IN THE MATTER OF EMPIRE Docket No. 92-11-SP
TECHNICAL SCHOOLS, Student Financial
Respondent. Assistance Proceeding
B. Wolff, Esq., Office of the General Counsel, for the Office of
Student Financial Assistance Programs, United States Department of
Before: Judge Richard F. O'Hair
Empire Technical Schools, Inc., (Empire) participated in the
various student financial
assistance programs authorized under Title IV of the Higher Education Act of 1965, as amended
(HEA). 20 U.S.C. § 1070 et seq. and 42 U.S.C. § 2751 et seq.
These programs are administered
by the Office of Student Financial Assistance Programs (SFAP),
See footnote 1
U.S. Department of Education
On November 13, 1991, SFAP
issued a Final Program Review Determination (FPRD) for Empire. The findings in the
determination were based on the program review report for the
1989-90 and 1990-91 award years. The FPRD found that Empire improperly admitted students
who did not demonstrate an ability to benefit from the educational program, made incorrect and
untimely refunds, failed to properly verify certain students, made an improper determination of
cost of attendance, failed to resolve conflicting information in certain student files, made
improper disbursements of GSL funds, and drew down excess Title IV funds for certain students.
Empire filed a request for review.
The FPRD and the underlying program review report were based
upon a sample of 32
students. Because the program review identified a number of findings of noncompliance by
Empire, it required Empire to conduct a full file review in order to determine the school's actual
liability under these findings. When Empire did not do so, the FPRD assessed liabilities in the
amount of all Title IV funds received by Empire during the period in question. In 1994, more
than three years after the school closed, Empire submitted a closeout audit. Empire requests that
the closeout audit be considered as a substitute for a full file review.
SFAP alleges that Empire should be required to refund all Title IV
funds that it disbursed
during the time period at issue because the school did not perform the requested full file review.
SFAP claims that the closeout audit submitted by Empire was not only untimely and incomplete,
but also identified substantial liabilities of the institution.
Empire responds that SFAP may seek reimbursement only of Title
IV funds that were
improperly disbursed by an institution and that there is no legal authority for ED's position that
the school must refund all Title IV funds disbursed because of its failure to perform a file review.
Empire asserts that the closeout audit is the best evidence available as to the school's actual
Empire's arguments to the contrary notwithstanding, previous
decisions of this tribunal
have held that when an institution fails to submit a full file review in response to a program
review, SFAP may be entitled to recover all Title IV funds disbursed to that institution during
the time period covered by the program review, but only if the school has not provided relevant
data with which to measure the actual loss to SFAP. In In the Matter of Selan's System of
Beauty Culture, Dkt. No. 93-82-SP, U.S. Dep't of Educ. (December 19, 1994), the judge
stated as follows:
Although [the institution] may have had a reasonable explanation
for failing to provide
SFAP with the requested documentation, it is well established that the nature of the
enforcement of Title IV programs, through the use of program review determinations,
creates the need for institutions to cooperate with SFAP by providing the agency with
complete file reviews when that information is needed to determine whether any, if not
all, Title IV funds disbursed to the institution were spent contrary to statutory and
regulatory requirements. More fundamentally, an institution's cooperation in providing
SFAP with documentation of its expenditure of Title IV funds is consistent with its
fiduciary duty to account for the disbursement of Title IV program funds.
Under the circumstances of this case, the school's failure to provide
SFAP with the data
requested . . . undercuts the school's position that Title IV funds should not be recovered.
In fact, SFAP has little choice other than to require the return of all Title IV funds
disbursed during the period at issue when an institution fails to provide SFAP with an
accounting of its expenditure of Title IV funds.
Selan's at 5 (emphasis in original). See also In the Matter of Pan American School,
Inc., Dkt. No. 92-118-SP, U.S. Dep't of Educ. (Oct. 18, 1994), at 5-6; In the Matter of
Illinois Medical Training Center, Dkt. No. 93-87-SA, U.S. Dep't of Educ. (May 9, 1994), at
9; In the Matter of Phillips Colleges, Inc., Dkt. No. 94-4-SP, U.S. Dep't of Educ. (Nov. 2,
1994), at 3;
In the Matter of Santa Clara Beauty College
, Dkt. No. 94-24-SP, U.S. Dep't of Educ. (Nov. 14, 1994), at 7.
As noted above, however, Selan's and other cases have held that the institution's
liabilities should be less than the total amount of Title IV funds disbursed where the institution
can provide data proving that such a reduction is warranted. In Selan's, the judge stated
Although I must uphold SFAP's calculation of liability because [the
institution] failed to
provide SFAP with the requisite data required to measure precisely the school's liability,
I recognize that in cases in which the school provides SFAP with some degree of relevant
data, the actual loss formula should be applied in a manner that reflects SFAP's loss
clearly associated with the proven regulatory violation.
In other words, SFAP should be entitled to recover the losses
directly attributed to [the
institution's] failure to pay refunds to lenders. If the evidence is available to determine
the extent of that loss, that amount will constitute the extent of SFAP's recovery.
Selan's at 3-4. Since the school had not provided such data, the judge stated that, under
the circumstances of that case, "I am unable to determine the school's liability more precisely
the calculation offered by SFAP."
To summarize, Selan's and the other cases stand for the
proposition that when an institution fails to submit a full file review in response to a program
review, SFAP may be
entitled to recover all Title IV funds disbursed to that institution during the time period covered
by the program review, but only if the school has not provided relevant data with which to
measure the actual loss to SFAP. Nonetheless, that data must be accurate and reliable. See, e.g.,
Pan American School at 5-6 (judge rejected file review offered by the school because it
had not been performed by a certified public accountant). This requirement is in accord with the
institution's burden of persuasion under 34 C.F.R. § 668.116(d). Thus, an accurate and
submitted closeout audit that covered all of the issues raised in the audit or program review could
be an acceptable substitute for a full file review. In the instant case, however, the closeout audit
submitted by Empire three years after the fact does not satisfy that requirement. Under 34
C.F.R. § 668.25(a)(3)(ii) (1990), Empire was required to submit to the Secretary of
letter of engagement for a closeout audit within 45 days of its closure in November 1990. Empire
admits that it did not do so, blaming its failure on lack of financial resources (a ground that was
rejected in Pan American School). Three and a half years later, in August 1994, Empire
finally submitted a closeout audit to ED, but this audit cannot be considered to be an accurate
reliable substitute for the full file review that was requested by SFAP. At numerous places, the
auditors state that because of the delay, records could not be obtained, no former employees of
the institution were available to assist in the preparation of the audit, and the institution's internal
controls could not be tested. As a result of the substantial amounts of missing information
identified by the closeout audit, Empire is not relieved of its duty to provide the full file review
requested by the program review report.
Even if the closeout audit could be considered accurate and reliable, I note that the auditors specifically discussed the findings of the program review and confirmed the existence of most of these deficiencies. Specifically, the auditors confirmed deficiencies for findings 3
(incorrect and untimely refunds), 4 (incomplete verification), 6 (unresolved conflicting
information), and 10 (unauthorized use of Title IV funds). Additionally, the auditors stated that,
as to finding 5, "the underlying assumptions and calculations which determined cost of
attendance were not available to the auditors for this audit." Although the closeout audit
submitted by Empire identified specific dollar amounts for the 19 areas of noncompliance with
ED regulations by Empire that it separately identified, it did not discuss the specific dollar
amounts for the actual loss to SFAP resulting from the deficiencies that it confirmed for findings
3, 4, 6, and 10 of the FPRD. As a result, under the circumstances of this case, Empire has not
satisfied its burden of persuasion because the closeout audit does not provide the relevant data
necessary to substitute for the full file review requested by SFAP.
For these reasons, I affirm the FPRD.
ORDERED, that Empire shall refund to the U.S. Department of
Education all Pell Grant,
Supplemental Educational Opportunity Grant (SEOG), and College Work-Study (CWS) funds
disbursed by the institution during the final two years of recorded operations (fiscal year 1989
and 1990), totaling $2,433,875. It is further ORDERED, that Empire shall repurchase from the
current holders of Federal Family Education Loans (FFELs) $3,595,726 disbursed during these
Judge Richard F. O'Hair
Issued: April 24, 1995
S E R V I C E
A copy of the attached initial decision was sent by CERTIFIED MAIL, RETURN RECEIPT
REQUESTED to the following:
David H. Larry, Esq.
Gregory P. Schaffer, Esq.
Manatt, Phelps & Phillips
1501 M Street, N.W.
Washington, D.C. 20005
Russell B. Wolff, Esq.
Office of the General Counsel
U.S. Department of Education
600 Independence Avenue, S.W.
Washington, D.C. 20202-2110