The Office of Inspector General (OIG) has undertaken a number of initiatives during the period to assist ED managers in implementing their responsibilities under current and impending legis-lative and regulatory mandates. Highlights of our efforts follow.
As major reauthorizations approach, the OIG is working with ED managers to shape Department legislation for the next century. This period, the Office of Inspector General has undertaken a number of initiatives with that goal in mind.
Reauthorization of the Higher Education Act
This period we met with departmental and congressional staff, and others knowledgeable in the student financial assistance (SFA) pro-grams, to assist us in determining the types of reviews necessary for the OIG to have effec-tive input to the reauthorization of the Higher Education Act in 1998. Many of our ongoing reviews and planned audits in the areas of student loans, contracting, gatekeeping, and oversight will help in assessing whether legis-lative changes are needed.
Reauthorization of the Elementary and Secondary Education Act
As a result of our earlier work with program managers and staff, state and local officials, and congressional staff, we identified issue ar-eas to support the reauthorization of the Elementary and Secondary Education Act (ESEA) in 1999. This period, following up on that in- itiative, we began the first in a series of audits designed to assist the Department and Congress in the reauthorization effort.
Regulatory ActivitiesThe Office of Special Education and Rehabilitative Services is in the process of revising Rehabilitation Act regulations to include controls over state funding of the establishment authority for community rehabilitation programs to address concerns raised in OIG audits of these programs. The audits raised issues with regard to the efficiency of community rehabilitation programs that either do not primarily benefit vocational rehabilitation clients or benefit them at higher costs than alternative sys-tems providing such services.
The revised regulations of the State Vocational Rehabilitation Services program address the concerns raised by the OIG and are expected to require that state agencies serve only those individuals whoare applicants and are eligible under the Vocational Rehabilitation program. The revised regulations are also expected to require that state agencies describe in the state plan the need to establish, develop or improve, as appropriate, a community rehabilitation program to provide services to applicants and eligible individuals.
Congressional TestimonyThe Inspector General testified before the House Subcommittee on Oversight and Investigations, Committee on Economic and Educational Opportunities, on two issues of significant import relative to the Department's SFA programs. The Inspector General's testimony is summarized below. Additional information is provided in Abstract 3, "Initiatives Conducted in Response to Congressional Requests."
OPE management review
At the request of the House Subcommittee on Oversight and Investigations, Committee on Economic and Educational Opportunities, the Inspector General provided testimony regarding the OIG's management review of the Office of Student Financial Assistance Programs. The review focused on the administration for the period of time when the Federal Family Education Loan program and the Federal Direct Student Loan program were separate components of the Office of Postsecondary Education. During the hearing, the Inspector General stressed OIG's recommendation that the Office of Postsecondary Education move forward and implement its plan to select a chief operating officer to head the Office of Student Financial Assistance and administer the multibillion-dollar loan programs. As of the end of the reporting period, no chief operating officer had been named.
Gatekeeping in the student financial assistance programs
The Inspector General testified before the House Subcommittee on Human Resources and Intergovernmental Relations, Committee on Government Reform and Oversight, about continuing problems with the gatekeeping process for ensuring that only high-quality schools participate in the Federal SFA programs under Title IV of the Higher Education Act.
Few have adopted quantifiable and objective performance standards
Focusing on short-term, non-degree-granting, vocational schools, the Inspector General told the Subcommittee that OIG audits found that very few accrediting agencies have adopted quantifiable and objective performance stan- dards for such schools, and that no accrediting agencies used performance standards as enforcement mechanisms to eliminate substandard schools from accreditation and therefore Title IV participation.
Rather, the performance standards that exist are treated as mere goals by the accrediting agencies and by the Department of Education. The result is that students and taxpayers are not always getting their money's worth for the $8.8 billion spent annually on postsecondary vocational training.
Legislation of standards recommended
The Inspector General advocated that, with respect to the non-degree-granting, vocational trade schools sector, Congress legislate consistent, measurable, objective standards which schools would have to meet in order to be eligible to participate in the SFA programs,particularly in the areas of job placement and student achievement.
OIG Efforts in Postsecondary EducationOIG efforts this period in the postsecondary education arena focused on several important areas. Our activities in these areas are highlighted in the pages that follow.
Direct Loan program audits
This period we initiated a project to assess how well the Direct Loan program is functioning at the school level. We plan to issue a consolidated report based on the audits of 17 Direct Loan schools in the next reporting period. Our report will contain details of problems being experienced by individual schools, as well as problems that may be systemic, with appropriate recommendations for corrective action.
SFA student eligibility controls
This period we reviewed the adequacy of controls in the Department's systems for screening to assure that only eligible students are awarded student financial assistance (SFA) funds. Our review determined that the Department has not completed an independent security review and formal risk analysis as required by the Office of Management and Budget (OMB), and that existing controls may not prevent data manipulation and the awarding of SFA funds to ineligible students. The report recommended an independent security review along with formal risk analysis and strengthened controls (see Abstract 1, "Significant Audits and Audit-Related Activities.")
We continued to find that guaranty agencies are retaining excessive amounts from payoffs on the consolidation of defaulted loans by improperly reporting the consolidations to ED as collections. Under the Department's regulations, guaranty agencies may retain up to 18.5 percent for consolida- tions, but are allowed to retain 27 percent on collections.
We first identified this condition in 1994 and the Department promptly published guidance in March 1994 to address the above concerns, yet this condition still has not been corrected. This period we issued audit reports on six guaranty agencies recommending that they refund more than $4 million of improperly retained funds (see Abstract 1, "Significant Audits and Audit-Related Activities.")
Federal Family Education Loan program lenders
In the area of the Federal Family Education Loan (FFEL) program, the OIG is continuing to devote significant resources to investigations relating to instances of alleged falsification of loan collection efforts (e.g., due diligence) involving federally guaranteed student loans. Later in this report, we describe the results of our recently concluded investigation of AmSouth Bank, Birmingham, Alabama. In that case, AmSouth agreed to pay ED over $5.7 million in restitution and civil penalties for falsified collection efforts on guaranteed student loans (see Abstract 2, "Significant Prosecutive Actions Resulting from OIG Investigations.")
Ongoing investigations involving lenders and servicers
The OIG has several other ongoing investi-gations involving lenders and servicers who have engaged in activities similar to AmSouth. Those investigations have the potential to in-validate the reinsurance claims on multimillion-dollar student loan portfolios.
Bank charged with falsifying collection histories
For example, in June 1994 a civil fraud complaint was filed against First Tennessee Bank,Memphis, Tennessee, by the U.S. Department of Justice (Semiannual Report No. 29, page 26). The complaint alleged that First Tennessee employees falsified collection histories on student loan default claims totaling about $1.3 million. Since the filing of the complaint in June 1994, the OIG has continued to assist the Department of Justice with discovery respond-ing to a variety of pre-trial motions and trial preparation. This case is currently scheduled for trial in March 1997.
Departmental OperationsFinancial statement audit
The Government Management Reform Act (GMRA), passed in 1994, mandates agencywide financial statements for fiscal year 1996. The Department of Education elected to produce financial statements for fiscal year 1995 at the Department level, one year ahead of the implementation date set by GMRA. We contracted with an independent public accounting firm to conduct an audit of the FY 1995 consolidated financial statements. Their reports were delivered to the Department in August and included in the Department's first accountability report.
Auditors unable to express opinion
The independent public accountants were un-able to express an opinion on the consolidated financial statements primarily because certain amounts related to the FFEL program could not be supported by sufficient and reliable accounting information and certain differences between financial statement amounts and un- derlying accounting records could not be adequately explained.
Corrective action plan in process
Management agreed with the need to further improve FFEL program data; however, they believe that the reported FFEL program liabilities for loan guarantees are reasonable. Management is analyzing the recommendations to determine the best way to proceed toward achieving the desired results before developing a comprehensive corrective action plan.
Reviews of administrative operations
We are working in partnership with various departmental managers conducting management reviews focused primarily on the Department's administrative operations systems, processes, policies, and procedures. Reviews are aimed at identifying systemic problems and weaknesses up front and gen- erating solutions for more efficient and better work processes.
Audit Quality Improvement InitiativesRevision to single audit requirements
The Single Audit Act Amendments of 1996 were enacted on July 5, 1996. This legislation will affect the audits of thousands of Department of Education grant recipients that are conducted by nonFederal auditors.
In 1993, an interagency team led by OIG staff, under the President's Council on Integrity and Efficiency (PCIE), issued a report, Study on Improving the Single Audit Process. Since then, OIG has worked extensively with OMB and the General Accounting Office on revising the legislation and OMB implementing guidance. Virtually all of the recommendations in the PCIE report requiring legislative change have been incorporated in the Amendments.
We believe that the Amendments and implementing OMB guidance will provide for more efficient and effective audit coverage of Department programs.
Revision to audit guidance for audits of guaranty agencies
This period, we issued revised guidance for non-Federal audits of guaranty agencies. This guidance includes specific audit steps to audit the billings and reports sent to ED by guaranty agencies to assure that they are materially correct. Inadequate audit coverage of these reports has been cited as a material internal control weakness in the 1995 Department-wide financial statement audit and prior financial statement audits of the Federal Family Education Loan program.
This period, OIG staff undertook two training initiatives aimed at improving the performance of in- dependent public accountants (IPAs) who audit Department of Education programs.
In cooperation with the American Institute of Certified Public Accountants (AICPA), OIG staff presented a one-day training program for IPAs who audit schools that receive funding under Title IV SFA programs. The training was presented in eight cities.
We are also developing, with the AICPA, a training course for IPAs who perform audits for the U.S. government under the new attestation standards. This course is needed since the standards are relatively new and ED is the only governmental department requiring audits under these standards so far. We are expecting to complete this project in the next reporting period.
Cooperative audit resolution
As reported in previous Semiannual Reports, we have been working with an intra-departmental team on a wide-ranging project known as the Cooperative Audit Resolution and Oversight Initiative, or CAROI. Other offices participating in the CAROI initiative include the Office of Elementary and Secondary Education, the Office of the General Counsel, and the Office of the Chief Financial Officer. The following activities were accomplished during the reporting period as part of this initiative.
IASA compliance supplement
As part of this initiative, the CAROI team revised the compliance supplement for Educa- tion programs reauthorized under the Improv- ing America's Schools Act (IASA). This supplement was issued in June 1996 in time for auditors to use during the first audits of programs reauthorized under the IASA.
Cooperative audit resolution pilot
During this period, the CAROI team completed the first cooperative resolution pilot with Florida. As part of a settlement agreement, Florida and Department officials jointly de- signed a substitute time-distribution system that helped resolve longstanding audit issues in Florida relating to keeping time-distribution records. Florida's substitute system can be adopted by other state and local agencies look-ing to reduce the burdens of OMB Circular A-87.
IASA regional conferences
Also this period, the CAROI team made presentations to state and local officials at the first of three regional conferences for IASA. The team is participating on a White House task force on flexibility and financing issues that is, in part, considering how the CAROI concept could be used by other Federal agencies.
Statutory Federal Law Enforcement AuthorityMuch of the investigative work done by OIG special agents is very similar to that of other Federal law enforcement agents who possess statutory Federal law enforcement authority. Historically, ED/OIG agents were at a severe disadvantage that at times put them in danger because they lacked this authority.
Full blanket special deputation
This period, ED/OIG entered into a Memorandum of Understanding (MOU) with the Department of Justice that grants full blanket special deputation authority to special agents of the OIG. The terms of this MOU are similar to the ones contained in the MOUs signed by the seven OIGs that were originally granted such authority in 1995. The terms of the ED/ OIG's MOU are effective until September 30, 1997.
Intensive training for OIG agents
In preparation for entering into this MOU, so as to be in full compliance with its provisions, the Education OIG put all its special agents through an intensive two-week refresher training at the Federal Law Enforcement Training Center in Glynco, Georgia. In addition, the OIG has developed internal policies and procedures as guidance and direction for its special agents while operating under this blanket special deputation authority.