for profit school audit

For the first time in sixteen years, the U.S. Department of Education Office of Inspector General (OIG) has released a new Audit Guide for Proprietary Schools. The Guide replaces the one from 2000 and contains new instructions for how independent auditors should audit proprietary schools for compliance with federal financial aid regulations.

Proprietary schools are required to have a financial statement audit and compliance audit conducted by an independent auditor each year. The new Audit Guide for Proprietary Schools takes effect for fiscal years that begin after June 30, 2016. Thus, schools with a fiscal year ending June 30, 2017 will be the first to be audited under the expanded procedures.

The audit procedures contained in the new Guide increase both the size and scope of testing significantly, while bringing focus to a number of items that haven’t been part of examination level attestations before.

Understanding these changes and their impact on your school is crucial to planning, and preparing to have a good clean audit during your next audit cycle. It goes without saying that increased findings could lead to heightened regulatory oversight and increased likelihood of program reviews. But what may not be apparent is that systemic problems are more easily revealed with larger samples and a vastly expanded scope.

The updated Guide contains several major changes from the prior version, which raise the level of required testing to be performed by a school’s independent auditor.

Prior guidance only required auditors to conduct an examination-level attestation engagement of a school’s management’s assertions of compliance. The new Guide instructs auditors perform a full compliance audit each year. This essentially changes the scope of the work your auditor will perform from an examination of compliance to an audit of compliance. It sounds like a subtle difference, but the change necessitates much more rigorous testing than in the past. Auditors will have to visit each campus annually where processing or awarding is done. As a result, expect auditors to spend more time conducting site visits. And that’s going to cost more.

One of the biggest changes is the way the student universe is used to draw an audit sample. Under the new guidance, samples must be separated into two categories:

  • Students who were enrolled, graduated or on approved leave of absence
  • Students who have withdrawn, dropped, enrolled but failed to begin attendance or were terminated

As a result, schools can expect the number of students included in an audit sample to increase as much as 50-60%. Auditors will have to test more files from the withdrawn, dropped and terminated population. That means your auditors will be looking at more R2T4 calculations and testing timeliness of refunds and post withdrawal disbursements. They’ll also be looking at NSLDS enrollment reporting compliance, exit counseling, and loan calculations for students who drop and re-enroll.

The new procedures include expanded testing for verification, enrollment reporting, student eligibility, and disbursement activities. Expect your auditors to ask for your school’s written policies and procedures related to these items. Auditors are required to confirm that each school has a written policy and procedure for student verification processes, disbursement approval, disbursement, and delivery of Title IV funds. Expect your auditors to verify the verification status that your school reports to COD, in addition to confirming that disbursement dates on students’ ledger cards tie out to disbursement dates in COD. The Guide also requires a school’s auditors to compare a school’s written procedures to actual process the school uses and report on any differences. And the scope of the audit doesn’t stop there.

The procedures in the Audit Guide specify that the required monthly reconciliations for the federal direct loan program must also be audited. Schools must have documentation showing that monthly reconciliation is being done between ED’s records and a school’s financial aid and business office records each month. They’ll be looking for source documentation to ensure proper internal controls.

We’ve always said that when it comes to audits and program reviews, the folks with the biggest pile of documentation win. And to win the game, you have to be sure that your school maintains verifiable source documentation and that it concurs with any published information. For example, Auditors will test Gainful Employment Reporting, certain consumer information such as Campus Crime statistics and placement rates for the first time. The new procedures require them to trace and verify the data used in compiling these statistics all the way back to the source documents.

Finally, although it has long been understood that it was the school’s responsibility to calculate their own 90/10 ratios some schools weren’t doing so. Instead they were relying on their auditor to do it for them. The new Guide makes it clear that a proprietary school must disclose in a note to the financial statements the percentage of its revenues derived from Title IV program funds and that the calculation presented in the notes to the financial statements must be made by the school, not the auditor performing the audit. In addition, the Guide requires auditors to determine whether the amounts to include in the 90/10 calculation for student revenue are determined on a student by student basis. Why you ask?

As you can expect, the OIG is wise to schemes schools have used to manipulate their 90/10 calculation, so auditors have been given specific guidance on procedures to determine the validity of transactions. The Guide instructs auditors who determine that a school’s calculation is misstated by any amount to disclose it as a finding in the report on internal control over financial reporting and compliance.

The Audit Guide for Proprietary Schools can be found here:

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