On September 27, 2016, the Department of Education released the much anticipated new Audit Guide for proprietary schools and Title IV third party servicers. The newly revised guide will be effective for fiscal years beginning after June 30, 2016 and contains several important changes that impact the 90/10 calculation.
The first change is very explicit language that states the calculation presented in the notes to the financial statements must be prepared by the school, not the audit firm performing the audit. This wording is very clear that the auditor can no longer assist the school in preparing the 90/10 calculation presented in the footnotes to the financial statements. Our interpretation is that the auditor is still permitted to take a school prepared calculation and compile it in the required footnote presentation.
The next change is a required audit procedure that indicates the auditor must determine if the calculation is performed on a student-by-student basis. In the past we are aware of schools with very low 90/10 rates that performed a high level summary of the 90/10 rate that did not contain a student-by-student calculation; this is no longer allowed. If your student information system does not contain a 90/10 report function on a student-by-student basis, we have a spreadsheet model available into which institutional data may be input to accurately calculate the 90/10 rate.
The final change requires the auditor to report any misstatement in the overall rate as a finding in the report on internal controls over financial reporting and compliance. This change is challenging as it disregards materiality and auditor’s judgment. In addition, the auditor is required to explain why the 90/10 calculation is incorrect and their opinion on what the 90/10 rate should be.
While we are on the subject of 90/10, a few reminders and tips when reviewing and calculating:
1. Review all types of charges to students and make a determination whether they are institutional charges or non-institutional charges. This determination should result in consistent treatment between R2T4 calculations and 90/10 calculations. Volume 5 of the FSA Handbook discusses institutional charges for R2T4 purposes and these same definitions apply to 90/10.
2. Review all fund source types and that they are properly classified in the 90/10 calculation following the Presumptive Rule. For example, VA Benefits should be treated similar to cash payments and counted after Title IV payments for 90/10 purposes.
3. When calculating 90/10 at the student level the funds included in the calculation can never exceed the total amount of eligible institutional charges (i.e. the rate for an individual student cannot be greater than 100%).
4. Review your 90/10 calculation for accuracy and reconcile Title IV Fund sources in total to G5 activity reports. Also, reconcile your 90/10 denominator back to your accrual basis revenue reflected on the school’s financial statements.
Communication with your auditor before year end will be the key to ensuring compliance with these changes and accurately reporting your schools 90/10 rate.