IN THE MATTER OF CALVINADE BEAUTY ACADEMY,
Docket No. 93-151-SA
Student Financial Assistance Proceeding
Appearances: Leslie H. Wiesenfelder, Esq., Dow, Lohnes & Albertson, of
Washington, D.C., for Calvinade Beauty Academy.
Denise Morelli, Esq., Office of the General Counsel, for the Office of Student Financial Assistance Programs, United States Department of Education.
Before: Judge Ernest C. Canellos.
On September 17, 1993, the Office of Student Financial Assistance Programs (SFAP) of the
United States Department of Education (ED) issued a final audit determination (FAD)
See footnote 1
finding that Calvinade Beauty Academy (Calvinade) failed to submit an appropriate financial
and compliance audit covering four fiscal years ending June 30, 1987, and an appropriate
close-out audit covering two fiscal years ending June 30, 1988, as required by Title IV of the
Higher Education Act of 1965, as amended (Title IV). See 20 U.S.C. § 1070 et seq. By letter,
dated November 5, 1993, Calvinade filed a timely appeal of the FAD. Due to the illness of the
administrative law judge initially assigned to this case, this case was reassigned to me.
SFAP seeks recovery of $1,047,381: $511,056 in estimated losses to ED for subsidy and
anticipated default expenses in the Federal Guaranteed Student Loan (GSL) program, and
$536,325 in the Federal Pell Grant program. The issue before me is whether ED is entitled to
its recovery. For the reasons stated below, I find that SFAP is entitled to the recovery it seeks
on the basis of Calvinade's failure to submit acceptable audits.
Pursuant to 34 C.F.R. § 668.23 (1992), institutions that disbursed Title IV program funds
were required to have an independent auditor conduct a financial and compliance audit of its
Title IV programs at least once every two years in accordance with standards and procedures
set out in Title IV regulations. In addition, in accordance with the applicable regulations, the
audit must comply with audit guidelines developed by ED's Office of the Inspector General
The pertinent facts in this case are not in dispute. In response to an audit report filed by
Calvinade covering four fiscal years ending June 30, 1987, SFAP issued a FAD, dated
September 27, 1990, wherein the agency determined that the audit report was defective
because Calvinade's independent auditor did not express an opinion on the school
statements due to deficiencies in the school's accounting and time-keeping records. The
auditor's report cited numerous weaknesses in the institution's fiscal procedures and internal
control measures including Calvinade's failure to maintain accurate student ledger sheets, its
failure to monitor the satisfactory progress of its students, and the institution's inadequate
recording and tracking of student attendance.
In addition, the institution lost its Title IV eligibility designation on June 29, 1989, as a result
of the loss of its accreditation. Consequently, the FAD also noted that Calvinade had not
submitted its close-out audit covering the period July 1, 1987 through June 30, 1989, as
required, by Title IV for all institutions which become ineligible to participate in Title IV
programs. Subsequently, Calvinade re-submitted audit reports covering each year at issue. By
letter, dated May 8, 1992, the OIG rejected those audit reports and returned the reports to the
institution. On May 20, 1992, SFAP reinstated the FAD on the basis that the audits were
deemed defective by the OIG. According to the record, no subsequent re-audit reports have
been received by ED. On September 17, 1993, SFAP, once again, reissued the FAD. The
September 1993 FAD served to amend [the] May 20, 1992" FAD concerning Calvinade's
outstanding audit liabilities. According to the September 1993, FAD, Calvinade's failure to
submit audits in compliance with Title IV regulations requires the institution to reimburse ED
$536,325 in Pell Grant funds disbursed by Calvinade during the period covered by the
deficient audit reports, and $511,056 in estimated actual losses for default claims, interest,
and special allowances for GSL program loans disbursed by the school during the same period.
As the basis for recovery, SFAP relies upon 34 C.F.R. § 668.24 (1992). Section 668.24
provides that if the OIG determines that an audit report reveals questionable expenditures or a
failure to comply with applicable audit procedures, the Secretary may determine, based on the
audit finding, the amount of funds improperly spent.
According to SFAP, it has done just
that in setting out the audit liabilities noted in the FAD. Calvinade argues that SFAP
all-back liability determination denies Calvinade its right to contest both the reasonableness of
's rejection of its audits and the legality of SFAP's demand for recovery of all Title IV
funds at issue.
See footnote 2 According to Calvinade, SFAP
's authority to recover funds as a result of
findings from a final audit determination is limited to measuring an institution's liability by the
amount of Title IV funds overpaid, overawarded, or misused by the institution. I do not agree.
The gravamen of Calvinade's argument was carefully considered and rejected in several cases before this tribunal.See footnote 3 It is axiomatic that in a Subpart H proceeding, SFAP may recover funds as a form of damages flowing from the institution's breach of its Program Participation Agreement (PPA).See footnote 4 In that regard, the enforcement of the PPA is in the nature of an action to recover damages for breach of contract and, therefore, in a Subpart H proceeding, SFAP is not without authority to recover Title IV funds spent contrary to the terms of the PPA as well as funds calculated as harm caused to an identifiable Federal interest, including estimated or actual default claims, interest, and special allowance charges.
In SFAP's calculation of liability, SFAP determined that Calvinade should repay ED $511,056
in estimated losses for subsidy and default expenses and interest and special allowance
expenses in the GSL program, and $536,325 covering all Pell Grant program fund
disbursements made by the institution during the award years at issue. According to SFAP,
Calvinade's liability for GSL program loan disbursements was calculated by applying an actual
loss formula to the total amount of GSL funds disbursed by the institution during the award
years at issue.See footnote 5 This loss formula was used in lieu of requiring Calvinade to repay to the
appropriate lenders the total amount of GSL loans disbursed by the institution during the award
years at issue. In several cases before this tribunal SFAP's use of its actual loss formula has
been permitted in those cases, like here, where the institution failed to provide SFAP with the
requisite data required to measure precisely the school's liability.
SFAP proposed its calculation of GSL liability because the institution failed to provide SFAP
with appropriate financial and compliance audits, which would permit SFAP to determine
whether Calvinade disbursed Title IV funds contrary to program requirements. Although
Calvinade may have had a reasonable explanation for failing to provide SFAP with proper
audits, it is well established that the nature of the enforcement of Title IV programs, through
the use of audit and determinations, creates the need for institutions to cooperate with SFAP by
providing the agency with proper and timely audits 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. In this proceeding, the institution has the burden of
proving that the questioned expenditures were proper. 34 C.F.R. § 668.116(d); see also In the
Matter of Sinclair Community College, Dkt. No. 89-21-S, U.S. Dep't of Educ. (September 26,
1991). Consequently, to sustain its burden of proof, Calvinade must show that the
unaccounted for Title IV funds were disbursed in compliance with Title IV. Clearly, in this
case that burden has not been met. Accordingly, I uphold SFAP's calculation of liability and
find that Calvinade owes a liability to ED for $1,047,381 for failure to submit an appropriate
financial and compliance audit covering four fiscal years ending June 30, 1987, and an
appropriate close-out audit covering two fiscal years ending June 30, 1988.
On the basis of the foregoing findings of fact and conclusions of law, it is HEREBY
ORDERED, that Calvinade Beauty Academy pay to the United States Department of Education
the sum of $1,047,381.
Ernest C. Canellos
Issued: March 21, 1995