(a) General --(1) Calculating the revenue percentage. A proprietary institution meets the requirement in Sec. 668.14(b)(16) that at least 10 percent of its revenue is derived from sources other than Title IV, HEA program funds by using the formula in appendix C of this subpart to calculate its revenue percentage for its latest complete fiscal year.
(1) Calculating the revenue percentage. A proprietary institution meets the requirement in Sec. 668.14(b)(16) that at least 10 percent of its revenue is derived from sources other than Title IV, HEA program funds by using the formula in appendix C of this subpart to calculate its revenue percentage for its latest complete fiscal year.
(2) Cash basis accounting. Except for institutional loans made to students under paragraph (a)(5)(i) of this section, the institution must use the cash basis of accounting in calculating its revenue percentage.
(3) Revenue generated from programs and activities. The institution must consider as revenue only those funds it generates from--
(i) Tuition, fees, and other institutional charges for students enrolled in eligible programs as defined in Sec. 668.8;
(ii) Activities conducted by the institution that are necessary for the education and training of its students provided those activities are--
(A) Conducted on campus or at a facility under the institution's control;
(B) Performed under the supervision of a member of the institution's faculty; and
(C) Required to be performed by all students in a specific educational program at the institution; and
(iii) Funds paid by a student, or on behalf of a student by a party other than the institution, for an education or training program that is not eligible under Sec. 668.8 if the program--
(A) Is approved or licensed by the appropriate State agency;
(B) Is accredited by an accrediting agency recognized by the Secretary under 34 CFR part 602;
(C) Provides an industry-recognized credential or certification, or prepares students to take an examination for an industry-recognized credential or certification issued by an independent third party;
(D) Provides training needed for students to maintain State licensing requirements; or
(E) Provides training needed for students to meet additional licensing requirements for specialized training for practitioners that already meet the general licensing requirements in that field.
(4) Application of funds. The institution must presume that any Title IV, HEA program funds it disburses, or delivers, to or on behalf of a student will be used to pay the student's tuition, fees, or institutional charges, regardless of whether the institution credits the funds to the student's account or pays the funds directly to the student, except to the extent that the student's tuition, fees, or other charges are satisfied by--
(i) Grant funds provided by non-Federal public agencies or private sources independent of the institution;
(ii) Funds provided under a contractual arrangement with a Federal, State, or local government agency for the purpose of providing job training to low-income individuals who need that training;
(iii) Funds used by a student from a savings plan for educational expenses established by or on behalf of the student if the saving plan qualifies for special tax treatment under the Internal Revenue Code of 1986; or
(iv) Institutional scholarships that meet the requirements in paragraph (a)(5)(iv) of this section.
(5) Revenue generated from institutional aid. The institution must include the following institutional aid as revenue:
(i) For loans made to students and credited in full to the students' accounts at the institution on or after July 1, 2008 and prior to July 1, 2012, include as revenue the net present value of the loans made to students during the fiscal year, as calculated under paragraph (b) of this section, if the loans--
(A) Are bona fide as evidenced by standalone repayment agreements between the students and the institution that are enforceable promissory notes;
(B) Are issued at intervals related to the institution's enrollment periods;
(C) Are subject to regular loan repayments and collections by the institution; and
(D) Are separate from the enrollment contracts signed by the students.
(ii) For loans made to students before July 1, 2008, include as revenue only the amount of payments made on those loans that the institution received during the fiscal year.
(iii) For loans made to students on or after July 1, 2012, include as revenue only the amount of payments made on those loans that the institution received during the fiscal year.
(iv) For scholarships provided by the institution in the form of monetary aid or tuition discount and based on the academic achievement or financial need of its students, include as revenue the amount disbursed to students during the fiscal year. The scholarships must be disbursed from an established restricted account and only to the extent that the funds in that account represent designated funds from an outside source or income earned on those funds.
(6) Revenue generated from loan funds in excess of loan limits prior to the Ensuring Continued Access to Student Loans Act of 2008 (ECASLA). For each student who receives an unsubsidized loan under the FFEL or Direct Loan programs on or after July 1, 2008 and prior to July 1, 2011, the amount of the loan disbursement for a payment period that exceeds the disbursement for which the student would have been eligible for that payment period under the loan limit in effect on the day prior to enactment of the ECASLA is included and deemed to be revenue from a source other than Title IV, HEA program funds but only to the extent that the excess amount pays for tuition, fees, or institutional charges remaining on the student's account after other Title IV, HEA program funds are applied.
(7) Funds excluded from revenues. For the fiscal year, the institution does not include--
(i) The amount of Federal Work Study (FWS) wages paid directly to the student. However, if the institution credits the student's account with FWS funds, those funds are included as revenue;
(ii) The amount of funds received by the institution from a State under the LEAP, SLEAP, or GAP programs;
(iii) The amount of institutional funds used to match Title IV, HEA program funds;
(iv) The amount of Title IV, HEA program funds refunded or returned under Sec. 668.22. If any funds from the loan disbursement used in the return calculation under Sec. 668.22 were counted as non-title IV revenue under paragraph (a)(6) of this section, the amount of Title IV, HEA program funds refunded or returned under Sec. 668.22 is considered to consist of pre-ECASLA loan amounts and loan amounts in excess of the loan limits prior to ECASLA in the same proportion to the loan disbursement; or
(v) The amount the student is charged for books, supplies, and equipment unless the institution includes that amount as tuition, fees, or other institutional charges.
(b) Net present value (NPV). (1) As illustrated in appendix C of this subpart, an institution calculates the NPV of the loans it made under paragraph (a)(5)(i) of this section by--
(1) As illustrated in appendix C of this subpart, an institution calculates the NPV of the loans it made under paragraph (a)(5)(i) of this section by--
(i) Using the formula, NPV = sum of the discounted cash flows R\t\/(1+i)\t\, where--
(A) The variable ``i'' is the discount rate. For purposes of this section, an institution must use the most recent annual inflation rate as the discount rate;
(B) The variable ``t'' is time or period of the cash flow, in years, from the time the loan entered repayment; and
(C) The variable ``R\t\'' is the net cash flow at time or period t; and
(ii) Applying the NPV formula to the loans made during the fiscal year by--
(A) If the loans have substantially the same repayment period, using that repayment period for the range of values of variable ``t''; or
(B) Grouping the loans by repayment period and using the repayment period for each group for the range of values of variable ``t''; and
(C) For each group of loans, as applicable, multiplying the total annual payments due on the loans by the institution's loan collection rate (e.g., the total amount of payments collected divided by the total amount of payments due). The resulting amount is used for variable ``R'' in each period ``t'', for each group of loans that a NPV is calculated.
(2) Instead of performing the calculations in paragraph (b)(1) of this section, using 50 percent of the total amount of loans that the institution made during the fiscal year as the NPV. However, if the institution chooses to use this 50 percent calculation, the institution may not sell any of these loans until they have been in repayment for at least two years.
(c) Sanctions. If an institution does not derive at least 10 percent of its revenue from sources other than Title IV, HEA program funds--
(1) For two consecutive fiscal years, it loses its eligibility to participate in the Title IV, HEA programs for at least two fiscal years. To regain eligibility, the institution must demonstrate that it complied with the State licensure and accreditation requirements under 34 CFR 600.5(a)(4) and (a)(6), and the financial responsibility requirements under subpart L of this part, for a minimum of two fiscal years after the fiscal year it became ineligible; or
(2) For any fiscal year, it becomes provisionally certified under Sec. 668.13(c)(1)(ii) for the two fiscal years after the fiscal year it failed to satisfy the revenue requirement. However, the institution's provisional certification terminates on--
(i) The expiration date of the institution's program participation agreement that was in effect on the date the Secretary determined the institution failed this requirement; or
(ii) The date the institution loses its eligibility to participate under paragraph (c)(1) of this section; and
(3) It must notify the Secretary no later than 45 days after the end of its fiscal year that it failed to meet this requirement. (Approved by Office of Management and Budget under control number 1845-NEW2) (Authority: 20 U.S.C. 1085, 1088, 1091, 1092, 1094, 1099a-3, 1099c, 1141) [74 FR 55937, Oct. 29, 2009]
Sec. Appendix A to Subpart B of Part 668--Standards for Audit of
Governmental Organizations, Programs, Activities, and Functions (GAO)
Part III Chapter 3--Independence
(a) The Third general standard for governmental auditing is: In matters relating to the audit work, the audit organization and the individual auditors shall maintain an independent attitude.
(b) This standard places upon the auditor and the audit organization the responsibility for maintaining sufficient independence so that their opinions, conclusions, judgments, and recommendations will be impartial. If the auditor is not sufficiently independent to produce unbiased opinions, conclusions, and judgments, he should state in a prominent place in the audit report his relationship with the organization or officials being audited. \1\---------------------------------------------------------------------------
\1\ If the auditor is not fully independent because he or she is an employee of the audited entity, it will be adequate disclosure to so indicate. If the auditor is a practicing certified public accountant, his or her conduct should be governed by the AICPA ``Statements on Auditing Procedure.''---------------------------------------------------------------------------
(c) The auditor should consider not only whether his or her own attitude and beliefs permit him or her to be independent but also whether there is anything about his or her situation which would lead others to question his or her independence. Both situations deserve consideration since it is important not only that the auditor be, in fact, independent and impartial but also that other persons will consider him or her so.
(d) There are three general classes of impairments that the auditor needs to consider; these are personal, external, and organizational impairments. If one or more of these are of such significance as to affect the auditor's ability to perform his or her work and report its results impartially, he or she should decline to perform the audit or indicate in the report that he or she was not fully independent.
Personal Impairments
There are some circumstances in which an auditor cannot be impartial because of his or her views or his or her personal situation. These circumstances might include:
1. Relationships of an official, professional, and/or personal nature that might cause the auditor to limit the extent or character of the inquiry, to limit disclosure, or to weaken his or her findings in any way.
2. Preconceived ideas about the objectives or quality of a particular operation or personal likes or dislikes of individuals, groups, or objectives of a particular program.
3. Previous involvement in a decisionmaking or management capacity in the operations of the governmental entity or program being audited.
4. Biases and prejudices, including those induced by political or social convictions, which result from employment in or loyalty to a particular group, entity, or level of government.
5. Actual or potential restrictive influence when the auditor performs preaudit work and subsequently performs a post audit.
6. Financial interest, direct or indirect, in an organization or facility which is benefiting from the audited programs.
External Impairments
External factors can restrict the audit or impinge on the auditor's ability to form independent and objective opinions and conclusions. For example, under the following conditions either the audit itself could be adversely affected or the auditor would not have complete freedom to make an independent judgment. \2\---------------------------------------------------------------------------
\2\ Some of these situations may constitute justifiable limitations on the scope of the work. In such cases the limitation should be identified in the auditor's report.---------------------------------------------------------------------------
1. Interference or other influence that improperly or imprudently eliminates, restricts, or modifies the scope or character of the audit.
2. Interference with the selection or application of audit procedures of the selection of activities to be examined.
3. Denial of access to such sources of information as books, records, and supporting documents or denial or opportunity to obtain explanations by officials and employees of the governmental organization, program, or activity under audit.
4. Interference in the assignment of personnel to the audit task.
5. Retaliatory restrictions placed on funds or other resources dedicated to the audit operation.
6. Activity to overrule or significantly influence the auditors judgment as to the appropriate content of the audit report.
7. Influences that place the auditor's continued employment in jeopardy for reasons other than competency or the need for audit services.
8. Unreasonable restriction on the time allowed to competently complete an audit assignment.
Organizational Impairments
(a) The auditor's independence can be affected by his or her place within the organizational structure of governments. Auditors employed by Federal, State, or local government units may be subject to policy direction from superiors who are involved either directly or indirectly in the government management process. To achieve maximum independence such auditors and the audit organization itself not only should report to the highest practicable echelon within their government but should be organizationally located outside the line-management function of the entity under audit.
(b) These auditors should also be sufficiently removed from political pressures to ensure that they can conduct their auditing objectively and can report their conclusions completely without fear of censure. Whenever feasible they should be under a system which will place decisions on compensation, training, job tenure, and advancement on a merit basis.
(c) When independent public accountants or other independent professionals are engaged to perform work that includes inquiries into compliance with applicable laws and regulations, efficiency and economy of operations, or achievement of program results, they should be engaged by someone other than the officials responsible for the direction of the effort being audited. This practice removes the pressure that may result if the auditor must criticize the performance of those by whom he or she was engaged. To remove this obstacle to independence, governments should arrange to have auditors engaged by officials not directly involved in operations to be audited. [51 FR 41921, Nov. 19, 1986. Redesignated at 65 FR 65650, Nov. 1, 2000]
Sec. Appendix B to Subpart B of Part 668--Appendix I, Standards for Audit of Governmental Organizations, Programs, Activities, and Functions
(GAO)
Qualifications of Independent Auditors Engaged by Governmental
Organizations
(a) When outside auditors are engaged for assignments requiring the expression of an opinion on financial reports of governmental organizations, only fully qualified public accountants should be employed. The type of qualifications, as stated by the Comptroller General, deemed necessary for financial audits of governmental organizations and programs is quoted below:
``Such audits shall be conducted * * * by independent certified public accountants or by independent licensed public accountants, licensed on or before December 31, 1970, who are certified or licensed by a regulatory authority of a State or other political subdivision of the United States: Except that independent public accountants licensed to practice by such regulatory authority after December 31, 1970, and persons who although not so certified or licensed, meet, in the opinion of the Secretary, standards of education and experience representative of the highest prescribed by the licensing authorities of the several States which provide for the continuing licensing of public accountants and which are prescribed by the Secretary in appropriate regulations may perform such audits until December 31, 1975; Provided, That if the Secretary deems it necessary in the public interest, he may prescribe by regulations higher standard than those required for the practice of public accountancy by the regulatory authorities of the States.'' \1\---------------------------------------------------------------------------
\1\ Letter (B-148144, September 15, 1970) from the Comptroller General to the heads of Federal departments and agencies. The reference to ``Secretary'' means the head of the department or agency.---------------------------------------------------------------------------
(b) The standards for examination and evaluation require consideration of applicable laws and regulations in the auditor's examination. The standards for reporting require a statement in the auditor's report regarding any significant instances of noncompliance disclosed by his or her examination and evaluation work. What is to be included in this statement requires judgment. Significant instances of noncompliance, even those not resulting in legal liability to the audited entity, should be included. Minor procedural noncompliance need not be disclosed.
(c) Although the reporting standard is generally on an exception basis--that only noncompliance need be reported--it should be recognized that governmental entities often want positive statements regarding whether or not the auditor's tests disclosed instances of noncompliance. This is particularly true in grant programs where authorizing agencies frequently want assurance in the auditor's report that this matter has been considered. For such audits, auditors should obtain an understanding with the authorizing agency as to the extent to which such positive comments on compliance are desired. When coordinated audits are involved, the audit program should specify the extent of comments that the auditor is to make regarding compliance.
(d) When noncompliance is reported, the auditor should place the findings in proper perspective. The extent of instances of noncompliance should be related to the number of cases examined to provide the reader with a basis for judging the prevalence of noncompliance. [45 FR 86856, Dec. 31, 1980. Redesignated at 65 FR 65650, Nov. 1, 2000]
Sec. Appendix C to Subpart B of Part 668--90/10 Revenue Calculation[GRAPHIC] [TIFF OMITTED] TR29OC09.006 [GRAPHIC] [TIFF OMITTED] TR29OC09.007 [GRAPHIC] [TIFF OMITTED] TR29OC09.008 [GRAPHIC] [TIFF OMITTED] TR29OC09.009 [74 FR 55938, Oct. 29, 2009]