Abstract 1
 Significant Audits and
 Audit-related Activities
 (October 1, 1995 March 31, 1996)


Note: The amounts reported by auditors for the reports described below
are subject to further review and final determination by Department officials.


 Elementary, Secondary and Other Education Programs 

"New York State Department of Education and New York City Board of Education
 Audit of Chapter 1/Title I Monitoring and Recognition Programs"
 ACN 02-40201 February 2, 1996
Our audit disclosed that the Chapter 1/Title I program in New York City is closely monitored by both the New York State
Education Department (NYSED) and the New York City Board of Education (NYCBOE); has a heavy emphasis placed
on identifying and rewarding exemplary programs; and strongly encourages less successful programs to emulate these
exemplary programs. Our concern, however, is that the current NYCBOE Chapter 1/Title I recognition program, which
is based solely on annual changes in standardized test scores, does not consider any other performance factors, and may
be rewarding schools whose students, despite improvements in test scores, are still failing to reach grade-level proficiency
or to meet NYSED-developed standards.
We recommended that NYSED review NYCBOE's Chapter 1/Title I reward and recognition systems to ensure that these
systems better reflect the actual success of NYCBOE's schools in enabling students to reach grade-level proficiency and/or
to meet NYSED-developed standards.
Both the Board of Education of the City of New York and The State Education Department agreed with our finding and
advised us that action has already been taken to improve the Title I recognition process. Furthermore, the recognition
program is no longer based solely on annual changes in standardized test scores without considering other performance
factors.


 


"New Jersey Division of Vocational Rehabilitation Services Needs to Strengthen
Its Policies, Procedures, and Controls for Vocational Rehabilitation Program Income"
 ACN 02-50202 March 15, 1996
Our review of the New Jersey Division of Vocational Rehabilitation Services' (DVRS) administration of the Vocational
Rehabilitation (VR) program disclosed a number of areas needing improvement. It also disclosed that DVRS has taken
significant actions to address these issues. We found that:
 Reimbursements received by DVRS from third parties were generally not classified as program income or reported
 to the Rehabilitation Services Administration (RSA). We estimate that DVRS did not report $133,000 in program
 income to RSA in 1994. However, we determined that the funds were used for program purposes.

 Although DVRS does classify and report reimbursements from the Social Security Administration (SSA) as program
 income, it needs to establish better controls over the process by reconciling and following up on outstanding claims. 
 SSA receipts for 1994 totaled $1.2 million.
DVRS officials agreed that policies and procedures concerning classification of reimbursements need to be in compliance
with RSA regulations, and noted that changes in policy, and training and guidance to its field offices had been instituted
to accomplish this. However, officials indicated that DVRS's internal controls over third-party payments were strong
and that it had properly reported all third-party payments to RSA. They further advised us that controls over SSA receipts
would be strengthened as a result of DVRS's automated management system.
We recommended that RSA require that DVRS continue its efforts to revise its policies, procedures and controls to ensure
that all program income is properly classified, controlled and reported to RSA; and continue to implement stronger
controls over the process of claims and receipts from SSA.




 Departmental Management 

"Lessons Learned from RTC's Handling of Federal Family Education Loans ...
Strategy Needed to Handle Student Loan Administrative Issues Involving
 Failed or Bankrupt Institutions Participating in the
 Federal Family Education Loan Program"
 ACN 04-38000 March 19, 1996
Our review disclosed that at least 40 percent of the approximately 769 savings and loan institutions that became insolvent
in the late 1980s, and were either sold or taken over by the Resolution Trust Corporation (RTC), had valid lender
identification numbers and were eligible to participate in the FFEL program. RTC estimated that these institutions had
approximately $453 billion in assets, of which $1 billion were student loans.

The Department and RTC entered into an agreement whereby the Department would waive the right to refuse to pay
reinsurance for any FFEL program loan acquired and subsequently sold by RTC. This agreement neither allowed for
Department officials to participate in the sale of student loans portfolios, nor required RTC to provide any details
concerning the composition or disposition of the student loan portfolios. Our analysis of student loan sales data from RTC
showed that RTC sold the student loans for a wide range of prices to purchasers some of whom were not eligible lenders.
We recommended that the Department develop a strategy for responding when institutions participating in the FFEL
program become insolvent or bankrupt. In addition, we recommended that program officials pursue further dialogue with
the Federal Deposit Insurance Corporation (FDIC) in order to establish a mechanism through which ED and FDIC can
coordinate and share data concerning these institutions.


 


"Process Enhancements in the HEA, Title III, Institutional Aid Program
 Would Increase Program Efficiency, Despite Limited Resources"
 ACN 04-60001 March 27, 1996
Our limited review disclosed that processes could be enhanced in the Title III, Institutional Aid program, to increase
program efficiency and help realize the goals of the 1993 National Performance Review. The processes that could be
enhanced include those of determining eligibility, reviewing applications, and granting awards, as well as those of
providing technical assistance and conducting monitoring. In addition to satisfying the recommendations of the NPR, the
enhancements would help focus limited administrative resources where needed most and facilitate achievement of
objectives by grant recipients.


 


 "Effectiveness and Efficiency of Debt Collection Service 
 Areas Outside Management's Control"
 ACN 05-40003 March 12, 1996
Our review disclosed that ED might have an opportunity to further improve customer service and generate about $16
million to $17 million for each additional $1 million invested toward Debt Collection Service (DCS) in-house collection
activities by either moving DCS, currently housed in the Office of Postsecondary Education (OPE), to the Office of the
Chief Financial Officer (OCFO); or developing a Memorandum of Understanding (MOU) between OCFO and OPE to
ensure that OPE maintains a consistent focus on ED's long-term, Department-wide debt collection policy.
We also found that DCS's computer system was not always available for DCS staff to use, operated slowly, and was
awkward to use. As a result, DCS:
 could not implement its collection initiatives in a timely manner;
 used limited staff resources to manually perform tasks that could be automated, delaying other important work; and
 could not service its entire portfolio, delaying account resolution and customer service processes.
We recommended that ED provide DCS with more control over its computer system, or dispose of the current system
and contract for a new one.
The Department disagreed with our recommendation to move DCS to OCFO, believing that such a move would fragment
student financial assistance program delivery and would not necessarily result in either increased customer service,
improved credit management, or increased net revenue. Our alternative recommendation for an MOU between OPE and
OCFO is under consideration.
The Department agreed with our recommendation to provide DCS with more control over its computer system so that
DCS has the capability and flexibility to meet changing technological needs.


 


 "ED Needs to Consider Implementing Changes
 for Monitoring Lenders and Servicers"
 ACN 05-40005 February 15, 1996
Our review found that potential shifts in loan volume from the Federal Family Education Loan program to the Federal
Direct Student Loan program may result in a reduction in lender third-party servicing capacity for the existing FFEL
portfolio. We identified 6 out of 30 servicers that we considered marginally financially responsible; 3 of the 6 service
about $11 billion of the FFEL portfolio.
We believe that ED has an interest in ensuring an orderly transition if existing servicers cease operations. Based on the
results of our audit, we identified two improvements ED should consider implementing to enhance its effectiveness in this
area. We believe the Department should:

 improve its servicer database so that all FFEL lender third-party servicers can be identified; and
 establish a process to identify lender third-party servicers that demonstrate marginal financial responsibility and
 perform special reviews of marginal servicers with significant portfolios so that there is an orderly transition if
 lender third-party servicing capacity is reduced, thereby ensuring uninterrupted access to servicing for FFEL
 lenders.
The Department concurred with our recommendations. 


 


"Audit of Great Lakes Higher Education Corporation's Reporting of Defaulted
 Federal Family Education Loan Program Loans Consolidated
 Under the Federal Consolidation Loan Program"
 ACN 05-50002 November 8, 1995
Our review found that reporting consolidated loans as collections allowed the Great Lakes Higher Education Corporation
(GLHEC) to retain excessive FCL (Federal Consolidation Loan) payments. We recommended that the Department
instruct GLHEC to:
 refund to ED $1,012,000; and
 report the payments received in the consolidation of defaulted loans separately from collections on defaulted loans
 on its monthly claims and collections report.
GHLEC concurred with the general policy objective of our recommendations. Following the issuance of our draft report,
we were advised that the Department plans to issue guidance clarifying the retention of payments guaranty agencies
receive as the result of borrowers consolidating defaulted FFELs. Therefore, the amount recommended for refund to ED
may need to be adjusted.


 


"Audit of Illinois Student Assistance Corporation's Reporting of Defaulted
 Federal Family Education Loan Program Loans Consolidated
 Under the Federal Consolidation Loan Program""
 ACN 05-50004 November 9, 1995
Our review found that reporting consolidated loans as collections allowed the Illinois Student Assistance Corporation
(ISAC) to retain excessive FCL payments. We recommended that the Department instruct ISAC to:
 refund to ED $445,777; and
 report the payments received in the consolidation of defaulted loans separately from collections on defaulted loans
 on its monthly claims and collections report.


 


 "Effectiveness and Efficiency of Debt Collection Service 
 Areas Related to Collection Agency Activities"
 ACN 05-50007 November 9, 1995
During our audit, we found that collection agencies played a very important role in DCS operations. By using collection
agencies, DCS had more people collecting on accounts and only incurred costs when results were successful. In the
future, collection agencies will continue to play a very important role. 
Our review found that DCS could improve the role collection agencies play in DCS's efforts to meet its mission of
providing quality customer service and sound credit management to increase net revenue. We recommended that DCS:
 include provisions in the next set of collection contracts to assure itself that collection agencies continue performing
 required collection activity on all accounts;
 let collection agencies approve compromises, and automate the Debt Management and Collection System (DMCS)
 so that compromise payments close accounts; and
 let collection agencies process disability and death resolutions, and automate the DMCS for disability and death
 resolutions.
The Department generally agreed with the conclusions and recommendations in the report. The written response indicated
that DCS, as an organization that espouses continuous improvement, is already implementing specific changes in two of
the three improvement areas discussed in the report. We have further been advised that DCS concurs with the conclusions
and recommendations in the third improvement area and will implement the recommendations the same way it implements
changes related to the second improvement area.


 


 "Effectiveness and Efficiency of Debt Collection Service 
 Areas Related to Internal Operations"
 ACN 05-50008 November 7, 1995
The Debt Collection Service provides leadership in trying to apply state-of-the-art debt collection techniques to collect
defaulted accounts held by the Department, guaranty agencies, schools, and other participants. Our review found that,
in the future, DCS can better achieve its mission by strengthening efforts for tracking mail, recovering administrative
costs, identifying accounts with incorrect addresses, transferring accounts with incorrect addresses to collection agencies,
and tracking account characteristics and experimenting with transfer criteria.
DCS management generally agreed with the conclusions in the report. The response indicated that DCS is already in the
process of implementing specific changes.


 


 "Review of Office for Civil Rights 
 Complaint Evaluation and Use of Resources"
 ACN 05-50200 November 22, 1995
Our audit disclosed that OCR has made many improvements in operations including employee empowerment, reduced
levels of review, a new Complaint Resolution Manual, and a new organizational structure which have helped OCR
improve the way it evaluates and resolves civil rights complaints. Our report recommended ways in which OCR might
further improve its operations in the following areas.
 We found that some regional offices may rely on the memory of regional personnel for information to determine
 if OCR will proceed with or continue complaint resolution during the evaluation process. OCR could improve
 complaint resolution by requiring all regions to routinely use a formal system, rather than memory, to gather
 information needed to fully evaluate civil rights complaints.
 OCR uses many different information systems to gather information, record complaints and manage its case load. 
 These systems currently do not always provide complete and accurate information in a flexible manner. We
 suggested several actions which OCR could take to improve its information systems.
 OCR is reorganizing, moving from a hierarchical structure to a team-based structure. We provided suggestions
 to help OCR improve its reorganization and further meet its mission.
OCR management generally agreed with the conclusions and recommendations in the report. The response indicated that
OCR has made many improvements in operations and expects to implement most of the changes by the end of fiscal year
1996.


 


 "The Escrow Process: A Potentially Effective Tool
 for Safeguarding Title IV Funds"
 ACN 06-40004 January 29, 1996
Our audit found that the Department's lack of coordinated policies and procedures relative to the escrow process has
caused the process to be used only sparingly as a sanction against schools with known refund problems. As a result, many
Title IV funds remain at heightened risk, and students and the government bear the cost when loan and other Title IV
refunds go unmade.
We recommended that the Department develop and apply policies and procedures that encourage the use of escrow
agreements at schools with known refund problems. These procedures should ensure that the escrow agents perform the
monitoring function the Department expects from them. We further recommended that the Department establish and
coordinate which office(s) will be responsible for initiating and overseeing the escrow process.
We delayed issuing this final report because responsible ED officials verbally indicated that action had been taken to
address our recommendations and that a written response was forthcoming. However, because no response was received,
we were obliged to issue the final report without the Department's comments.


 


"OPE Waivers: The Department Should Establish and Follow a Process"
 ACN 07-58051 February 13, 1996
The objective of our review was to evaluate OPE's waiver-granting process for the Federal Family Education Loan
program. The review was limited to waivers for lenders, servicers, guaranty agencies, and secondary markets. OPE
officials told us that there was no waiver-granting process. We recommended that OPE officials establish and follow
specific conditions and criteria for granting waivers, clarify the waiver authority delegation policy, and establish and
follow specific definitions and criteria for waivers and consitions under which waivers will be granted.
OPE officials agreed in general with the recommendation to improve the process for administering the Secretary's waiver
authority, and agreed that a specific delegation of authority would be appropriate. However, officials expressed the view
that considerable flexibility should be retained with respect to conditions and criteria for granting waivers.


 


 "Cost Analysis of the Department's Initiative to Consolidate
 Debt Collection Service Loans into the Direct Loan Program"
 ACN 11-50002 January 19, 1996
The objective of the audit was to assess the cost-effectiveness of the Department's initiative to target defaulted Debt
Collection Service borrowers' loans for consolidation into the Federal Direct Consolidation Loan Program. Based on
current information, we concluded that it is not cost-effective to consolidate the DCS loans for the following reasons:
 The Department's cost to consolidate DCS borrowers into the Direct Consolidation Loan Program will be relatively
 expensive. This is due in large part to collection agency fees and servicer fees. Although the majority of the cost
 will be added to the borrower's principal loan balance, we do not expect collections to be sufficient to cover the
 cost of consolidation.
 While the borrower's loan is in the Direct Consolidation Loan Program, the Department will lose revenue from
 involuntary collections. Federal offset, the most effective collection method, resulted in revenues of approximately
 $548 million in FY 1995, of which $99 million was from the borrowers targeted in this initiative.
 Based on the fact that DCS borrowers have a poor payment history, there is a strong possibility that these borrowers
 will default again or be allowed to make zero to minimal payments. DCS reports voluntary collections averaging
 $18 million per year, which results in an annual collection rate of 0.59 percent for the targeted borrowers. Over
 the maximum allowable period for Income Contingent Repayment (ICR) 25 years we estimate the Department
 would have to increase its collection rate by 1,100 percent each year to recoup the cost of this consolidation.
 DCS currently has the option of accepting payments based on the borrower's ability to pay. Analysis of current
 collections indicates that the Department's expectations for the Direct Consolidation Loan's ICR plan may be overly
 optimistic. In addition, an ICR plan will soon be available in DCS.
To limit the financial risk to the Department, we recommended that the Department discontinue the active pursuit of
consolidating DCS loans and conduct a study to determine the economic viability of this initiative. OPE, although not
in total agreement with the audit results, agreed with our recommendations and plans to implement them.


 


 Cooperative Audit Resolution and Oversight Initiative
The CAROI team includes members from the Office of Elementary and Secondary Education, Office of the Chief
Financial Officer, Office of the General Counsel, and OIG. The team has partnered with three States (Florida,
Mississippi, and Washington). The goal of CAROI is to improve education programs and student performance at State
and local levels through better use of audits, monitoring and technical assistance. To accomplish this goal the CAROI
team developed four strategies that are described below along with the team's accomplishments during this reporting
period.

 #1: Create and Maintain Dialogue with States
Objective: Work with key parties to address State concerns, remove obstacles to improved program performance, foster
new cooperative methods of audit resolution, and avoid recurrence of violations.
Accomplishments: The CAROI team made presentations to State and local officials and held focus groups at the
following conferences:
 Office of Elementary and Secondary Education and Office of Bilingual Education and Minority Languages Affairs
 National Conference
 National Association of State Coordinators for Compensatory Education Conference
 Title VI Innovative Education Programs Conference

#2: Work with States to Resolve Open Audits or Audits Under Appeal
Objective: Work with States to resolve audits from periods covered under prior legislation in a manner that is more
consistent with the Improving America's Schools Act, the Goals 2000: Educate America Act, and the School-to-Work
Opportunities Act.
Accomplishments: This period, the CAROI team worked on the first cooperative resolution with the State of Florida
to develop a flexible time distribution system. This cooperative resolution is expected to be completed during the next
reporting period.

 #3: Improve the Single Audit Process
Objective: Ensure that Single Audits focus on the most important issues and concerns in Department of Education
programs; and revise the Office of Management and Budget's Compliance Supplement for Education Programs for
programs authorized under the Elementary and Secondary Education Act to reflect new flexibility in a manner consistent
with new education legislation.
Accomplishments: An "exposure draft" of the revised OMB Compliance Supplement for Education Programs for
programs authorized under the ESEA was recently distributed nationwide for comment. The final is targeted for June
1996 and the first audits of the ESEA programs will begin this summer.

 #4: Coordinate Audits, Monitoring, and Technical Assistance
Objective: Improve program performance through better coordination of audits, Federal monitoring, and Federal
technical assistance, while encouraging creativity and flexibility at the State and local level.
Accomplishments: CAROI held three focus groups of Department employees to solicit input for creating a database
for tracking all Department audit, monitoring and technical assistance activities.


 


 Audit Quality Issues:
 Settlement in Non-Federal Audit Suit
We reported in Semiannual Report No. 19 that our audit of Tarkio College, Tarkio, Missouri, disclosed that $16.9 million
in Federal student financial assistance was awarded to students enrolled in ineligible extension programs. Interest and
special allowances of $3.2 million were paid by ED on those Stafford loans. Subsequent to our audit, Tarkio College
declared bankruptcy and ultimately sued its non-Federal auditors for negligence in conducting its audits. Negligence was
alleged in that the non-Federal auditors used the wrong audit guide, were unfamiliar with ED requirements for such
audits, did insufficient audit work in the area of institutional eligibility, and failed to gather and document sufficient
evidence to substantiate the audit opinions issued in the non-Federal audits of Tarkio College.
Recently Tarkio College and its non-Federal auditors entered into a settlement agreement that will net Tarkio College
approximately $3.5 million, after payment of legal fees and expenses. As one of Tarkio's creditors, ED expects to receive
some portion of the $3.5 million.