Corinthian Colleges, Inc.

Non-Title IV Revenue Percentage Calculations

FINAL AUDIT REPORT

Audit Control Number ED-OIG/A09-90001

February 2000

Our mission is to promote the efficient U.S. Department of Education

and effective use of taxpayer dollars Office of Inspector General

in support of American education. Sacramento, California
NOTICE

Statements that management practices need improvement, as well

as other conclusions and recommendations in this report, represent

the opinions of the Office of Inspector General. Determination of

corrective action to be taken will be made by the appropriate

Department of Education officials.

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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 ................................................................... 3

Amounts Used in the Non-Title IV Revenue Percentage

Calculations Must Represent Revenue Received ............................. 3

Revenue Under Cash-Basis Accounting

Represent an Actual Inflow of Cash ......................................... 4

CCI Improperly Included Amounts in Its Calculations

That Did Not Represent Cash Received .................................... 4

Recommendation ............................................................ 8

CCI’s Comments ............................................................ 8

OIG Response ............................................................... 10

Other Matters ................................................................. 12

Background .................................................................... 13

Purpose, Scope and Methodology ......................................... 14

Statement on Management Controls ...................................... 15

Attachment –

Corinthian Colleges, Inc.’s Comments to the Report .......... 16
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Executive Summary

Corinthian Colleges, Inc. (CCI) used improper methodologies to calculate non-Title IV revenue

percentages for institutions in each of its subsidiaries: Corinthian Schools, Inc. and Rhodes

Colleges, Inc. During our audit period, CCI’s subsidiaries received Title IV funds under

29 separate Office of Postsecondary Education Identifier (OPEID) numbers. The Higher

Education Act (HEA), as amended, requires that a proprietary institution has a minimum

percentage of its revenues from sources other than Title IV programs.

In its fiscal year 1997 and 1998 financial statements, CCI reported revenue percentages showing

that institutions under each OPEID number met the non-Title IV revenue percentage requirement

in those years. However, we found that CCI improperly included amounts that did not represent

revenue received. Specifically, CCI improperly included the following amounts:

♦ institutional loan principal,

♦ institutional loan servicing fees,

♦ institutional scholarships,

♦ institutional matching contributions, and

♦ accrued grant funds.

These amounts did not represent non-Title IV revenue received by the institution in accordance

with Title 34 of the Code of Federal Regulations (CFR), Section 600.5. Our recalculation of the

revenue percentages found that one CCI institution, Las Vegas College (located in Las Vegas,

Nevada) did not derive at least 15 percent of its revenues from non-Title IV sources in fiscal

years 1997 and 1998. Another institution, Mountain West College (located in Salt Lake City,

Utah) did not derive at least 15 percent of its revenues from non-Title IV sources in fiscal year

1998. As a result, these two institutions did not qualify as eligible proprietary institutions of

higher education effective July 1, 1997 and July 1, 1998, respectively. Due to a policy statement

contained in Dear Partner Letter GEN-99-33, we have not included recommendations in this

report to either terminate the two institutions’ participation in Title IV programs, or recover the

Title IV funds received by the institutions.

In October 1999, the U.S. Department of Education, Student Financial Assistance (SFA) issued

Dear Partner Letter GEN-99-33 informing the education community that SFA did not intend to

exercise its enforcement authority against institutions that count valid loans and scholarships as

revenue solely on the grounds that the loans and scholarships fail to comply with cash-basis

accounting requirements. The Dear Partner Letter provided guidance for evaluating whether the

loans and scholarships would be considered valid for purposes of the non-Title IV revenue

calculation. Based on this guidance, we concluded that the CCI loans and scholarships were

valid. With inclusion of institutional loan principal amounts in the revenue calculations,

Las Vegas College and Mountain West College met the minimum non-Title IV revenue

requirement.
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CCI must take steps to correct its revenue calculation methodologies. Therefore, we recommend

that the Chief Operating Officer (COO) for SFA require that CCI revise its calculation

methodology to comply with Federal regulations and current SFA guidance.

In its comments to the draft report, CCI did not agree with our conclusions and recommendation.

CCI’s comments are summarized in the report and included as an attachment.
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Audit Results

We concluded that CCI used improper methodologies to calculate non-Title IV revenue

percentages for institutions in its two subsidiaries: Corinthian Schools, Inc. (Corinthian) and

Rhodes Colleges, Inc. (Rhodes). While CCI reported revenue percentages for each OPEID

number in the notes to its subsidiaries’ financial statements, the calculations supporting the

percentages improperly included institutional loan principal, institutional loan servicing fees,

institutional scholarships and institutional matching contributions that did not represent revenue

received by the institution during the fiscal year. CCI also improperly included amounts from

the Federal Pell Grant and Federal Supplemental Educational Opportunity Grant (FSEOG)

programs that were not received by the institution during the fiscal year.

Amounts Used in the Non-Title IV

Revenue Percentage Calculations

Must Represent Revenue Received

The 1992 reauthorization of the HEA added a provision requiring a proprietary institution to

have “at least 15 percent of its revenues from sources that are not derived from funds provided

under this title [Title IV programs], as determined in accordance with regulations prescribed by

the Secretary.”1 This institutional eligibility requirement is codified in Title 34 CFR Section

600.5(a)(8). The regulation provides the formula for assessing whether an institution has

satisfied the requirement, and specifies that amounts used in the formula must be received by the

institution during its fiscal year. Specifically, 34 CFR Section 600.5(d)(2)(i) states that “. . . the

title IV, HEA program funds included in the numerator and the revenue included in the

denominator are the amount of title IV, HEA program funds and revenues received by the

institution during the institution’s last complete fiscal year; . . . .” [emphasis added]

Proprietary institutions that fail to satisfy the non-Title IV revenue percentage requirement lose

their eligibility to participate in Title IV programs on the last day of the fiscal year covering the

period that the institution failed to meet the requirement.

 

1

 The 1998 amendments to the HEA, enacted on October 7, 1998, changed the provision to require that a

proprietary institution have at least 10 percent of its revenue from non-Title IV sources. This change will

apply to CCI’s revenues for its fiscal year ending June 30, 1999.
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Revenues Under Cash-Basis Accounting

Represent an Actual Inflow of Cash

The Financial Accounting Standards Board (FASB) provides a definition of revenue in its

Statement of Financial Accounting Concepts No. 6. The FASB defines revenues as “inflows or

other enhancements of assets of an entity or settlements of its liabilities (or a combination of

both) from delivering or producing goods, rendering services, or other activities that constitute

the entity’s ongoing major or central operations.” The FASB Statement also states that

“Revenues represent actual or expected cash inflows (or the equivalent) that have occurred or

will eventuate as a result of the entity’s ongoing major or central operations.”2 The accounting

method that recognizes revenues when amounts are received is referred to as cash-basis

accounting. In contrast, the accrual basis of accounting recognizes revenue when sales are made

or services are performed, regardless of when cash is received.

When the Department issued the regulation covering institutional eligibility requirements on

April 29, 1994, the Secretary specified in the preamble that “institutions will use a cash basis of

accounting for both title IV, HEA program funds and revenues.” He further explained in the

“Analysis of Comments and Changes” section of the Final Rule that “[u]nder a cash basis of

accounting, the institution reports revenues on the date that the revenues are actually received.”

CCI Improperly Included

Amounts in Its Calculations That

Did Not Represent Cash Received

CCI improperly included institutional loan principal, institutional loan servicing fees,

institutional scholarships, institutional matching contributions and accrued grant funds in its

revenue percentage calculations.

♦ Institutional loan principal amounts included in CCI’s calculations did not represent

non-Title IV cash received during the fiscal year. CCI used different methods to

determine the institutional loan amounts used in the calculations for its two subsidiaries.

For Corinthian schools,3

 the institutional loan amounts used in the calculations consisted

of two amounts: (1) payments received from current students during the fiscal year on

outstanding loans, and (2) the remaining principal balance on loans for those students

 

2

 FASB’s Statement of Financial Accounting Standards No. 95 defines “cash equivalents” as short-term,

highly liquid investments that are both readily convertible to known amounts of cash and so near their

maturity that they present insignificant risk of changes in value because of changes in interest rates.

3

 One exception is the Southfield campus. The institutional loan amounts used in the calculation

consisted of the loan principal amounts at the time the loans were made. Per CCI official, this method

was similar to the Rhodes schools since the Southfield campus offered longer programs.
ED-OIG ACN ED-OIG/A09-90001 Page 5

who completed the program or left school during the fiscal year.4 For Rhodes schools,

institutional loan amounts used in the calculations consisted of the loan principal amount

at the time the loan was made.5

In the preamble to the Final Rule, the Department stated its position on including

institutional loans (and institutional scholarships) as revenue. In the “Analysis of

Comments and Changes” section of the Final Rule, the Secretary stated that:

 “An institution is not prohibited from including institutional charges

that were paid by institutional scholarships and institutional loans as

revenue... provided that the scholarships and loans are valid and not just

part of a scheme to artificially inflate an institution’s tuition and fee

charges. For this purpose, the Secretary does not consider institutional

loans to be real unless such loans are routinely repaid by the student

borrowers. The Secretary does not consider institutional scholarships to

be valid if every student receives such a scholarship so that no student

ever pays the claimed tuition and fee charges.” [emphasis added]

While the preamble indicates that valid institutional loans could be included, the

regulations stress that revenue used in the calculation must be received. 6 As mentioned

earlier, cash-basis accounting recognizes revenue when cash is received (inflow of cash).

Therefore, the institutional loan principal amounts should not have been included in the

calculation as non-Title IV revenues. Instead, CCI should have included the borrower

payments received on the school’s institutional loans during the fiscal year.

♦ CCI included fees paid to its institutional loan servicers as non-Title IV funds. CCI has

agreements with TFC Credit Corporation and National Loan Servicing Center, Inc. to

service its subsidiaries’ institutional student loan accounts. The servicers submit the

borrower payments (net of servicing fees) to the corporation. CCI included the loan

servicers’ fees as part of the non-Title IV funds. The loan servicing fees do not represent

an inflow of cash to the institutions. Therefore, CCI should not have included the loan

servicers’ fees in the revenue percentage calculations.

 

4

 When the student graduates or leaves school, the remaining loan principal balance is recorded as a

payment on the student account and the corresponding amount is recorded as a note receivable in the

accounting records. CCI used the payments recorded on the student accounts to determine revenue

amount for purpose of the non-Title IV revenue percentage calculation. The amounts subsequently

collected on the remaining loan principal balance for students who have completed/left school were not

included in the revenue percentage calculation.

5

 The principal portions of student payments received on these loans were not used in the revenue

percentage calculations.

6

 We found that CCI’s institutional loans were valid, did not appear to be part of a scheme to artificially

inflate tuition, and were routinely repaid by student borrowers.
ED-OIG ACN ED-OIG/A09-90001 Page 6

♦ Institutional scholarship amounts included in CCI’s calculations did not represent

non-Title IV cash received. Various Corinthian and Rhodes schools awarded

institutional scholarships to a few selected students. Each school offering scholarships

had its own qualification requirements and the award amounts varied.

The preamble section of the Final Rule, cited previously, indicated that institutional

scholarships could be included as revenue provided that the scholarships are valid. The

institutional scholarships appeared to be valid. However, CCI did not have an external

source for institutional scholarship funds. The institutional scholarship amounts were

recorded as tuition reduction. These transactions were non-cash accounting entries and

did not represent inflows of cash to the institution. As we noted earlier, the regulation

stresses that revenue used in the calculation must be received (inflow of cash). Therefore,

CCI should not have included the institutional scholarships in the revenue percentage

calculations.

♦ Institutional matching contributions included in CCI’s calculations did not represent

non-Title IV cash received. CCI included the required 25 percent institutional

contribution for the FSEOG program as part of the non-Title IV receipts. According to

the CCI official, the FSEOG matching contribution was treated as an expense to the

institution. For example, if a student were awarded $100 in FSEOG, the institution

would record $100 as tuition received, $75 as FSEOG cash received from the Department

and $25 as FSEOG matching contribution expense. The institution’s matching portion of

this transaction does not represent an inflow of cash to the institution. Therefore, CCI

should not have included the institutional matching contributions in the revenue

percentage calculations.

♦ Accrued Pell Grant and FSEOG amounts included in CCI’s calculations did not

represent Title IV cash received during the fiscal year. For Rhodes schools, CCI

included amounts from the Federal Pell Grant and FSEOG programs that were not

received by the institution during the fiscal year. The Rhodes schools receive Pell Grant

and FSEOG funds under the reimbursement method.7 A CCI official explained that the

Department required schools to record the Pell Grant and FSEOG amounts in student

ledgers before requesting reimbursement from the Department. For the revenue

percentage calculations, CCI used the accrued amounts of Pell Grant and FSEOG as

Title IV funds. CCI should have only included the Pell Grant and FSEOG funds that

were actually received from the Department during the fiscal year.

In its fiscal year 1997 and 1998 financial statements for Corinthian Schools and Rhodes

Colleges, CCI reported that institutions under all 29 OPEID numbers met the non-Title IV

revenue percentage requirement. After adjusting CCI’s calculations for the above amounts that

were improperly included in the calculations, we concluded that two Rhodes’ institutions failed

to meet the minimum non-Title IV revenue percentage. Las Vegas College did not derive at

least 15 percent of its revenues from non-Title IV sources during fiscal years ended

June 30, 1997 and 1998. Mountain West College did not derive at least 15 percent of its

revenues from non-Title IV sources during fiscal year ended June 30, 1998. Proprietary

institutions that fail to satisfy the non-Title IV revenue percentage requirement lose their

 

7

 Corinthian schools received Title IV grant funds under a method other than the reimbursement method.
ED-OIG ACN ED-OIG/A09-90001 Page 7

eligibility to participate in Title IV programs on the last day of the fiscal year covering the period

that the institution failed to meet the requirement. Therefore, Las Vegas College and Mountain

West College did not qualify as eligible proprietary institutions of higher education as of

July 1, 1997 and July 1, 1998, respectively.

In October 1999, SFA issued Dear Partner Letter GEN-99-33. The letter informed the education

community that SFA did not intend to exercise its enforcement authority against institutions that

count valid loans and scholarships as revenue solely on the grounds that the loans and

scholarships fail to comply with cash-basis accounting requirements. The Dear Partner Letter

provided guidance for evaluating whether the loans and scholarships would be considered valid

for purposes of the non-Title IV revenue calculation. Based on this guidance, we concluded that

the CCI loans and scholarships were valid. The institutional loans and scholarships were applied

to the student accounts during the fiscal year. The institutional loans were documented and did

not appear to be part of a scheme to artificially inflate tuition. Student borrowers routinely

repaid the loans. CCI’s institutions had established scholarship criteria that provided

scholarships for a small percentage of students.

Tables 1 and 2 compare the percentages of non-Title IV revenues as reported by CCI, calculated

by the OIG and after application of the guidance provided in the Dear Partner Letter.

Table 1. Las Vegas College. In fiscal years 1997 and 1998, Las Vegas College did not have sufficient

non-Title IV revenues to meet the minimum non-Title IV revenue requirement. However, after application of the

SFA guidance issued in Dear Partner Letter GEN-99-33, Las Vegas College met the minimum requirement for both

years.

Las Vegas College

1997

(15% Minimum )

1998

(15% Minimum) Revenues Received

Per School Per OIG Per SFA

Guidance Per School Per OIG Per SFAGuidance

Title IV Revenue $1,619,001 $1,689,958 $1,689,958 $1,427,732 $1,430,177 $1,430,177

Non-Title IV Revenues:

 Institutional Loans8 114,070 35,833 115,591 217,760 44,369 212,914

 Other 177,956 182,622 182,622 99,166 99,166 99,166

Sub Total Non-Title IV

Revenues 292,026 218,455 298,213 316,926 143,535 312,080

Addition:

 Institutional FSEOG

Match 7,253 0 0 6,169 0 0

Total Non-Title IV

Revenues $299,279 $218,455 298,213 $323,095 $143,535 $312,080

Total Revenues $1,918,280 $1,908,413 $1,988,171 $1,750,827 $1,573,712 $1,742,257

Non-Title IV Revenue as a

Percent of Total Revenues 15.60% 11.45% 15.00% 18.45% 9.12% 17.91%

 

8

 CCI obtained ownership of Las Vegas College during fiscal year 1997. The institutional loan amounts

shown in the “Per OIG” and “Per SFA Guidance” columns include amounts for the period during fiscal

year 1997 that Las Vegas College was under its former owner. CCI did not include these amounts in its

calculations.
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Table 2. Mountain West College. In fiscal year 1998, Mountain West College did not have sufficient

non-Title IV revenues to meet the minimum non-Title IV revenue requirement. However, after application of the SFA

guidance issued in Dear Partner Letter GEN-99-33, Mountain West College met the minimum requirement.

1998

(15% Minimum) Revenues Received

Per School Per OIG Per SFA

Guidance

Title IV Revenue $1,770,541 $1,779,651 $1,779,651

Non-Title IV Revenues:

 Institutional Loans 286,730 96,371 279,363

 Other 214,993 214,993 214,993

Sub Total Non-Title IV Revenues 501,723 311,364 494,356

Adjustment:

 Institutional FSEOG Match 11,791 0 0

Total Non-Title IV Revenues $513,514 $311,364 $494,356

Total Revenues $2,284,055 $2,091,015 $2,274,007

Non-Title IV Revenue as a Percent of

Total Revenues 22.48% 14.89% 21.74%

After including the institutional loan principal amounts, both Las Vegas College and Mountain

West College met the minimum non-Title IV revenue requirement. Therefore, we have not

included recommendations in this report to either terminate the two institutions participation in

Title IV programs, or recover the Title IV funds received by the institutions.

The policy guidance provided in the Dear Partner Letter will remain in effect until the new

regulations published in the October 29, 1999 Federal Register go into effect on July 1, 2000.

The new regulation explicitly states that an institution must use the cash-basis of accounting and

that, under cash-basis accounting, the institution must include only the amount of loan

repayments received by the institution during the fiscal year. For institutional scholarships, the

institution must include only the amount of funds it disbursed during the fiscal year from an

established restricted account and only to the extent that the funds in the account represent

designated funds from an outside source or income earned on those funds. Therefore, in the

future, CCI will need to revise its methodology to fully comply with the requirement that

amounts included in calculations are on a cash-basis of accounting.

Recommendation

We recommend that the Chief Operating Officer of SFA require that CCI revise its calculation

methodology to comply with Federal regulations and current SFA guidance.

CCI’s Comments

CCI did not agree with our conclusions and recommendation. CCI maintained that each of its

institutions met the non-Title IV revenue requirement and CCI had accurately and correctly

calculated the revenue percentages based on the regulatory policy guidance available during the

audited periods. CCI stated that its methodology was based upon a statement confirmed by a

staff member in the Department’s Policy Development Division, the OIG’s Audit Guide for
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Compliance Audits (Attestation Engagements) of Federal Student Financial Assistance

Programs at Participating Institutions and its certified public accountant (CPA) firm’s

understanding of the requirements set forth in the regulations. CCI stated that the positions taken

by the OIG in the audit report were not consistent with the above guidance.

CCI stated that the OIG issued a new interpretation of the regulations in its April 1999 Dear CPA

Letter. Specifically, CCI claimed that the Dear CPA Letter contained a “new definition” of

revenue for institutional loans, scholarships and matching contributions. CCI stated that the OIG

is seeking to retroactively apply the “new definition.”

Institutional loan principal. CCI stated that the OIG’s “new definition” of revenue for

institutional loans was not supported by either the language of the regulations or the preamble

accompanying the April 29, 1994 publication of the regulations. CCI also noted that the

following statement, confirmed by Policy Development Division staff, had not been rescinded by

SFA: “ . . . institutional loans made by institutions to its students are included in the year they are

made[emphasis added], if such loans are valid and not part of a scheme to artificially inflate the

institution’s tuition and fee charges.”

Institutional loan servicing fees. CCI stated that these fees were an operating expense, not a

reduction of the amount paid by students. The fact that the loan servicer and CCI chose to have

the servicer receive payment of its fees from the collected student loan payments did not alter the

amount of money that was being paid by students to CCI. A June 14, 1999 letter from its CPA

firm supported CCI’s position.

Institutional scholarships. CCI stated that its scholarship funds represent a reduction in tuition

and fees charged to students who meet specific, well-defined criteria entitling them to a

scholarship. The institution deducted the scholarship amount from the outstanding balance on

the student’s payment ledger. CCI believed that this treatment of scholarship funds, while not

offset from funds from an endowment or trust, is revenue.

Institutional matching contributions. CCI stated that it applied the entire FSEOG disbursement

to student ledgers, which consisted of 75 percent Title IV funds and 25 percent non-Title IV

funds, thereby, representing payment to student accounts. CCI claimed that crediting student

accounts for payment should be treated as “cash.” The fact that CCI’s institutions did not pay

the institutional match to each student individually did not reduce that institution’s revenue. The

June 14, 1999 letter from its CPA firm supported this position.

CCI also referred to the preamble language that states “an institution should not include

institutional matching funds in the numerator as part of its Title IV HEA program funds.” CCI

concluded from this statement that institutional matching contributions can and must be included

in the denominator.

Accrued grant funds. CCI cited the Federal regulations covering the reimbursement payment

method that state: “The Secretary considers an institution to have made a disbursement if the

institution has either credited the student’s account or paid a student or parent directly with its

own funds.” CCI concluded that this regulation dictates that the funds be considered revenue.

CCI also referred to the June 14, 1999 letter from its CPA, which stated that the institutions have

“constructive receipt” of Title IV funds at the time the student account is credited. The CPA
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firm stated that “constructive receipt” is a cash-basis concept used by the Internal Revenue

Service to define when the cash revenues must be included for tax purposes.

Recommendation. CCI stated that the OIG’s interpretation of the regulations covering the

non-Title IV revenue requirement was not the only acceptable, reliable, substantiated

methodology under Generally Accepted Accounting Principles (GAAP). However, CCI agreed

to comply with revised regulatory policy if SFA officially embraced the OIG’s interpretation. In

its response to the draft report, CCI provided revenue percentages for fiscal year 1999 for the

two institutions that failed to meet the minimum revenue percentage. The non-Title IV revenue

percentages for the Las Vegas College and Mountain West College, using the OIG methodology,

were 83.26 percent and 83.93 percent, respectively.

OIG Response

We did not change our conclusions based upon CCI’s comments. However, we revised our

recommendations based on the SFA policy guidance issued in Dear Partner Letter GEN-99-33.

The OIG did not create a “new definition” of revenue in its April 1999 Dear CPA Letter. The

definition for revenue used in the April 1999 Dear CPA Letter, and this report, was issued by

FASB. FASB is the designated organization in the private sector for establishing standards of

financial accounting and reporting. The regulations clearly state that amounts used in the

revenue calculation must represent revenue received. The Preamble to the Final Rule, issued on

April 29, 1994, clearly stated that institutions will use a cash-basis of accounting for amounts

included in revenue calculations.

The conclusions presented in this report are also supported by the final regulations issued by the

Department on October 29, 1999. In the preamble to the notice of proposed rulemaking for these

regulations, the Secretary noted that questions arose, after issuance of the April 1994 final

regulations, with regard to the treatment of institutional loans and scholarships under the

cash-basis of accounting. Due to these questions, and in order to remove any apparent or

perceived ambiguities that may exist with regard to the regulations, the Secretary proposed a

number of clarifications regarding the non-Title IV revenue requirement. The resulting final

regulations are clear that an institution must use the cash-basis of accounting, and that cash-basis

accounting recognizes revenue when cash is received by the institution from an outside source.

The regulations contain specific provisions on institutional loans, scholarships and matching

contributions that support conclusions contained in this report.

Institutional loan principal and institutional scholarships. Statements confirmed by Department

staff do not have the same legal force as regulations issued pursuant to formal rulemaking.

However, in Dear Partner Letter GEN-99-33, SFA recognized the existence of differing

interpretations of the preamble statements to the April 1994 regulations. In the letter, SFA noted

that some institutions had concluded that the preamble statements regarding institutional loans

and scholarships superseded the general requirement that amounts included in the revenue

calculations must be revenue under a cash-basis of accounting. Due to the differing

interpretations, SFA issued the policy that the Department, absent unusual circumstances, does

not intend to exercise its enforcement authority against institutions that count institutional loans
ED-OIG ACN ED-OIG/A09-90001 Page 11

as revenue solely on the grounds that the loans and scholarships fail to comply with the

cash-basis accounting requirements. We revised our recommendations to reflect this SFA

policy.

Institutional loan servicing fees. CCI’s institution did not actually receive the portion of the

student payments that was retained by the loan servicer. Therefore, these amounts do not

represent revenue received by the institution and cannot be included in the revenue calculation.

Institutional matching contributions. Institutional matching contributions do not represent

inflows or other enhancements of the institution’s assets or settlements of its liabilities.

Therefore, matching contributions do not meet the FASB definition of revenue.

The preamble to the April 1994 regulations did state that matching funds should not be included

in the numerator of the calculation. However, the absence of a statement regarding the

denominator does not negate other statements contained in the preamble. As mentioned

previously, the preamble contained a clear statement that an institution must use a cash-basis of

accounting for amounts included in the revenue calculation.

Accrued grant funds. Regulations governing the reimbursement payment method and Internal

Revenue Service guidelines are not applicable to the revenue calculation.
ED-OIG ACN ED-OIG/A09-90001 Page 12

Other Matters

Perkins Loan Amounts in CCI’s Percentage Calculations. The institutions under

Corinthian Schools, Inc., participate in the Title IV Perkins Loan Program. 9 The transactions for

the Perkins Loan Program include the Federal Capital Contribution (FCC), institution’s capital

contribution (required institutional match), Perkins Loan disbursements and borrower payments

(principal and interest) on Perkins Loans. As mentioned in the Audit Results section, under

cash-basis accounting, amounts used in the revenue percentage calculation must represent cash

received by the institution during the fiscal year. We believe that only the FCC and borrower

payments provide an inflow of cash (revenue received) to institutions.

CCI management informed us that Corinthian schools did not receive an FCC for Perkins Loans

in FY 1998. However, student payments were collected for outstanding Perkins Loans and

placed in the revolving Perkins Loan accounts. CCI made new loan disbursements to students

from the revolving accounts. CCI included Perkins Loan disbursements, made from its

institution’s Perkins Loan Program revolving fund, as Title IV funds in the revenue percentage

calculation.

In SFA Action Memorandum No. 99-7 issued January 8, 1999, we alerted the Department about

the need to provide guidance to institutions on the amounts that institutions should include in the

revenue percentage calculation for the Perkins Loan Program.

CPA Review of CCI’s Percentage Calculation. During our fieldwork, we met with

representatives of the Certified Public Accountant (CPA) firm that audited CCI’s financial

statements for the fiscal years ended June 30, 1997 and 1998. The CPA firm’s representatives

explained that they used guidance from Federal regulations, the Federal Register, national

organizations, third-party servicers and the accounting firm that performed CCI’s student

financial assistance compliance audit. The CPA firm’s review included tests of cash receipts,

verification of source information and review of bank statements and student ledgers. The

representatives stated that they did not identify problems with CCI’s calculations or its

supporting documentation. However, as we disclosed in the Audit Results section, CCI used

improper methodologies to calculate the revenue percentages. The incorrect amounts included

institutional loan principals, institutional loan servicing fees, institutional scholarships,

institutional matching contributions for FSEOG and accrued Pell Grant and FSEOG receipts.

 

9

 Institutions under the Rhodes subsidiary did not participate in the Perkins Loan programs during the

period covered by our review and do not currently participate in the program.
ED-OIG ACN ED-OIG/A09-90001 Page 13

Background

CCI, through its wholly-owned subsidiaries, Corinthian Schools, Inc. and Rhodes Colleges, Inc.,

operates degree and non-degree granting proprietary schools. CCI used the services of Global

Financial Aid Services, a third-party school servicer. The corporate headquarters is located in

Santa Ana, California.

CCI was founded in February 1995 and acquired certain schools from National Education

Centers, Inc. (NEC). CCI acquired 16 NEC schools in 1995 and two additional campuses in

1996.10 During fiscal year 1998, CCI operated these schools through the Corinthian Schools

subsidiary. Campuses under Corinthian Schools are located in Virginia, West Virginia, Texas,

Michigan, Massachusetts, Louisiana, Washington and California. Corinthian schools offer

non-degree programs in the medical, dental, business and technology fields, and are accredited

by the Accrediting Commission of Career Schools and Colleges of Technology or the

Accrediting Council of Independent Colleges and Schools.

In October 1996, CCI purchased 18 campuses from Phillips Colleges, Inc. During fiscal year

1998, CCI operated these schools through its Rhodes Colleges subsidiary.11 Campuses under

Rhodes Colleges are located in Oregon, Colorado, Nevada, Utah, Missouri, Pennsylvania, New

York, Washington and Florida. Rhodes Colleges offer degree programs in accounting, business,

healthcare and computers, and are accredited by the Accrediting Council of Independent

Colleges and Schools. Rhodes Colleges receive Federal Pell Grant, Federal Supplemental

Educational Opportunity Grant and Federal Work Study funds under the reimbursement method.

During the period July 1, 1996, through December 31, 1998, CCI received a total of about

$180 million in Title IV funds from the following programs: Federal Pell Grant, Federal

Supplemental Educational Opportunity Grant and Federal Family Education Loan. CCI also

participated in the Federal Perkins Loan and Federal Work Study Programs. CCI has continued

to receive Title IV funds for the period after December 31, 1998.

 

10 The Sacramento campus (a former NEC school) was closed in December 1997.

11 Rhodes Colleges has two wholly-owned subsidiaries, Florida Metropolitan University, Inc. and Rhodes

Business Group, Inc. Rhodes Colleges and its subsidiaries operated the 18 campuses. References in this

report to Rhodes Colleges include its subsidiaries.
ED-OIG ACN ED-OIG/A09-90001 Page 14

Purpose, Scope and Methodology

The purpose of our audit was to determine if CCI institutions derived at least the minimum

required percentage of their revenues from non-Title IV sources and that CCI properly reported

the Title IV revenue percentages in its financial statements.

To accomplish our objective, we obtained background information about the institution and

identified the Department’s OPEID numbers under which the institution received its Title IV

funds. We reviewed the financial statements for CCI’s subsidiaries, Corinthian Schools and

Rhodes Colleges. We also reviewed selected SFA audit reports prepared by CCI’s CPA firm.

We conducted interviews with CCI officials and reviewed student records. We assessed whether

the institution used the non-Title IV revenue percentage formula in the regulations, and reviewed

the financial statements for proper disclosure of the percentage.

To achieve our audit purpose, we obtained and analyzed CCI’s revenue percentage calculations

for all institutions under each of the 29 OPEID numbers. We analyzed data extracted from

CCI’s student account ledgers, which were maintained on a computerized database. Information

from student account ledgers that was used as a basis for our audit conclusion was traced to other

sources, such as institutional bank statements, school servicer records and student records. We

used data extracted from the Department’s National Student Loan Data System (NSLDS) for

comparative purposes and reports generated from the Department’s Postsecondary Education

Participants System (PEPS) for background information purposes.

Our audit covered the institution’s fiscal year ending June 30, 1998. After determining that two

Rhodes schools did not meet the non-Title IV revenue requirement for fiscal year 1998

(minimum 15 percent), we expanded our review to include the fiscal year ended June 30, 1997

for the two schools. 12 For this prior year, we evaluated the types of revenues included in CCI’s

calculations, and determined that these two schools did not meet the minimum percent

requirement.

We performed fieldwork at CCI’s corporate office and at two campuses in Southfield, Michigan

and Las Vegas, Nevada. We also performed fieldwork at CCI’s Audit Compliance Department

and its school servicer, both located in Gulfport, Mississippi. Fieldwork was conducted in

October and December 1998, and in January and February 1999. Our audit was performed in

accordance with generally accepted government auditing standards appropriate to the scope of

the review described above.

 

12 The fiscal year ending June 30, 1997 is CCI’s first fiscal year for calculating the revenue percentages

for Rhodes schools since acquiring the schools from Phillips Colleges, Inc.
ED-OIG ACN ED-OIG/A09-90001 Page 15

Statement on Management Controls

As part of the review, we assessed CCI’s management control structure, and its policies,

procedures and practices applicable to the scope of the audit. The purpose of our review was to

assess the level of control risk for determining the nature, extent and timing of our substantive

tests. For this report, we assessed management controls related to the institutions’ calculations of

revenues from non-Title IV sources and reporting of its Title IV revenue percentages.

Based on our assessment, the management control structure was sufficient to prevent or detect

errors or irregularities in the non-Title IV revenue percentage calculations. However, because of

inherent limitations, a study and evaluation made for the limited purposes described above would

not necessarily disclose all material weaknesses in the control structure.

The Audit Results section of this report disclosed that CCI improperly included amounts in its

calculation of non-Title IV revenue that did not represent cash received by its institutions. This

condition resulted from a misinterpretation of Federal regulations rather than a weakness in

CCI’s management control structure.
ED-OIG ACN ED-OIG/A09-90001 Page 16

Attachment

Corinthian Colleges, Inc.’s

Comments to the Report

OIG Note

This attachment contains only those portions of CCI’s comments applicable to statements,

conclusions and recommendation presented in the final report. Upon request, our office will

provide a full copy of CCI’s response with its attachments.

The OIG provided three draft reports to CCI for its comment: Corinthian Colleges, Inc. (Audit

Control No. ED-OIG/A09-90001), Mountain West College (Audit Control No.

ED-OIG/A09-90015) and Las Vegas College (Audit Control No. ED-OIG/A09-90016). The

draft reports and CCI’s comments on those reports were consolidated and presented in this final

report.

2

CCI Improperly Included

Amounts in Its Calculations That

Did Not Represent Cash Received

• Institutional loan principal amounts included in CCI’s calculations did not represent non-Title

IV cash received during the fiscal year.

CCI’S RESPONSE:

CCI takes exception to the OIG’s assertion that “Institutional loan principal amounts included in

CCI’s calculations did not represent cash received during the fiscal year.” The report further

states “While the preamble indicates that institutional loans could be included, the regulations stress

that revenue used in the calculation must be received.”

CCI did include the full principal of institutional loans in the calculation, as allowed in the regulations

issued on April 29, 1994. Furthermore, CCI developed its methodology for calculating the 85 Percent

Rule based upon regulatory guidance available to the industry during the relevant audit years.

In a good faith effort to ensure compliance, CCI sought and used consistent guidance that came from

several different sources. As this response indicates, CCI’s methodology was based upon Department

of Education guidance from its policy division, OIG guidance provided during the reporting years in

question, and the interpretation of the independent certified public accountants that attested to, and

later certified, CCI’s internal calculations. A detailed description of the guidance that was used

follows:

Department of Education Guidance

The education industry received guidance from the Division of Policy Development at the US

Department of Education (ED) regarding the inclusion of institutional loans in the

denominator for purposes of calculating the 85 Percent Rule. In a letter dated May 13, 1994

(within two weeks of promulgation of the final regulations), a specific request for clarification

of interpretation was submitted to Cheryl Leibovitz, Senior Program Specialist, General

Provision Branch Division of Policy Development, US Department of Education. A

concurrence with the interpretation that “...institutional loans made by institutions to its

students are included in the year they are made, [emphasis added] if such loans are valid and

not part of a scheme to artificially inflate the institution’s tuition and fee charges” was

requested. On August 24, 1994, Cheryl Leibovitz confirmed that interpretation. A copy of

this letter is attached as Exhibit A. As stated in this report, the OIG examined CCI’s

institutional scholarship and loan programs and determined them to be valid.

Office of Inspector General Guidance

The OIG issued a revised Audit Guide in June 1995. The guidance provided at that time is

found on page I-8 and states “85/15 Attestation. ED will provide guidance which will

address the 85/15 attestation, which is effective July 1, 1995, and other financial statement

issues.” A copy of this page is attached as Exhibit B-1. The OIG again revised the Audit

Guide in June 1997. Changes to the portion pertaining to the 85/15 Attestation are found
3

on page 2 of the June 1997 Update that states “85/15 Attestation. Delete the word

Attestation and insert Revenue Test. Delete the sentence: ED will provide guidance which

will address the 85/15 attestation; which is effective July 1, 1995, and other financial

statement issues. Insert a new sentence: A proprietary institution must disclose in a footnote

to its audited financial statements the percentage (including the figures used to make the

calculation) of its revenues derived from the Title IV funds received during the fiscal year

covered by that audit (34 CFR 668.23). The calculation must be made on a cash basis and in

accordance with 34 CFR 600.5.” A copy of that update is attached as Exhibit B-2.

Independent CPA Interpretation

CCI also sought and received guidance and an interpretation from its independent certified

public accountants. In order to clarify the information provided to the school during this

period, the Certified Public Accountant firm which reviewed and attested/certified CCI's

calculations has issued a position letter stating their understanding of the requirements set

forth in the regulations issued on April 29, 1994. A copy of their letter is enclosed as Exhibit

C.

Now, four years after the first attestations were due on July 1, 1995, and a year after the latter of the

two audit periods in question was concluded, the OIG has published new interpretations, markedly

different from ED’s 1994 policy guidance, which the OIG is seeking to retroactively apply to prior

audit years. CCI in good faith structured and conducted operations in past audit years based on ED’s

written 1994 policy guidance. Significantly, in a March 20, 1997 statement to Congress, the Inspector

General expressed concern about the clarity of ED’s policy guidance on the 85 Percent Rule. The

Inspector General noted that “the Department has provided inconsistent guidance for implementation

of the 85/15 Rule”, (March 20, 1997, Statement of Thomas R. Bloom before the Subcommittee on

Human Resources of the House Committee on Government Reform and Oversight), yet the OIG took

no steps at that time to advise the industry of what it believed to be the correct understanding of the

85 Percent Rule.

The OIG’s new interpretation, detailed in a May 1999 “Dear CPA Letter” which went directly to

CPA's and not to the institutions, contains the OIG’s “new definition” of revenue for institutional

loans, scholarships, and institutional matching contributions. This clearly is a new interpretation, one

that encompasses many new definitions, and it was published and articulated almost a full audit

period after the reporting periods in question. A copy of the “Dear CPA Letter” is enclosed as

Exhibit D. (See OIG Note)

Recently, the Department of Education, which is responsible for setting institutional eligibility policy

through regulations, issued a Notice of Proposed Rulemaking (NPRM) proposing new Regulations

which adopt the OIG’s new interpretations. However, before the NPRM can be published as a Final

Rule, the higher education community will have an opportunity to comment on the NPRM and at the

Secretary’s discretion changes to the NPRM could be made See 20 U.S.C. Section 1089(c)(1). In any

event, even if the Department decides to maintain the new definitions of the OIG as policy, under the

Master Calendar requirements adopted in the 1998 Amendments to the Higher Education Act of

1965, these changes will not become effective until July 1, 2000. This earliest possible effective date,

will be two years after the conclusion of the most recent audit period reviewed in this report.

OIG Note: The Dear CPA Letter referred to in this paragraph was issued in April 1999 rather than

May 1999.
4

In addition, contrary to the OIG’s statement in its audit report, the OIG’s current definition of

revenue for institutional loans is not supported by either the language of the regulation (34 CFR

Section 600.5) or the preamble accompanying the April 29, 1994 publication of the regulation. The

regulation itself did not address the treatment of institutional loans, and the preamble did not state

that it is improper for an institution to include the full principal of an institutional loan in the

denominator of the 85 Percent calculation for the fiscal year in which the loan was made to the

student. Rather, the preamble implicitly acknowledges that when a student uses the full principal of

the institutional loan, during the fiscal year in which the loan was made, to meet tuition and related

charges, the institution may include the full principal in its 85 Percent calculation as long as the

Institutional loans are valid and are routinely repaid. The preamble reference to routine repayments

as a measure of the validity of a loan would be unnecessary and meaningless if, as the OIG now

contends, only loan installments made during the fiscal year may be included in the 85 Percent

calculation. Therefore, it is readily apparent that the full principal amount of valid institutional loans

can be counted in the fiscal year in which they are made.

In light of these factors, and the fact that the policy guidance given by Cheryl Leibovitz has never

been rescinded by ED, nor was it ever publicly repudiated by the OIG until long after the close of the

audit years at issue, CCI maintains its belief that, based on the regulatory guidance available during

the audit years in question, it correctly calculated and reported its compliance with the 85 Percent

Rule.

Therefore, CCI believes that it is in compliance with the 85 Percent Rule requirements related to

institutional loans, as they existed during the relevant audit years, and requests that this issue be

closed without further action on the part of its Institutions.

• CCI included fees paid to its institutional loan servicers as non-Title IV funds.

CCI’s RESPONSE:

CCI disagrees with this interpretation. CCI did include fees paid to its loan servicer in its report of

its 85 Percent Rule to ED. The calculation included total principal loan amounts (disbursed to

students during the fiscal year and paid by them to the institution), interest, and fees paid by students

(in repayment) in it’s original report of its 85 Percent Rule. These amounts all meet the requirements

set forth in regulations issued on April 29, 1994, as previously stated. CCI did not include principal

amounts repaid by borrowers in repayment in its calculation.

During the OIG’s audit, CCI was asked to provide the payment history from its loan servicer (TFC)

for the period of review. It was at this point in the audit process CCI was made aware that the OIG

had a “new definition” of revenue as it relates to the 85 Percent Rule. CCI provided to the OIG the

complete payment history for its institutional loans for the audit period, which reflected total amounts

paid by students and posted to the student accounts in Notes Receivable. The OIG used the principal,

interest, and fees paid by students, i.e. late fees, return checks, etc. representing amounts repaid by

borrowers as the institutional loan amount, in their calculation. However, the OIG excluded that

portion of loan payment that was retained by the servicer as its fees. These fees were an operating

expense item for CCI, not a reduction of the amount paid to CCI by the student. These fees were

deducted, by the loan servicer, from the amount paid by the student.
5

The fact that the loan servicer and CCI chose to have the servicer receive payment of its fees out of

student loan payments to CCI does not alter the amount of money that was being paid by the students

to CCI to reduce their outstanding loans. Of course, CCI could have chosen to receive the full

amount of each loan installment payment, to deposit such payment to its operating account, and then

to turn around and make payment to the servicer of its fees just as CCI makes payment out of its

operating account for other expenses. But the means CCI chose of authorizing the servicer to

withhold a portion of the loan payment as satisfaction of its fees does not and should not alter CCI’s

income and expense accounting. CCI posted the total amount paid by the student to the notes

receivable and did not deduct the loan servicing fees from the student payment. The accuracy of this

method is further supported by CCI’s Certified Public Accountant. This issue is addressed further in

the Independent Certified Public Accountant's position letter enclosed as Exhibit C.

CCI requests that this issue be closed without further action on the part of its Institutions.

• Institutional scholarship amounts included in CCI’s calculations did not represent non-Title

IV cash received.

CCI’S RESPONSE:

CCI disagrees with the OIG that it should not have included the institutional scholarships in the

revenue percentage calculations. CCI is not structured in such a manner to have “an external source

for institutional scholarship funds”, nor does it believe that it needs to be in order to count legitimate

scholarships as revenue for the purpose of the 85 Percent Rule.

As indicated by the OIG report, CCI scholarships are valid. They are based on specific criteria

established by the institution and are “not part of a scheme to artificially inflate an institution’s

tuition and fee charges”, as discussed in the Analysis of Comments and Changes of the Final

Regulations highlighted earlier in this report.

The scholarship funds are, in fact, a reduction in tuition and fees charged to students who meet

specific, well defined criteria entitling them to a scholarship, which the institution deducts from their

payment ledger. CCI believes strongly that this treatment of scholarship funds, while not offset from

funds from an endowment or trust fund, is revenue.

To illustrate that CCI’s interpretation is consistent with that of the guidance provided by ED on this

issue we refer you to a recent quote from Brian Kerrigan, Deputy Director, Office of Student

Financial Assistance Program, Policy Training and Analysis Service Division. In response to

questions posed by Eli Lake, a reporter for Education Daily and Vocational Training News,

regarding institutions’ use of the scholarship funds as revenue for purposes of calculating the 85

Percent Rule; Mr. Kerrigan stated:

“As long as it wasn't a sham situation, we said they could do this. We shouldn’t have

said that. At the very least, it was a misunderstanding; at the very worst, it was a

mistake. It certainly was a poor choice of words.”
6

Whether or not ED now considers its prior statement to have been a misunderstanding, mistake or

poor choice of words; CCI relied in good faith on that guidance in developing its methodologies and

calculating its 85 Percent Rule for each audit period. And as recently as May 20, 1999, Mr. Kerrigan

has stated that institutions were allowed to do so. A copy of both the Education Daily and Vocational

Training News articles are attached as Exhibits E-1and 2.

Therefore, CCI maintains that it has accurately and correctly calculated and reported institutional

scholarships as revenue under the 85 Percent Rule and requests that this issue be closed without

further action on the part of its Institutions.

• Institutional matching contributions included in CCI's calculations did not represent non-Title

IV cash received.

CCI’S RESPONSE:

CCI disagrees with the OIG that it should not include the 25% institutional matching expense

contribution for FSEOG as non-Title IV revenues. CCI applied the entire FSEOG disbursement to

student ledgers, which consists of 75% Title IV funds and 25% non-Title IV funds, thereby

representing payment to the student’s account. The Regulations require institutions to maintain

FSEOG accounts and to make disbursements at the point at which a student account is credited See

34 CFR Section 676.16. The crediting of the student’s account for payment should be treated the

same for “cash” as it is for Title IV. The fact that CCI’s institutions did not pay the institutional

match to each and every student individually does not reduce that institution’s revenue.

The Institutions cited in the OIG’s audit report are on the Reimbursement payment method. The

Regulations regarding reimbursement are clear regarding when funds are considered paid. Section

668.162(d)(1) states: “Under the reimbursement payment method-

(1) An institution must first make disbursements to students and parents for the amount of funds

those students and parents are eligible to receive under the Federal Pell Grant, Direct Loan,

and campus-based programs before the institution may seek reimbursement from the

Secretary for those disbursements. The Secretary considers an institution to have made a

disbursement if the institution has either credited the student's account or paid a student or

parent directly with its own funds.”

The fact that the Institution, under the requirements of federal regulations, must consider funds paid

upon credit of student accounts, dictates the funds be considered as revenue.

This issue is addressed further in the Independent Certified Public Accountant’s position letter

enclosed as Exhibit C.

Moreover, the preamble to the April 29, 1994, final regulations state: “[a]n institution should not

include institutional matching funds in the numerator as part of its Title IV HEA program funds.”

See 59 FR 22324, 22327 (April 29, 1994). Therefore, the institutional matching contributions can and

must be included in the denominator.

For the reasons stated, the CCI requests this issue be closed without further action on the part of its

Institutions.
7

• Accrued Pell Grant and FSEOG amounts included in CCI's calculations did not represent

Title IV cash received during the fiscal year.

CCI’S RESPONSE:

CCI disagrees with the OIG’s assertion that it “improperly included the accrued amount of Pell

Grant and FSEOG revenues as Title IV funds instead of actual receipt of reimbursed funds from the

Department.”

The Institutions cited in the OIG’s audit reports are on the Reimbursement payment method. The

Regulations regarding reimbursement are clear regarding when funds are considered paid. Section

668.162(d)(1) states “Under the reimbursement payment method-

(1) An institution must first make disbursements to students and parents for the amount of

funds those students amusements are eligible to receive under the Federal Pell Grant,

Direct Loan, and campus-based programs before the institution may seek

reimbursement from the Secretary for those disbursements. The Secretary considers

an institution to have made a disbursement if the institution has either credited the

student's account or paid a student or parent directly with its own funds.

The fact that the Institutions cited in the OIG’s audit reports, under the requirements of federal

regulations, must consider funds paid upon credit of student accounts, dictates the funds be

considered as revenue. Furthermore, as further detailed in the position letter of the independent

Certified Public Accountant enclosed as Exhibit C, these Institutions have “constructive receipt” of

such funds. Constructive receipt is a cash basis concept used by the Internal Revenue Service in

defining when the cash revenues must be included.

CCI requests that this issue be closed without further action on the part of its Institutions.

Recommendations

CCI’s RESPONSE:

CCI believes it correctly calculated and reported its Institutions’ 85 Percent Rule for both of the

audit years detailed in this report.

The methodologies used to calculate the 85 Percent Rule were and are accurate based on the

regulatory policy guidance given by ED to the industry during the years challenged by the OIG.

During this same period the OIG published two sets of revisions to the Audit Guide. The first

revision in June of 1995, indicated that institutions were to follow the guidance provided by the

Department when calculating its Title IV aid percentage and that this percentage was to be attested

to by an independent certified public accountant. The second revision in June of 1997, required

institutions to report their 85 Percent Rule compliance in their audited financial statements. This

revision required the independent certified public accountant to include the outcome of the test of
8

the 85 Percent Rule in the audit opinion expressed in the audited financial statements, rather than as

a separate attestation. That second revision also stated that, “The calculation must be made on a cash

basis and in accordance with 34 CFR 600.5.” No guidance as to the OIG's interpretation of “cash

basis”, particularly as related to institutional loans, scholarships and FSEOG matches, was provided

at that time, even though the Inspector General’s early 1997 statement to Congress indicated that the

OIG believed ED had failed to provide consistent and correct guidance on the 85 Percent Rule.

In May of this year (four years after the regulations implementing the 85 Percent Rule went into effect

and two years after the OIG stated generally that cash basis accounting was to be used), the OIG

published a “Dear CPA Letter” containing specific definitions on its interpretation of what constitutes

“revenue” under cash basis accounting and attempted to retroactively apply these definitions to all

prior audit periods.

CCI strongly disagrees with the OIG’s assertion that this is the only reasonable conclusion that can be

drawn under GAAP cash basis accounting. Furthermore, CCI does not agree that this is not

retroactive implementation of these definitions that were published the same month in which the draft

copy of this audit report was received by the Institution.

An independent certified public accountant who audited the Institution’s calculations has issued an

opinion which upheld our methodology that was developed with the guidance provided by ED. This

demonstrates that the OIG's interpretation is not the only acceptable, reliable, substantiated

methodology under GAAP Accounting.

The OIG’s interpretation clearly falls outside of the period reviewed in this audit report and must not

be applied in this instance. The guidance and definitions promoted in the “Dear CPA Letter”:

• were not, and still have not been, officially presented to the institutions that are being cited

for non-compliance;

• have not been promulgated in final regulations by the Secretary who is responsible for setting

regulatory policy; and

• can not be applied to audit periods that ended almost a full year before the interpretation,

and its corresponding definitions, were published.

The courts have ruled that retroactive implementation of new rules is unjust. We hope that the OIG

will heed the principle acknowledged by the Supreme Court in Heckler v. Community Health Services

of Crawford County, Inc. and will refrain from attempting to enforce its new definitions on audit

periods already completed.

This having been said, if the OIG seeks to implement its interpretation prospectively, CCI will closely

monitor the decisions of ED, and if ED should officially embrace the OIG’s interpretation and their

new definitions, CCI will modify its methodologies to ensure that all of its institutions adhere to the

regulatory policy changes. Specifically, if the Secretary’s Final Regulations implementing the Higher

Education Act Amendments of 1998, like the proposed regulations in the NPRM issued on July 15,

1999, include the changes outlined in the “Dear CPA Letter”, CCI will make sure that it is in

compliance with the revised regulatory policy by the July 1, 2000, effective date.
9

Nonetheless, while CCI does not agree with the OIG’s recently announced interpretation and its

definitions stated in this report, CCI performed 90 Percent Rule calculations for both Institutions for

fiscal year 1999 using both the OIG’s interpretation and the Institution's methodology. CCI’s

independent certified public accountant has issued an attestation of those calculations using both

methodologies. A copy of the attestations are enclosed as Exhibit F.

As the charts below indicate, using either methodology, both Mountain West College and Las Vegas

College have percentages below the eligibility threshold required by law and in the regulations for the

most recent audit period.

Mountain West College's 90/10 Calculation

Fiscal Year 1999

OIG’s Interpretation CCI’s Interpretation

Total Funds $2,982,607 $2,991,886

Title IV Funds $2,503,337 $2,521,953

Title IV Percentage 83.93% 84.29%

Las Vegas College's 90/10 Calculation

Fiscal Year 1999

OIG's Interpretation CCI’s Interpretation

Total Funds $2,114,467 $2,099,132

Title IV Funds $1,760,431 $1,756,668

Title IV Percentage 83.26% 83.69%

In summation, during the audit years at issue in this report, CCI used the guidance provided by ED,

which was consistent with other resources, to develop its methodologies under the 85 Percent Rule and

acted accordingly. Had the guidance provided in the OIG’s interpretation and its new definitions been

published during the reporting periods in question, at the very least we would have sought additional

guidance from ED as to whether or not these interpretations were consistent with ED’s regulatory

policy and we would have acted accordingly.

In spite of the Inspector General’s expression of concern in early 1997 to a Congressional

Subcommittee about the correctness of ED’s policy guidance on the 85 Percent Rule, the OIG did not

publish any policy guidance for the industry. Furthermore, the OIG’s interpretation was not

publicized during the audit periods under review in this report and was not even provided as informal

guidance by ED, who is responsible for setting regulatory policy. In fact, ED provided written

responses that are in direct conflict with the interpretations now being employed by the 0IG. CCI,

after reviewing the pronouncements of both organizations and other sources, calculated its 85

Institution’s Percent Rule compliance using the regulatory policy guidance provided by ED. The OIG

cannot now nullify the Institution’s compliance through retroactive application of a new rule.

Accordingly, the OIG’s findings of non-compliance should be rescinded and this matter should be

closed with no further action being required by CCI on the part of its Institutions.
Report Distribution List

Audit Control No. ED-OIG/A09-90001

No. of 

Auditee Copies 

Mr. David Moore, President/CEO 1

Corinthian Colleges, Inc.

6 Hutton Centre Drive, Suite 400

Santa Ana, CA 92707-5764

Primary Action Official

 Mr. Greg Woods 4

Chief Operating Officer

Student Financial Assistance

U.S. Department of Education

400 Maryland Ave., SW

Regional Office Building 3, Room 4004

Washington, DC 20202

Other ED Offices

General Manager for Schools Channel, Student Financial Assistance 1

Director, Default Management, Student Financial Assistance 1

Chief Financial Officer, Student Financial Assistance 1

General Counsel, Office of General Counsel 1

Area Case Director, San Francisco Team 1

Other

Director, California State Bureau for

Private Postsecondary and Vocational Education 1

Director, Accrediting Commission of Career Schools and Colleges of Technology 1

Director, Accrediting Council of Independent Colleges and Schools 1

Office of Inspector General (Electronic Copy)

Inspector General 1

Deputy Inspector General 1

Counsel to Inspector General 1

Acting Assistant Inspector General for Investigation 1

Assistant Inspector General for Audit 1

Deputy Assistant Inspector General for Audit 1

Director, Student Financial Assistance Advisory and Assistance Team 1

Regional Offices 1 each