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GAO Finds For-Profit Schools Encouraged Fraud

Published: Wednesday, 4 Aug 2010 | 3:03 PM ET

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By: Herb Greenberg
CNBC Senior Stocks Commentator

Jupiterimages | Getty Images
An investigation by the Government Accountability Office (GAO) contends that for-profit colleges encouraged fraud and engaged in deceptive and questionable marketing practices.

The investigation is part of a detailed report released this morning in conjunction with testimony before the Senate Committee on Health, Education, Labor and Pensions by Gregory Kutz, the GAO’s managing director of forensic audits and special investigations.

The probe focused on visits to 15 for-profit colleges. For-profit colleges, unlike a state university or such private institutions as Cornell or Stanford, are businesses and are often trade schools. In many cases, the ability to pay tuition is the only entrance requirement.

Among the GAO's findings:

Four schools “encouraged fraudulent practices.”
The fraud included encouraging applicants to falsify applications so they would qualify for federal aid.
One admissions officer told an applicant to fraudulently remove $250,000 from savings.
All 15 schools visited by the GAO made deceptive or otherwise questionable statements to the undercover applicants.

The fraud included encouraging applicants to falsify applications so they would qualify for federal aid.

Tuition at for-profit schools is sometimes higher than at public colleges.

To keep this in perspective, around 2000 for-profit colleges are eligible to receive federal aid. Claims of fraud and deception, however, have been rampant for years creating tug-of-wars between bull and bear investors on such hot-button names as ITT Education [ESI Loading... () ], Apollo Group [APOL Loading... () ] and Corinthian Colleges [COCO Loading... () ], which are some of the major players in this arena.

The GAO’s report did not name schools. To read the full report, click here.

But in response to questions from senators, Kutz did mention that schools visited included those run by Apollo, Corinthian, Education Management [EDMC Loading... () ], and Kaplan, which is owned by the Washington Post [WPO Loading... () ] and generates more than 61 percent of the publishing company’s revenue.

Kutz made it clear he believed the company’s findings suggested the practices were widespread throughout the industry, suggesting to some industry observers that legislators are likely to more tightly regulate the industry.

For its part, Kaplan said: "The actions described in the GAO report at two of our colleges are contrary to our standards and values in every way. Immediately upon learning of the incidents we initiated our own internal investigations at these schools. We have suspended enrollment at our Pembroke Pines, Florida campus. Investigations at this campus and Riverside, CA are ongoing."

And according to Apollo: "Apollo Group takes the GAO’s findings very seriously, and we have initiated an immediate internal investigation. We have strict policies in place to protect students during the enrollment process and throughout their tenure with the University, and when we discover any violation of this policy, we take immediate and decisive disciplinary action up to, and including, termination of the employees involved. We are committed to being leaders not only in the education of our students, but also in compliance with all applicable standards and regulations, and we will continue working with regulators and legislators to accomplish this goal."

Corinthian said in a statement that it has "detailed, written policies that forbid admissions representatives from making false or misleading statements," adding that it uses a "mystery shopping" enforcement program on Corinthian campuses. It is investigating the situation on two campuses visited by the GAO.

Corinthian, which employs roughly 2,100 people, noted that it fired 68 staff members for misconduct in the past fiscal year.

Officials at ITT did not return calls seeking comment. Corinthian indicated that the Career College Association, which represents many schools, could speak for it.

Meanwhile Harris Miller, president of the Career College Association, told me the findings are “disturbing.” And while the report was expected, “It's hard to put lipstick on a pig. To have four schools have financial aid officers that are advising students to misrepresent their financial situation is totally unacceptable. The necessity to focus on compliance has to be elevated.”

He went on to say he didn’t think schools were “encouraging this behavior, but to have this many negative experiences is indicative that a culture of compliance is not being adopted across the entire organization.”