The board that regulates the state's 122 for-profit colleges provides inadequate oversight, hasn't had an outside financial audit in 10 years and lacks a clear understanding of its role, according to an audit released Wednesday by State Auditor Crit Luallen.
The Kentucky State Board for Proprietary Education oversees the burgeoning field of for-profit colleges that enroll more than 19,000 students each year and specialize in educating them for specific careers. The institutions are known for their bold recruiting, including TV commercials featuring people who have gone from unemployment to middle-class lifestyles after completing career training with the colleges.
"The key point is, as a state, Kentucky has a need ... for more of our people to receive a quality education," Luallen said Wednesday. "This board really has to help protect the reputable schools from unfair competitive practices or schools that may be lacking in quality. Those color the whole reputation of the proprietary education industry."
State Rep. Reginald Meeks, D-Louisville, asked for the audit. He has long sought increased oversight for proprietary education through the legislature, but those bills failed.
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He said the audit shows that "there's no continuity of training and accountability. ... They're not only administrative issues. We're looking at serious consumer protection issues."
The board is dominated by the same people who run the colleges. Six of its 11 seats are filled by representatives of the colleges themselves. The members of the board are appointed by the governor.
Gov. Steve Beshear said he expects his staff to work closely with the board to ensure the audit's recommendations are followed.
"Our top priority is the protection of the students who rely on these schools for a quality education," he said.
The national for-profit education industry has come under fire in the past year from Congress, the U.S. Department of Education and the states as students complained that they went into debt — often using federal financial aid — without getting the educations or job placements that the schools promised.
In December, Kentucky Attorney General Jack Conway subpoenaed records from six of the colleges operating in the state, asking for information about student loan default rates, recruitment practices and job placements. He declined to name the specific schools.
The audit criticized the slipshod inspection and licensing procedures performed by the Kentucky Office of Occupations and Professions, the state agency that performs administrative and financial duties for the board. The office provides 20 regulatory boards that license professionals with help for a fee. The Board for Proprietary Education paid O&P, as it is known, $110,000 for its services in 2010.
However, O&P's services created a $78,026 "misstatement" in the board's financial reports, according to the audit.
It also noted that O&P does not retain adequate paperwork, sufficiently monitor expenses or fees, or provide detailed board meeting minutes. In at least one case, a for-profit school operated without a license for two years.
Shannon Tivitt was named as the new executive director of O&P earlier this year by Beshear. She was in training and unavailable for comment Wednesday, the governor's office said.
The state established a Student Protection Fund in 1990 to pay students back when a school closes or a student can't continue. The audit recommended that schools be required to notify all students about the fund, how to file a claim and how to appeal if the student disagrees with the board's decision.
The audit slammed travel vouchers submitted to and authorized by O&P, including a fast-food restaurant wrapper taped to a sheet of paper with a handwritten note that was turned in as a meal receipt. In another case, supporting documentation for lodging was a handwritten note stating the board member stayed at a hotel for "I think $65" and "I think food was around $7 total."
Some of the records requested by the auditor's office were not available.
Included among the records inadequately kept were those listing all the proprietary schools in the state. That list includes institutions that are not schools or that are no longer open, according to Terry Sebastian, a spokesman for the auditor.
Not knowing how many schools the board is supposed to be regulating was one of the things the audit criticized.
For-profit schools in Kentucky include Spencerian College, MedTech School, The Lexington Healing Arts Academy and ExecuTrain.
The auditor's office reviewed six new schools licensed in fiscal 2010 to ensure that proper procedures were followed.
Other problems cited in the audit included:
■ Two of the six new schools did not have an inspection performed. O&P responded that the schools teach at remote locations, such as hotels, which have their own independent building inspections.
But some requirements for new-school inspection, such as adequate learning space, file maintenance and sufficient instructional quality have nothing to do with building safety inspections, the audit noted.
■ A school that had operated since 2008 without a license received no disciplinary action. The school was licensed in fiscal 2010.
■ The board does not review applications for license renewals. Once a school obtains its license, it is not inspected again unless there is a change in location or program — even though the audit pointed out that the board has the authority to perform inspections at any time.
When the board does not inspect schools after the initial license, the schools can modify programs and locations and go undetected.
"There is little incentive for schools to stay in compliance with regulations and policies if there is no risk of detection or penalty," the audit said.
O&P responded within the audit that it has begun the process of developing a corrective action plan. The Public Protection Cabinet will oversee the implementation of the auditor's recommendations.
The board said that it agreed with the auditor's recommendations and will review current regulations and make necessary corrections.
The occupations and professions office said in its response to the audit that its new executive director will establish written policies and procedures for the office's operations. The Public Protection Cabinet staff is overseeing the implementation of the auditor's recommendations as a corrective action plan within the next 60 days.
Meeks said he is hopeful the board's new management direction will work.
"The legislature wants this board to work and work effectively and do the job of protecting our citizens that it's supposed to do," he said.