**Advanced Career Training Institute's Administration**

**of the Title IV Higher Education Act Programs**

## **FINAL AUDIT REPORT**

### ED-OIG/A04-B0019

### September 2003

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Our mission is to promote the efficiency, U.S. Department of Education
effectiveness, and integrity of the Office of Inspector General

Department's programs and operations. Atlanta, Georgia

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

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

**TABLE OF CONTENTS**

# 

#########  Page

**EXECUTIVE
SUMMARY..............................................................................\...1**

###### 

###### AUDIT RESULTS...........................................................................................4

## **Finding No. 1 -- ACT Failed to Meet the 90/10 Rule in FY 1999...............\............4**

> **Recommendations...................................................................................7**
>
> **Finding No. 2 -- ACT Breached Its Fiduciary Responsibility Regarding
> the**
>
> **Use of Title IV
> Funds..............................................................................14**
>
> **Recommendations..................................................................................17**
>
> **Finding No. 3 -- ACT Improperly Disbursed Title IV Funds to
> Ineligible**
>
> **Students
> ..............................................................................................18**
>
> **Recommendations.................................................................................19**
>
> **Finding No. 4 -- ACT Did Not Reconcile Direct Loan
> Funds..............................20**
>
> **Recommendation...................................................................................21**
>
> **Finding No. 5 -- ACT Failed to Properly Calculate or Make Refunds
> for**
>
> **Students Who
> Withdrew..........................................................................22**
>
> **Recommendations
> \...\...............................................................................23**
>
> **Finding No. 6 - ACT Did Not Demonstrate Administrative
> Capability................24**
>
> **Recommendation..................................................................................25**

**OTHER
MATTERS.......................................................................................26**

### BACKGROUND.........................................................................................\....27

#### OBJECTIVES, SCOPE, AND METHODOLOGY....................................................27

### STATEMENT ON MANAGEMENT CONTROLS\..................................................29

**ATTACHMENT A -- OIG 90/10 CALCULATION FOR FY
1999...............................30**

**ATTACHMENT B -- WRITTEN RESPONSE TO THE DRAFT
REPORT..................31**

**EXECUTIVE SUMMARY**

Advanced Career Training Institute (ACT) is a proprietary institution
with campuses in Atlanta and Riverdale, GA, and Jacksonville, FL. The
purpose of the audit was to determine whether ACT administered the
student financial assistance programs in accordance with Title IV of the
Higher Education Act (HEA) of 1965, as amended, and applicable
regulations. Specifically, we reviewed ACT's compliance with the
requirements for (1) institutional eligibility, including the 90/10
Rule, accreditation, and State licensing, (2) cash management,
(3) William D. Ford Federal Direct Loan (Direct Loan) reconciliation,
(4) refunds and the return of Title IV funds, (5) student eligibility,
(6) program length, and (7) commissioned sales. Audit coverage included
award years 1998‑1999, 1999‑2000, and 2000‑2001. For purpose of the
90/10 revenue calculations and cash management review, audit coverage
included school fiscal years (FY) 1999 through 2001. For program length,
audit coverage included school FY 2001. During its school FY's 1999
through 2001, ACT received \$23.5 million in Title IV funds.

We identified problems with the 90/10 Rule revenue percentage, cash
management, student eligibility, Direct Loan reconciliation, and refunds
and the return of funds. Based on the significance of these findings, we
concluded that ACT did not meet the administrative capability standards
required to participate in the Title IV programs.

To participate in the Title IV programs, at least 10 percent of a
proprietary institution's revenues must come from sources that are not
derived from funds provided under Title IV (90/10 Rule). ACT determined
a 90/10 revenue percentage of 85.1. However, when it calculated the
90/10 revenue percentages, ACT did not properly determine the amount of
Title IV revenue used to satisfy tuition, fees, and other institutional
charges to students and adjust for credit balances on student accounts
and cash paid to students. We determined that ACT's Title IV revenue was
91.6 percent for school FY 1999. Failure to meet the 90/10 Rule in a
fiscal year results in ineligibility for the subsequent fiscal year. As
a result, ACT was not eligible for the \$7.4 million in Title IV funds
it received during FY 2000.

Institutions must act with competency and integrity in administering the
Title IV programs and in accounting for the funds received. ACT breached
its fiduciary responsibility to the Secretary when it used Title IV
funds for other than the intended purpose. It was ACT policy to transfer
Title IV funds from its Federal Funds account to its operating account
one day after the funds were drawn down from the Department. Such
transfers are to be done only when the funds are used for their intended
purpose (i.e., disbursed to students). ACT did not know who the intended
student beneficiaries were for the funds transferred to the operating
account. During FY's 1999, 2000, and 2001, Title IV drawdowns
transferred to the operating account exceeded the amounts posted to
student accounts by almost \$995,000.

Title IV funds drawn down from the Department are to be disbursed to
students within three business days. Over two‑thirds of the student
accounts that we reviewed were not posted within three business days
after the funds were drawn down. The elapsed days between draw down and
disbursement to student accounts ranged from 4 to 648 days.

ACT improperly disbursed \$67,744 in Title IV funds to ineligible
students by disbursing funds to students more than 90 days after their
last date of attendance, making second Direct Loan disbursements to
students who had withdrawn from school, and disbursing funds to students
who did not pass the ability‑to‑benefit test.

Direct loan funds are to be reconciled on a monthly basis. ACT did not
reconcile Direct Loan awards during FY's 1999 and 2000. ACT officials
were attempting to reconcile Direct Loan funds at the time of this
audit. ACT returned \$900,000 in unaccounted for Direct Loan funds to
the Department in October 2001.

Institutions are required to calculate returns of Title IV funds for
students who withdraw from school. Of the 51 student files reviewed that
required refunds, ACT failed to make refunds for ten students and
incorrectly calculated refunds for two students. ACT has a history of
refund problems. Its FY 1999 and FY 2000 compliance audits contained
findings pertaining to untimely refunds and the failure to make refunds.
These findings resulted in the Department requesting a letter of credit
for \$3.5 million from ACT's parent corporation, International Education
Corporation (IEC).

We recommend that the Chief Operating Officer for Federal Student Aid:

-   Recover \$7.4 million of Title IV funds provided to ACT during FY
    2000;

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-   Recover \$67,744[^1] in Federal funds improperly disbursed to
    students and \$9,619 for refunds not made or made in the incorrect
    amount; and

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```
-   Impose appropriate action against ACT, up to and including
    terminating participation in the Title IV student financial
    assistance programs.

If ACT is allowed to continue to participate in the Title IV programs,
we recommend that the Chief Operating Officer for Federal Student Aid
require ACT to establish policies, procedures, and management controls
to ensure the following:

-   The 90/10 Rule revenue percentage is accurately calculated and
    reported,

-   Title IV funds are maintained in the interest-bearing Federal Funds
    account until the funds are disbursed to students,

-   Title IV funds are disbursed to students within three business days,

-   Ineligible students do not receive Title IV disbursements,

-   Direct Loans are reconciled on a monthly basis, and

-   Refunds are calculated accurately and timely returned to the
    Department.

In its written response to the draft report, a copy of which is included
as Attachment B to this report, ACT disagreed that it failed to meet the
requirements of the 90/10 Rule for school FY 1999. ACT stated that the
report was fundamentally flawed in failing to apply the cash basis of
accounting and in the treatment of third-party loans received by certain
students. ACT accepted OIG's figure for Title IV revenue, but disagreed
with some of OIG's figures for non‑Title IV revenue. ACT provided
supplemental information regarding non‑Title IV revenue. Using its
revised 90/10 non‑Title IV revenue figures, ACT concluded that it met
the 90/10 Rule.

ACT agreed that it did not consistently disburse Title IV funds to
students in accordance with Departmental requirements. ACT acknowledged
that during the period covered by the audit, Title IV funds were not
consistently credited to student accounts within three business days.
ACT also agreed that it did not reconcile its Direct Loan accounts on a
monthly basis during 1988-1999 and 1999-2000 and that subsequent to that
time it initiated a reconciliation of its Direct Loan funds.

ACT provided additional information for the students identified as
receiving improper Title IV disbursements, and stated that it had
implemented various new procedures and provided additional training to
its staff to ensure that Title IV funds are not disbursed to ineligible
students. ACT also provided additional information for the withdrawn
students for which ACT failed to make Title IV refunds or incorrectly
calculated refunds.

ACT acknowledged that it had administrative and cash management problems
in the past. ACT stated that it tried to demonstrate that is has devoted
extensive attention and resources to correcting these problems. Based on
the corrective actions taken to address the issues identified in the
report, and its current capabilities and processes, ACT does not believe
that it should be limited, suspended, or terminated from future
participation in the Title IV programs.

We disagree with ACT's position that the cash basis of accounting should
be used without regard to when and for what Title IV funds are used.
Title IV funds are not used for the purpose intended until the funds are
disbursed to students. Also, only Title IV and non‑Title IV funds used
to satisfy tuition, fees, and other institutional charges within the
fiscal year can be included in the annual 90/10 revenue computation. We
revised some of the non‑Title IV revenue figures based on the additional
information provided by ACT. However, based on the revised figures, we
found that ACT still failed to meet the 90/10 Rule for school FY 1999.
We also made adjustments to Findings 3 and 5 based on ACT's written
response to the draft audit report. We summarized ACT's response after
each finding and included them in their entirety as Attachment B to this
report. ACT also provided supporting documentation with the written
response to the draft report, which is available upon request.

**AUDIT RESULTS**

### 

Our audit objective was to determine whether ACT administered the
student financial assistance programs in accordance with Title IV of the
Higher Education Act of 1965, as amended, and applicable regulations.
Specifically, we reviewed ACT's compliance with the requirements for
(1) institutional eligibility, including the 90/10 Rule, accreditation,
and State licensing, (2) cash management, (3) Direct Loan
reconciliation, (4) refunds and the return of Title IV funds,
(5) student eligibility, (6) program length, and (7) commissioned sales.
Audit coverage included award years 1998‑1999, 1999‑2000, and 2000‑2001.
For purposes of the 90/10 revenue calculation and cash management
review, audit coverage included school FY's 1999 through 2001. For
program length, audit coverage included school FY 2001.

We did not identify compliance problems with accreditation, licensing,
program length, or commissioned sales. However, we identified problems
with the 90/10 Rule revenue percentage, cash management, student
eligibility, Direct Loan reconciliation, and refunds and the return of
funds. Based on the significance of these findings, we concluded that
ACT did not meet the administrative capability standards required to
participate in the Title IV programs.

### 

### Finding No. 1 -- ACT Failed to Meet the 90/10 Rule in FY 1999

International Education Corporation (IEC), ACT's parent corporation, did
not properly determine the amount of Title IV revenue used to satisfy
tuition, fees, and other institutional charges to students when
calculating the 90/10 revenue percentages for ACT. IEC also did not
properly adjust for credit balances on student accounts or cash payments
to students. ACT reported 90/10 calculations of less than 90 percent for
school FY's 1999, 2000, and 2001. Although ACT determined a 90/10
revenue percentage of 85.1 for school FY 1999, our calculation for this
school fiscal year was 91.6 percent. As a result of failing to meet the
90/10 eligibility requirement for school FY 1999, ACT was ineligible for
the \$7.4 million in Title IV funds it received for school FY 2000.

Section 102(b) of the Higher Education Act (HEA), as amended, specifies
that a proprietary institution of higher education is -

> A school that . . . has at least 10 percent of the school's revenues
> from sources that are not derived from funds provided under
> \[T\]itle IV, as determined in accordance with regulations prescribed
> by the Secretary.

This institutional eligibility requirement is commonly referred to as
the 90/10 Rule. Institutions are required to calculate the 90/10 revenue
percent annually. If the result of the calculation is greater than
90 percent, the institution becomes ineligible to participate in the
Title IV programs the following year. The regulations at
34 C.F.R. § 600.5(d)(1)[^2] provide the following formula to be used in
calculating the revenue percentage:

> Title IV, HEA program funds the institution used to satisfy tuition,
> fees, and other institutional charges to students.
>
> ---------------------------------------------------------------------------------------
>
> The sum of revenues generated by the institution from: Tuition, fees,
> and other institutional charges for students enrolled in eligible
> programs as defined in 34 CFR \[§\] 668.8; and activities conducted by
> the institution, to the extent not included in tuition, fees, and
> other institutional charges, that are necessary for the education or
> training of its students who are enrolled in those eligible programs.

**90/10 Revenue Not Properly Calculated**

IEC used its CLASS accounting system to calculate the 90/10 revenue
percentages. The CLASS system contained the student ledgers, which
showed the disbursement of Title IV and non‑Title IV funds to student
accounts. The CLASS system contained two date fields to indicate the
date that students received Title IV and non‑Title IV funds. The
"transaction date" field contained the date that the disbursement should
have occurred per ACT/IEC officials. ACT/IEC staff entered the
transaction dates into the CLASS system. The "posting date" field
contained the date that the disbursement was actually posted to student
accounts. The posting date was automatically generated by the computer
system.

IEC used the transaction date data to determine revenue for the 90/10
calculation. As a result of using the transaction date data, the 90/10
calculation did not reflect funds that were actually disbursed to
students in the fiscal year. By using the transaction date data,
Title IV revenue was understated and non‑Title IV revenue was
overstated. Attachment A illustrates the extent of the under and
overstatements of revenue. To determine revenue for the 90/10
calculation, we used the CLASS system posting date data because it
represented the date that funds were actually disbursed to students.

**Incorrect Amount for Sallie Mae Recourse Loans Included in the 90/10
Calculation**

As a result of using transaction date data, ACT included \$745,222 in
Student Loan Marketing Association (Sallie Mae) recourse loans as
non‑Title IV revenue in the 90/10 calculation. We determined that
\$538,661.90 in Sallie Mae recourse loans was actually posted and
disbursed to student accounts during school FY 1999.

According to the terms of the contract with Sallie Mae, IEC was required
to deposit 30 percent of the original principal balance of every loan
originated into an escrow account. The escrow was funded either by ACT
depositing 30 percent or Sallie Mae retaining 30 percent from funds
delivered. The contract required ACT to replenish the escrow account if
default payments reduced the balance below 20 percent of the principal
balance of all outstanding loans. In it's original calculation, ACT
excluded \$40,124 for the escrow requirement. For our initial 90/10
calculation, we included the Sallie Mae recourse loans posted to student
accounts during the fiscal year and adjusted for the full amount
(30 percent) required to be escrowed. However, in its response to the
draft report, ACT provided documentation that \$41,259 was deposited in
the escrow account during its fiscal year 1999. In finalizing this
report, we used the \$41,259 figure for the Sallie Mae escrow adjustment
in calculating 90/10 revenue (see Attachment A).

**Credit Balances and Cash Paid to Students Not Taken into Account for
the 90/10 Calculation**

IEC included both Title IV and non‑Title IV credit balances (funds in
excess of what the institution used to satisfy tuition, fees, and other
institutional charges) in the 90/10 calculations. ACT also failed to
subtract Title IV and non‑Title IV cash paid to students.

We used ACT's CLASS system to identify students who had credit balances
on their accounts as of the last day of the fiscal year, determined the
cause for the credit balances, and adjusted the 90/10 calculation by
subtracting the credit balance amounts from the respective category
(Title IV or non‑Title IV). Funds charged to student accounts in excess
of tuition and fees (causing a credit balance) were not used in our
90/10 calculations.

We also used the CLASS system to identify students who received cash
payments as a result of credit balances, determined the cause for the
cash payments, and adjusted the 90/10 calculation by subtracting the
cash payments from the respective category (Title IV or non‑Title IV).

**90/10 Eligibility Requirement Not Met**

The 90/10 revenue originally reported in ACT's audited financial
statements was 86.2 percent for FY 1999. Based on its review of the
draft audit report, ACT amended some of its revenue figures and computed
90/10 revenue of 85.1 percent. Our calculation of the 90/10 revenue
percentage using posting date data and adjusting for credit balances and
cash paid to students (and additional non‑Title IV revenue documentation
provided by ACT as a result of the draft audit report) revealed that
ACT's 90/10 percentage was 91.6 for school FY 1999. Since the Title IV
revenue percentage for FY 1999 was greater than 90 percent, ACT was not
eligible to participate in the Title IV programs for its FY 2000. ACT
received \$7,399,072 in Title IV funds (\$5,201,173 in Direct Loan
funds, \$2,075,046 in Pell grants, \$75,128 in Federal Supplemental
Education Opportunity Grant (FSEOG) funds, and \$47,725 in Federal Work
Study) during its FY 2000. See Attachment A for the 90/10 calculation
for FY 1999.

We also performed an alternative 90/10 calculation using Title IV
receipts per the Department's Grants Administration Payments System
(GAPS) because ACT had not posted student accounts in a timely manner
and in some cases not at all. GAPS represents all Title IV fund
drawdowns from the Department. If an institution complies with Title IV
regulations, all funds drawn down are disbursed to students within three
business days. Using the GAPS Title IV draw down figures and making
adjustments for funds returned, refunds, and credit balances per the
CLASS system posting date data, we calculated a 90/10 revenue percentage
of 91.7. (See Attachment A for this calculation.)

During the audit exit conference, ACT/IEC officials said they did not
disagree with the facts presented regarding the CLASS accounting system
transaction dates being used to calculate the 90/10 revenue percentages.
Also, the officials did not disagree that credit balances and cash paid
to students should be taken into account for the 90/10 revenue
calculations.

**RECOMMENDATIONS**

We recommend that the Chief Operating Officer for Federal Student Aid
require ACT to:

1.  Return the \$7,399,072 of Title IV funds received during the period
    November 1, 1999, through October 31, 2000.

2.  Ensure that the 90/10 Rule revenue requirement is accurately
    calculated by:

-   Using the correct date that funds are disbursed to students for the
    Title IV and non‑Title IV revenue portions of the calculation,

-   Including the correct amount of Sallie Mae recourse loans in the
    non‑Title IV portion of the calculation, and

-   Adjusting for credit balances and cash paid to students.

**ACT RESPONSE AND OIG COMMENTS**

In its June 21, 2003, written response to the draft audit report, ACT
stated that OIG's determination that ACT failed to meet the requirements
of the 90/10 Rule for school FY 1999 was based on an incomplete and
faulty analysis of the data underlying the school's 90/10 calculation
for that year. ACT stated that the report was fundamentally flawed in
failing to apply the cash basis of accounting and in the treatment of
third-party loans received by certain students. It is ACT's position
that it did not fail the 90/10 Rule for school FY 1999. ACT provided a
detailed response to the following areas: cash basis of accounting,
Sallie Mae loan revenue, Sallie Mae escrow account, Sallie Mae credit
balance adjustments, and sale of student retail installment contracts
(RIC). ACT's full written response is included as Attachment B.

**[Cash Basis of Accounting]{.underline}**

[ACT Response]{.underline}. ACT cited Departmental regulations regarding
the requirement for institutions to use the cash basis of accounting
whereby revenue is recognized by an entity when that entity receives
cash; i.e., the date that the revenue is actually received. ACT cited
regulations that require institutions to use the cash basis of
accounting in reporting Title IV and non‑Title IV revenue for the 90/10
revenue calculation. ACT focused on the point that, in calculating
revenue, institutions are required to include Title IV and non‑Title IV
funds received during the fiscal year. ACT stated that the regulations
require no more than that the funds be received by the institution,
which is satisfied when the funds are deposited into the institution's
bank account.

ACT stated that the issue of how to calculate the Sallie Mae loan
revenue in the ratio must be analyzed under the precise terms of the
90/10 Rule, and specifically the requirement to focus on the funds
"received" by the institution in the applicable year. By its terms, the
regulation requires that the funds be received by the institution, which
is satisfied when the funds are deposited into the institution's bank
account. Cash-basis accounting focuses exclusively on when cash is
received or paid. It is plain that funds that have been deposited in an
institution's bank account for the use of the institution have been
received by that institution.

[OIG Comments]{.underline}. The formula for the 90/10 revenue
computation provides that funds [used]{.underline} to satisfy tuition,
fees, and other institutional charges are to be included in the
computation. Until funds are posted to a student's account, the funds
have not been used to satisfy tuition, fees, and other institutional
charges nor may they be considered to be revenue generated from tuition,
fees, and other institutional charges for students enrolled in eligible
programs. The fact that funds have been transferred to an institution's
account does not mean that those funds have been used for tuition, fees,
and other institutional charges. Until the funds have been posted to a
student's account, an institution cannot know what, if any, portion is
cash basis revenue because some funds may be disbursed directly to the
student for non‑institutional expenses, and some of the remaining funds
may be used to satisfy tuition, fees, and other institutional charges.
In the case of ACT, some funds received were not disbursed at all.

In the preamble to the final regulations published on October 29, 1999,
64 Federal Register No. 209, 58610 (October 29, 1999 Preamble), the
Department clarified that "the regulation applies to cash received used
to satisfy tuition, fees and other institutional charges." Therefore,
funds are to be received and used within the fiscal year in order to be
included as 90/10 revenue. The receipt of cash is not revenue for 90/10
purposes until it is posted to student accounts and used to satisfy
tuition, fees, and other institutional charges.

Our position is further supported by ACT's inadequate policies and
procedures in place over the administration of Title IV funds during the
audit period. As discussed in Finding 2 of this report, ACT breached its
fiduciary responsibility regarding the use of Title IV funds by
transferring Title IV funds to its operating account one day after
drawing down the funds from the Department and not disbursing the funds
to student accounts within three business days. In some instances, funds
were not disbursed to student accounts at all. By basing its 90/10
calculation on the date funds are received, ACT would include funds in
the calculation that have not been used to cover tuition fees, and other
institutional charges.

**[Sallie Mae Loan Revenue]{.underline}**

[ACT Response]{.underline}. ACT utilized the CLASS software system for
accounting for student aid funding, including Title IV funding, and
maintaining records regarding student activity. The CLASS system
provides a number of data fields to track information related to student
accounts, including a "transaction date" and a "posting date." Under the
CLASS system, the transaction date was entered on a student account only
after ACT had received the funds with respect to that student. In most
cases, such funds were received into the ACT bank account managed
through the IEC corporate office so that, upon receipt, the corporate
office personnel would notify ACT through a transmittal document that
the funds had been received and instruct ACT to credit the student's
account using the transmittal date as the transaction date.

With regard to the receipt of loan funds from Sallie Mae, the
transaction date was supported by receipts for wired funds, which were
dated on or before the transaction date for the affected students. The
transaction date was entered into the CLASS system after the IEC
corporate office or ACT personnel had confirmed that the applicable
funds had been received into the ACT bank account and were available,
without restriction, to pay the obligations of the student borrowers.
All funds are considered credited to the student's account as of the
transaction date entered for those funds.

The audit report uses the posting date to determine when funds,
including Sallie Mae loan funds, were received for purposes of the 90/10
Rule. The OIG only counted Sallie Mae loans in the 90/10 ratio if such
loans had a posting date on or before October 31, 1999. This resulted in
the exclusion of \$246,684 in Sallie Mae loan funds for 26 students
whose accounts had transaction dates prior to October 31, 1999, but
posting dates on or after November 1, 1999. In the case of all 26
students, ACT had received \$246,684 from Sallie Mae on or before the
transaction date. These funds must be counted for a total of \$785,346
in Sallie Mae loan funds in the school's 90/10 calculation for FY 1999.

OIG's use of the figure derived from the posting date rather than the
transaction date is wrong as a matter of fact and law. The report would
suggest that the transaction date is nothing but a prediction of the
date that a transaction "should" occur. This is a fundamental
misunderstanding, which ignores that ACT never determined and entered
the transaction date for Sallie Mae loans into the CLASS system until
such funds had been received into ACT's bank account. ACT treated, and
continues to treat, the transaction date as the date that funds are
credited to the student's account.

ACT treated the transaction date as the date that funds were credited to
its student's accounts as a payment of the student's obligations. Under
the Sallie Mae Loan Agreement, it is clear that Sallie Mae actually
disbursed funds to the students (as identified by name and exact dollar
amount on the wire transmittals) when it wired funds on behalf of those
students to the ACT bank account. ACT then entered a transaction date on
the student's account to reflect that the funds for that student had
been received and credited as a payment on the student's account on or
before such transaction date.

It is notable that 21 of the 26 loans with transaction dates prior to
October 31, 1999, have a posting date of November 1, 1999. For these 21
loans totaling \$218,895, ACT made the manual accounting entry that
generated the posting date on November 1st, the first business day
following the close of FY 1999. For the report to deny that these loans
belong in FY 1999 is to suggest that this issue should be decided by the
mechanical question of when certain entries were made in the CLASS
system, rather than when the funds were actually received by ACT and
credited by the school to the student's account to pay the student's
charges.

[OIG Comments]{.underline}. To be counted for 90/10 purposes, Title IV
and non‑Title IV funds must be used to satisfy tuition, fees, and other
institutional charges. Funds cannot be considered used until they are
posted to student accounts. Regardless of the transaction date
information provided by ACT, funds cannot be included in the 90/10
revenue calculation until they have been used to satisfy tuition, fees,
and other institutional charges.

# Our analysis of the transaction date data revealed that the transaction dates were not verifiable. Our review of a random sample of 74 student files who received Title IV funds during academic years 1999-2000 or 2000-2001 revealed that the [transaction date data]{.underline} showed that Title IV funds were disbursed to 18 student accounts greater than three days from the date the funds were drawn down. The number of days ranged from 4 to 368. In addition, the transaction date data showed that funds were disbursed to 11 students [before]{.underline} the date the funds were drawn down. Therefore, we concluded that the transaction date data were not reliable for 90/10 computation purposes.

# 

# Since the posting date was automatically generated by the computer system and represented the date that the disbursements were actually credited to student accounts (and, therefore, used for the intended purpose), we concluded that the posting date data reflected the date that the disbursements occurred. 

Regarding the exclusion of \$246,684 in Sallie Mae loan funds for 26
students whose accounts had transaction dates prior to October 31, 1999,
but posting dates on or after November 1, 1999, the regulations state
that funds are to be included in the 90/10 revenue calculation in the
fiscal year that the funds are used to satisfy tuition, fees, and other
institutional charges. The treatment of such funds was addressed in the
October 29, 1999 Preamble to the 64 Federal Register No. 209, 58610
(October 29, 1999). The preamble provided the following example for an
institution whose fiscal year is a calendar year:

> On December 30, 1999, the institution disburses \$100,000 of Title IV,
> HEA program funds to students on their accounts, and credit balances
> occur because the institution has not yet charged those accounts with
> related tuition and fees. On January 3, 2000, the institution charges
> tuition and fees to the students' accounts, and uses all of those
> previously disbursed funds to pay the students' tuition and fee
> charges. For purposes of the 90/10 formula in 600.5 (d)(1), none of
> the \$100,000 would be included in the institution's 90/10 calculation
> for its 1999 fiscal year because none of the funds had been used for
> tuition, fees, and other institutional charges; all of the \$100,000
> would be included in the institution's 90/10 calculation for its 2000
> fiscal year calculation, when the funds were used to satisfy tuition,
> fees, and other institutional charges.
>
> A similar result would apply if the institution drew down \$100,000 of
> Title IV, HEA program funds from the Department on December 30, 1999,
> but did not pay those funds to students for institutional charges
> until January 3, 2000.

The Sallie Mae recourse loans made by ACT on the last day of the fiscal
year for the full cost of tuition and fees closely resembled invalid
institutional loans as outlined in Dear CPA Letter 99‑02
(CPA‑99‑02).[^3] Our analysis of the Sallie Mae recourse loans made to
ACT students in FY's 1999 and 2000 revealed that if these loans had been
institutional loans, they would not have been considered valid. In
November 1999, the OIG issued Dear CPA Letter 99‑02 outlining the
following tests: Evaluate whether the institutional loans are routinely
repaid and evaluate the timing of the loans. The Dear CPA Letter stated
that an indication that institutional loans are routinely repaid is
whether the default rate exceeds 15 percent; and an indication that
institutional loans may not be valid would be where the majority of the
loans are made at the end of an institution's fiscal year rather than at
recurring intervals that are related to the institution's enrollment
cycle. The letter stated that, in general, institutional loans would
typically be made around the time a student begins an academic year or
new period of enrollment. We found that the large Sallie Mae loans made
to students failed these tests.

-   *[Loan Repayment]{.underline}*

> During FY's 1999 and 2000, students did not routinely repay the large
> Sallie Mae recourse loans. Of the 83 students who received a Sallie
> Mae recourse loan for the full cost of tuition and fees in October
> 1999 or 2000, ACT repurchased 35 (42 percent) of these loans within
> the following two years because students defaulted on them.

-   *[Timing of Loans]{.underline}*

> During FY's 1999 and 2000, the majority of the Sallie Mae recourse
> loans were made in October, the end of the institution's fiscal year,
> rather than at recurring intervals related to the institutions
> enrollment cycles. Prior to October, ACT awarded very few Sallie Mae
> recourse loans and the amounts of the loans were not for the full cost
> of tuition and fees. We found that most Sallie Mae recourse loans made
> to students during October 1999 or 2000 were for a larger amount than
> during any other time during the fiscal year. We identified 83 Sallie
> Mae recourse loans that were made for the full costs of tuition and
> fees in October 1999 and 2000. Only 5 Sallie Mae recourse loans for
> the full cost of tuition and fees were made in months other than
> October.

As noted in the Other Matters section of this report, we reviewed the
files of 61 of the 84 students who received large Sallie Mae recourse
loans for the full cost of tuition and fees during FY's 1999, 2000, and
2001. Of the 61 student files reviewed:

-   53 students received cash payments (totaling \$228,382) of the
    Sallie Mae loan proceeds.

-   40 students had Direct Loans prior to receiving the large Sallie Mae
    loans. Of these 40 students, 29 cancelled their Direct Loans or ACT
    repaid the Direct Loans when the students obtained the large Sallie
    Mae loans.

-   15 students were eligible for Direct Loans, but took Sallie Mae
    loans instead.

-   9 Sallie Mae loans were cancelled by ACT during the first month of
    the next fiscal year.

-   35 Sallie Mae loans were repurchased by ACT within the following two
    years because the students defaulted on the loans.

Regarding the 26 Sallie Mae loans with posting dates after October 31,
1999, 17 of these students already had Direct Loans and another 4
students had Pell grants. For these 21 students who already had either
Direct Loans or Pell grants, the Sallie Mae loans created credit
balances in the student accounts. Therefore, it is questionable whether
these students needed the Sallie Mae loans.

##### Sallie Mae Escrow Adjustment

[ACT Response]{.underline}. In July 1999, ACT's parent corporation, IEC,
entered into an agreement with an affiliate of Sallie Mae and Mid‑City
National Bank under which Sallie Mae agreed to make privately funded
loans to students who would otherwise not qualify for such loans due to
their credit history or other factors. Under the agreement, IEC agreed
to establish and maintain an escrow account to be equal to 30 percent of
the original principal balance of each loan made by Sallie Mae to ACT
students. IEC had the option of funding the escrow account through its
own payments or agreeing that Sallie Mae could withhold funds for that
purpose from new loan disbursements. IEC further agreed to credit the
student borrower with 100 percent of the loan amount for payment of
tuition and fees or other costs of education reflecting that these were
loans from Sallie Mae to the students for the benefit of the students.

The report adjusts the Sallie Mae loans included in the 90/10 ratio by
reducing the total loan principal by the 30 percent that would be paid
into the escrow account. Thus, the OIG input its own figure of \$161,599
(representing 30 percent of the loan amount of \$538,662) even though
actual cash transactions in the escrow account were significantly less.
As of October 31, 1999, ACT or Sallie Mae had deposited the sum of
\$41,259 in the escrow account. This figure is slightly higher than the
figure cited in the report due to the discovery of one additional
payment to the escrow account. Subsequently, in school FY 2000, ACT made
payments to bring the escrow account up to the customary 30 percent
coverage.

[OIG Comments]{.underline}. ACT provided documentation to support that
\$41,259 was placed in the escrow account during FY 1999. Since most of
the Sallie Mae loans were made on October 29, 1999, we agree that it is
reasonable that funds would not have been deposited in the escrow
account for these loans until November (i.e., the beginning of the next
fiscal year). We agree with this treatment and have used the \$41,259
figure in our 90/10 revenue calculation (see Attachment A).

Although we agree to this treatment of the escrow for purposes of the
90/10 revenue calculation, it should be noted that IEC had an agreement
with Sallie Mae Financial Corporation to allow IEC to defer
replenishment of the reserve account held with Sallie Mae until the
first month of the fiscal year. In September 2001, the Sallie Mae
Financial Corporation and IEC mutually agreed to allow IEC "to defer
replenish the reserve accounts for the months of August and September
2001 . . . and replenish the reserve accounts after October 31, 2001,
but prior to November 10, 2001." According to the letter, this was done
to help IEC "satisfy U.S. Department of Education regulation generally
referred to as the 90/10 Rule." By deferring the replenishment of the
escrow account, ACT reported no repurchases during these months, thus
artificially inflating the non‑Title IV cash portion of the calculation.
In addition, ACT deferred Title IV draws during the last months of the
fiscal year until the first month of the next fiscal year to help meet
the 90/10 eligibility requirement.

##### Sallie Mae Credit Balance Adjustment

[ACT Response]{.underline}. The OIG significantly reduced the value of
the Sallie Mae loans received by ACT by subtracting for credit balances
on student accounts. The report reduces the value of the Sallie Mae loan
principal based on credit balances in the amount of \$148,065. That
figure represents a 30 percent reduction of the \$211,521 in credit
balances on the student accounts. The OIG made the 30 percent adjustment
since the OIG also reduced the Sallie Mae loan principal by 30 percent
based on the OIG's interpretation of the requirements of the escrow
account. The OIG adjustment for credit balances is based entirely on
credit balances recorded on students' accounts, without regard to when
those credit balances were paid.

As of FY 1999, the Department had not issued any regulatory guidance
specifically addressing the treatment of credit balances in the 90/10
calculation. While the Secretary issued guidance in the Federal Register
of October 29, 1999, indicating that funds held as credit balances
generally are not counted in an institution's 90/10 calculation, that
guidance was published on the last business day of the school's FY 1999,
in connection with regulatory revisions that did not take effect until
July 1, 2000. As a result, the exclusion of credit balances from the
90/10 calculation was not expressly called for until FY 2000.

[OIG Comments.]{.underline} We identified \$211,521 in credit balance
adjustments during school FY 1999. We initially reduced this amount by
30 percent in the draft report to allow for the Sallie Mae escrow
account. However, since we agree to limit the Sallie Mae escrow account
adjustment to the amount deposited in escrow during FY 1999 (\$41,259),
we used the \$211,521 credit balance in the final report (see
Attachment A).

The regulations provide that credit balances occur whenever an
institution disburses Title IV funds by crediting a student's account
and the total amount of all Title IV funds credited exceeds the amount
of tuition and fees, room and board, and other authorized charges (34
CFR 668.164(e)). In other words, a credit balance is money credited to a
student's account that is not being used to pay for tuition, fees, and
other institutional charges. At the point that there is a credit
balance, the funds have not been used for tuition, fees, and other
institutional charges and cannot be used for 90/10 purposes. The
preamble to the final rule in the October 29, 1999, Preamble, states "In
general, funds held as credit balances in institutional accounts do not
get counted in the 90/10 formula in 600.5(d)(1)."

**[Sale of Institutional Retail Installment Contracts]{.underline}**

[ACT Response]{.underline}. The sale of institutional retail installment
contracts (RIC) on October 29, 1999, resulted in the receipt of an
additional \$90,295 in non‑Title IV funds in FY 1999. This sale
transaction was mistakenly overlooked and the sale proceeds were not
included in the 90/10 calculation as originally performed by ACT and its
auditor. ACT discovered the sale documents in preparing this response
and presents them to the OIG for the first time in connection with this
response. This \$90,295 was the payment received from an independent
third party, as demonstrated by the wire transfer records and purchase
agreement. The schedule to the purchase agreement identifies the student
loans that were sold and generating revenue received by ACT in FY 1999.

[OIG Comments]{.underline}. ACT provided adequate documentation to
support the receipt of an additional \$90,295 in non‑Title IV funds for
the sale of retail installment contracts (RIC) on October 29, 1999. We
included this sale in our revised 90/10 revenue calculation. During the
audit, ACT provided documentation to support \$22,375.26. Therefore, we
adjusted the RIC sales to include the amounts supported (\$112,670.26).
See Attachment A.

**Finding No. 2 -- ACT Breached Its Fiduciary Responsibility Regarding
the Use of Title IV Funds**

ACT did not maintain Title IV funds in an interest‑bearing account
identified as containing Federal funds. It was IEC policy to transfer
Title IV funds to its operating account one day after drawing down the
funds from the Department. ACT did not disburse Title IV financial aid
funds to student accounts within three business days following the date
the institution received the funds, and in some cases the funds were not
disbursed at all. As a result, not all Title IV funds were used for
their intended purpose. This failure to assure that Title IV funds were
used for their intended purpose placed ACT in violation of its fiduciary
responsibility.

The regulations at 34 C.F.R. § 668.82(a), (b)(1), and (c) state that an
institution:

> must at all times act with the competency and integrity necessary to
> qualify as a fiduciary . . . .
>
> In the capacity of a fiduciary . . . A participating institution is
> subject to the highest standard of care and diligence in administering
> the programs and in accounting to the Secretary for the funds received
> under those programs . . . .
>
> The failure of a participating institution . . . to administer a
> Title IV, HEA program, or to account for the funds that the
> institution . . . receives under that program, in accordance with the
> highest standard of care and diligence required of a fiduciary,
> constitutes grounds for . . . an emergency action against the
> institution, a fine on the institution, or the limitation, suspension,
> or termination of the institution's participation in that
> program . . . .

The regulations at 34 C.F.R § 668.161(b) state that "funds received by
an institution under the \[T\]itle IV, HEA programs are held in trust
for the intended student beneficiaries and the Secretary . . . . The
institution, as a trustee of Federal funds, may not use or hypothecate
(i.e., use as collateral) \[T\]itle IV, HEA program funds for any other
purpose."

The regulations at 34 C.F.R § 668.163(c)(2) state that for institutions
drawing down \$3 million in the previous year "an institution must
maintain Direct Loan, Federal Pell Grant, FSEOG, and FWS program funds
in an interest-bearing bank account . . . ." The regulations at
34 C.F.R. § 668.166(a) provide that institutions are to disburse
Title IV funds to students or credit their accounts within three
business days.

An analysis of ACT's Direct Loan Federal Funds accounts from 1998
through 2000 revealed that Direct Loan funds drawn from the Department
were wired to the Direct Loan Federal Funds account. However, these
funds were transferred from the Direct Loan Federal Funds account to a
non‑interest‑bearing operating account the following day. IEC staff
would then inform the applicable ACT campuses that the funds had arrived
and direct them to disburse the funds to the appropriate student
accounts.

Title IV funds are to be maintained in a Federal Funds account until
disbursed for their intended purpose. The funds are to be held in trust
for the intended student beneficiary and cannot be used for any other
purpose. An institution has not used Title IV funds for their intended
purpose until it has disbursed the funds to the intended student
beneficiaries. IEC's practice of transferring Title IV funds into its
operating account within one day of receipt without disbursing the funds
to students breached its fiduciary responsibility to the Secretary.

IEC could not account for all of the funds that it drew down from the
Department. We compared the total amount of Title IV funds drawn down
from the Department's GAPS system to the total amount of Title IV funds
posted to student accounts per ACT's CLASS system for school FY's 1999,
2000, and 2001. The tables below illustrate that the Title IV drawdowns
(less refunds) exceeded the amounts posted to student accounts by
\$994,619 for FY's 1999 through 2001.

**Table 2.1 - Direct Loan Drawdowns vs. Amounts Posted to Student
Accounts**

  ----------------- ---------------- ------------------ ------------------
  **Fiscal Year**   **GAPS**         **CLASS**          **Difference**

  1999              \$4,674,687      \$4,493,067        \$181,620

  2000              5,201,173        4,536,704          664,469

  2001              6,812,068        6,879,979          (67,911)

  **TOTALS**        \$16,687,928     \$15,909,750       **\$778,178**
  ----------------- ---------------- ------------------ ------------------

**Table 2.2 - Pell Grant Drawdowns vs. Amounts Posted to Student
Accounts**

  ----------------- ---------------- ------------------ ------------------
  **Fiscal Year**   **GAPS**         **CLASS**          **Difference**

  1999              \$1,563,993      \$1,531,801        \$ 32,192

  2000              2,075,046        1,930,274          144,772

  2001              2,808,319        2,859,397          (51,078)

  **TOTALS**        \$6,447,358      \$6,321,472        **\$125,886**
  ----------------- ---------------- ------------------ ------------------

***Table 2.3 -- FSEOG Drawdowns vs. Amounts Posted to Student
Accounts***

  ----------------- ---------------- ------------------ ------------------
  **Fiscal Year**   **GAPS**         **CLASS**          **Difference**

  1999              \$ 31,748        \$ 9,945           \$21,803

  2000              75,128           108,954            (33,826)

  2001              133,922          31,344             102,578

  **TOTALS**        \$240,798        \$150,243          **\$90,555**
  ----------------- ---------------- ------------------ ------------------

On October 31, 2001, ACT/IEC returned \$900,000 in Direct Loan funds to
the Department. ACT/IEC also returned \$265,000 in Pell grant funds to
the Department on November 14, 2001. According to IEC officials, the
returned funds represented excess cash accumulated during FY's 1999 and
2000.

ACT did not disburse Title IV funds to students within three business
days following the date the institution received the funds. We reviewed
a random sample of 74 files of students who received Title IV funds
during academic years 1999‑2000 or 2000‑2001 (July 1, 1999, through June
30, 2001). ACT failed to post Title IV funds to student accounts within
allowable time periods for about two‑thirds of the files reviewed.

Of the 74 files reviewed, 52 student accounts were not credited with
Title IV funds within three business days of the date that the funds
were drawn per the support provided for the drawdowns. We identified 176
disbursements that were not posted to the 52 student accounts within
three business days (per ACT's accounting system post date). ACT
officials were unable to provide names of alternative students who
received the funds. Table 2.4 below illustrates the number of lapsed
days for the 52 student accounts reviewed (176 disbursements).

Table 2.4 -- Disbursement Elapsed Days for the 52 Students

Whose Accounts Were Not Credited Within Three

Business Days of Drawdown of Funds

  ----------------------------------------- -----------------------------
  **Elapsed Days**                          **Disbursements**

  4-5                                       51

  6-10                                      46

  11-50                                     55

  51-100                                    9

  101-300                                   4

  301-500                                   8

  501-650                                   3

  Total                                     176
  ----------------------------------------- -----------------------------

ACT had no written policies and procedures over the draw down and
disbursement of Title IV funds. ACT also experienced a high turnover in
financial aid personnel and the current employees could not explain the
process used for drawing down and disbursing Title IV funds during award
years 1998 or 1999. In April 2000, ACT signed a contract with Global
Financial Aid Services (Global) to perform certain aspects of the draw
down and disbursement of Title IV funds as a third‑party servicer.

During the audit exit conference, ACT/IEC officials agreed that there
were two issues in this finding that needed to be addressed:
(1) Title IV funds not kept in an interest bearing account until
disbursed to student accounts and (2) Title IV funds not being disbursed
to student accounts within three business days. The IEC Vice President
of Student Financial Services said ACT got into the situation of not
posting large amounts of Title IV funds to student accounts within the
required timeframe because of turnover in personnel. In February 2001,
ACT began trying to reconcile the Direct Loan and Pell accounts. The
Direct Loan process involved matching students for which ACT had a valid
promissory note to Title IV draw downs made and posted. The result of
the Direct Loan and Pell reviews was the return of \$900,000 of Direct
Loan funds and \$265,000 of Pell funds to the Department of Education.

**RECOMMENDATIONS**

We recommend that the Chief Operating Officer for Federal Student Aid:

1.  Place ACT on the reimbursement method of payment for all the
    Title IV programs.

2.  Require ACT to maintain Title IV fund drawdowns in an
    interest-bearing Federal Fund account until the funds are disbursed
    to students.

3.  Require ACT to establish policies, procedures, and management
    controls to ensure that Title IV funds are disbursed to student
    accounts within three business days following the date the funds are
    received.

4.  Take appropriate action under 34 C.F.R. Part 668, Subpart G to fine,
    limit, suspend, or terminate the participation of ACT in the
    Title IV programs as a result of ACT's breach of fiduciary
    responsibility.

**ACT RESPONSE**

In its written response to the draft report (see Attachment B), ACT
agreed that for the period covered by the audit, it did not consistently
disburse Title IV funds to students in accordance with all applicable
Departmental requirements. During award year 2000-2001 to present, ACT
contends that it maintained Title IV funds in bank accounts identified
as containing Federal funds. However, these Federal funds accounts were
not interest bearing accounts because ACT determined that the interest
that would be earned on the funds in the accounts would be less than
\$250 per year. Regulations do not require institutions to maintain
Title IV funds in an interest-bearing account if the institution will
not earn over \$250 during the award year.

It was ACT's practice during the years covered by the audit (school
years 1999, 2000, and 2001) to transfer the Title IV funds it received
out of the Federal funds account and into its operating account
approximately one day after their receipt from the Department. ACT did
this because a predominant number of ACT students use all of the
Title IV funds awarded to them to pay institutional charges
(i.e., tuition, fees, books, and related charges). It was ACT's intent
that, immediately upon transfer of the funds to the institutional
operating account, it would credit the funds to the student's tuition
accounts. Unfortunately, during the period covered by the audit, this
did not always happen on a consistent basis, and funds were not
consistently credited to student's accounts within three business days.
ACT conceded that practices like this that were initiated by the prior
management of ACT's parent company were sometimes too informal and,
therefore, not consistent with applicable Federal regulations.

ACT has made several significant changes to institutional policies and
operations to address this problem. In 2000, ACT engaged the services of
Global Financial Aid Services, an experienced third-party servicer, to
handle key aspects of ACT's drawdown and disbursement of Title IV funds.
ACT has dramatically reduced the time lapse between the date Title IV
funds are drawn down and the date those funds are credited to students'
accounts.

The audit report describes past procedures and a problem that went back
as far as five years. ACT has taken numerous steps to revise it
practices, including the retention of a respected third-party servicer,
Global Financial Aid Services, to help administer its Title IV funds
appropriately and to help ensure these past practices will not continue.
For those reasons, ACT does not believe that it should be placed on
reimbursement, or that its Title IV participation should be limited,
suspended, or terminated.

**OIG COMMENTS**

ACT agreed that for the period covered by this audit, it did not
consistently disburse Title IV funds to students in accordance with
applicable regulations. ACT's response that it did not deposit Title IV
funds into an interest bearing account because the amount of interest
earned would be less than \$250 annually does not address the primary
violation. ACT's breach of its fiduciary responsibility is the fact that
ACT did not maintain the Title IV funds in the Federal Funds account
until the funds were disbursed to student accounts. The transfer of
Title IV funds to the operating account one day after the funds were
drawn down did not necessarily mean the funds were posted to student
accounts.

Furthermore, under the system in place at the time of our audit, ACT's
use of the CLASS system transaction date data made it appear that ACT
was in compliance with the requirement to disburse Title IV funds to
students within three business days when in many instances it did not.
To be in compliance with regulations, it would be necessary for the
transaction date to represent the date that funds were actually posted
to student accounts.

The new procedure described by ACT for Pell and Direct Loan
disbursements will not resolve the 90/10 revenue problems noted in this
report unless (1) the transaction date and posting date are the same as
the date the funds are credited to student accounts and (2) the funds
are disbursed to students within three business days from the date of
drawdown. We did not change our findings and recommendations regarding
ACT's breach of its fiduciary responsibilities.

**Finding No. 3 -- ACT Improperly Disbursed Title IV Funds to Ineligible
Students**

ACT improperly disbursed Title IV funds totaling \$67,744 to (1) seven
students more than 90 days after their last date of attendance,
(2) three students who had withdrawn from school, and (3) four students
who did not pass the ability‑to‑benefit test.

The regulations at 34 C.F.R. § 668.164(g)(2)(ii)(A) and (3) provide
that:

> An institution may not make a late or subsequent disbursement of a
> Direct Subsidized or Direct Unsubsidized loan unless the student has
> graduated or successfully completed the period for which the loan was
> intended . . . .
>
> If a student or parent borrower qualifies for a late disbursement . .
> . the institution . . . \[m\]ay make that late disbursement of
> \[T\]itle IV, HEA program funds only if the funds are used to pay for
> educational costs that the institution determines the student incurred
> in the period in which the student was enrolled and eligible; and . .
> . \[m\]ust make the late disbursement no later than 90 days after the
> date that student becomes ineligible . . . .

The regulations at 34 C.F.R. § 668.24(c)(1)(iii) require "\[t\]he
records that an institution must maintain . . . include but are not
limited to\--Documentation of each student's . . . eligibility for
\[T\]itle IV, HEA program funds . . . ."

The regulations at 34 C.F.R. § 668.32(e)(2) state that "\[a\] student is
eligible to receive \[T\]itle IV, HEA program assistance if the student
-- \[h\]as obtained within 12 months before the date the student
initially receives \[T\]itle IV, HEA program assistance, a passing score
specified by the Secretary on an independently administered test . . .
."

ACT improperly disbursed Title IV funds totaling \$25,587 to eight
students more than 90 days after their last date of attendance. ACT
returned to the Department \$2,141 disbursed to one of these students,
leaving a balance owed of \$23,446. ACT also made second Direct Loan
disbursements totaling \$4,688 to three students after their last date
of attendance even though the students withdrew before the end of the
payment period.

ACT did not always maintain documentation of the Wonderlic Ability‑to‑
Benefit (ATB) test scores in student files. A comparison of the
Department's National Student Loan Data System (NSLDS) and Wonderlic's
ATB database identified 11 students who received student financial aid,
but did not pass the Wonderlic ATB test. A review of these 11 student
files revealed that four files did not contain adequate documentation to
establish eligibility to receive Title IV funds. As a result, \$39,610
was disbursed to four ineligible students.

ACT officials stated that the institution had a high turnover in staff.
We concluded that this contributed to ACT's difficulty in processing
financial transactions accurately, timely, and in accordance with
regulations. We also noted that there was confusion among financial aid
personnel regarding whose responsibility it was to post Title IV funds
to student accounts once the campus was notified that the funds had
arrived.

**RECOMMENDATIONS**

We recommend that the Chief Operating Officer of Federal Student Aid
require ACT to:

1.  Return \$67,744 of Title IV funds that were improperly
    disbursed.[^4]

2.  Address confusion among financial aid personnel regarding their
    responsibilities to ensure that ineligible students do not receive
    Title IV disbursements.

**ACT RESPONSE**

The ACT written response (see Attachment B) provided additional
information for each of the students identified in the draft report as
receiving improper Title IV disbursements. The response also stated that
ACT had implemented various new procedures and had provided additional
training to its staff to ensure that Title IV funds are not disbursed to
ineligible students. ACT is discontinuing use of ability-to-benefit
testing for admitting new students. Effective June 1, 2003, new
applicants to ACT will only be admitted if they have a high school
diploma or GED certificate.

**OIG COMMENTS**

Based on the additional information provided by ACT in its response to
the draft report, we adjusted the finding to include eight students
(down from nine) who received Title IV funds more than 90 days after
their last date of attendance; three students (up from two) who received
Title IV funds after their last date of attendance even though the
students withdrew before the end of the payment period; and four
students (down from five) who did not have passing ATB test scores. The
one student file that was missing was provided for review. Based on the
additional information provided, we reduced the total amount of
improperly disbursed Title IV funds to \$67,744 (from \$82,832).

**Finding No. 4 -- ACT Did Not Reconcile Direct Loan Funds**

ACT did not reconcile its 1998-1999 or 1999-2000 Direct Loan awards on a
monthly basis. ACT/IEC officials stated that these awards were not
reconciled due to high staff turnover and improperly trained personnel.
Because the school's records do not match the Department's records, the
Department cannot account for the Direct Loan funds or identify
potential problems with timely disbursements or excess cash.

The regulations at 34 C.F.R. § 685.102(b)(3) for an origination option 2
school such as ACT states that the school "reconciles on a monthly
basis." Direct Loan Bulletin-97-49 provides that "Each academic year
will be closed on July 31st of the year following the academic year."

The regulations at 34 C.F.R. § 685.402(c)(2) state:

> The Secretary may require a school to change origination status if the
> Secretary determines that such a change is necessary to ensure program
> integrity or if the school fails to meet the criteria and performance
> standards established by the Secretary, including but not limited to .
> . . the timely submission of completed and signed promissory notes and
> accurate origination and disbursement records, and the successful
> completion of reconciliation on a monthly basis.

We reviewed a judgment sample of six months each of Direct Loan Student
Account Summary (DLSAS) reports for the 1998-1999 and 1999-2000 award
years to determine whether ACT reconciled its Direct Loan awards on a
monthly basis. The DLSAS reports showed that ACT carried an ending cash
balance at the end of 10 of the 12 months reviewed. ACT also carried an
ending cash balance and unbooked loans after the close of the 1998‑1999
and 1999‑2000 academic years.

ACT's failure to reconcile its Direct Loan awards on a monthly basis
contributed to the unaccounted for Direct Loan funds that were not
returned to the Department in a timely manner. We reviewed ACT's bank
statements, GAPS activity reports, and student ledgers for a judgment
sample of three months each for award years 1998‑1999, 1999‑2000, and
2000‑2001 to determine whether funds drawn down from GAPS were disbursed
to student accounts. We noted a significant difference between the
amount of funds drawn from GAPS and the amount of funds disbursed to
student accounts in seven of the nine months reviewed. These funds
represented unaccounted for loan funds in the ACT operating account.

IEC officials were attempting to reconcile these awards at the time of
the audit. On October 31, 2001, IEC returned to the Department \$900,000
of unaccounted for funds from Direct Loan award years 1998‑1999 and
1999‑2000. According to IEC officials, \$150,000 was from award year
1998‑1999 and \$750,000 was from award year 1999‑2000.[^5]

IEC signed a contract with Global Financial Aid Services (Global) in
April 2000 for Global to perform ACT\'s 2000‑2001 Direct Loan
reconciliation. Global began handling the reconciliation of ACT\'s
2000‑2001 Direct Loans for the month ended September 30, 2000. A limited
review of Global revealed that it had policies and procedures in place
for reconciling ACT\'s 2000-2001 Direct Loans on a monthly basis. Our
analysis of a three‑month sample of DLSAS reports revealed that Global
was following its procedures and reconciling ACT\'s 2000‑2001 Direct
Loans on a monthly basis.

**RECOMMENDATION**

We recommend that the Chief Operating Officer for Federal Student Aid
require ACT to:

1.  Train personnel in the reconciliation requirements of the Direct
    Loan program.

2.  Monitor its third‑party servicer's performance to ensure continued
    compliance with program requirements.

**ACT RESPONSE**

ACT agreed that it did not reconcile its Direct Loan accounts on a
monthly basis during 1988-1999 and 1999-2000. However, subsequent to
that time ACT initiated a reconciliation of its Direct Loan funds. As a
result of that reconciliation, ACT returned excess cash funds to the
Department, as acknowledged in the audit report. In April 2000, ACT
engaged Global Financial Aid Services to perform a variety of Title IV
cash management functions. One of the services Global performs on behalf
of ACT is the reconciliation of Direct Loan transactions. Global began
conducting complete monthly reconciliation of Direct Loans at the
beginning of the 2000-2001 school year. ACT personnel are now fully
aware of the monthly reconciliation requirements and the Global staff
performing the reconciliation is fully trained, experienced, and capable
to perform those duties.

**OIG COMMENTS**

ACT agreed that it did not always reconcile Direct Loan funds in
accordance with Departmental requirements. Although ACT engaged Global
Financial Aid Services to perform their reconciliation of Direct Loan
funds, ACT remains the responsible party regarding compliance with
Direct Loan program requirements. Our limited review of Global revealed
that it had policies and procedures in place for reconciling Direct
Loans on a monthly basis; however, we did not make a determination as to
whether the reconciliation was timely and accurate. We did not change
our findings and recommendations regarding Direct Loan reconciliation.

**Finding No. 5 -- ACT Failed to Properly Calculate or Make Refunds For
Students Who Withdrew**

ACT failed to make refunds for ten students and incorrectly calculated
refunds for two students in our sample who withdrew during academic
years 1999‑2000 and 2000‑2001. As a result, ACT owes the Department
\$9,619 for refunds not made or made in the incorrect amount.

Institutions are required to calculate returns of Title IV funds for
students who withdraw according to the procedures in 34 C.F.R. § 668.22
(2000). Amended regulations to implement the return of Title IV
requirements of the Higher Education Amendments of 1998 were published
in the Federal Register on November 1, 1999. Institutions were not
required to implement these new requirements until October 7, 2000,
although institutions could choose to implement them earlier. ACT did
not choose early implementation. We used the appropriate refund
calculation depending on when the refund was made.

ACT did not always calculate refunds correctly or make the refunds. A
review of the files of 23 randomly selected students who withdrew from
ACT's Atlanta campus during the 2000‑2001 school year revealed that two
refunds were not made at all and one refund made was calculated
incorrectly.

We also reviewed refunds as part of our student eligibility file review.
Of the 74 files reviewed of students who received Title IV funds during
academic years 1999-2000 and 2000-2001, 28 students withdrew and
required a refund calculation. Of these 28 students, eight refunds were
not made and one was made, but calculated incorrectly.

Of the 51 (23 + 28) student files reviewed that required refund
calculations, ACT failed to make refunds for ten students and two
refunds were made, but calculated incorrectly. As a result of its
failure to correctly calculate and/or make refunds for these12 students,
ACT owes the Department \$9,619.

ACT has a history of refund problems. ACT's FY 1999 and FY 2000
compliance audits contained findings pertaining to untimely refunds and
the failure to make refunds.[^6] To resolve the FY 1999 refund finding,
the Office of Federal Student Aid required ACT to conduct a full file
review to identify all late refunds. This file review indicated that of
152 refunds, 58 were paid late (38 percent), and of the \$239,516 of
refunds paid, \$104,152 were paid late (44 percent). The Office of
Federal Student Aid also required ACT to conduct a full file review to
resolve the FY 2000 refund findings. The compliance audit identified
refunds totaling \$24,278 that had not been paid and \$11,114 in refunds
that were paid late. The full review identified refunds totaling
\$112,884 that had not been paid for the FY 2000 award year. The
Department requested and received a letter of credit for \$3.5 million
from IEC relating to ACT's refund issues.

During the audit exit conference, IEC's Vice President of Student
Financial Services stated that ACT has historically had a problem with
refunds. The officials said a new system to calculate refunds was
implemented in July 2001 to resolve this problem. We did not review this
system.

**RECOMMENDATIONS**

We recommend that the Chief Operating Officer for Federal Student Aid:

1.  Require ACT to refund to the Department \$9,619 (less \$3,255 paid
    subsequent to the issuance of the draft audit report) for refunds
    not made or made in the incorrect amount.

2.  Require ACT to implement policies, procedures, and management
    controls to ensure the accurate calculation of refunds and the
    timely return of such refunds to the Department.

3.  Take appropriate action under 34 C.F.R. Part 668, Subpart G to fine,
    limit, suspend, or terminate the participation of ACT in the
    Title IV programs as a result of ACT's continued failure to make
    refunds.

**ACT RESPONSE**

ACT provided additional information for each of the students cited in
this finding. As a result of its recalculations for these students, ACT
believes that the correct amount of additional refunds due is \$3,255
for four students, which ACT fully paid prior to submitting its written
response to the report. The ACT response also stated that the audit
report notes that ACT had late and unmade refunds in the past, facts
that ACT readily admit. ACT performed extensive file reviews over a
period of several years, under the direction of the Department's Case
Management \[and Oversight\] Team, to identify additional refunds that
were not paid correctly and timely. ACT paid all additional refund
amounts identified by those file reviews, and the Case Management Team
closed the compliance reviews for those years.

ACT's independent auditor's Title IV compliance attestation report for
school FY 2000 identified only one late refund and no unmade refunds in
its audit sample. Therefore, ACT believes that the refund problem is a
problem of the past that has been cured. ACT developed and now has in
place detailed policies and procedures for ensuring refunds are
correctly and timely made. ACT believes that no additional adverse
action against it is warranted, and requested that the recommendation to
limit, suspend, or terminate ACT's participation in Title IV programs
due to its failure to make refunds be removed from the final report.

**OIG COMMENTS**

Based on the additional information provided by ACT in its response to
the draft report, we adjusted the finding to show that ACT failed to
make refunds for ten students (down from eleven) totaling \$9,042 and
incorrectly calculated and made refunds for two students totaling \$577.
We also reduced the total amount of refunds due to \$9,619 (from
\$10,112). We noted that ACT returned some of the recommended recoveries
subsequent to issuing the draft audit report; therefore, we amended the
amount to be recovered in Recommendation 5.1. Given ACT's history of
refund problems, we did not change Recommendation 5.3.

**Finding No. 6-- ACT Did Not Demonstrate Administrative Capability**

As discussed in Findings 1 through 5 above, ACT had significant problems
affecting its ability to administer the Title IV programs. There was a
high turnover of financial aid staff and a lack of management controls
over program operations. As a result, ACT did not meet the
administrative capability standards required to participate in the
Title IV programs.

In order to continue participation in the Title IV programs, an
institution must demonstrate that it:

> is capable of adequately administering that program under each of the
> standards established in this section. The Secretary considers an
> institution to have that administrative capability if the
> institution\--Administers the Title IV, HEA programs in accordance
> with all statutory provisions of or applicable to Title IV of the HEA,
> all applicable regulatory provisions prescribed under that statutory
> authority, and all applicable special arrangements, agreements, and
> limitations entered into under the authority of statutes applicable to
> Title IV of HEA. \[34 C.F.R. § 668.16\]

Among the factors in 34 C.F.R. § 668.16 that should be considered in
evaluating administrative capability are whether the institution:

> \(a\) Administers the Title IV, HEA program in accordance with all
> statutory provisions of or applicable to Title IV of the HEA, \[and\]
> all applicable regulatory provisions prescribed under that statutory
> authority . . .
>
> \(c\) Administers the Title IV, HEA programs with adequate checks and
> balances in its system of internal control . . .
>
> \(d\) Establishes and maintains all required records . . .
>
> \(j\) Shows no evidence of significant problems that affect the
> institution's ability to administer the Title IV programs that are
> identified by oversight agencies . . .
>
> \(n\) Does not otherwise appear to lack the ability to administer the
> Title IV programs competently . . . .

ACT did not administer the Title IV programs in accordance with all
statutory and regulatory requirements when it failed the 90/10 revenue
requirement; breached its fiduciary responsibility to the Secretary by
using Title IV funds for other than their intended purpose; improperly
disbursed Title IV funds to ineligible students; failed to reconcile its
Direct Loan accounts with the Department; failed to make all required
refunds; and failed to calculate refunds correctly. We attributed these
problems to a lack of adequate accounting and management controls and a
high turnover of financial aid staff. As a result, ACT did not meet the
administrative capability standards required to participate in the
Title IV programs.

**RECOMMENDATION**

We recommend that the Chief Operating Officer of Federal Student Aid:

1.  Take appropriate action under 34 C.F.R. Part 668, Subpart G to fine,
    limit, suspend, or terminate the participation of ACT in the
    Title IV programs as a result of ACT's lack of administrative
    capability.

**ACT RESPONSE**

ACT stated that while it acknowledges that it had certain administrative
and cash management problems in the past, it has also tried to
demonstrate that it has devoted extensive attention and resources to
correcting these problems. The problems identified in the audit report
have been addressed and have been either completely or largely
corrected. ACT addressed its past high turnover rate for financial aid
staff by bringing in Global Financial Aid Services to perform many of
the financial aid functions and by increasing training of its own
financial aid employees. ACT's annual compliance audits show a distinct
improvement in the magnitude and type of findings identified. ACT's most
recent audits show marked improvement and a greatly reduced error rate,
further attesting to its current administrative capability. Based on the
corrective actions taken to address the issues identified in the report,
and its current capabilities and processes, ACT does not believe that it
should be limited, suspended, or terminated from future participation in
the Title IV programs.

**OIG COMMENTS**

ACT agreed that during the period covered by this audit it did not
always administer the Title IV programs in accordance with Departmental
requirements regarding the drawdown and disbursement of Title IV funds
to students; disburse Title IV funds to eligible students; reconcile
Direct Loan funds on a monthly basis; and make refunds to students who
withdrew. Therefore, ACT did not demonstrate administrative capability
to administer the Title IV programs. We did not change our findings and
recommendations regarding administrative capability. ACT stated that it
plans to continue using the CLASS system transaction date data to
compute 90/10 revenue. Since the transaction date data entered by ACT
during the period of this audit was not reliable to determine when
Title IV funds were disbursed to student accounts, the continued use of
transaction date data in the same manner will not resolve the problem of
inaccurate 90/10 revenue calculations. The 90/10 revenue computation
will only be corrected if ACT changes its methodology for entering
transaction date data whereby the date that Title IV funds are credited
to student accounts is the same date as the posting date data.

**OTHER MATTERS**

To meet the 90/10 Rule requirement, it was IEC policy to maximize
non‑Title IV revenues near the end of the fiscal year. ACT did this, in
part, by delaying the draw down of Title IV funds during the last months
of the fiscal year until the next fiscal year, and by encouraging
students to obtain Sallie Mae recourse loans during the last month of
the fiscal year. In October 1999, 2000, and 2001, 84 students obtained
Sallie Mae recourse loans for the full cost of tuition and fees (ranging
from \$9,995 to \$11,895). Sallie Mae recourse loans for these amounts
were rarely made during other months of the fiscal year.

We reviewed the files of 61 of the 84 students that obtained large
Sallie Mae recourse loans. We found that 15 of the 61 students were
eligible for Direct Loans, but ACT encouraged them to obtain a Sallie
Mae recourse loan instead. Forty of the 61 students had a Direct Loan at
the time they obtained the Sallie Mae loan. The Direct Loans for 29 of
these 40 students were cancelled or repaid by ACT when the students
obtained the Sallie Mae loans. The remaining 11 students kept both the
Direct Loan and the Sallie Mae loan. The Direct Loans had an interest
rate of 8.25 percent while the Sallie Mae loans had interest rates
ranging from 14.63 to 15.94 percent. In addition to the lower interest
rate, there were other benefits to Direct Loan such as deferment options
and grace periods.

We also noted that ACT cancelled and returned 9 of the Sallie Mae loans
during the first month of the next fiscal year (November 1999 and 2000,
respectively). We also found that ACT repurchased 35 of the loans within
the following two years because students defaulted on them. The IEC/ACT
policy suggests that students were encouraged to obtain the large Sallie
Mae loans to help ACT meet the 90/10 Rule.

**BACKGROUND**

Advanced Career Training Institute (ACT), founded in 1975, is a two‑year
proprietary institution with campuses in Atlanta and Riverdale, GA, and
Jacksonville, FL. ACT offers vocational training in the following areas:
Networking Technology, Dental Assistant, Medical Assistant, and Business
Office Administration. ACT was accredited by the Accrediting Council for
Continuing Education & Training and offered a degree in each vocational
training program. ACT is owned by International Education Corporation,
Inc. (IEC), located in Irvine, CA.

During school FY's 1999 through 2001, ACT participated in the William
D. Ford Direct Loan Program, the Federal Pell Grant Program, the Federal
Supplemental Educational Opportunity Grant Program (FSEOG), and the
Federal Work Study (FWS) Program. According to GAPS, ACT drew down
\$23.5 million from the William D. Ford Direct Loan, Pell Grant, FSEOG,
and Federal Work Study programs during FY's 1999, 2000, and 2001.

**OBJECTIVES, SCOPE, AND METHODOLOGY**

Our audit objective was to determine whether ACT administered the
student financial assistance programs in accordance with Title IV of the
Higher Education Act of 1965, as amended, and applicable regulations.
Specifically, we reviewed ACT's compliance with the requirements for
(1) institutional eligibility, including the 90/10 Rule, accreditation,
and State licensing, (2) cash management, (3) Direct Loan
reconciliation, (4) refunds and the return of Title IV funds,
(5) student eligibility, (6) program length, and (7) commissioned sales.
Audit coverage included award years 1998‑1999, 1999‑2000, and 2000‑2001.
For purposes of the 90/10 revenue calculation and cash management
review, audit coverage included school FY's 1999 through 2001. For
program length, audit coverage included school FY 2001.

We accomplished these objectives by reviewing the HEA, regulations, and
policies applicable to the Title IV programs. We interviewed officials
representing ACT\'s Atlanta, Riverdale, and Jacksonville campuses; ACT's
parent corporation, IEC; and ACT's Title IV third‑party servicer, Global
Financial Aid Services. We also interviewed U.S. Department of Education
officials representing Federal Student Aid's Case Management Office,
Direct Loan Office, and the Loan Origination Center. We reviewed ACT's
written policies and procedures for managing its Title IV programs. We
also reviewed ACT's compliance audits for the periods ending October 31,
1998, 1999, and 2000, and its financial statement audits for the periods
ending October 31, 1999 and 2000. In addition, we reviewed the
compliance attestation audits of ACT's third‑party servicer, Global
Financial Aid Services, for the periods ending December 31, 1998, 1999,
and 2000.

We performed a student eligibility file review in which we reviewed the
files of a randomly selected sample of 93 students (from a universe of
3,127) who were enrolled at ACT schools between July 1, 1999, and
June 30, 2001, and received Title IV funds per ACT's CLASS accounting
system or the Department's National Student Loan Data System (NSLDS). Of
these 93 selected students, the school could not locate 4 of the files.
Our review of the student ledgers and NSLDS indicated that 3 of these 4
students did not receive student financial aid, nor did 15 of the
remaining 89 student files. As a result, we examined 74 files of
students who received Title IV funds from ACT during the audit period.

We accomplished the objectives pertaining to the 90/10 Rule by reviewing
the 90/10 calculations for FY's 1999, 2000, and 2001. We recalculated
the Title IV revenue for these years using ACT's CLASS system posting
date data and adjusting for credit balances and cash paid to students.
We calculated non‑Title IV revenue using the CLASS accounting system
posting date data. Due to the incompleteness of the CLASS system
(student accounts not posted timely or not at all), we also calculated
the 90/10 revenue percentages using the Department's GAPS data.

We accomplished the cash management objective by reviewing the Title IV
drawdowns for the Direct Loan, Pell, and FSEOG programs for FY's 1999,
2000, and 2001 and compared these amounts to the amounts posted in ACT's
CLASS system. We also traced Direct Loans received by ACT from draw down
to posting by reviewing ACT's bank statements, GAPS activity reports,
and student ledgers for a judgment sample of the last three months of
FY's 1998, 1999, and 2000. Cash management objectives were also reviewed
as part of the student eligibility file review and the Direct Loan
reconciliation review.

We accomplished the Direct Loan reconciliation objective by reviewing
the Direct Loan Student Account Statements (DLSAS) and DLSAS
Reconciliation Summary Reports for a judgment sample of the last
three months of the 1998-1999 and 1999-2000 Direct Loan awards, and a
judgment sample of the last six months for the 2000-2001 Direct Loan
award.

To meet the audit objectives pertaining to refunds, we performed a
detailed test of a 10 percent random sample (23 of 230 files) of student
withdrawals for ACT's 2000-2001 school year to verify refunds and return
of Title IV funds. We also reviewed the accuracy and timeliness of
refunds as part of our student eligibility file review. We also reviewed
the files of the 28 students who withdrew (of the 74 student files
showing that the students received Title IV financial assistance).

We reviewed accreditation reports, program participation agreements,
State licenses, personnel employment contracts, employee compensation
plans, employee payroll ledgers, Wonderlic Ability-to-Benefit score
reports, and externship contracts. We reviewed a random sample of 26
students who completed an externship during FY 2001 and analyzed the
files to determine whether ACT complied with its externship policies and
procedures. We also determined whether ACT complied with the
requirements of the Accrediting Council for Continuing Education and
Training and State Licensing Boards for the externship program.

To achieve the audit objectives, we relied in part on computer-processed
data contained in ACT's CLASS accounting system and the Department's
Grant Administration Payment System (GAPS) and NSLDS. The CLASS
accounting system contained two date fields to indicate the date that
students received Title IV and non‑Title IV funds. We determined that
the \"transaction date\" data found in the CLASS system was not
verifiable. Since the "posting date" data was automatically generated by
the computer system and contained the date that disbursements were
actually posted to student accounts, we relied upon the \"posting date\"
data in CLASS for our analyses. We performed limited testing of the
CLASS data to assure ourselves that the data were reliable for the
purposes of the audit objectives. While conducting the student file
review, we compared source information found within the student files to
the information recorded in CLASS and NSLDS. While evaluating ACT's cash
management procedures and 90/10 calculations, we examined the dates and
amounts of Title IV funds received per GAPS to the dates the funds were
posted to student accounts per CLASS. We also performed limited testing
of data while recalculating the 90/10 revenue percentages by comparing
the information used to calculate the 90/10 percentages to the
information in the Department's GAPS and source documentation to support
the calculation that was provided by ACT. Based on the results of our
tests we concluded that, except for the transaction date data, the CLASS
accounting system data were sufficiently reliable to meet our audit
objectives.

Audit work was performed during the period July 2001 through September
2002. We held an exit conference with school officials on December 16,
2002.

The audit was conducted in accordance with generally accepted government
auditing standards appropriate to the scope of review described above.

**STATEMENT ON MANAGEMENT CONTROLS**

As part of the audit, we assessed the system of management controls,
policies, procedures, and practices applicable to ACT's administration
of the Title IV programs. Our assessment was performed to determine the
level of control risk for determining the nature, extent, and timing of
substantive tests to accomplish the audit objectives. For the purposes
of this report, we assessed and classified significant controls into the
following categories: Institutional eligibility (90/10 revenue
percentage, accreditation, and licensing); cash management; student
eligibility, Direct Loan reconciliation; and refunds/returns of Title IV
funds.

Due to inherent limitations, an evaluation made for the limited purposes
described above would not necessarily disclose all material weaknesses
in the management controls. We identified no deficiencies with the
externship program, or accreditation and licensing. However, our overall
assessment disclosed management control weaknesses in each of the other
control areas mentioned above. These weaknesses are discussed in the
AUDIT RESULTS section of this report.

> **OIG 90/10 CALCULATION FOR FY 1999**

**(November 1, 1998, through October 31, 1999)**

[NOTES]{.underline}:

[1]{.underline}/ GAPS data is net of funds returned by ACT.

[2]{.underline}/ The 90/10 calculations can only include funds used to
pay for tuition, fees, and other institutional charges. Credit balances
were subtracted from the Title IV and non‑Title IV figures used for the
calculation.

[3]{.underline}/ Credit balances paid to students for which ACT did not
adjust in its 90/10 calculation.

[4]{.underline}/ Data obtained from ACT's CLASS system (posting date
data).

[5]{.underline}/ Based on the information provided for the financial
statement audit.

[6]{.underline}/ ACT originally computed 86.2 percent; however, in its
written response to the draft audit report, ACT amended non‑Title IV
revenue figures for Sale of Retail Installment Contracts and the Sallie
Mae Escrow Adjustment.

**\[NOTE: Due to the volume of the written response to the draft report,
Attachment B will be transmitted in a separate document.\]**

[^1]: \$3,852 of this amount was disbursed during school FY 2000. If it
    is determined that ACT must return the \$7.4 million in Title IV
    funds received during school FY 2000, the \$3,852 should be deducted
    from the \$67,744.

[^2]: Unless otherwise noted, all 34 C.F.R. citations are to the July 1,
    1998, volume.

[^3]: CPA Letter 99-02 was written in response to Dear Partner Letter
    GEN 99-33 to provide guidance to auditors in evaluating the validity
    of institutional loans and scholarships. Dear Partner Letter GEN
    99-33 established the Department's policy for accepting
    institutional loans and scholarships after the 1998 Reauthorization
    of the Higher Education Act until new regulations went into effect
    on July 1, 2000. CPA Letter 99-02 was developed in conjunction with
    and approved by the Department.

[^4]: It should be noted that \$3,852 of the \$67,744 was disbursed
    during school FY 2000. Therefore, if it is determined that ACT must
    return the \$7.4 million in Title IV funds that it received during
    school FY 2000 as a result of Finding No. 1, the \$3,852 should be
    deducted from the \$67,744 (i.e., the \$3,852 is included in the
    \$7.4 million).

[^5]: An additional \$47,237 of excess cash was due for the 1998-1999
    Direct Loan award. Subsequent to the completion of our audit work,
    the Division Director of Case Management and Oversight issued a
    Final Program Review Determination on January 4, 2002, requiring ACT
    to return \$52,267, which included an additional excess cash balance
    of \$47,237 for the 1998‑1999 Direct Loan award year plus accrued
    interest of \$5,030. The school appealed this determination, and the
    Department subsequently agreed to allow the \$47,237 of excess cash
    be paid by offset against money due back to the institution from the
    Direct Loan program for the 1997‑1998 award year. A check was paid
    for the \$5,030 of accrued interest.

[^6]: The Office of Federal Student Aid also requested ACT to conduct a
    full file review for its fiscal year ending October 31, 2001, and
    for the period November 1, 2001, through December 31, 2001.