSA --

1.  Perform onsite program reviews to examine supporting records for the
    establishment of the Federal and Operating Funds at the 27 guaranty
    agencies not previously reviewed by OIG to ensure that the funds
    were established in accordance with the HEA, as amended, including
    the requirement for the use of the cash basis of accounting.

2.  Ensure that the program reviewers have the requisite accounting
    knowledge to sufficiently evaluate the establishment of the Federal
    and Operating Funds.

3.  Ensure that adequate resources are devoted to perform the program
    reviews, *e.g.,* adequate staff days and travel funds.

4.  In performing the program reviews, identify, quantify, and report as
    erroneous payments any lost revenue to the Federal Fund that
    resulted from the incorrect assessment of usage fees.

5.  In performing the program reviews, identify any improper purchases
    made by guaranty agencies prior to the establishment of the Federal
    and Operating Funds, and require full repayment to the Federal Fund.

[]{#__RefHeading___Toc176920533 .anchor}FSA COMMENTS

[]{.mark}

On July 3, 2007, we provided FSA with a copy of our draft report for
comment. FSA provided its comments to the report on August 14, 2007. FSA
did not disagree with our inspection results and concurred with all of
our recommendations. A copy of FSA's comments, in their entirety, is
attached to this report.

***Recommendation 1­*** - Perform onsite program reviews to examine
supporting records for the establishment of the Federal and Operating
Funds at the 27 guaranty agencies not previously reviewed by OIG to
ensure that the funds were established in accordance with the HEA, as
amended, including the requirement for the use of the cash basis of
accounting.

**FSA Comments**

To the extent data is available, Federal Student Aid will ensure that
independent onsite reviews of the establishment of the Federal and
Operating Funds will be performed at the remaining 27 guaranty agencies
not reviewed by OIG. FSA also stated that to ensure the program review
processes are sufficient, FSA will require guidance from the OIG.

**OIG Response**

The work previously done by our office showed that the beginning balance
of the Federal Fund at the nine guaranty agencies our office audited was
understated by over \$17.8 million. All of the audits identified
problems with the establishment of the Federal Fund. If FSA had
adequately responded to the original audit recommendations, any funds
not belonging to the Operating Fund at the 27 guaranty agencies not
audited by our office could have been returned to the Federal Fund.
Should guaranty agency accounting records not be available due to FSA's
lack of action on the original recommendations and the amount of time
that has passed since those recommendations were made, FSA should
develop an alternative method to determine any amounts to be returned to
the Federal Fund at the 27 guaranty agencies not audited by OIG. If an
alternative method cannot be developed, FSA should determine what
reporting is required under the Federal Managers Financial Integrity Act
or Office of Management and Budget (OMB) Circular A-123, Management's
Responsibility for Internal Control.

FSA must take ownership of the corrective actions it will be taking in
response to this inspection. To the extent that FSA knows of general
weaknesses in its program review abilities and processes, it should take
corrective action independently. OIG will, as it has in the past,
provide advice and comments on specific actions concerning the program
reviews to be conducted of the Federal and Operating Funds at the 27
guaranty agencies we did not audit.

***Recommendation 2*** - Ensure that the program reviewers have the
requisite accounting knowledge to sufficiently evaluate the
establishment of the Federal and Operating Funds.

**FSA Comments**

FSA will ensure that individuals with the requisite accounting knowledge
perform the recommended reviews. FSA also stated that to ensure the
reviewers have the requisite accounting knowledge of these types of
reviews, an independent, external firm with the required accounting
experience will be required.

**OIG Response**

This recommendation was based on an acknowledgement by Financial
Partners management that staff did not have the requisite accounting
knowledge to perform the program reviews. In addition to hiring an
outside firm to perform the program reviews, FSA should take steps to
develop in-house capacity and the skills to perform not only this type
of program review, but other guaranty agency, lender, and servicer
reviews in the future. As we noted in the report, the FFEL program is a
complicated financial and accounting intensive program. Therefore, to
ensure program compliance, a program reviewer should have a sufficient
background in accounting. FSA should also ensure that the external firm
that performs this work has the essential program knowledge to confirm
that the Federal and Operating Funds were established in accordance with
the HEA, as amended.

***Recommendation 3*** - Ensure that adequate resources are devoted to
perform the program reviews, *e.g.,* adequate staff days and travel
funds.

**FSA Comments**

FSA agreed to implement the recommendation.

***Recommendation 4* -** In performing the program reviews, identify,
quantify, and report as erroneous payments any lost revenue to the
Federal Fund that resulted from the incorrect assessment of usage fees.

**FSA Comments**

The reviews will include the determination of the appropriateness of
usage fees and purchases, if needed. The Department, with the OIG's
approval, has entered into usage fee settlements with many of the
guaranty agencies considered in the scope of these reviews. The results
of the reviews will include, as appropriate, identification of
liabilities in accordance with FSA established procedures.

**OIG Response**

The appropriateness of usage fees must be evaluated at all 27 guaranty
agencies. FSA's method of establishing usage fees for non-liquid assets
other than real estate did not follow the requirement in the regulations
that stated usage fees be based on the fair market value for all assets
purchased using federal funds. OIG does not approve of or make
Department management decisions. Our office provided advice and comments
on proposed settlement agreements related to the disposition of real
property purchased with federal reserve funds at a small number of
guaranty agencies. OIG did not approve decisions on these settlements.

FSA's comments did not address the portion of our recommendation related
to reporting of improper payments. In conducting reviews of usage fees,
FSA should report not only liabilities assessed, but also improper
payments in the form of lost revenue to an agency's Federal Fund. There
may be circumstances where FSA cannot assess and collect a liability due
to improper assessment of usage fees. Nevertheless, improper payments
should be reported pursuant to OMB Circulars A-123, Management's
Responsibility for Internal Control, Appendix C, Requirements for
Effective Measurement and Remediation of Improper Payments, and A-136,
Financial Reporting Requirements, even if a liability cannot be
assessed.

***Recommendation 5*** - In performing the program reviews, identify any
improper purchases made by guaranty agencies prior to the establishment
of the Federal and Operating Funds, and require full repayment to the
Federal Fund.

**FSA Comments**

FSA will ensure that the reviews will include the determination of the
appropriateness of purchases, if needed. The results of the reviews will
include, as appropriate, identification of liabilities in accordance
with FSA established procedures.

**OIG Response**

FSA must evaluate the appropriateness of purchases at each of the 27
guaranty agencies not audited by OIG. An audit previously done by our
office identified \$7.4 million spent prior to the establishment of the
Federal and Operating Funds as improper administrative expenses at one
guaranty agency. Without testing the appropriateness of purchases at
each guaranty agency, FSA has no assurance that federal funds were not
misused. In addition to identifying liabilities, FSA also needs to
require repayment of any liabilities identified.

Prior work by our office has shown that FSA's established procedures to
identify liabilities were not adequate to protect the federal interest.
FSA should carefully review any established procedures it currently uses
to identify liabilities to ensure that all liabilities are not only
identified, but repaid to the Federal Fund.

[]{#__RefHeading___Toc176920534 .anchor}OBJECTIVE, SCOPE, AND
METHODOLOGY

# The objective of our inspection was to determine the adequacy of FSA's support for its conclusions concerning the establishment of the Federal Fund and the Operating Fund at the 27 guaranty agencies not audited by OIG. The OIG audited nine guaranty agencies and reported the results in the 2003 OIG Audit, *Oversight Issues Related to Guaranty Agencies Administration of the Federal Family Education Loan Program Federal and Operating Funds*.

We began our fieldwork on November 8, 2006, and we conducted an exit
conference on April 17, 2007. We reviewed the HEA, applicable
regulations, and Dear Colleague Letters.

We interviewed FPS staff at headquarters and conducted phone interviews
with FPS staff from its Regional offices. Additionally, we interviewed
all available FPS officials who served as the CAP Verification Leads for
the reviews of the 27 guaranty agencies.

We reviewed the CAP verification work papers and the supporting
documentation the CAP Verification Leads used for their reviews of the
establishment of the Federal and Operating Funds at each of the 27
guaranty agencies. FSA's CAP completion package contains seven elements
related to specific areas of concern identified by OIG in prior audits
of nine guaranty agencies' establishment and operation of the Federal
and Operating Funds. The scope of CAP Element 1, titled "Establishment
of the Federal Fund," directly relates to the objective of this
inspection, while the other six CAP elements are related to the
operation of the Federal and Operating Funds after the establishment. As
a result, we limited our review to the documentation and supporting work
papers related to CAP Element 1.

To determine the liabilities from previous FPS program review reports,
we identified findings specifically related to the establishment or
beginning balance of the Federal and Operating Funds at the 27 guaranty
agencies included in our inspection. We added the total amount of
liabilities quantified by FPS and found that FPS quantified \$1,117,910
in findings at 27 guaranty agencies.

To determine the liabilities from the 2003 OIG Audit, we reviewed the
audit findings and added the liabilities related to the understatement
of the beginning balance of the Federal Fund. The 2003 OIG Audit found
that "\[f\]our guaranty agencies understated the beginning balances of
the Federal Funds by over \$15.2 million" and that "\[t\]hree guaranty
agencies understated the beginning balances of the Federal Funds by over
\$2.6 million." These understatements totaled over \$17.8 million.

Our inspection was performed in accordance with the *2005 President's
Council on Integrity and Efficiency Quality Standards for Inspections*
appropriate to the scope of the inspection described above.

[]{#__RefHeading___Toc176920535 .anchor}ATTACHMENT: FSA RESPONSE TO
DRAFT INSPECTION REPORT

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[^1]: The 2003 OIG Audit, *Oversight Issues Related to Guaranty
    Agencies' Administration of the Federal Family Education Loan
    Program Federal and Operating Funds*, presented conclusions based on
    the issues identified in OIG audits at nine guaranty agencies.

[^2]: Our conclusions are based solely on the documentation used by FSA
    to draw its conclusions regarding the establishment of the Federal
    and Operating Funds. We did not perform inspections or audits of the
    27 guaranty agencies.

[^3]: During the time period covered by this inspection, FPS was the
    division within FSA that was responsible for the oversight of the
    guaranty agencies. The Financial Partner Eligibility and Oversight
    division is currently responsible for the oversight of the guaranty
    agencies.

[^4]: In 2005, FPS Guarantor and Lender Review Specialists (CAP
    Verification Leads) examined review reports, work papers, and
    documentation to determine whether the Federal and Operating Funds
    were sufficiently reviewed and addressed during a prior FPS program
    review.

[^5]: For the purposes of this report, the 2003 OIG Audit, *Oversight
    Issues Related to Guaranty Agencies Administration of the Federal
    Family Education Loan Program Federal and Operating Funds*
    (ED-OIG/A05-D0010, July 2003) will be referred to as the 2003 OIG
    Audit.

[^6]: OIG agreement with a CAP indicates that OIG agrees that the
    proposed CAP, if implemented, should address or adequately respond
    to audit or inspection findings and recommendations.

[^7]: The Regional FPS Directors assigned Guarantor and Lender Review
    Specialists as the CAP Verification Leads. During interviews we were
    informed that Regional Directors usually assigned the liaison for
    the guaranty agency or the team lead for the Financial Review as the
    CAP Verification Lead for that specific guaranty agency.

[^8]: The seven CAP Elements were: 1) Establishment of the Federal Fund;
    2) Deposit of Supplemental Preclaim Assistance into the Federal Fund
    After 10/1/98; 3) Use of Federal Funds; 4) Cost Allocation Plans; 5)
    Conflict of Interest - Pre & Post Default Collections; 6) Conflict
    of Interest - Agency Board Members, Officials, and Employees; and 7)
    Standards of Conduct.

[^9]: For the purposes of this report, FPS program reviews include the
    following: 1) Technical Assistance Review; 2) Financial or Funds
    Review; and 3) Comprehensive or Full-Scope Program Review.

[^10]: Our conclusions are based solely on the documentation used by FPS
    to draw its conclusions regarding the establishment of the Federal
    and Operating Funds. We did not perform inspections or audits of the
    27 guaranty agencies.

[^11]: All regulatory citations are to the July 1, 2000 volume.

[^12]: The regulation at 34 CFR § 682.410(a)(3) establishes that the
    Reserve Fund is accounted for using the cash basis of accounting:
    "*Accounting basis*. Except as approved by the Secretary, a guaranty
    agency . . . shall deduct the items listed in paragraph (a)(2) of
    this section from its \[R\]eserve \[F\]und upon their payment,
    without any accrual for accounting purposes."

[^13]: According to the Financial Accounting Standards Board, "Accrual
    accounting attempts to record the financial effects on an entity of
    transactions and other events and circumstances that have cash
    consequences for the entity in the periods in which those
    transactions, events, and circumstances occur rather than only in
    periods in which cash is received or paid by the entity." Accruals
    that are recorded as assets represent future rights to resources and
    accruals that are recorded as liabilities represent future uses of
    resources. Accruals represent the future inflow or outflow of
    resources from an entity.

[^14]: Because we did not perform inspections or audits of the 27
    guaranty agencies, we do not specifically name any guaranty agencies
    covered by this inspection report.

[^15]: 34 CFR § 682.420 provides instruction on how to value non-liquid
    assets, how revenue from non-liquid assets must be applied to the
    Federal Fund, and how usage fees must be paid to the Federal Fund.
    All usage fees are to be based on the net fair value of the asset.

[^16]: FPS internally established nominal value at \$5,000. One of the
    CAP Verification Leads explained that in his role as a Guarantor and
    Lender Review Specialist he recommended that usage fees not be
    calculated for assets with a book value of less than \$5,000. This
    CAP Verification Lead explained that he based nominal value on the
    guidelines from the Office of Management and Budget (OMB) Circular
    A-87. The \$5,000 nominal value in OMB Circular A-87, however, is
    not related to usage fees.

[^17]: Without the benefit of performing an audit of these purchases, we
    cannot be certain that these purchases were improper.

[^18]: The OIG audit, *California Student Aid Commission's
    Administration of the Federal Family Education Loan Program Federal
    and Operating Funds* (ED-OIG/A09-C0013, 2003) found that "CSAC used
    reserve fund assets to pay EDFUND for about \$5.1 million of
    equipment, software, and equipment-related services purchased in
    September 1998. Our review of three EDFUND purchase agreements,
    which accounted for \$4.5 million of the \$5.1 million in purchases,
    found that the purchased equipment, software, and services were for
    administration of the FFEL program after September 30, 1998."

[^19]: The guaranty agency spent \$344,523 on 31 printers, 22 computers,
    8 computer monitors, 7 power units, computer equipment, computer
    disk storage, a scanner, a binding machine, a telecommunications
    device, and other equipment.

[^20]: The guaranty agency spent at least \$790,539 on equipment such as
    photocopy machines, enterprise cards, test equipment, furniture,
    telecommunications equipment, a router, an auto dialer, a server,
    and an electric generator.

[^21]: OIG's audits of the nine guaranty agencies disclosed (1) \$48.3
    million in cash funds not transferred to the Federal Fund, (2)
    \$10.9 million in assets owned by the Federal Fund, (3) \$1.7
    million in unsupported labor expenses charged to the Federal Fund,
    and (4) \$103.0 million in excess reserve funds not recalled by the
    Department, for a total of approximately \$164 million in monetary
    findings.

[^22]: OMB Circular A-50: *Audit Followup* requires the audit
    organization and agency management to agree on the actions to be
    taken on reported findings and recommendations. In cases where the
    agency management officials disagree with an audit recommendation,
    the matter shall be resolved by the followup official.