September 20, 2002

#  [ED-OIG/A09-C0005]{.underline}

## 

## Mr. Sal Younis

President

Silicon Valley College

######## 41350 Christy Street

######## Fremont, CA 94538-3115

Dear Mr. Younis:

This is the Office of Inspector General's Final Audit Report, entitled
Silicon Valley College's Administration of the Higher Education Act,
Title IV Programs. The purpose of the audit was to determine whether
Silicon Valley College (SVC) met eligibility requirements and
administered the Title IV programs in compliance with the Higher
Education Act of 1965, as amended, and applicable regulations.

In its response to our draft report, SVC generally concurred with our
findings, except for subsequent leaves of absence. Based on the school's
input, we reduced the number of exceptions for subsequent leaves of
absence from five to three. SVC concurred with our recommendations,
except for recommendation 2.3. We revised the wording in the
recommendation to narrow the scope of the review. The school's comments
are summarized in the report following each finding and the full text of
the comments is included as an attachment.

### AUDIT RESULTS

SVC did not have adequate policies and procedures for ensuring that it
complied with Federal requirements applicable to students who request or
are on leaves of absence. Also, for students who withdrew from the
institution, SVC did not have reliable records of the last day of
attendance, which is used in calculating the amount of funds to be
returned to Title IV programs. We concluded that SVC had properly
administered other aspects of the Title IV programs. We also concluded
that SVC met institutional eligibility and program eligibility
requirements.

FINDING NO. 1 --- SVC Needs to Strengthen Its Leave of Absence
Procedures

SVC did not have adequate policies and procedures to ensure that loans
were not disbursed to students on leaves of absence, subsequent leaves
of absence were for allowable lengths, and student requests for leaves
of absence were dated.

[Improper Loan Disbursements]{.underline}. We found that SVC improperly
disbursed Federal Family Education Loan funds to three students while
the students were on leaves of absence.[^1] A prior audit also found
that SVC had made a similar improper disbursement.[^2] The regulations
at 34 C.F.R. § 682.604(c)(4) state---

> A school may not credit a student's account or release the proceeds of
> a loan to a student who is on a leave of absence ...

Under SVC's procedures, the school's Financial Services Department
confirms that students on the school's disbursement roster are shown in
an active status on the school's database prior to disbursing Title IV
funds. For two of the three students, leaves of absence had not been
entered into the school's database at the time the loan disbursements
were made to the students. Thus, the Financial Services Department was
unaware that the students were inactive. For the remaining student, we
found no apparent cause for the erroneous disbursement.

The two late recordings of leaves of absence in the school's database
were not the only instances we noted. We found that 16 of 26 leaves of
absence received by the 20 sampled students were not entered into the
database timely. The posting dates for the leaves of absence were an
average of 14 days after the beginning date of the leave of absence
(elapsed days ranged from 1 to 44 days). SVC staff relies on information
contained in the school's database as part of the management controls
for ensuring compliance with SVC policies and Federal regulations. Thus,
information needs to be entered into the database in sufficient time for
the school's procedures to be effective.

We have not recommended the return of the improperly disbursed loan
amounts since the three students returned from their leaves of absence
and would have been eligible for the loan disbursements at that time.

[Subsequent Leaves of Absence]{.underline}. We found SVC granted
subsequent leaves of absence for unallowable lengths and purposes to
three students who were subject to the limitations specified in
34 C.F.R. § 668.22(d)(2)(i). The regulations state---

> \[A\]n institution may treat --
>
> One leave of absence subsequent to a leave of absence . . . as an
> approved leave of absence if the subsequent leave of absence does not
> exceed 30 days and the institution determines that the subsequent
> leave of absence is necessary due to unforeseen circumstances . . .

The subsequent leaves of absence were approved for periods exceeding the
30‑day limit, for lengths ranging from 56 to 63 days. SVC's leave of
absence policy included the 30-day limitation, but SVC staff did not
adhere to the policy when approving subsequent leaves of absence.

[Undated Leave of Absence Requests]{.underline}. We found that SVC's
documentation for six leaves of absence did not include the date of the
student's request.[^3] The regulations at 34 C.F.R. § 668.22(d)(4)(iii)
state---

> An institution's leave of absence policy is a "formal policy" if the
> policy- . . . \[r\]equires students to provide a written, signed, and
> dated request for a leave of absence prior to the leave of absence.
> However, if unforeseen circumstances prevent a student from providing
> a prior written request, the institution may grant the student's
> request for a leave of absence, if the institution documents its
> decision and collects the written request at a later date.

SVC staff use either the school's "Change of Status" or "Request for
Leave of Absence" form to document an approved leave of absence. While
the school's forms included a line for "date initiated," the date was
not always entered.

### 

### Recommendations

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

1.1 Implement procedures that ensure leave of absences are entered in
the school's database timely.

1.2 Evaluate whether its current procedures contain sufficient
safeguards to prevent loan disbursements while a student is on a leave
of absence, and ensure that staff comply with its leave of absence
policies and procedures.

SVC Comments

SVC did not agree with our finding regarding subsequent leaves of
absence. In its comments, SVC stated that it has taken corrective action
in response to recommendations 1.1 and 1.2, including providing
training, reviewing and revising policy, and establishing computer
controls.

-   
-   

OIG Response

As a result of SVC's response to our draft audit report, we reevaluated
the five students we identified with multiple leaves of absence. Two of
the students were on leaves of absence for medical reasons and we
eliminated them from the finding. We suggest that during audit
resolution, the Chief Operating Officer review the school's policies and
procedures: (1) for database updates for leaves of absence and (2) for
the posting of Federal Family Education Loan funds.

FINDING NO. 2 --- SVC Needs a Reliable Record of Students' Last Dates of
Attendance

SVC did not have reliable records for the last date of attendance, which
is used in calculating the amount of funds to be returned to Title IV
programs for students who withdraw from school. We found that the dates
were inaccurately recorded in the database or the source documentation
was ambiguous for eight students with return of funds calculations.[^4]

The last dates of attendance for five students were not accurately
recorded in the school's database. For three of the students, SVC's use
of the inaccurate dates resulted in an understatement of the amount to
be returned to Title IV programs. The following table shows the results
of our recalculation of the return of funds for the five students:

+-------------+------------+----------------+-------------------------+
| **Last Date |            | **Change in**  | ## Title IV Program     |
| of          |            |                |                         |
| A           |            | **Return of    |                         |
| ttendance** |            | Title IV Funds |                         |
|             |            | Amount**       |                         |
+-------------+------------+----------------+-------------------------+
| **Date Used | **Date     |                |                         |
| in**        | Used in    |                |                         |
|             | OIG's      |                |                         |
| **SVC's**   | Recal      |                |                         |
|             | culation** |                |                         |
| **Ca        |            |                |                         |
| lculation** |            |                |                         |
+-------------+------------+----------------+-------------------------+
| 7/2/2001    | 6/28/2001  | \$76           | ####                    |
|             |            |                | #### Federal Pell Grant |
+-------------+------------+----------------+-------------------------+
| 7/18/2001   | 6/27/2001  | \- 0 -         | \-\--                   |
+-------------+------------+----------------+-------------------------+
| 7/30/2001   | 7/25/2001  | \$238          | Stafford Subsidized     |
|             |            |                | Loan                    |
+-------------+------------+----------------+-------------------------+
| 7/30/2001   | 7/26/2001  | \$122          | Stafford Unsubsidized   |
|             |            |                | Loan                    |
+-------------+------------+----------------+-------------------------+
| 7/19/2001   | 8/6/2001   | (\$229)^a^     | Stafford Subsidized     |
|             |            |                | Loan                    |
+-------------+------------+----------------+-------------------------+

### ^a^ Represents amount of funds paid to lender that exceed the required return of Title IV funds amount. 

### 

For another three students, we could not determine the last date of
attendance from the class attendance roster. The notations on the roster
were difficult to read (two students) or were changed based on
information provided by someone other than the instructor (one student).

In addition to return of Title IV fund calculations, accurate and
legible attendance records are important for monitoring student
satisfactory academic progress and determining whether a student should
be dropped from the school.

### Recommendations

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

2.1 Return \$360 to the applicable lenders and \$76 to the school's
Federal Pell Account for the three students whose return of Title IV
funds amounts were understated.

2.  Resolve the last dates of attendance for the three students for whom
    the attendance rosters were ambiguous and, if applicable,
    recalculate and return the appropriate Title IV funds amount.

3.  Have its independent auditor confirm that the institution used the
    appropriate last dates of attendance for the return of funds
    calculation for students who withdrew during the period June 1, 2001
    to current, and, if applicable, recalculate and return the
    appropriate Title IV funds amount.

2.4 Implement procedures to ensure that the last day of attendance is
accurately recorded in the school's database for each student.

**SVC Comments**

In its comments, SVC stated that it has taken or initiated corrective
action in response to recommendations 2.1, 2.2, and 2.4, including
returning Title IV funds for three students, resolving the ambiguous
last date of attendance for another three students, and revising
procedures to ensure the accuracy of the last date of attendance.

SVC did not concur with recommendation 2.3, stating that the burden and
expense of any audit

work in addition to that done during the annual compliance audit were
not warranted by the

immaterial findings and non-representative sample.

**OIG Response**

We suggest that during audit resolution, the Chief Operating Officer
review: (1) the documentation used to resolve the ambiguous last dates
of attendance and (2) the revised procedures.

With respect to SVC's objection to recommendation 2.3, while the dollar
amounts discussed in the finding are small from the perspective of the
school and the Department, they may not be considered immaterial from a
student's perspective. We altered the wording in recommendation 2.3 to
narrow the focus of the review to the last date of attendance, since we
identified no errors with any other aspect of the return of funds
calculations we examined. Footnote 4 acknowledges that the results
presented in the finding may not be representative of the entire
population.

##### 

##### BACKGROUND

SVC is a proprietary institution with a main campus in Fremont,
California, and additional locations in Walnut Creek, San Jose, and
Emeryville, California. SVC offers educational programs in Design
Drafting, Computer Graphics, Information Technology, and Health Care
Technology. SVC is accredited by the Accrediting Commission of Career
Schools and Colleges of Technology. U.S. Education Corporation purchased
SVC on June 12, 2002.

SVC received initial approval to participate in the Title IV programs in
1991. SVC records show that the institution received \$13.8 million of
Title IV funds during the period January 1, 2000 to December 31, 2000.
The 1999 Cohort Default Rate (the Department's most recently published
rate) for SVC was 9.6 percent.

##### PURPOSE, SCOPE, AND METHODOLOGY

The objective of our audit was to determine whether SVC met eligibility
requirements and administered the Title IV programs in compliance with
the Higher Education Act and applicable regulations. For the review of
institutional eligibility, we reviewed the school's most recently
completed fiscal year at the time the audit was initiated (fiscal year
ending December 31, 2000). For the review of student eligibility, our
audit period was from July 1, 2000 through December 5, 2001. Our review
did not cover SVC's administration of the Federal Work Study program or
educational programs offered at the Emeryville campus, which was not
approved for participation in the Title IV programs at the time we
initiated our review.

To accomplish our objective, we reviewed applicable Title IV regulations
and gained an understanding of SVC's policies and procedures by
interviewing managers and staff responsible for admissions, registration
and attendance, student financial aid and business transactions. We
evaluated SVC's procedures and reviewed records to assess the
effectiveness of its management controls. Specifically, we evaluated: 1)
institutional and program eligibility, 2) cash management and financial
responsibility, and 3) selected administrative and compliance
requirements (student eligibility, award calculations and disbursements,
return of Title IV funds calculations, attendance records and leaves of
absence, recruitment activities, and default management).

To evaluate SVC's procedures, we reviewed documentation for 20 students
randomly selected from a universe of 406 students who had started
classes between July 1, 2000 and October 31, 2001, and either withdrew
during the time period June 1, 2001 to December 5, 2001 or were in a
leave of absence status on December 5, 2001. The universe included
students who received and did not receive Title IV funds. We also
reviewed files for 13 students that were judgmentally selected based on
a risk analysis.

We relied on computer-processed data obtained from the institution's
database for our review of student eligibility, Title IV disbursements,
and the return of Title IV funds. As disclosed in the AUDIT REPORT
section of this report, our tests found that leaves of absence and last
dates of attendance were not accurate or timely recorded in the
database. However, when the data are viewed in context with other
available evidence, we believe the opinions, conclusions, and
recommendations in this report are valid.

We performed our fieldwork at SVC's corporate office in Fremont,
California and at the campuses in Fremont, Walnut Creek and San Jose,
California, from November 2001 to March 2002. We held an exit briefing
with SVC and U.S. Education Corporation officials on June 21, 2002. Our
audit was performed in accordance with government auditing standards
appropriate to the scope of the review described.

##### STATEMENT ON MANAGEMENT CONTROLS

As part of our review, we assessed SVC's management controls, policies,
procedures and practices applicable to the scope of the audit. We
assessed the level of control risk for determining the nature, extent
and timing of our substantive tests. For the purposes of this report, we
assessed and classified the significant controls related to the Title IV
programs as follows:

-   Oversight of program eligibility

-   Monitoring of institutional eligibility and financial responsibility
    requirements

-   Student eligibility determinations

-   Award and disbursement of Title IV funds

-   Monitoring attendance and leaves of absence

-   Return of Title IV funds.

Because of inherent limitations, a study and evaluation made for the
limited purpose described above would not necessarily disclose all
material weaknesses in the management controls. However, our assessment
disclosed weaknesses in the procedures for granting and recording leaves
of absence and determining the last dates of attendance. These
weaknesses are discussed in the AUDIT RESULTS section of this report.

**ADMINISTRATIVE MATTERS**

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

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

> Ms. Theresa S. Shaw
>
> Chief Operating Officer
>
> Federal Student Aid

######### Union Center Plaza Building, Room 112G1

> 830 1^st^ Street, NE
>
> Washington, D.C. 20202-5402

Office of Management and Budget Circular A-50 directs Federal agencies
to expedite the resolution of audits by initiating timely action on the
findings and recommendations contained therein. Therefore, receipt of
your comments within 30 days would be greatly appreciated.

In accordance with the Freedom of Information Act (5 U.S.C. § 552),
reports issued by the Office of Inspector General are made available, if
requested, to members of the press and general public to the extent
information contained therein is not subject to exemptions under the
Act.

If you have questions, please contact me at (916) 930-2399.

> Sincerely,
>
> /s/
>
> Gloria Pilotti
>
> Regional Inspector General
>
> for Audit Services

Attachment

cc: Chief Operating Officer

U.S. Education Corporation

**ATTACHMENT**

**SVC's Comments on the Draft Report**

[^1]: Our sample of 33 students consisted of 20 students that were
    randomly selected and 13 students that were judgmentally selected.
    Twenty of the 33 students had leaves of absence during their
    enrollments. Since a portion of the sample was judgmentally
    selected, the results presented in this finding may not be
    representative of the entire population. The PURPOSE, SCOPE, AND
    METHODOLOGY section of the report provides details on our sample
    selection methodology.

[^2]: SVC's Independent Certified Accountant disclosed in the
    institution's annual audit report for fiscal year ended December 31,
    2000, that SVC had disbursed loan funds to one student on a leave of
    absence.

[^3]: For purposes of our review, we accepted dates noted on any
    documentation in the student file related to the leave of absence.

[^4]: SVC staff performed return of Title IV fund calculations for 23 of
    the 33 sampled students. Since a portion of the sample was
    judgmentally selected, the results presented in this finding may not
    be representative of the entire population.