Third-party servicers for lenders in the Federal Family Education Loan Program (FFELP) did not submit required audited financial statements to the Department of Education and the Department lacked a policy and specific procedures to ensure receipt and review of these audited financial statements, according to a recent Government Accountability Office (GAO) study of student loan program audit requirements and oversight procedures.

The Department's Offices of Federal Student Aid (FSA) were supposed to use financial statement audits to oversee the financial condition of the schools and guaranty agencies that participate in the student loan programs. FSA was required to track findings in these audit reports. Without such reviews, FSA might not be informed of a third-party servicer's unfavorable audit opinion or significant reported findings that could affect program operations, according to the report.

GAO urged the Department of Education's Inspector General to update its Lender Audit Guide to include all appropriate regulatory requirements for audits of ongoing FFELP participants. The report also recommends that the Secretary of Education develop and implement policies and procedures requiring the Department's Office of Federal Student Aid (FSA) to review audited financial statements for lender servicers. The Department and Inspector General agreed with GAO's recommendations in the report.

GAO was required by the Higher Education Opportunity Act (HEOA) to conduct the study of the financial and compliance audits and reviews required or conducted for the FFEL program and the Direct Loan program. This report focuses on identifying differences and similarities in audit requirements and oversight procedures for the FFEL and DL programs, including anticipated changes to selected oversight activities, and describing how the Office of Federal Student Aid's policies and procedures are designed to monitor audits and reviews.

GAO identified differences and similarities in audit requirements and oversight procedures for the two programs. Differences include the following:

• The FFEL and DL programs generally had different audit requirements stemming primarily from divergent program structures. The FFEL program relied on lenders, guaranty agencies -- which administer federal government loan guarantees to lenders -- and other entities that were subject to statutory and regulatory audit requirements. The DL program did not have as many audit requirements because DL loans are provided by the federal government, and fewer external entities are involved.

• GAO found differences in audit requirements for nonprofit and for-profit lenders. Certain applicable audit objectives included in Office of Management and Budget (OMB) requirements for compliance audits of nonprofit lenders were not included in the Department of Education Office of Inspector General (OIG) Lender Audit Guide for compliance audits of for-profit lenders. As a result, audits of lenders performed in accordance with the OIG Lender Audit Guide were at risk of omitting compliance testing for a key audit objective.

Similarities in audit requirements and oversight procedures include these:

• Schools were subject to annual financial statement and compliance audits under both programs.

• The functions performed by the DL servicer, with which Education contracts to administer certain functions of the DL program, were similar to functions performed by lenders, guaranty agencies, and their servicers in the FFEL program. GAO's analysis found that objectives addressed by FFEL participant compliance audits were similar to the objectives addressed through oversight procedures for the DL servicer, such as Education's review of the servicer's monthly performance metrics.

Posted 07/30/10 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit website questions or comments to Web@NASFAA.org.