**INSPECTOR GENERAL'S MESSAGE TO CONGRESS**

We are pleased to provide this semiannual report on the activities and
accomplishments of the Office of Inspector General (OIG), U.S.
Department of Education (Department) from April 1, 2006, through
September 30, 2006, as required by the *Inspector General Act of 1978*.
The audits, inspections, investigations, and other activities
highlighted in this report illustrate our on-going commitment to
promoting accountability, efficiency, and effectiveness in federal
education programs and operations. America's students and taxpayers
deserve nothing less.

Over the last six months, OIG issued 41 audit, inspection, and related
reports, memoranda, and letters. We identified over \$283,590,000 in
questioned costs, over \$19,800 in unsupported costs, and \$882 million
in funds that could be better put to use. Summaries of our work are
highlighted in this report, including our inspection of the Department's
Reading First grant application process; our audit of special allowance
payments the Department made to Nelnet, a participant in the
Department's student financial assistance programs; and our audit of
Financial Partners, a division within the Office of Federal Student Aid
that is responsible for the oversight of the Federal Family Education
Loan program.

While our work is a valuable tool for the Department, it is not a
substitute for good management and organizational accountability. The
lack of effective management and organizational accountability can place
taxpayer dollars at risk of waste, fraud, abuse, or non-compliance, and
can impact the public's trust in the Department's ability to effectively
and fairly carry out its programs and mission.

During this reporting period, we closed a number of cases involving
individuals who abused their positions of trust for personal gain. Work
conducted by our Special Agents led to the sentencing of a former
Georgia Superintendent of Education and her co-conspirators, who
concocted a scheme to funnel over \$500,000 in federal education dollars
into her failed 2002 gubernatorial campaign. Our work also led to the
sentencing of the former Financial Manager for the West Virginia
Regional Education Service Agency-1 for embezzling over \$1.3 million in
education funds. Overall, we closed 92 investigations, with over \$7.5
million in recoveries, restitution, fines, and settlements over the last
six months. You will find more information on a number of these cases in
the pages of this Semiannual Report.

While my office has been very productive over the last six months, we do
face a significant challenge in conducting all of the work necessary to
help ensure the integrity of the Department's programs and operations.
Throughout this year, a number of the audits we planned to conduct were
put on hold, as staff was reassigned to our Congressionally-directed
efforts related to hurricane recovery, or as required by our on-going
work, such as Reading First. We remain, however, ever vigilant and
committed to working with the Department to ensure that its operations
and programs provide the best service to the American public.

Thank you for your continued support of our efforts. I look forward to
working with you and the Department in furthering our goals and
achieving our mission.

John P. Higgins Jr.

**CONTENTS**

**Overview**

**1. Management and Accountability in State and Local Programs**

-   No Child Left Behind

    -   Reading First

    -   Migrant Education

        -   Arkansas

    -   Supplemental Education Services

        -   California

    -   Parental Involvement Funds

        -   School District of the City of Detroit

    -   Data Quality

        -   South Dakota Department of Education

    -   Grantee Accountability

        -   Connecticut - New Haven After School Programs

        -   Puerto Rico-Salinas School District

        -   Education Leaders Council

-   Investigations

    -   Georgia

    -   Minnesota

    -   New York

    -   Texas

    -   West Virginia

**2. Management and Accountability in Student Financial Assistance
Programs**

-   Financial Partners

-   Special Allowance Payments to Nelnet

-   MCed Career College

-   Investigations

    -   Fraud by School Officials

    -   Fraud by Government Contractors

    -   Identity Theft/Falsification of Identity

    -   Foreign School Fraud

**3. Management and Accountability in Department's Internal Operations**

-   Information Security

    -   Federal Information Security Management Act

        -   System Security Review of the Department's Education Data
            Center

        -   System Security Review of FSA-Managed Data Centers

        -   Review of the Department's Incident Handling Program and
            Intrusion Detection System

        -   On-line Privacy and Protection of Sensitive Information

    -   Additional IT Reviews

        -   Personally Identifiable Information

        -   Intrusion Detection System

-   Other Internal Operations

    -   Recovery Audit Efforts

    -   Institute of Education Sciences Contractor Employee Personnel
        Security Screenings

    -   Reimbursable Work Authorization Process

    -   Purchase Cards

    -   Contract Proposals

-   Investigations

**4. Hurricane-Related Efforts**

-   Mississippi Institutions of Higher Learning

**5. Other Noteworthy Activities**

-   Nonfederal Audits

-   President's Council on Integrity and Efficiency

    -   PCIE Audit Committee

        -   National Single Audit Sampling Project

        -   Revisions to Audit Bulletin

        -   *FISMA* Framework

        -   FAEC Annual Conference

    -   PCIE IT Roundtable

        -   IT Roundtable Expansion

        -   Protecting Sensitive Agency Information

-   PCIE Homeland Security Roundtable on Hurricane Recovery

-   President's Task Force on Identity Theft

**6. Reporting Requirements of the Inspector General Act of 1978**

> Table 1: Recommendations Described in Previous SARs
>
> on Which Corrective Action Has Not Been Completed
>
> Table 2: OIG Audit Reports on Department Programs
>
> and Activities (April 1, 2006, to September 30, 2006)
>
> Table 3: Other OIG Reports on Department Programs
>
> and Activities (April 1, 2006, to September 30, 2006)
>
> Table 4: OIG Issued Audit Reports with Questioned Costs
>
> Table 5: OIG Issued Audit Reports with Recommendations
>
> for Better Use of Funds
>
> Table 6: Unresolved Reports Issued Prior to April 1, 2006
>
> Table 7: Administrative Appeals of Final Audit Determinations Pending
>
> Before the Secretary as of September 30, 2006
>
> Table 8: Statistical Profile: April 1, 2006, to September 30, 2006

**OVERVIEW**

The Office of Inspector General (OIG), for the period April 1, 2006,
through September 30, 2006, continued its work to promote efficiency,
effectiveness, and integrity in the programs and operations of the U.S.
Department of Education (Department). As discussed in this Semiannual
Report (SAR), we concluded a number of high-visibility audits and
inspections and closed a number of significant investigations.

While our work continues to identify areas of concern and recommends
actions the Department must take to address weaknesses in its operations
and programs, our work is not a substitute for good management and
organizational accountability. The lack of effective management and
organizational accountability can place taxpayer dollars at risk of
waste, fraud, abuse, or non-compliance, and can impact the public's
trust in the Department's ability to effectively and fairly carry out
its programs and mission.

In the first section of our report, we provide a summary of the work
conducted in the area of elementary and secondary education programs
over the last six months. This includes our inspection of the
Department's Reading First grant application process, where we found
that program officials failed to maintain a control environment that
exemplifies management integrity and accountability. In addition,
recently concluded audits in the area of elementary and secondary
education continue to show that the Department lacks effective oversight
of and accountability in its state and local programs. This is
particularly true in the areas of migrant education and the monitoring
of elementary and secondary programs and grantees, which are discussed
in more detail in this section of the report. You will also find
summaries of cases of theft and fraud by individuals placed in positions
of trust in the preschool, elementary, and secondary education arena
that OIG closed during this reporting period.

For 26 years, helping the Department identify and reduce waste, fraud,
abuse, or non-compliance in the student financial assistance programs
has been a top OIG priority. With over \$70 billion awarded annually
through the student financial assistance programs and an outstanding
loan portfolio of nearly \$400 billion, the Office of Federal Student
Aid (FSA) must provide adequate oversight and demand accountability from
its staff, partners, and participants to help protect these taxpayer
dollars from waste, fraud, abuse, and non-compliance. The second section
of our report details the student financial assistance-related audits we
concluded during this reporting period. Our findings show that effective
management and accountability still challenge FSA. One example of this
challenge is detailed in our audit of Financial Partners, the division
within FSA responsible for the oversight of the multi-billion dollar
Federal Family Education Loan (FFEL) program. Further, our audit of
special allowance payments made to Nelnet, a participant in the
Department's student financial assistance program, estimated that FSA
has improperly paid Nelnet more than \$278 million in special allowance
payments for the quarter ended March 31, 2003 through the quarter ended
June 30, 2005, and could improperly pay Nelnet about \$882 million after
June 2005, unless its billings are corrected. Also provided in this
section are summaries of some of the investigative cases we closed
involving theft of student financial aid funds by those in a position of
trust in schools, as well as by students themselves.

In the third section of this report, we highlight the audits and reviews
we completed on the Department's internal operations, including the
results of our annual *Federal Information Security Management Act
(FISMA)* audits. We provide summaries of the internal investigations we
conducted or closed during this reporting period, which show several
individuals abused their positions of trust within the Department.

In the fourth section of our report, we provide an update on our
hurricane-related efforts. Like most federal agencies, we consider
stewardship of these funds to be one of our highest priorities. As the
initial outlay of education-related funding is still under way, the bulk
of our work has not yet been completed. It is our long-standing policy
to keep confidential the details of our ongoing work; therefore, we
report only on our completed work in this section of the report.

OIG constantly strives to improve its operations through our work with
the IG community. In the fifth section of this report, we highlight a
number of our contributions and the work we accomplished over the last
six months within the IG community.

In the sixth and final section of this report, there is a compilation of
tables of the audits, inspections and investigations we concluded during
this reporting period, as required by the *Inspector General Act of
1978,* as amended.

For more information on the work or activities discussed in this report,
please contact the OIG Congressional Liaison at (202) 245-7023, e-mail
us directly at <oigpublicaffairs@ed.gov> or visit our website
<http://www.ed.gov/about/offices/list/oig/index.html>.

**SECTION 1:**

**MANAGEMENT AND ACCOUNTABILITY IN**

**STATE AND LOCAL PROGRAMS**

The Department\'s elementary and secondary programs serve more than
14,600 school districts and approximately 54 million students attending
more than 94,000 public schools and 27,000 private schools each year.
During this reporting period, we concluded an audit of the Department's
Reading First grant application process, and continued our audits into
state educational agency (SEA) and local educational agency (LEA)
compliance with the diverse programs associated with the *Elementary and
Secondary Education Act (ESEA) of 1965,* as amended by the *No Child
Left Behind Act of 2001 (NCLB*). Our work identified an on-going need
for improvements in accountability by Department management and staff,
as well as the need for additional guidance and monitoring of *NCLB*
programs and program participants. In addition, we closed a number of
significant investigative cases of theft of federal education dollars by
those in positions of trust to educate our children. Below you will find
a brief summary of some of the more high-profile reports and
investigative cases we closed over the last six months.

**[No Child Left Behind]{.underline}**

**[Reading First]{.underline}**

Title I, Part B, subpart A of *ESEA*, as amended by the *NCLB*,
established the Reading First program aimed at helping every child in
every state become a successful reader by the end of third grade. The
Congress appropriated nearly \$5 billion for this program over its first
five years \-- monies to be allotted to SEAs based on the proportion of
children aged 5 to 17 who reside within the state from families with
incomes below the poverty line. SEAs submit applications to the
Department to receive the funds. In accordance with the law, the
applications are to be reviewed by an expert review panel composed of,
at a minimum, three individuals nominated by three different groups plus
the Department, and each application had to meet all statutory
requirements before the state would receive any funds. The Department's
Office of Elementary and Secondary Education (OESE) is responsible for
administering the Reading First program.

During this reporting period, we concluded an inspection of the
Department's Reading First program grant application process. Our effort
had three objectives, to determine: (1) if the Department selected the
expert panel in accordance with *NCLB,* and if it screened the panel
members for possible conflict of interest issues; (2) if the panel
reviewed the applications in accordance with established criteria; and
(3) if the panel adequately documented its reasons for denying funding.

We found that the Department did not select the expert review panel in
compliance with the requirements of *NCLB* in that it did not ensure
that each state application was reviewed by a properly constituted
panel. Although not required by statute to screen panel members for
possible conflicts of interest, we found the Department used a process
that was not effective. It also did not follow its own guidance for the
peer review process for state applications. The Department also awarded
grants to states without documentation that the expert review panels had
approved the final applications, and included requirements in the
criteria used by the expert review panels that went beyond the statutory
requirements of *NCLB*. In addition, Department officials obscured the
statutory requirements of the law, acted in contravention of Government
Accountability Office (GAO) *Standards for Internal Control in the
Federal Government*, and took actions that call into question whether
they violated the language of the *Department of Education Organization
Act* that prohibits Department officials from exercising any direction,
supervision or control over the curriculum or program of instruction of
any educational institution, school, or school system.

Our findings underscore the Department's lack of an appropriate control
environment around the implementation of this program. We made a number
of recommendations, including that the Department review the management
and staff structure of the Reading First program office and make
changes, as appropriate, to ensure that the program is managed and
implemented consistent with the statutory requirements of *NCLB*. The
Department did not agree with all key points made in our findings, but
did concur with all of our recommendations. [Click
here](http://www.ed.gov/about/offices/list/oig/aireports/i13f0017.pdf)
for a copy of our report.

**[Migrant Education]{.underline}**

**Arkansas:** SARs 50 and 52 provided information on the first three
reports in a series of audits we are conducting on SEA compliance with
the child count provisions of the Migrant Education Program (MEP)
statute. During this reporting period, we concluded a fourth audit: to
determine if the Arkansas Department of Education (ADE) implemented
systems to accurately count the children eligible to participate in the
MEP. Our audit found that 96 percent (114 out of 119) of the migrant
children in our sample were ineligible to participate in the program.
Based on the sample results, we project that ADE had 3,127 ineligible
migrant children in the districts we reviewed, and we estimate that ADE
inappropriately spent about \$877,000 in MEP grant funds for those
children.

Federal regulations define a MEP eligible migratory child as a child who
is, or whose parent, spouse, or guardian is, a migratory agriculture
worker, including a migratory dairy worker, or a migratory fisher, and
who, in the preceding 36 months, has moved from one school district to
another, to obtain temporary or seasonal employment in agricultural or
fishing work. MEP funds are allocated by formula to SEAs based on each
state's per pupil expenditure for education and counts of eligible
migratory children, aged 3 through 21, residing within the state. In our
sample, we identified 68 children that did not meet the migrant
eligibility requirement. We also identified 46 ineligible migrant
children whose families did not work in temporary or seasonal positions,
as required. Although the Department's guidance allows a state to
complete an industrial survey to establish that work that is available
year-round can be considered temporary positions for the MEP, ADE did
not complete an industrial survey, nor did it have any adequate
alternative documentation to show how permanent jobs were considered to
be temporary for MEP purposes. Based on our findings, we recommended
that the Department require ADE to conduct a statewide migrant child
count for the \$5.1 million of MEP funds allocated to Arkansas in
FY2003-2004, as well as for all subsequent years; to return to the
Department any funds expended for ineligible children; and to establish
adequate internal controls to ensure federal requirements are followed
by migrant officials when identifying and recruiting children into the
program. ADE strongly disagreed with our audit approach and our finding.
[Click
here](http://www.ed.gov/about/offices/list/oig/auditreports/a06f0016.pdf)
to review our report.

**[Supplemental Education Services]{.underline}**

**California:** Title I, Part A of the *ESEA*, as amended by *NCLB*,
requires LEAs to offer supplemental education services (SES) to students
from low-income families attending Title I schools in their second year
of school improvement status, or that have been identified for
corrective action or restructuring under the statute. State-approved SES
providers, selected by the individual student's parents, provide SES to
eligible students under agreements that the LEAs are required to
develop. These agreements, which should be developed in consultation
with the parents and the provider, are required to include a statement
of specific achievement goals, identify how the student's progress will
be measured, and set a timetable for improving the student's
achievement. The SEA is responsible for evaluating potential providers,
maintaining a current list of approved providers, and monitoring all
providers delivering services in the states.

> We conducted five SES audits of providers in California, including
> for-profit providers, non-profit providers, and an LEA provider. We
> also looked at a variety of delivery modes---individual, small group,
> and online---to identify and understand specific issues associated
> with each type of provider. In September, we released a Management
> Information Report to provide the Department with information
> identified in our audits. Our intent was to provide insight to the
> Department on selected issues identified in our audits, and offer
> suggestions for enhancing the Department's SES Non-Regulatory Guidance
> published in June 2005. Our report noted four areas of concern in
> California: (1) improper LEA prioritization of students who received
> SES; (2) LEA preparation of student learning plans; (3) provider
> payments for SES; and (4) SES provider effectiveness. We made a number
> of suggestions for each area, including that the Department take
> actions to enhance its guidance related to SES provider effectiveness.
> It should also continue to monitor implementation of the
> prioritization provisions of the *ESEA* and be prepared to further
> enhance its guidance if LEAs continue to misinterpret the application
> requirements. This may include a step-by-step process that LEAs can
> follow to ensure consistent determinations on whether an LEA should
> prioritize. While the suggestions in our report were directed to the
> Department, we recognized that the SEAs also play an important role in
> ensuring that LEAs comply with the SES provisions, through SEA
> monitoring activities. The Department concurred with the information
> presented in our report, and has subsequently placed conditions
> related to SES on California\'s Title I Part A grant. [Click
> here](http://www.ed.gov/about/offices/list/oig/auditreports/x09g0007.pdf)
> for a copy of our report.

**[Parental Involvement Funds]{.underline}**

**School District of the City of Detroit**: We conducted an audit to
determine whether the School District of the City of Detroit (Detroit)
consulted with parents in determining how to use parental involvement
funds under Title I of the *ESEA* during the 2004-2005 school year, and
if it properly accounted for these funds during the 2003-2004 and
2004-2005 school years. While we found that Detroit consulted with
parents, its policy did not include all required elements. In addition,
it did not properly account for or use the funds. Based on our findings,
we made a number of recommendations, including that the Department
require the Michigan Department of Education (MDE) to ensure that
Detroit returns over \$930,000 in unallowable costs to the Department,
as well as develop and implement policies and procedures that provide
reasonable assurance that Title I parental involvement non-personnel
expenditures are necessary, reasonable, allocable, and adequately
documented. MDE and Detroit did not dispute most of our findings and
recommendations. [Click
here](http://www.ed.gov/about/offices/list/oig/auditreports/a05f0018.pdf)
to review our report.

**[Data Quality]{.underline}**

**South Dakota Department of Education:** We concluded an audit to
determine whether the South Dakota Department of Education's (SDDE)
required reporting of dropout and graduation rates in the 2003-2004
Consolidated State Performance Report (CSPR) were supported by reliable
data and met the requirements of Title I, Part A of the *ESEA,* as
amended by *NCLB*. The *ESEA* provides states the option of applying for
and reporting on multiple *ESEA* programs through a single consolidated
application and report, known as the CSPR. While we found that SDDE met
the requirements of Title I by reporting dropout and graduation rates,
the state reported its 2003-2004 graduation rates by using a one-year
cohort definition, instead of the four-year cohort definition, as
suggested by the Department. We also determined that for the schools
reviewed, SDDE collected unreliable data to support the graduation and
dropout rates reported in the 2003-2004 CSPR. We recommended that the
Department require SDDE to develop and implement a graduation definition
that meets Title I requirements, as well as develop and implement
improved procedures on classifying and documenting graduate and leaver
data, training data-reporting staff, and data collection oversight and
monitoring. SDDE did not agree with one of our findings and
recommendation. [Click
here](http://www.ed.gov/about/offices/list/oig/auditreports/a06f0021.pdf)
to review the report.

**[Grantee Accountability]{.underline}**

**Connecticut - New Haven After School Programs:** We conducted an audit
of the New Haven School District's (New Haven) administration of the
program under Title I, Part A of the *ESEA*, Summer and After School
Program funds to determine whether it properly administered the funds in
accordance with federal laws and regulations. We found that New Haven
did not properly administer the \$3.78 million it expended on summer and
after school programs. New Haven supplanted funds from other nonfederal
sources; and 15 of its 21 summer programs lacked documentation and were
held in ineligible schools. In addition, the City of New Haven's
accounting system, the official accounting system for New Haven,
identified expenditures in the aggregate and could not identify
individual expenditures for its 21 summer programs. Based on our
findings, we made a number of recommendations, including that the
Department instruct the Connecticut Department of Education (CDE) to
require New Haven to identify Title I expenditures associated with
ineligible programs and return those funds to the Department, or return
the entire \$3.78 million of Title I funds used to pay for the summer
programs. CDE did not concur with our finding or recommendations. [Click
here](http://www.ed.gov/about/offices/list/oig/auditreports/a02f0005.pdf)
to review our report.

**Puerto Rico -- Salinas School District:** We conducted an audit to
determine if the Puerto Rico Department of Education Salinas School
District's (PRDE-Salinas) properly administered non-salary funds under
Title I, Part A of the *ESEA,* in accordance with grant requirements,
federal laws, and regulations. We found that PRDE-Salinas failed to
provide proper documentation to support several small disbursements
totaling approximately \$28,000, and lacked appropriate supervisory
oversight of its cash management activities. Based on our findings, we
made several recommendations, including that the Department require PRDE
to submit the missing documentation to account for the expended funds,
or return the money to the Department. PRDE generally concurred with our
findings and recommendations. [Click
here](http://www.ed.gov/about/offices/list/oig/auditreports/a02f0017.pdf)
to review our report.

**Education Leaders Council (ELC)**: We conducted an audit to determine
if the Education Leaders Council's (ELC) subcontracting activities
complied with the procurement standards set forth in the Education
Department General Administrative Regulations (EDGAR), if its
subcontract costs for Achievement Technologies, Incorporated (ATI) and
The Princeton Review (TPR) charges to the federal grants were reasonable
and allocable, and if there was any conflict of interest between ELC and
its subcontractors. We found that ELC's subcontracting activities did
not comply with the procurement standards set forth in EDGAR, nor did it
perform and document an adequate cost or price analysis. As a result, we
were unable to determine if the costs charged by ATI and TPR were
reasonable relative to other vendors' prices. Additionally, while ATI
and TPR made significant contributions to ELC and its affiliates in
2003, we found no conflicts of interest issues between ELC and the
subcontractors. We made several recommendations, including that ELC
ensure that it complies with procurement and documentation standards set
forth in Department regulations when renewing or awarding any federally
funded contract. ELC, which has changed its name to "Following the
Leaders," concurred with our findings and did not disagree with our
recommendations. [Click
here](http://www.ed.gov/about/offices/list/oig/auditreports/a03f0003.pdf)
to review our report.

**[INVESTIGATIONS]{.underline}**

Our investigations into suspected fraudulent activity by SEAs, LEAs, and
other federal education grantees have led to the arrest and conviction
of a number of high-ranking state and local education
employees---individuals who were in positions of public trust---for
misuse of federal education funds. We will continue to aggressively
pursue those who seek to defraud federal education programs at the
expense of our nation\'s students. Here are a few examples of our work
in this area over the last six months.

**Georgia:** The former State Superintendent of Education and 2002
gubernatorial candidate and five co-conspirators were sentenced for
their roles in a scheme to funnel over \$500,000 in federal education
dollars from the Georgia Department of Education (GDOE) into several
companies owned by one of the co-conspirators. Portions of those funds
were funneled into the former official's gubernatorial campaign, and
used for personal expenses of the candidate, including cosmetic surgery.
Our investigation revealed that the former official ordered GDOE
officials to issue checks totaling \$500,000 to various companies,
purportedly to provide computer licenses and services to the Atlanta
Area School for the Deaf, the Georgia School for the Deaf, and the
Governor's Honors Program. The co-conspirator who owned those companies,
transferred substantial portions of those funds to the gubernatorial
campaign. Other co-conspirators included the owner's former Chief
Financial Officer, a former Deputy State School Superintendent for GDOE,
a former Federal Programs Manager for GDOE, and the former manager of
the former official's gubernatorial campaign. The former State
Superintendent/candidate was sentenced to eight years in prison, and
ordered to pay restitution of more than \$414,000. Her co-conspirators
received sentences ranging from eight-years in prison to one-year
probation, and were ordered to make financial payments, ranging from a
fine of over \$3,000 to restitution of over \$382,000.

**Minnesota:** The former owners of the Right Step Academy, one of the
first charter schools in Minnesota, were sentenced for defrauding the
school in order to finance their extravagant lifestyle. They were given
prison sentences ranging from 30-37 months, followed by probation, and
were ordered to pay nearly \$490,000 in restitution. Our investigation,
conducted jointly with the IRS-Criminal Investigation Division
(IRS-CID), uncovered evidence that the couple set up a dummy corporation
and diverted school funds to the corporation---funds that were used to
purchase luxury cars, vacations, personal real estate, clothing, and
house furnishings.

**New York:** The former Assistant Superintendent for Personnel at the
William Floyd Union Free School District pled guilty, was sentenced to
community service, lost his employment license, and was fined for
falsifying records. The former official obtained a letter from William
Floyd's former Certified Public Accountant firm falsely indicating that
his daughter-in-law was qualified for an accounting position at William
Floyd. This resulted in her being hired for a position in which she was
responsible for the preparation of final expenditure reports for federal
grants received by William Floyd. Our investigation uncovered evidence
that the daughter-in-law prepared 15 false expenditure reports that were
filed with the New York State Department of Education, that enabled
William Floyd to fraudulently obtain over \$530,000 in federal education
grant funds.

**Texas:** During this reporting period, three former officials of the
Prepared Table Charter School in Texas were ordered to pay \$2 million
in restitution for defrauding a number of federal and state agencies. A
task force consisting of OIG staff, the FBI, IRS-CID, the U.S.
Department of Agriculture OIG, and the Texas Education Agency, found
that officials misreported student attendance data in order to receive
federal and state funds. From 1999 through 2002, the school received
over \$2.5 million in federal funds. The task force found that the
school also commingled its finances with a church in Houston, which is
against the law. The school's charter was revoked in August 2002. The
three officials each pled guilty and were sentenced to prison in 2005.

**West Virginia:** The former Financial Manager and Executive Secretary
for the West Virginia Regional Education Service Agency 1 (RESA-1) was
sentenced to 64 months in prison and ordered to pay over \$1.5 million
in restitution for embezzling education funds and filing a false tax
return. RESA is a state educational agency that receives funds under
Title I, Part A of the *ESEA* to provide a broad spectrum of services
and support for local educational agencies to improve student
achievement and maximize economies of scale in staff development,
purchasing, and administrative services. Our investigation, conducted in
partnership with the FBI, IRS CID, and the Beckley Police Department,
revealed that the former official embezzled over \$1.3 million dollars
in education funds from RESA-1 and filed a false tax return with the
IRS.

**SECTION 2:**

**MANAGEMENT AND ACCOUNTABILITY IN**

**STUDENT FINANCIAL ASSISTANCE PROGRAMS**

The Department's student financial assistance programs are large and
complex. The loan and grant programs rely on over 6,000 postsecondary
institutions, more than 3,000 lenders, 35 guaranty agencies and many
contractors. With over \$70 billion awarded annually through the student
financial assistance programs and an outstanding loan portfolio of over
\$400 billion, the Department must ensure that all entities involved in
the programs are adhering to statutory and regulatory requirements. As
the office responsible for administering the student aid program, FSA
must provide adequate oversight and demand accountability from its
staff, partners, and participants to help protect these dollars from
waste, fraud, abuse, and non-compliance. Audits concluded during this
reporting period show that effective management and accountability
challenge FSA. In addition, we closed a number of investigative cases of
theft of student financial aid funds by both those in positions of trust
in schools, as well as by students themselves. Our reports and more
significant cases are highlighted below.

**Financial Partners:** Financial Partners is the division within FSA
that is responsible for the oversight of the FFEL program---a program
that in 2005 guaranteed \$43 billion in loans to 5.8 million FFEL
recipients, paid \$5.1 billion to lenders for interest and special
allowance subsidies, and paid \$4 billion to guaranty agencies. It has
staff located in Washington, DC, and regional offices across the
country. The regional offices are responsible for providing oversight
of, and technical assistance to, the guaranty agencies, lenders, and
servicers, and other organizations participating in the FFEL program.
During this reporting period, we concluded an audit to evaluate the
adequacy of Financial Partners' processes for monitoring guaranty
agencies, lenders, and servicers. We found that it has not implemented
an acceptable level of internal control for monitoring and providing
oversight of FFEL program participants, as required by the *Federal
Managers Financial Integrity Act of 1982 (FMFIA*). According to *FMFIA*,
internal accounting and administrative controls of each executive agency
shall be established in accordance with GAO's *Standards for Internal
Control in the Federal Government*. During our audit period, we
identified internal control weaknesses relating to five of the internal
control standards---control environment, control activities, monitoring,
information and communications, and risk assessment. Based on our
review, Financial Partners did not provide adequate oversight and
consistently enforce FFEL program requirements.

Specifically, we found that: program monitoring and oversight were not
in the tactical goals of FSA's Strategic Plan for Financial Partners;
its reporting structure created an inherent organizational conflict of
interest, with the advocate for guaranty agencies supervising the staff
responsible for compliance and oversight of those entities; it
overstated the number of program reviews performed in the Postsecondary
Education Participation System and did not consistently quantify
liabilities in program reviews; and it did not ensure that the
Department's policies regarding delegation of authority for waiving
liabilities were followed.

In addition, Financial Partners did not adequately review, test,
identify, and report significant instances of non-compliance in its
program reviews and technical assistance. It does not have an effective
information and communications process for requesting assistance on
policy issues and communicating resolution to staff. As a result,
Financial Partners staff does not receive timely policy guidance to
determine whether guaranty agencies, lenders, and servicers are in
compliance. And lastly, Financial Partners has not fully implemented its
scorecards as a risk assessment tool and does not have sufficient
information to evaluate whether the scorecard elements are useful in
assessing risk.

Based on our findings, we made a number of recommendations, including
that FSA include compliance monitoring of guaranty agencies, lenders,
and services in the tactical goals of FSA's strategic plan. FSA did not
concur with all of our findings, but did concur with several of our
recommendations. [Click
here](http://www.ed.gov/about/offices/list/oig/auditreports/a04e0009.pdf)
for a copy of our report.

**Special Allowance Payments to Nelnet**: Special allowance payments are
made to lenders in the FFEL program to ensure that lenders receive an
equitable return on their loans. In general, the amount of a special
allowance payment is the difference between the amounts of interest the
lender receives from the borrower or the government and the amount that
is provided under requirements in the *Higher Education Act of 1965*, as
amended *(HEA)*. The *HEA* includes a special allowance calculation for
loans that are funded by tax-exempt obligations issued before October 1,
1993. The quarterly special allowance payment for these loans may not be
less than 9.5 percent, minus the interest the lender receives from the
borrower or the government, divided by four. In April 2003, Nelnet
implemented a process to increase the amount of its loans receiving
special allowance under the 9.5 percent floor. Known as Project 950,
Nelnet transferred loans into and out of an eligible tax-exempt
obligation from taxable obligations, continuing to bill under the 9.5
percent floor for those loans after they were transferred to the taxable
obligations. Nelnet repeated this process many times, increasing the
amount of loans it billed under the 9.5 percent floor from about \$551
million in March 2003 to about \$3.66 billion in June 2004. Nelnet
terminated Project 950 in May 2004, after the introduction of the
*Taxpayer Teacher Protect Act,* which when passed, amended the *HEA* to
make loans that were transferred, sold, or refinanced by taxable
obligations after September 30, 2004, ineligible for the 9.5 percent
floor.

In 2005, we initiated an audit to determine whether Nelnet's use of
Project 950 to increase the amount of its student loans billed under the
9.5 percent floor complied with *HEA* requirements, regulations, and
other guidance issued by the Department. We found that Nelnet's Project
950 did not comply with applicable laws, regulations, or Department
guidance; therefore, the increased amount of loans created by Project
950 was ineligible to be billed under this 9.5 percent floor. We
estimated that Nelnet was improperly paid more than \$278 million in
special allowance payments for these loans from the quarter ended March
31, 2003 through the quarter ended June 30, 2005. Nelnet could be
improperly paid about \$882 million for the ineligible loans after June
2005, if its billings are not corrected.

Based on our finding, we made several recommendations, including that
FSA instruct Nelnet to exclude all Project 950 loans from its claims for
payment under the 9.5 percent floor, as well as require the return of
the overpayments described in our report. Nelnet strongly disagreed with
our findings and recommendations, asserting that its actions were in
accordance with the *HEA*, regulations, and guidance issued by the
Department. While we received no official comments from the Department
prior to issuing our final audit report, the Secretary is currently
considering the Department's response to the findings and
recommendations in this report. [Click
here](http://www.ed.gov/about/offices/list/oig/auditreports/a07f0017.pdf)
for a copy of our report.

**MCed Career College:** Our audit of MCed Career College's (MCed)
administration of student financial assistance programs sought to
determine whether its administration of *HEA* Title IV programs was in
compliance with applicable laws and regulations governing institutional
eligibility, program eligibility, student eligibility, awards
calculations, disbursements, and return of *HEA* Title IV funds. While
we concluded that MCed met requirements governing institutional and
program eligibility, it did not consistently comply with Title IV
requirements governing student eligibility, award calculations,
disbursements, and the return of Title IV funds. Specifically, MCed did
not have adequate controls in place to ensure that verification of
student eligibility data was properly documented, Title IV award
calculations were accurate, and the timing of Title IV disbursements was
appropriate. In addition, MCed did not have adequate controls in place
to ensure that return of Title IV calculations were performed correctly,
or that the unearned Title IV funds were returned in a timely manner and
to the proper Title IV program.

We made a number of recommendations, including that FSA require MCed to
have its independent public accountant, as a part of the institution's
next annual audit, and provide an attestation that the described
internal control procedures and changes in its accounting system were
fully implemented. We also recommended that MCed identify all amounts of
unearned Title IV funds that have not been returned to the appropriate
Title IV program for students and return the funds to the applicable
Title IV program. MCed concurred with our findings and described
corrective actions to address our recommendations. [Click
here](http://www.ed.gov/about/offices/list/oig/auditreports/a09g0001.pdf)
to review our report.

**[INVESTIGATIONS]{.underline}**

### Identifying and investigating fraud and abuse in the student financial assistance arena has always been a top OIG priority. The following are summaries of the most egregious cases of student financial aid fraud that were closed over the last six months. 

**[Fraud by School Officials]{.underline}**

-   The former Dean of Education at the Western School of Health and
    Business Careers, located in Pittsburgh, Pennsylvania, was sentenced
    to two years of probation and 50 hours of community service for
    forging accrediting agency documents. Our investigation revealed
    that the former Dean forged four Accrediting Commission of Career
    Schools and Colleges of Technology (ACCSCT) program approval
    letters. The letters were never issued by ACCSCT, and the programs
    were not approved. Our investigation further determined that there
    were four other programs that were never approved by ACCSCT. As a
    result of his criminal conduct, the school received and disbursed
    over \$5 million of federal financial aid to which it was not
    entitled.

-   The former financial aid director of the Troy School of Beauty
    Culture (TSB), located in New York, was sentenced to 18 months in
    jail and two years of supervised release for embezzlement. Our
    investigation, conducted jointly with the FBI, disclosed that the
    former director embezzled over \$410,000 in Pell Grant funds over a
    four-year period. He used the identities of at least 25 individuals,
    including a co-worker, to substantiate drawdowns of funds into the
    TSB Pell Grant account. He then wrote checks to "cash" and converted
    them for his personal use.

-   The three former owners of the Moler Beauty College (MBC), located
    in Louisiana, were sentenced and fined for conspiracy to commit
    student financial aid fraud.  Our joint investigation with the FBI
    disclosed that the three owners, along with a financial aid
    administrator and a contracted Ability-To-Benefit (ATB) tester,
    engaged in a scheme to fraudulently obtain Title IV funds by
    falsifying student and school records.  MBC officials also engaged
    in a scheme to prevent the return of Title IV funds to the
    Department. The owners received prison sentences ranging from 12 to
    27 months, and were ordered to jointly pay over \$164,000 in
    restitution to the Department.

**[Fraud by Government Contractors]{.underline}**

-   A former ATB tester in Illinois was sentenced to six months in
    prison, three years supervised released, and was ordered to pay over
    \$156,000 in restitution for falsifying ATB tests. Our investigation
    found that from 1997 through 1999, the former tester falsified ATB
    tests to make it appear that students were eligible for financial
    aid, causing over \$150,000 in Pell Grant and Supplemental Education
    Opportunity Grant funds to be disbursed on behalf of ineligible
    students.

**[Identity Theft/Falsification of Identity]{.underline}**

-   As a follow-up to a case we reported in our last *SAR*, another
    family member received a prison sentence for his role in a nearly
    \$1 million financial aid fraud scheme. The man was sentenced to
    serve 24 months in prison. He was one of seven family members who
    participated in the scheme, orchestrated by his grandmother, in
    which the participants used the identities of more than 65 people to
    obtain almost \$1 million in student financial aid at various
    colleges in Arizona, Colorado, Maryland, Nevada, and Texas through
    distance education programs.

-   The ringleader and his intermediaries were sentenced for their roles
    in a \$200,000 financial aid fraud kickback scheme at Texas Tech
    University (TTU). The ringleader, a former student worker in the TTU
    financial aid office, devised a scheme whereby he submitted
    fraudulent Free Applications for Federal Student Aid (FAFSAs) on
    behalf of students to qualify them for student aid, and received a
    kick-back of up to half the amount each student received. Two
    intermediaries helped recruit students to participate in the scheme
    and provided student names and Social Security numbers (SSN) to the
    ringleader. The ringleader also used the identities of 13 other
    students to obtain federal Pell Grant funds for himself. He was
    sentenced to over two years imprisonment, three years supervised
    release, and was ordered to pay over \$122,000 in restitution. Both
    intermediaries were sentenced to a period of home confinement,
    followed by probation. One of the intermediaries was ordered to pay
    over \$29,000 in restitution, and the other over \$14,000 in
    restitution. Three other students were sentenced for participating
    in the scheme, while two others were acquitted.

-   A former Ohio public school employee was sentenced to two years
    probation and ordered to pay \$142,000 in restitution for financial
    aid fraud. Our investigation revealed that for nearly 22 years, the
    woman assumed the identity of a high school friend who died in 1969.
    From 1990 until 2001, she used the false identity to attend various
    universities and apply for and receive federal financial aid. After
    completing her schooling and using the false identity, the woman
    applied for and obtained a teaching certification to teach in Ohio
    public schools. She had previously defaulted on student loans using
    her identity and SSN, which left her ineligible to receive further
    financial aid.

-   A former New York University student was sentenced to 20-months
    imprisonment, three years supervised release, and ordered to pay
    over \$103,000 for his role in an identity theft/student aid fraud
    scheme. Our investigation found that the individual used a false
    identity and an SSN assigned to another person to apply for and
    receive federal and private student financial aid to which he was
    not entitled. He also applied for and received---under false
    pretenses---private scholarship and grant funds reserved for victims
    of the September 11^th^ attacks.

-   A former Temple University student was sentenced to two years
    probation and ordered to pay over \$83,000 in restitution for theft
    of education funds and credit card fraud. Our investigation
    disclosed that the former student forged her mother\'s signature to
    apply for and receive nine Parent Loan for Undergraduate Students
    (PLUS) loans totaling nearly \$55,000, as well as used her mother's
    identity to fraudulently obtain various credit cards.

**[Foreign School Fraud]{.underline}**

-   An Indiana man was sentenced to six months incarceration, three
    years supervised released, and was ordered to pay over \$83,000 in
    restitution for financial aid fraud. From May 2001 to May 2002, the
    man received student loan funds in order to attend Bond University,
    located in Australia. Our investigation revealed that the man did
    not attend Bond during the time period he received financial aid.

**SECTION 3:**

**MANAGEMENT AND ACCOUNTABILITY IN DEPARTMENT'S INTERNAL OPERATIONS**

OIG's reviews of the Department's internal operations are designed to
help improve the overall operation of this mission-focused agency. Our
reviews seek to help the Department accomplish its objectives by
ensuring the reliability and integrity of its data, its compliance with
applicable policies and regulations, its ability to safeguard its
assets, and that it is effectively and efficiently utilizing the
taxpayer dollars with which it has been entrusted. Work concluded during
this reporting period shows that there are significant inadequacies with
the Department's management of and accountability for its internal
operations. In addition, enforcement of its policies and procedures
continues to challenge the Department.

**[INFORMATION SECURITY]{.underline}**

In 1998, GAO released a report noting that deficiencies in federal
information security are a growing concern. Eight years and countless
technological advancements later, it remains a concern throughout the
federal government.

**[Federal Information Security Management Act]{.underline}**

The *E-Government Act of 2002*, signed into law by President George W.
Bush, recognized the importance of information security to the economic
and national security interests of the United States. Title III of the
*E-Government Act*, entitled the *Federal Information Security
Management Act (FISMA) of 2002,* requires each federal agency to
develop, document, and implement an agency-wide program to provide
information security for the information and information systems that
support the operations and assets of the agency, including those
provided or managed by another agency, contractor, or other source. It
also requires the Inspectors General to perform independent evaluations
of the effectiveness of information security control techniques and to
provide assessments of the agency's compliance with *FISMA*.

We issued a series of reports to address the 2006 *FISMA* requirement: a
system security review of the Department's Education Data Center; a
system security review of FSA-managed data centers; a review of the
Department's incident handling program and intrusion detection system;
and a report on the Department's online privacy policy and protection of
sensitive information. Our findings in these reviews, some of which had
been previously reported, were brought to management's attention for its
determination as to whether the findings represent a "significant
deficiency," as defined in the Office of Management and Budget (OMB)
Circular A-123, *Management's Responsibility for Internal Control*. In
response to each of these audits, the Department generally concurred
with our findings and recommendations and provided a proposed correction
action plan to address our recommendations; however, FSA did not concur
that the deficiencies rose to the level of significant deficiency, as
defined in OMB\'s FY 2005 Instructions for Preparing the *FISMA* report
and Privacy Management Report."

Our *FISMA* and other IT security audits fall under exemption (b)(2) of
the *Freedom of Information Act*. For security purposes and to maintain
the integrity of the Department's critical data, these audits are not
posted on our Web site or shared outside of official channels. Below we
discuss only the general/public aspects of our work and findings.

**System Security Review of the Department's Education Data Center:**

> We performed a security review of the information technology
> infrastructure at the Department's Education Data Center (EDC). EDC
> supports major applications that are vital to the Department's
> success. Our review identified significant security weaknesses that
> must be addressed in order for the Department to maintain the security
> certification and accreditation (C&A) of its systems. We also
> identified a deficiency in the Department's configuration management
> program that restricts its ability to reasonably maintain its systems
> in a secure manner. Based on our findings, we determined that the
> Department lacks certain management, operational, and technical
> security controls to adequately protect the confidentiality,
> integrity, and availability of systems and data residing at the EDC.
> We recommended that the Department develop a plan to address the
> security vulnerabilities at the EDC, and that it implement procedures
> to verify that resulting corrective actions fully addresses these
> security weaknesses.
>
> **System Security Review of FSA-Managed Data Centers**: Our audit
> sought to evaluate the operational, management, and technical controls
> of FSA's system security program at its data centers to determine if
> those controls adequately reduce the likelihood that system security
> weaknesses can be exploited, and if those controls effectively prevent
> unauthorized access, alteration, or destruction to mission critical
> systems and data. Our audit scope, however, was limited to FSA's
> Rockville Data Center (RDC), because an FSA subcontractor responsible
> for managing the Common Origination and Disbursement system (COD)---a
> \$100 million financial processing operation---refused to provide
> information necessary for our audit. From the information we were able
> to review at RDC, we determined that FSA must improve its controls to
> adequately protect its systems. We made a number of recommendations,
> including that FSA develop a plan to address the security
> vulnerabilities at the RDC, and that it implement procedures to verify
> that resulting corrective actions fully addresses these security
> weaknesses.
>
> **Review of the Department's Incident Handling Program and Intrusion
> Detection System:** We conducted a review to evaluate the
> effectiveness of the Department's Incident Handling (IH) and Intrusion
> Detection System (IDS) in identifying and responding to aggressive
> Internet-based attacks in accordance with applicable laws and
> regulations. We identified a significant deficiency in the
> Department's management control structure in IH and IDS that restricts
> its ability to reasonably identify and report suspicious activity. In
> addition, other identified deficiencies must be addressed in order to
> maintain the security C&A of its systems. Based on our findings, we
> determined that the Department's IH program and IDS are not effective
> in ensuring identification and responsiveness to malicious attacks
> against its systems, a determination we have identified in previous
> FISMA audits and reported to the Department. We recommended that the
> Department develop a plan to address the security vulnerabilities
> identified in our audit, and implement procedures to verify that
> resulting corrective actions fully address the security weaknesses.
>
> **Online Privacy and Protection of Sensitive Information:** Our audit
> sought to assess the Department's compliance with federal regulations
> requiring federal agencies to take all necessary/reasonable measures
> to swiftly eliminate significant vulnerabilities to the sensitive
> information entrusted to them. Through interviews, documentation
> reviews, and testing of the Department's external websites for privacy
> policy conformance, we found that it has not ensured compliance with
> privacy laws and guidance as specified by OMB and Departmental
> directives as they relate to establishing protection controls for
> privacy. In addition, our reviews identified potential areas of
> non-compliance with OMB directives. We recommended that the Chief
> Information Officer of both the Department and FSA ensure its publicly
> accessible websites comply with OMB regulations, and that controls are
> in place to ensure its online privacy policies are consistent.

**[Additional IT Reviews]{.underline}**

**Personally Identifiable Information:** Personally identifiable
information (PII) is generally defined as any piece of information that
can potentially be used to uniquely identify, contact, or locate a
single person. Because IT and the Internet have made it easier to
collect PII, it has become much more important to protect PII. During
this reporting period, we issued a memorandum to the Department to alert
it to weakneses we identified in a Financial Management System Software
(FMSS) application that impacts its protection of PII. The goal of the
memorandum was to expedite corrective action. We found that poor
internal controls exist over the FMSS application, resulting in reduced
accountability, violation of the principles of "Least Privilege"
(granting users only mimimal access to systems in order to perform their
duties), and unncessary access to sensitive PII. We also found that
improper levels of security clearances exist for application users,
creating unnecessary risk that could potentially lead to the compromise
of sensitive PII.

**Intrusion Detection System:** On February 27, 2006, the Department
contacted OIG to report that the Intrusion Detection System (IDS)
sensors for the Department's network, EDNet, had been non-operational
since February 17, 2006. As the IDS is a critical component of the
Department's IT security program, and its non-operation could
significantly impact the Department's ability to identify a computer
intrusion, OIG agreed to look further into the matter. Although we did
not conduct a full audit, we reviewed the IDS sensors, status reporting,
and the configuration of the network and identified three concerns that
we shared with the Department via an alert memorandum in order for
Department staff to research the issues further and take appropriate
action.

First, we found that the IDS sensors were operating properly (providing
intrusion alerts) an average of only 44 percent of the time, which put
the Department at a substantial risk of an undetected intrusion. Second,
we determined that this situation happened and remained unresolved for a
substantial period of time either due to the Department's inadequate
oversight of the EDNet contractor responsible for managing the IDS, or
because Department personnel were aware of the problem and chose not to
press the EDNet contractor to correct the problem, or inform higher
level management of the issue. Lastly, we found that the EDNet
contractor may not have met its Service Level Agreement for IDS. Based
on our findings, we recommended that the Department look for indications
of previously undetected intrusions on its computer systems; review
procedures/processes for oversight and management of its contractors as
it pertains to IDS; and determine if there are contractual remedies
against the EDNet contractor that may not have met the IDS service level
agreement.

**[OTHER INTERNAL OPERATIONS]{.underline}**

**Recovery Audit Efforts:** Since 2002, federal government agencies that
enter into contracts of more than \$500 million in a fiscal year are
required to identify possible errors made in paying contractors, and for
recovering any over-payments or other erroneous payments. A required
element of such a program is the use of recovery audits and recovery
activities. To complete this work, the Department contracted with a
consulting company (contractor) to conduct an audit of possible
duplicate payments. As the contractor's initial review identified only
two duplicate payments, it refocused its efforts on any interest
penalties the Department overpaid. In this effort, the contractor
identified 184 vendors that were overpaid interest penalties by the
Department, totaling approximately \$269,000.

We conducted an audit to determine the methodology used by the
contractor to identify erroneous interest payments, whether the
identified exceptions were accurately assessed as overpayments, and if
the contractor delivered services as set forth in its contract with the
Department. Our audit revealed that the methodology used by the
contractor was not reliable in calculating interest penalties; the
contractor did not correctly assess interest payments as overpayments or
correctly calculate interest overpayments; nor were all of the services
delivered as required by the contract. We also found that the Department
did not follow its own policy regarding contract monitoring; thus the
Department was unaware that the contractor inaccurately calculated
interest overpayments, and that the contractor had not delivered all of
its contracted services. Based on our findings, we made a number of
recommendations, including that the Department consider recouping fees
paid to the contractor for claims that were erroneously collected, and
that it take steps to ensure that its contract monitoring policies are
followed in order to provide assurance that its contractors are
performing the work they are being paid to do. The Department concurred
with our recommendations, and provided a proposed corrective action plan
to address our recommendations. [Click
here](http://www.ed.gov/about/offices/list/oig/auditreports/a17f0011.pdf)
to review our report.

**Institute of Education Sciences Contractor Employee Personnel Security
Screenings.** The *Education Sciences Reform Act of 2002* established
the Institute of Educational Sciences (IES), a division within the
Department, to provide rigorous evidence on which to ground education
practice and policy. During this reporting period, we reviewed 10 IES
contracts, totaling nearly \$194 million in payments for FY2005, and
issued a memorandum to alert the Department that the IES has not fully
implemented Departmental policy regarding contractor employee
screenings. As a result, the Department lacks assurance that contractor
employees with access to Department-controlled facilities, and/or with
access to sensitive or *Privacy Act*-protected information, are suitable
for the access granted. Department Directive OM 5-101states that all
contractor employees must undergo personnel security screening if they
will be employed for 30 days or more, and that the screenings will be
commensurate with the risk and magnitude of harm the individual could
cause. It provides a definition of "contract employee," and directs
offices to establish and maintain procedural documentation for complying
with this directive, including determining the risk levels for each
contractor position, and ensuring contractor employees receive
appropriate screening. While IES developed procedures implementing the
Directive, it did not maintain a list of contract positions and current
risk level designations; thus it cannot ensure that its contractor
employees received the appropriate screening. Further, without this key
component, IES cannot assess potential harm or exposure should an
incident with a contractor employee occur. We made a number of
suggestions, including that IES take immediate action to ensure that
contractor employees receive appropriate security screening. IES agreed
with our suggestions and proposed corrective action to implement all of
our suggestions.

**Reimbursable Work Authorization Process:** The *Federal Property and
Administrative Services Act of 1949* gave the General Services
Administration (GSA) the responsibility to manage the government's real
property. The Public Buildings Service (PBS) was established by the
*Public Buildings Act of 1959*, which sets forth the functions of PBS,
including "providing for repairs and alterations of Government owned or
leased space on a reimbursable basis." This function is the basis for
the Reimbursable Work Authorization (RWA) program, which was established
to capture and bill the costs of altering, renovating, repairing, or
providing services in space managed by GSA over and above the basic
operations financed through rent. The Office of Management/Facilities
Services (OM/FS) manages the Department's RWA function, working directly
with GSA.

We conducted an audit to determine the adequacy of the Department's
oversight of the RWA process, if RWA funds are tracked and accounted for
properly, if a systemic issue exists with the tracking and accounting of
the RWA funds, and the reasonableness of employee overtime pertaining to
the process. We found that there is a lack of clarity of roles and
responsibilities for the various personnel governing the RWA process,
inadequate financial accountability and ineffective reporting of RWA
activities, and a lack of compliance with the Department's guidance on
premium pay. In addition, our audit work revealed that no individual
appeared to have earned excessive overtime pay when compared to all
other individuals in OM/FS. We made a number of recommendations to
correct the identified weaknesses. The Department agreed with our
findings and recommendations. [Click
here](http://www.ed.gov/about/offices/list/oig/auditreports/a17g0001.pdf)
to review our report.

## 

## Purchase Cards: As discussed in our previous SARs (No. 51 and No. 52), we conducted a Department-wide audit of its purchase card program. We issued reports to Department program offices, addressing specific issues noted in each specific program office review. In April we issued a final audit, summarizing the results of all work performed and presented recommendations to improve the overall management of the Department's purchase card program. The scope of our review included purchases made by Washington, DC, cardholders during the period July 1, 2003, through June 30, 2004. We identified a total of 6,474 purchases valued at over \$2.8 million. While we found that the Department had improved controls over the purchase card program and implemented corrective actions in response to prior OIG reviews, there were still several areas where improvements were needed. Based on the findings in our 2002 review, we recommended that the Department develop guidelines and conduct on-site reviews of purchase card activities. While Department staff performs quarterly reviews of selected purchase card activity, it stated that it does not have the resources to perform on-site reviews. Additionally, while we did not identify any inappropriate purchases, we did find that internal controls over documentation required to support purchases needed improvement -- a repeat finding from our 2002 audit. The Department concurred with our findings, and provided a proposed corrective action plan to address each of our recommendations. [**Click her**](http://www.ed.gov/about/offices/list/oig/auditreports/a19e0018.pdf)[e]{.underline} to review our report.

**Contract Proposals:** OIG conducted "pre-award reviews" of proposals
for a number of the Department's contracts over the last six months. We
reviewed 12 proposals from contractors covering three pending awards and
identified overstated costs of approximately \$649,000 and understated
costs of approximately \$1.3 million.

**[Investigations]{.underline}**

During this reporting period, OIG Special Agents were involved in two
cases involving employees who abused their positions of trust for
personal gain, be it financial gain or other, as well as the case of an
individual who illegally gained access to the Department's information
system. Here is a brief summary of each of these cases.

-   A former OIG employee was sentenced to five months in prison
    followed by five months of home confinement, and was ordered to pay
    \$40,000 in restitution for computer hacking and unauthorized
    access. Our investigation disclosed that the former staffer
    installed software on his supervisor\'s computer enabling him to
    view the supervisor\'s e-mail and Internet activity, as well as
    other communications, at-will. He continued his illegal activity for
    nearly two years.

-   A former Department program specialist pled guilty in federal court
    to accepting \$10,000 from the president of a company that had been
    awarded a contract from a Department grantee to install computer
    systems at schools in California and Oregon. He was sentenced to six
    months home detention, three years probation, and was ordered to pay
    \$10,000 in restitution on October 20.

-   An individual was sentenced to two years probation and fined \$1,000
    for obtaining information from a Department computer without
    authorization. Our investigation revealed that the individual
    intentionally gained unauthorized access to EDNET and illegally
    obtained information from it. He was able to gain access by using
    keystroke-monitoring software to capture an employee's user name and
    password.

**SECTION 4: HURRICANE RELATED EFFORTS**

The *Hurricane Education Recovery Act (HERA),* passed as part of Public
Law 109-148 in 2005*,* authorized three new grant programs to assist
school districts and schools in meeting the educational needs of
students displaced by Hurricanes Katrina and Rita, and to help schools
closed as a result of the hurricanes to re-open as quickly and
effectively as possible. These programs are: (1) the Immediate Aid to
Restart School Operations program, funded at \$750 million; (2) the
Assistance for Homeless Youth program, funded at \$5 million; and (3)
the Temporary Emergency Impact Aid for Displaced Students (Emergency
Impact Aid) program, funded at \$645 million. In addition, *Public Law
109-148* included \$200 million for students and institutions of
postsecondary education affected by the hurricanes.

In June 2006, Congress appropriated an additional \$235 million for the
Emergency Impact Aid programs, and an additional \$50 million for
postsecondary institutions and students in the *Emergency Supplemental
Appropriations Act for Defense, the Global War on Terror, and Hurricane
Recovery 2006*.

OIG has worked closely with the Department, providing assistance and
advice in matters to help ensure that hurricane-related funds are
expended in accordance with the terms of the grants and applicable laws,
regulations, policies, and procedures. During this reporting period, OIG
completed one audit, seven ongoing audits are near completion, and four
additional audits are planned to begin in FY2007. The OIG also was an
active participant in creating a new section for the March 2006
Compliance Supplement to OMB Circular A-133 to cover the new HERA
programs. This addition to the Compliance Supplement, issued in April
2006, applies to all audit periods that begin after June 30, 2005.

As it is our long-standing policy to keep confidential the details of
our ongoing work, below you will find a summary of our completed audit.
When the other audits are finalized, we will report our findings to the
U.S. Congress, the Department, and the general public.

**Mississippi Institutions of Higher Learning:** We initiated an audit
to evaluate the Mississippi Institutions of Higher Learning's (IHL)
administration of the \$95 million appropriation authorized by *Public
Law 109-148*. Our audit sought to assess IHL's methodology for
allocating hurricane relief funds to schools, evaluate the adequacy of
the information provided by schools to IHL, and to identify and assess
IHL's controls over the accounting for the hurricane relief funds and
compliance with laws and regulations. We found that IHL has implemented
methodologies to allocate hurricane relief funds to its institutions and
to make hurricane relief assistance awards to eligible students through
the Special Leveraging Educational Assistance Partnership Program. For
the \$50.5 million in hurricane relief funds spent through this program
as of July 20, 2006, IHL appears to have implemented an adequate
internal control system. We were, however, unable to fully meet our
audit objectives, as the funding period had not yet ended, and material
events may occur in IHL's administration of the hurricane relief funding
that could impact our final assessment. We will begin a separate audit
to assess IHL's full distribution of its hurricane relief funds and
perform additional audit work after the completion of the funding
period, which ended September 30, 2006.

**SECTION 5: OTHER NOTEWORTHY ACTIVITIES**

# [Nonfederal Audits]{.underline} 

Participants in Department programs are required to submit annual audits
performed by independent public accountants (IPAs). We perform quality
control reviews (QCRs) of these audits to assess their quality. We
completed 44 QCRs of audits conducted by 42 different IPAs, or offices
of firms with multiple offices. We concluded that 16 (36 percent) were
acceptable, 22 (50 percent) were technically deficient, and 6 (14
percent) were substandard. We have made 3 referrals of IPAs to State
Boards of Accountancy for substandard work, based on QCRs reported in a
prior SAR, and to the American Institute of Certified Public Accountants
(AICPA), if they were AICPA members.

**[President's Council on Integrity and Efficiency]{.underline}**

## PCIE Audit Committee: Inspector General Higgins continues to chair the Audit Committee of the President's Council on Integrity and Efficiency (PCIE). Highlights this reporting period include:

**[National Single Audit Sampling Project]{.underline}**

> OIG continues to lead an intergovernmental project to accurately
> assess the quality of all audits conducted under the *Single Audit
> Act.* During this reporting period, the core work of the project
> continued, as we conducted QCRs of selected audits. We will compile
> the results over the next six months, and issue a report in the next
> SAR.

##### 

##### Revisions to Audit Bulletin

> During this reporting period, several members of the Federal Audit
> Executive Council's (FAEC) Financial Statement Audit Network
> participated in a workgroup led by OMB to revise OMB's audit Bulletin
> No. 01-02. The revised Bulletin, No. 06-03, *Audit Requirements for
> Federal Financial Statements*, is a vital guide for OIG offices. The
> workgroup's changes included revising the definition of material
> weakness, reportable condition, and significant deficiency to be
> consistent with SAS 112, *Communicating Internal Control Related to
> Matters Identified in an Audit*, and proposed conforming changes to
> the *Government Auditing Standards,* issued by the Comptroller
> General.

**[*FISMA* Framework]{.underline}**

> The FAEC Information Technology Committee issued a proposed framework
> for implementing the requirements of *FISMA*. The framework will
> enhance the consistency, comparability, and completeness of annual
> independent evaluations of agencies' information security program and
> practices. OIG Assistant Inspector General for Audits, Helen Lew,
> chairs the FAEC.

# [FAEC Annual Conference]{.underline}

> In July, the FAEC hosted its annual conference in Charlottesville,
> Virginia. Speakers included Danny Werfel, Deputy Controller, OMB, on
> the Financial Management Line of Business; Dr. Ron Ross, National
> Institute of Standards and Technology, described *FISMA*
> implementation; Dave Richards, President, Institute of Internal Audit,
> discussed recent internal audit activities; and Marcia Buchanan,
> Assistant Director, GAO, talked about the proposed changes to the
> *Government Auditing Standards*.

**PCIE IT Roundtable**: Inspector General Higgins is also the Chair of
the PCIE IT Roundtable, and Charles Coe, the OIG Assistant Inspector
General for Information Technology Audit and Computer Crime
Investigations, continues as the Roundtable's Coordinator. Highlights
this reporting period include:

**[IT Roundtable Expansion]{.underline}**

> In September 2006, the IT Roundtable announced that it would broaden
> its scope and overall mission. To facilitate a change in scope and
> mission, the PCIE IT Roundtable Advisory Council was established. The
> Council includes representatives from all IG disciplines: audits;
> inspections; investigations; and a liaison from the CIO Council, as
> well as the IT Security Advisory Board. The Advisory Council will help
> enhance and expand the IT Roundtable's overall effort in devising
> strategies to ensure adequate and coordinated IG oversight for
> initiatives with high fraud potential, and recommending strategies to
> enhance IT training and IG internal infrastructure capabilities,
> including knowledge transfer, shared infrastructures, and
> secure/intelligent documents.

**[Protecting Sensitive Agency Information]{.underline}**

> The PCIE IT Roundtable worked diligently to coordinate the IG
> Community's efforts to comply with OMB Memorandum M-06-16, *Protection
> of Sensitive Agency Information*. During this reporting period, the IT
> Roundtable assisted in developing the final data collection instrument
> and guide for assessing agency's efforts to protect sensitive
> information. The IT Roundtable will consolidate the information into
> one report and submit to OMB in October.

**[PCIE Homeland Security Roundtable on Hurricane
Recovery]{.underline}**

After the devastating hurricanes of 2005, the PCIE formed the PCIE
Homeland Security Roundtable on Hurricane Recovery in order to share
information and provide updates to Congress in the form of monthly data
compilations and semiannual reports. Our office is a participant in this
roundtable and contributed to the Roundtable's reports. [Click
here](http://www.dhs.gov/) to review a copy of the Roundtable's most
recent reports.

**[President's Task Force on Identity Theft]{.underline}**

In May, President Bush signed an Executive Order establishing an
Identity Theft Task Force: a government-wide effort to help combat
identity theft. The Task Force will make recommendations as to how the
federal government can: (1) increase aggressive law enforcement actions
to prevent, investigate, and prosecute identity theft crimes, recover
the proceeds of such crimes, and ensure just and effective punishment of
those who perpetrate identity theft; (2) improve public outreach to
better educate the public about identity theft and measures they can
take to protect themselves, as well as address what steps the public
sector can take to protect personal data; and (3) increase safeguards
that federal departments, agencies, and instrumentalities can implement
to better secure government-held personal data. OIG Deputy Assistant
Inspector General for Investigations (DAIG-I), Mike Deshields, was
selected as a member of the Task Force---one of only two U.S. Department
of Education representatives. DAIG-I Deshields is currently serving on a
special subgroup focused on Education and Outreach. The Task Force will
present a strategic plan to the President in November.