Background To participate in federal student aid programs, postsecondary schools  must be 1) certified by Education as eligible to participate in federal  student aid programs, 2) accredited by a recognized accrediting agency—  generally nongovernmental, nonprofit entities—and 3) authorized by the  state in which the school is physically located. (See table 1.) FSA is responsible for ensuring that schools with access to federal  student aid are eligible and capable of properly administering federal  student aid funds, according to standards established by Education and  authorized by the Higher Education Act. These standards include  requirements for schools related to communication, personnel, policies,  procedures and reporting, and adequate checks and balances in a  system of internal controls, among others. FSA is also responsible for  conducting ongoing financial oversight of schools that receive federal  student aid. This includes reviewing annual financial statement audits to  assess a school’s financial responsibility and providing additional  oversight to schools that do not meet financial responsibility standards  outlined in the Higher Education Act. Schools that participate in federal student aid programs generally are  required to submit annual compliance audits. The compliance audit  provides information that FSA can use to assess the school’s  administration of federal student aid programs and to identify schools that  require additional oversight because they do not fully comply with federal  student aid administrative requirements. The OIG is required to assess  the quality of school compliance audits and selects a sample to review  each year. The OIG reviews the audit documentation to ensure that it  supports the auditor’s opinions and that the audit results are reliable.  According to agency guidance, FSA staff should refer compliance audits  to the OIG for a quality review if they have any concerns about the quality  of the audits. Both FSA and OIG officials stated that the OIG has primary  responsibility for issues related to audit quality. General Certification  Process When a school first applies to be certified to administer federal student  aid, FSA will either approve the school for provisional certification— generally for 1 year—or deny certification (see fig. 1). Once a school is  approved for initial certification and applies for recertification, FSA will  provisionally or fully recertify the school, or deny certification. According to FSA procedures, FSA uses provisional certification for initial,  or first time, applicants, as well as schools that are applying for  recertification. Provisional certification is the only approval status  available to new schools. In addition, FSA may decide to recertify a  school provisionally if it determines that a school has not fully complied  with federal student aid requirements. FSA prohibits provisionally  certified schools from opening new campus locations or offering new  programs without approval from FSA, and provisionally certified schools  that are denied recertification have a less substantive appeals process  than fully certified schools. Further, recertified schools in provisional  status are subject to more FSA oversight than schools that are fully  certified. FSA procedures allow for some discretion in determining for  how long to certify a school. Provisional recertification generally lasts 1 to  3 years, while full recertification generally lasts 4 to 6 years. Education Evaluates  a Variety of  Information during the  Certification Process  and Approves Most  Schools  Education Reviews  Information from Multiple  Sources to Assess a  School’s Capability to  Administer Federal  Student Aid Education’s FSA regional staff draw information from a variety of sources  during the certification process to assess a school’s capability to  administer federal student aid. According to FSA documents, regional  staff are to review information collected from schools and third parties,  such as annual compliance audits conducted by independent auditors,  among other information sources. FSA staff responsible for different  functional areas, such as financial and compliance audits, accreditation  status, and student loan default rates, compile and review information on  schools, according to FSA procedures. FSA officials told us that these  staff meet to discuss any potential program eligibility issues and to ensure  that all information relevant to a school is considered before making a  certification decision. FSA’s certification procedures outline some of the  key information that regional staff should assess, some of which is  relevant to both initial and recertification decisions, and some of which is  specific to each type of certification process (see fig. 2). Documents and policies provided by schools: FSA regional staff  are directed to review documents submitted by schools, including  school catalogs, and certain school policies—such as admissions and  student refund policies—that are relevant to assessing administrative  capability. Proof of accreditation: School accreditors are responsible for  applying and enforcing standards to help ensure that the education  offered by schools is of sufficient quality to achieve program  objectives. Accreditation of schools, which generally includes a site  visit, takes place on a cycle that may range from every few years to as  many as 10 years. Proof of state authorization: States are responsible for authorizing  schools to offer postsecondary education and respond to student  complaints. The process for approving schools varies from state to  state and may include on-site visits. Audited financial statements: FSA regional staff are directed to  review information in audited financial statements to assess schools’  financial health. Schools are required to have annual audited financial  statements issued by an independent certified public accountant or a  government auditor. Key Information Required for  Initial Certification Self-reported school data: FSA regional staff are instructed to  review data on continual student enrollment in eligible academic  programs and student withdrawal rates. Pre-certification review and school outreach: FSA staff are  responsible for contacting school personnel to verify the school’s  application information and discuss relevant policies, procedures, and  other materials relevant to administering federal student aid. FSA visits to newly certified schools: After schools first apply and  are provisionally certified, Education requires FSA regional staff to  contact them within 3 months and schedule an on-site school visit.  Schools cannot administer federal student aid until they are certified,  so FSA has limited information on how newly certified schools are  administering federal student aid programs. School visits provide FSA  with an opportunity to collect additional information about a  provisionally certified school’s ability to administer federal student aid.  Some FSA regional staff we interviewed told us that on-site visits to  newly certified schools provide valuable first-hand information about  whether these schools are administering federal student aid in  accordance with program requirements. If FSA regional staff find that  a school is having difficulties administering federal student aid, FSA  procedures direct regional staff to assist schools by providing  clarification and guidance on federal student aid policies,  recommending additional training for school officials, and helping  schools develop a plan to track and report on their corrective actions,  among other things. Key Information Required for  Recertification Compliance audits: FSA staff are directed to review information in  compliance audits to determine if schools are complying with specific  federal student aid requirements. Generally, compliance audits are  required to be conducted annually by an independent auditor, and  submitted with the school’s audited financial statements. Program reviews: FSA regional staff are also responsible for  conducting program reviews, usually on site, which evaluate school  compliance with federal requirements and can provide more in-depth  information on schools than compliance audits, according to some  FSA staff we interviewed. Generally, FSA selects schools for program  reviews that it considers to be at risk for noncompliance, according to  Education documents. FSA conducts approximately 250 to 300  program reviews per year, according to FSA documentation. FSA  staff from all four of our selected regional offices told us they consider  results from any recent program review in decisions about  recertification and noted that such information, when available, is  valuable for assessing schools’ administrative capability. Education data: FSA regional office staff are also directed to review  data on student loan default rates. Most Schools Are  Provisionally or Fully  Certified to Receive  Federal Student Aid From calendar years 2006 through 2017, FSA approved most schools  applying for certification to receive federal student aid, according to  Education data. Initial Certification Applications From 2006 through 2017, FSA approved 89 percent of schools new to  administering federal student aid for provisional certification and denied  11 percent of schools overall (see fig. 3). Denial rates for initial  certification were 11 percent for public and for-profit schools and 14  percent for nonprofit schools. For more information on 2006-2017 school  certification outcomes by year, see appendix I. FSA regional staff responsible for reviewing school applications told us  that schools are denied initial certification for issues such as a lack of  accreditation, not offering eligible programs for federal student aid, or not  meeting other statutory eligibility requirements. For example, FSA staff  said that for-profit and vocational schools that apply for initial certification  are required to provide an eligible program continuously for 2 years prior  to their initial application. FSA staff may also advise schools that do not  meet basic eligibility requirements not to apply, which could result in  fewer initial certification denials overall. In addition, FSA staff said they  often work with schools to address compliance problems, for example, by  providing guidance on revising school policies that do not meet  requirements, so that the schools are able to meet FSA’s certification  requirements. Recertification Applications From 2006 through 2017, 76 percent of schools applying for  recertification were fully recertified, 21 percent were provisionally  recertified, and 3 percent were denied recertification. Sixty-six percent of  for-profit schools were fully recertified, 28 percent were provisionally  recertified, and 6 percent were denied. In comparison, 86 percent of  public schools were fully recertified, 14 percent were provisionally  recertified, and fewer than 1 percent were denied. Nonprofit schools had  rates similar to public schools, with 80 percent fully recertified, 18 percent  provisionally recertified, and 2 percent denied (see fig 4). FSA staff from all four of our selected regional offices told us that they  typically deny recertification when a school no longer meets eligibility  requirements, such as losing accreditation, or when there is significant  evidence of serious issues or massive wrongdoing, such as fraud. For  example, managers in one regional office told us they denied  recertification for a school because they had evidence that the school was  accepting students without valid high school diplomas and referring them  to diploma mills to boost enrollment. Staff in two FSA regional offices told us that they can also choose to fully  recertify a school for shorter periods of time if they uncover issues related  to administrative capability. For example, one regional staff member told  us that when they found a school’s default rate for one federal student  loan program had been high for the prior 3 years, the regional office  decided to shorten the school’s full recertification period from 6 to 4 years,  to allow FSA staff to review the school again sooner. Reasons for Provisional  Certification FSA staff from all four of our selected regional offices told us that they  provisionally certify schools for a variety of reasons, including when a  school submits a late compliance audit or when a recent compliance audit  indicates that a school could potentially have significant problems.  Generally, schools in provisional certification status are subject to  additional monitoring by FSA compared to schools that have been fully  certified. For example, Education officials said that if they have concerns  about a provisionally certified school’s student withdrawal rate, they can  add provisional conditions requiring the school to submit monthly  enrollment rosters for review. Staff in two FSA regional offices told us that  in other cases, if they have concerns about how a school is administering  federal student aid or suspected fraud, they can put a school on  provisional status and conduct a program review to collect more detailed  information on compliance with federal requirements. Education data also show that most schools remain in provisional status  the first time they are recertified—62 percent from 2006 to 2017. In  contrast, FSA staff fully recertified over three-quarters of schools that  applied for recertification a second time during the same time period (see  table 2). For more information on first and second recertification  outcomes by school sector, see appendix II. Compliance Audits  Are Key to  Certification Process  and Education Has  Taken Steps to  Address Audit Quality We found that FSA generally relies on compliance audits as the only  annual on-site review to determine how schools applying for  recertification administer federal student aid. The audits provide direct  information collected by independent auditors from school visits and file  reviews examining how schools administer federal student aid and  comply with program requirements. For example, OIG audit guidance  directs auditors to check whether schools are distributing federal student  aid to eligible students and accurately calculating student loan amounts.  FSA officials and staff from all four of our selected regional offices said  that compliance audits are a key source of information they use to assess  a school’s administrative capability. Officials from Education’s OIG said that the quality of information in  compliance audits varies substantially and depends on the auditor. The  OIG has found quality problems in some of the compliance audits it  selects—based on auditor and school risk factors—for its annual quality  control reviews. Because the OIG selects higher risk audits to review, its  reviews are more likely to detect problems, and OIG officials said they  cannot make any conclusions about the overall prevalence of quality  problems in compliance audits. However, our analysis of OIG quality  review data found that of the 739 compliance audits reviewed by the OIG  from fiscal years 2006 through 2017, the OIG passed 23 percent (173)  and failed 59 percent (436). An additional 18 percent (130) passed with  deficiencies. For example, across the 41 compliance audits it reviewed  in fiscal year 2016, the OIG identified 264 quality deficiencies with the  auditor’s work, according to our analysis of quality reviews provided by  the OIG. The most frequently cited issues in these 41 audits were:  reporting (24 audits), such as lack of evidence that the auditor tested  whether the school correctly reported student enrollment status;  student eligibility (20 audits), such as lack of evidence that the auditor  verified student school attendance; and administrative capability (19 audits), such as lack of evidence that the  auditor determined whether the accreditor had been notified about a  change in school ownership within 10 days. FSA officials also identified quality issues with the compliance audits of  some schools. FSA headquarters officials and staff we interviewed in  several regional offices said they have seen schools with significant  program review findings that had not been identified in annual compliance  audits. FSA staff said they have referred some compliance audits to the  OIG for quality reviews when they have had questions about the  thoroughness of an audit. We also found a couple of examples in our  review of school certification documents in which the findings identified in  a school’s compliance audit were different from the findings identified by  FSA in a program review of the same school covering the same time  period. In one case, FSA staff said they probably would have fully  recertified the school if they had relied solely on the compliance audit.  Instead, they used the program review to determine that the school  should be provisionally recertified. Compliance audits and program review  findings are based on a sample of student records, and FSA staff said  some differences in findings might be explained by differences in the  records reviewed. FSA and OIG officials cited several issues that can affect the quality of  compliance audits. FSA and OIG officials we interviewed said that some  auditors conducting compliance audits have insufficient training in federal  student aid, which contributes to audit quality problems. OIG staff also  said that even if an auditor meets the general training hour requirements  for auditors, the training content may not be relevant for federal student  aid audits. In addition, FSA and OIG officials said some schools— particularly smaller schools—tend to hire less experienced auditors in  order to save money, often resulting in poor quality audits. FSA officials in  most selected regional offices said that additional training on federal  student aid for auditors who are new to or unfamiliar with federal student  aid could help improve audit quality. FSA and the OIG recently have taken steps to address audit quality and  the information available to FSA staff when making certification decisions.  These efforts include: Training for auditors: The OIG has taken steps to enhance training  offered to auditors of schools’ administration of federal student aid  and is exploring opportunities to provide additional training. In  December 2017, the OIG and the American Institute of Certified  Public Accountants cosponsored training for auditors on the OIG’s  2016 revised guide for audits of for-profit schools, and other topics  related to auditing federal student aid. The training included  discussion of common audit quality issues and areas of highest risk.  According to an OIG official, about 200 auditors attended, and after  the event, the American Institute of Certified Public Accountants and  the OIG posted a recording of the training to their websites to make it  available to additional auditors. In addition, OIG officials said they  maintain an email account—listed on the OIG website—through which  auditors can ask questions and receive responses. In March 2018, the  OIG posted frequently asked questions and answers to the website. Timeliness of OIG quality reviews: Both FSA and OIG officials said  that the OIG has recently renewed efforts to issue compliance audit  quality reviews more quickly, after several years in which staffing  shortages and other issues led to some delayed quality reviews. Guidance to schools on selecting an auditor: OIG officials said  that at the 2017 FSA training conference for school financial aid staff,  they presented to more than 400 participants about factors schools  should consider when hiring an auditor. For example, they suggested  that schools verify the licenses of certified public accountants, ask  about the types of engagements an auditing firm has conducted,  request and check references, check for any actions that may have  been taken against a firm, and ask whether the auditor has been  subject to a previous review by the OIG or another agency. FSA  officials said they expected to invite the OIG to present at future FSA  conferences, and OIG officials said they were seeking additional  opportunities to share information on auditor selection with schools,  including a planned presentation to an association of postsecondary  schools. FSA working group: FSA recently established a working group to  update its guidance to FSA staff on how to coordinate with the OIG to  address compliance audits with quality problems. Among other topics,  the working group has consulted with the OIG about how schools are  made aware of the OIG’s findings regarding the quality of their audits.  FSA officials said that OIG officials have provided input and feedback  on FSA’s proposed changes to the guidance. Audit guide revisions: In addition, OIG and FSA staff told us they  expected the OIG’s 2016 revisions to the for-profit school audit guide  to improve the quality of compliance audits for those schools. They  said that because the revised guide clarified some issues that were  confusing to auditors in the previous guide issued in 2000, auditors  might be better able to implement the guidance. The audit guide  revisions include more testing and reporting requirements, clarified  procedures, and guidance on issues such as fraud reporting and  coordinating financial and compliance audits. The 2016 revisions first  applied to audits for fiscal years beginning after June 30, 2016, and  FSA began receiving those audits at the end of 2017. In addition,  although the OIG’s 2016 revisions only apply to audits of for-profit  schools, FSA officials said they planned to establish a working group  to consider improvements to audit guidance for public and nonprofit  schools. FSA and OIG efforts to address audit quality could help ensure that  compliance audits provide accurate and reliable information on school  administrative capability for Education’s recertification decisions. Agency Comments  and Our Evaluation We provided a draft of this report to Education for review and comment.  Education’s Office of Inspector General provided technical comments,  which we considered and incorporated as appropriate. Education did not  provide other comments on the report. We are sending copies of this report to the appropriate congressional  committees; the Secretary of Education; and other interested parties. In  addition, the report is available at no charge on the GAO website at  http://www.gao.gov. If you or your staff have any questions about this report, please contact  me at (617) 788-0534 or emreyarrasm@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix III. Appendix I: School Certification Outcomes,  Calendar Years 2006-2017 Appendix II: Distribution of First and Second  Recertification Outcomes by School Sector,  Calendar Years 2006-2017 Appendix III: GAO Contact and Staff  Acknowledgments GAO Contact Staff  Acknowledgments In addition to the contact named above, Michelle St. Pierre (Assistant  Director), Kristy Kennedy (Analyst-in-Charge), Edward Bodine, Marissa  Jones, and Mark Ward made significant contributions. Also contributing to  this report were Susan Aschoff, Deborah Bland, Nagla’a El-Hodiri, Monika  Gomez, Sheila R. McCoy, Jessica Orr, Mimi Nguyen, John Mingus,  Rhiannon Patterson, Monica Savoy, Benjamin Sinoff, and Rosemary  Torres Lerma.
Education provided over $122 billion in grants, loans and work study funds to help students pay for college at about 6,000 schools in fiscal year 2017. Education is responsible for certifying that these schools are eligible for and capable of properly administering federal student aid funds. Schools are required to submit an annual compliance audit that provides information on schools' administrative capability, which Education considers in its school certification decisions. GAO was asked to review Education's process for certifying schools to receive federal student aid. This report examines (1) how Education certifies schools to administer federal student aid and how frequently schools are approved and denied certification; and (2) the role of compliance audits in the certification process and what, if any, steps Education has taken to address the quality of the audit information. GAO analyzed data on school certification outcomes for calendar years 2006-2017 (when GAO determined data were most reliable); reviewed data and reports summarizing Education's reviews of compliance audit quality for fiscal years 2006-2017; reviewed a non-generalizable sample of 21 school certification decisions from fiscal years 2015 and 2016, selected for a mix of decisions, school characteristics, and geographic regions; examined relevant federal laws, regulations, policy manuals and guidance; and interviewed Education officials. The Department of Education (Education) is responsible for evaluating a variety of information to determine whether a postsecondary school should be certified to administer federal student aid programs, and agency data show that it approves most schools that apply. Education procedures instruct regional office staff to review school policies, financial statements, and compliance audits prepared by independent auditors, among other things. Education can certify schools to participate in federal student aid programs for up to 6 years, or it can provisionally certify them for less time if it determines that increased oversight is needed—for example, when a school applies for certification for the first time or when it has met some but not all requirements to be fully certified. In calendar years 2006 through 2017, Education fully or provisionally approved most schools applying for initial or recertification to receive federal student aid (see figure). Note: Schools applying for certification for the first time and approved are placed in provisional certification. In deciding whether to certify schools, Education particularly relies on compliance audits for direct information about how well schools are administering federal student aid, and Education's offices of Federal Student Aid and Inspector General have taken steps to address audit quality. The Inspector General annually selects a sample of compliance audits for quality reviews based on risk factors, such as auditors previously cited for errors. In fiscal years 2006 through 2017, 59 percent of the 739 selected audits received failing scores. Audits that fail must be corrected; if not, the school generally must repay federal student aid covered by the audit. Because higher risk audits are selected for review, Inspector General officials said they cannot assess the overall prevalence of quality problems in compliance audits. These two Education offices have taken steps to improve audit quality. For example, the Inspector General offered additional training to auditors on its revised 2016 audit guide and provided guidance to schools on hiring an auditor, while Federal Student Aid created a working group to strengthen its procedures for addressing poor quality compliance audits. Education's efforts to address audit quality could help ensure that these audits provide reliable information for school certification decisions.