HI-TECH INSTITUTE OF HAIR DESIGN Docket No. 94-66-ST
AND RICKERSON BEAUTY Student Financial
ACADEMIES #3 AND #5, Assistance Proceeding
Jim Conley, Esq.
, for Hi-Tech Institute of Hair
Design and Rickerson Beauty Academies #3 and #5.
Edmund J. Trepacz, II, Esq.
, Office of the General Counsel,
for the Office of Student Financial Assistance Programs, United States Department of
Before: Judge Richard F. O'Hair
On March 3, 1994, the Department of Education (ED), through the
Office of Compliance
and Enforcement Division, initiated procedures to terminate the eligibility of Respondents, Hi-
Tech Institute of Hair Design (Hi-Tech) and Rickerson Beauty Academy #5 (Rickerson #5), to
participate in programs authorized under Title IV of the Higher Education Act of 1965.See footnote 1
Simultaneously, the Division also initiated procedures to impose a fine on both of these
institutions, as well as on Rickerson Beauty Academy #3 (Rickerson #3). All three Respondents
appealed these terminations and/or fines and, following the submission of briefs, a hearing was
conducted on November 2, 1994.
The termination and fine procedures were initiated against Hi-Tech and Rickerson #5, pursuant to 34 C.F.R. § 668.86 and 34 C.F.R. § 668.84, because of the failure of both institutions to submit in a timely manner the required biennial, non-federal audit report for each Title IV program in which they participated for the award years of 1990-91 and 1991-92. Those particular audit reports were required to have been submitted to ED by June 30, 1993, but they were not submitted until March 22, 1994. The termination and fine proceedings are also
grounded on the allegation that the two institutions failed to meet the standards of conduct
required of a fiduciary,
as required by 34 C.F.R. § 668.82, because of their failure to submit the same required
reports. Only fine proceedings were initiated against Rickerson #3 for its failure to submit a
biennial audit for its award years of 1989-90 and 1990-91.See footnote 2
The Respondents' primary defense is that they were exempted from
required audits because of the Single Audit Act, 31 U.S.C. 7502(6). The single audit to which
they refer was one conducted by the ED Regional Inspector General (IG) between March and
July, 1993, and it addressed all student financial assistance funds expended by the three
institutions for the period July 1, 1987, through March 31, 1991. In the alternative the
Respondents maintain that it was improper for ED to initiate this termination proceeding because
no ED employee ever provided them with a "date certain" by which their audits must
or in any manner informed Respondents that on March 3, 1994, ED was going to initiate these
termination/fine proceedings. Finally, the Respondents challenge these proceedings on the
that during the period between June 30, 1993, and March 3, 1994, they were providing ED with
monthly financial reports as a result of their placement on the Reimbursement Program in July,
1991. Accordingly, they argue that ED had current financial information from them for the
audit period and that these reports attested to their compliance with their fiduciary
Based on this, they assert that the requirement to have an independent audit amounted to a
redundant, expensive submission. I am not persuaded.
Federal regulations, 34 C.F.R. § 668.86, clearly permit ED to
terminate the eligibility of
any institution to participate in any Title IV Programs if that institution violates certain specified
provisions of Title IV or the implementing regulations. One of those provisions is 34 C.F.R.
668.23, which requires any participating institution to have a financial and compliance audit
performed of all its Title IV, HEA programs.
This audit is to be conducted by an independent auditor in
accordance with the
general standards and the standards for financial and compliance audits in the U.S.
General Accounting Office's (GAO's) Standards for Audit of Governmental Organizations,
Programs, Activities, and Functions.
34 C.F.R. § 668.23(c)(1).
Further, "[t]he institution shall have an audit performed at least once every two years. Each audit must cover the institution's activities for the entire period of time since the last audit." This audit is due March 31 of the year following the last award year covered by the audit. Id. § 668.23 (c)(3). However, for audits due in 1992 and 1993, the due dates were extended to June 30 of the following years. The regulations provide only two exemptions from this audit requirement, one of which is the Single Audit Act, but neither of these exemptions apply in this
case. Id. § 668.23(d).See footnote 3
The regulations provide that, when presented with evidence that an
institution has failed to
comply with these audit requirements, the hearing official must find that termination is
Id. § 668.90(a)(3)(iv).
I find Respondents did not comply with the requirement that they
submit a timely audit
which had been prepared by an independent auditor. Applying the regulation to the instant facts,
Rickerson #3 was required to submit an audit by June 30, 1992 for the award years 1989-90 and
1990-91. No such audit has ever been submitted. Similarly Hi-Tech and Rickerson #5 were
required to submit audits by June 30, 1993, for award years 1990-91 and 1991-92. Those audits
were not submitted until March 23, 1994. The latter two audits were not timely and, without
more, the institutions are immediately subject to termination proceedings.See footnote 4
Despite arguments to the contrary by Respondents, ED had no
responsibility to warn them
of potential termination action for regulatory non-compliance. That notice already existed in the
regulations. Although not required, ED has the discretion, and was within its rights, to give
Respondents a reasonable amount of time to submit the required audits before it initiated
termination action. In this case ED waited over nine months, but this delay did not inure to the
benefit of Respondents, who did not submit their audits prior to the initiation of the instant
To address Respondents' last defensive position, there is no
authority in the regulations for
the proposition that an IG audit will serve as a substitute for the required biennial audit, which
must be conducted by an independent auditor. In the absence of any extension of the due date,
ED acted properly to initiate the termination procedures. I find the defenses proffered by
Respondents in their brief and during the hearing to be without merit.
Addressing the second of the two grounds for the termination of
Hi-Tech's and Rickerson
#5's eligibility to participate in Title IV programs, I find that Respondents' failure to submit the
required biennial audit also constituted a failure to adhere to the highest standard of care and
diligence required of a fiduciary in the administration and accounting of funds, as prescribed in
C.F.R. § 668.82. This failure provides the basis for a termination of these
The authority for imposing fines on all three Respondents for not submitting timely biennial audits is found in 34 C.F.R. § 668.84. The regulation authorizes the Secretary to impose
a fine of up to $25,000 for each violation by an institution. I find that the three institutions
me have each committed one violation and that the seriousness of these violations warrants the
imposition of fines on each. Using a formula which takes into account the amount of Title IV
funds received by the students attending each institution, SFAP seeks to impose the following
fines: $12,700 against Hi-Tech; $7200 against Rickerson #5; and $6800 against Rickerson #3. I
find these amounts to be reasonable and just.
Based on the foregoing, I find Hi-Tech and Rickerson #5 should be
further participation in Title IV programs, and that, along with Rickerson #3, each institution
should be fined in the amounts discussed above.
Judge Richard F. O'Hair
Issued: November 22, 1994
S E R V I C E
A copy of the attached initial
decision was sent by CERTIFIED MAIL, RETURN RECEIPT REQUESTED to the
Jim Conley, Esq.
The Law Offices of Jim Conley
403 South W.W. White Road
Texas Bank Building, Suite 2000
San Antonio, TX 78219
Edmund J. Trepacz, II, Esq.
Office of the General Counsel
U.S. Department of Education
600 Independence Avenue, S.W.
Washington, D.C. 20202-2110