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PublicationDate: 7/1/97 AuditGuideType: Audit Guide for Schools SectionNumber: IV SectionTitle: Required Servicer Management Assertions, Compliance Requirements, and Suggested Procedures PageNumbers: IV-1 to IV-14 SECTION IV REQUIREMENTS, AND SUGGESTED PROCEDURES INTRODUCTION This section: 1. Sets forth the minimum standards, which are the subject of management's written compliance assertions; 2. Briefly describes the related compliance requirements; and 3. Provides guidance on the general approach the IPA should consider in designing and carrying out procedures in the examination of management's written assertions. As discussed in Sections I and III of the Guide, the suggested procedures in Sections II and IV of the Guide are not intended to be a complete set of procedures to satisfy the engagement objectives, nor are they intended to supplant the IPA's judgment about the testing necessary for the IPA to report on management's assertions. Also, management's assertions may need to be modified based on the services performed. To perform the engagement, the IPA should obtain, read, and/or have available: 34 CFR Parts 600, 668, 674, 675, 676, 682, 685, 690 (Contained in 34 CFR Part 400 To End, revised as of July 1, 1996 and final regulations issued for 34 CFR Parts 668, 673, 674, 675, 676 and 690 on November 27, 1996; Parts 600 and 668 on November 29, 1996; and Parts 668, 674, 675, 676, 682, 685, and 690 on November 29, 1996; ED "Dear Colleague" letters; The Direct Loan School Guide for the year(s) being audited; and The servicer's client contracts and the following documents for each of its clients - Federal Cash Transaction Report PMS 272 or, as appropriate, the ED/PMS 272, - Federal Cash Transactions Report - Status of Federal Cash and ED/PMS 272a, - Federal Cash Transactions Report. - Monthly Cash Summary and Data Matching Reconciliations for FDLP - Student Status Confirmation Reports (SSCRs) - Final Student Payment Summary (SPS) The IPA should be familiar with the relevant statutes and sections of the CFR to obtain a complete understanding of the compliance requirements. Specific requirements may change periodically. IPAs should be alert to those changes. An excellent resource for updated SFA information is the annual Federal Student Financial Aid Handbook. 1. INSTITUTIONAL ELIGIBILITY AND PARTICIPATION Required Management Assertion [Servicer] complied with the Institutional Eligibility and Participation compliance requirements listed in Section II of the ED SFA Guide as applicable to our clients. Compliance Requirements and Suggested Procedures Servicers may contract to assist institutions to obtain and/or maintain their eligibility to participate in the Title IV, HEA programs. The institutional eligibility and participation compliance requirements are discussed in Section II of the Guide. The auditor should review the servicer’s contracts with its clients to obtain an understanding of what services are to be provided. To the extent that the servicer contracts to assist an institution in obtaining and/or maintaining its eligibility, the auditor should review the requirements and perform the suggested procedures in Section II. 2. REPORTING Required Management Assertion [Servicer] complied with the Reporting requirements, [list reports], listed in Section II of the ED SFA Guide as applicable to our clients. Compliance Requirements and Suggested Procedures Servicers may contract to provide financial and student record maintenance for institutions which will include compliance with reporting requirements as discussed in Section II of the Guide. The auditor should review the servicer’s contracts with its clients to obtain an understanding of what services and reports are to be provided. To the extent that the servicer contracts to comply with any of the reporting requirements, the auditor should review the requirements and perform the suggested procedures in Section II. 3. STUDENT ELIGIBILITY Required Management Assertion [Servicer] complied with the Student Eligibility compliance requirements listed in Section II of the ED SFA Guide as applicable to our clients. Compliance Requirements and Suggested Procedures SFA program descriptions and compliance requirements are detailed in Section II of the Guide. The auditor should review the servicer’s contracts with its clients to obtain an understanding of what services are to be provide with regard to the determination of student eligibility and the related compliance requirements. Based on the services provided, the auditor should perform the suggested procedures in Section II dealing with student eligibility. The sample of student files to test will be based on the sampling methodology discussed in Section III. The determination that a student’s financial aid award is not in excess of their need (suggested procedure c. 8 on page II-12) is the determination that the award is accurate and does not exceed any applicable aggregate or annual limits. Tests should be based on information available at the servicer, either electronic files or hard copies, and there should be no need to obtain student files or award packages from institutions. 4. DISBURSEMENTS Required Management Assertion [Servicer] complied with the Disbursements compliance requirements listed in Section II of the ED SFA Guide as applicable to our clients. Compliance Requirements and Suggested Procedures SFA compliance requirements, including payment periods, credit balances in student accounts and disbursement criteria are detailed in Section II of the Guide. The auditor should review the servicer’s contracts with its clients to obtain an understanding of what services are to be provided with regard to the disbursement of SFA funds and the related compliance requirements. Based on the services provided, the auditor should perform the suggested procedures in Section II dealing with disbursements. The sample of student files to test will be based on the sampling methodology discussed in Section III. Caution should be exercised when the servicer writes award checks. In these cases, the auditor should document the procedures used to actually disburse the funds, who signed the checks, procedures to ensure that the student attended classes for the prescribed time prior to the disbursement of the funds, and the return of funds when appropriate. Tests should be based on information available at the servicer, either electronic files or hard copies, and there should be no need to obtain student files or award packages from institutions. 5. REFUNDS Required Management Assertion [Servicer] complied with the Refund compliance requirements listed in Section II of the ED SFA Guide as applicable to our clients. Compliance Requirements and Suggested Procedures SFA compliance requirements, including refund sequence, time frame for return of Federal funds, and leave of absence withdrawals are detailed in Section II of the Guide. The auditor should review the servicer’s contracts with its clients to obtain an understanding of what services are to be provided with regard to refunds. Based on the services provided, the auditor should perform the suggested procedures in Section II dealing with refunds. The sample of student files to test will be based on the sampling methodology discussed in Section III. The determination that the proper refund has been calculated and made within the due dates and in the proper sequence should be based on the information available at the servicer, either electronic files or hard copies, and there should be no need to obtain student files from institutions. 6. CASH MANAGEMENT Required Management Assertion [Servicer] complied with the Cash Management compliance requirements listed in Section II of the ED SFA guide as applicable. FOR FISCAL YEARS ENDING THROUGH JUNE 30, 1995, THIS COMPLIANCE REQUIREMENT APPLIES ONLY TO SERVICERS THAT REQUESTED MORE THAN $1,000,000 OF TITLE IV FUNDING DIRECTLY FROM ED FOR ITS CLIENTS. FOR FISCAL YEARS ENDING BETWEEN JULY 1, 1995, AND JUNE 30, 1996, THIS COMPLIANCE REQUIREMENT APPLIES ONLY TO SERVICERS THAT REQUESTED MORE THAN $500,000 OF TITLE IV FUNDING DIRECTLY FROM ED FOR ITS CLIENTS. FOR FISCAL YEARS STARTING ON OR AFTER JULY 1, 1996, THESE COMPLIANCE REQUIREMENTS APPLIES ONLY TO SERVICERS THAT REQUESTED MORE THAN $300,000 OF TITLE IV FUNDING DIRECTLY FROM ED FOR ITS CLIENTS. Compliance Requirements and Suggested Procedures SFA compliance requirements are detailed in Section II of this Guide. The auditor should review the servicer’s contracts with its clients to obtain an understanding of what services are to be provided with regard to cash management and the related compliance requirements and their applicability. Based on the services provided, the auditor should perform the suggested procedures in Section II dealing with cash management. The cash management rules and procedures that apply to an institution under 34 CFR 668 Subpart K also apply to a third-party servicer. The auditor should document the servicer’s cash management responsibilities. Particular care should be given to the servicer’s procedures for ensuring that funds drawn are disbursed within three working days and that excess cash tolerances are not exceeded. 7. CLOSE OUT (IF APPLICABLE) If an institution loses its eligibility, ceases to provide educational instruction, or discontinues participation in the Title IV program during the award year, the following additional compliance requirements must be tested. Further, other compliance requirements in this audit guide must be tested. Required Management Assertion [Servicer] complied with Close Out compliance requirements listed in Section II of the ED SFA Guide as they apply to our clients. Compliance Requirements and Suggested Procedures SFA compliance requirements are detailed in Section II of the Guide. The auditor should review the servicer’s contracts with its clients to obtain an understanding of what services are to be provided with regard to an institution which ceases to participate in the Title IV programs during the award year and the related compliance requirements and their applicability. Based on the services provided, the auditor should perform the suggested procedures in Section II dealing with close out. The auditor should document the servicer’s responsibilities for any of its clients which may have ceased participation in the Title IV program during the award year. Particular care should be given to if and how the servicer assists the closed client in its arrangements with regard to records concerning the administration of the program and, if applicable, the collection of any outstanding Perkins or FDLP loans. 8. PERKINS LOAN COLLECTIONS AND DUE DILIGENCE Required Management Assertion [Servicer] complied with the Perkins Collections and Due Diligence compliance requirements listed in Section II of the ED SFA Guide as they apply to our clients. Compliance Requirements and Suggested Procedures SFA compliance requirements concerning Perkins Collections and Due Diligence are detailed in Section II of the Guide. The auditor should review the servicer’s contracts with its clients to obtain an understanding of what services are to be provided with regard to collections and due diligence over Perkins funds and the related compliance requirements. Based on the services provided, the auditor should perform the suggested procedures in Section II dealing with collections and due diligence. However, the sample of student files to test should be based on the sampling methodology discussed in Section III. 9. SERVICER ELIGIBILITY Required Management Assertion [Servicer] complied with the Third-Party Eligibility compliance requirements listed in Section IV of the ED SFA Guide. Compliance Requirements An institution may enter into a written contract with a third-party servicer only to the extent that the servicer’s eligibility has not been limited, suspended or terminated under the proceedings of 34 CFR 668 Subpart G. A third-party servicer may not enter into a written contract with an institution if the servicer has: Been limited, suspended, or terminated by the Secretary within the preceding five years; Had, during the two most recent audits, a finding that resulted in the servicer being required to repay an amount greater than five percent of the funds that the servicer administered under the Title IV programs for any award year; or Been cited during the preceding five years for failure to submit required audit reports in a timely fashion. Been subjected to a termination action and either the servicer, or one or more persons or entities that exercise substantial control over the servicer, or both: - failed to submit financial guarantees in an amount determined to be sufficient to satisfy potential liabilities arising from the servicer’s administration of the Title IV, HEA programs; and - failed to agreed to be jointly or severally liable for any liabilities arising from the servicer’s administration of the Title IV, HEA programs and the civil and criminal monetary penalties authorized under Title IV of the HEA. In a contract with an institution, a third-party servicer shall agree to: Comply with all statutory or regulatory provisions, and special arrangements, agreements, limitations, suspensions, and terminations entered into under Title IV HEA Programs. Refer to the Office of Inspector General of ED for investigation any information indicating there is reasonable cause to believe: - the institution might have engaged in fraud or other criminal misconduct in connection with the institution’s administration of any Title IV, HEA program, or - an applicant for Title IV, HEA program assistance might have engaged in fraud or other criminal misconduct in connection with his or her application. Be jointly and severally liable with the institution for any violation by the servicer of any statutory or regulatory provisions, and special arrangements, agreements, limitations, suspensions, and terminations entered into under the Title IV HEA Programs. In the case of a servicer that disburses funds or delivers FFELP proceeds to a student: Confirm the eligibility of the student before making that disbursement or delivering those proceeds; and Calculate and pay refunds and repayments due a student, the Title IV, HEA program accounts, and the student’s lender under the FSLP, Federal PLUS and Federal SLS programs in accordance with the institution’s refund policy, the provisions of Sec.668.21 and Sec. 668.22, and applicable program regulation. If the contract is terminated, or the servicer stops providing services, goes out of business, or files a petition under the Bankruptcy Code, return to the institution all: Records in the servicer’s possession pertaining to the institution’s participation in the program or programs for which services are no longer provided; and Funds, including Title IV, HEA program funds, received from or on behalf of the institution’s students, for the purposes of the program or programs for which services are no longer provided. The IPA should immediately notify the servicer and/or its governing body if it is determined that the servicer fails to meet any servicer eligibility criterion. The IPA should follow the guidance for reporting irregularities and illegal acts as discussed in Section I of the Guide. Suggested Procedures a. Make inquiries of the servicer’s management and obtain, as part of the management representation, written representation that the servicer has not: 1. been limited, suspended, or terminated by the Secretary within the preceding five years; and 2. had to repay an amount greater than five percent of the funds it administered under the Title IV programs for any award year as a result of a finding in one of the two most recent audits; and 3. been cited for failure to submit required audits during the preceding five years. b. Review a representative sample of the servicer’s contracts to determine if the servicer has agreed to comply with the requirements contained in 34 CFR 668.25(c), concerning compliance, referrals and liability. 10. SERVICER’S SYSTEMS AND INTERNAL CONTROLS Required Management Assertion [Servicer] has established systems with internal controls which assured compliance with requirements listed in Section II of the ED SFA Guide for those services which it provided. Compliance Requirements In addition to examining the servicer management’s assertions about the specified compliance requirements identified in Section II, this guide also requires the practitioner to examine and report on the servicer management’s assertion about the effectiveness of the servicer’s internal control structure over compliance with those specified compliance requirements. Management is responsible for the effectiveness of the servicer’s internal control structure and for evaluating its effectiveness using reasonable criteria. As discussed in paragraph 6 of SSAE No. 3, practitioners are allowed to accept an engagement to examine management’s assertion about the effectiveness of the entity’s internal control structure over compliance only if management uses reasonable criteria, such as those established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). When the servicer uses computers to process data the auditor may find useful information in the General Accounting Office publication Assessing the Reliability of Computer-Processed Data (GAO/OP-8.1.3, September 1990). In performing the examination-level engagement, the practitioner is required to obtain an understanding of the relevant portions of the servicer’s internal control structure over compliance as described above, and to test and evaluate the design and operating effectiveness of the servicer’s internal control structure over compliance with those specified compliance requirements. As the internal control structure over compliance varies among servicers, not all of the suggested procedures below may be applicable for testing the design and operating effectiveness of the servicer’s internal control structure over compliance. A servicer should have controls, however, that give the servicer reasonable assurance that it is complying with the specified compliance requirements identified in Section II of this guide. Thus for purposes of management and practitioner reporting, the severity of control deficiencies relates to whether those internal controls prevent or detect material noncompliance in each of the specified areas. Overall guidance for the consideration of the internal control structure and reporting requirements in an examination-level attestation engagement is provided in paragraphs 44-46 of SSAE No.3. Suggested Procedures *a. Document the system of internal controls over each SFA program service provided. This may consist of flowcharts, narratives or checklists, but must present a clear understanding of the servicer’s systems and its controls. b. Select a sample of transactions which are representative of the functions preformed and test their accuracy and compliance with applicable SFA requirements. For example, if Pell awards are determined by the servicer, the sample should include a number of student records and the computed awards. From the information available at the servicer, either electronic or hard copy files, evaluate the accuracy of the data and recompute the Pell awards. Be aware of possible inconsistencies in the data. c. In those cases where the servicer uses automated systems, consideration should be given to developing and running a "test deck" or other procedures on the servicer’s automated systems to insure that they function in accordance with documented procedures. The procedures should also be reviewed to determine that they comply with applicable SFA regulations. |