The Department of Education (ED) should update its method of determining an institution’s financial health and increase its transparency in how it calculates its financial composite score and shares that information with the public, according to a report from the Government Accountability Office (GAO).
Following the recent closure of several large postsecondary institutions, GAO was asked to review ED’s method of financial oversight for the nearly 6,000 schools that received about $125 billion in federal financial aid for fiscal year (FY) 2016. Using the most recent ED data on institution closures and finances, GAO examined how ED oversees the financial condition of institutions, how effective the oversight has been at identifying schools that are at risk of closure, and the extent to which ED informs schools and the public of its oversight efforts.
According to GAO’s findings, the Department found that about 450 schools did not receive a passing financial composite score during school year 2014-15, indicating issues with the school’s financial health. Furthermore, about 95 institutions closed in 2015-16.
While it is rare that an institution will close its doors, limitations in the Department’s composite score that impedes its effectiveness at identifying these at-risk schools, has predicted only 50 percent of school closures since 2010-11, and has not been updated since it was first established 20 years ago, according to the GAO report. Specifically, GAO found that the composite score is limited because it does not reflect updates in accounting practices, and it does not incorporate new financial metrics that would provide a better indication of institutions’ financial health (such as liquidity or future projections). In addition, the score allows some institutions to take advantage of a feature of the calculation that allows them to inflate their scores by taking out loans, allowing them to avoid posting letters of credit.
"Identifying and responding to risks is a key component of federal internal control standards, and Education’s failure to update its key financial measure makes it harder for Education to identify and manage schools at risk of closure," according to the GAO report.
According to GAO, the Department disagreed with the first recommendation, agreed to the second recommendation, and said it would further evaluate the third recommendation.
Publication Date: 9/21/2017