A college looks like a nonprofit or a school operator, but its audit has two layers. The first is ordinary financial reporting: tuition revenue recorded net of aid, deferred revenue between terms, and student receivables. The second is federal student aid. An institution that participates in Title IV programs accepts compliance rules that can cost it eligibility, and the audit has to address them. This guide covers both layers for a CPA firm taking on an institution.
How revenue is recognized
Tuition is recognized over the academic term as instruction is delivered. A public operator, Perdoceo Education Corporation, describes the pattern in its 2025 Form 10-K: tuition billed at the start of a term is recognized on a straight-line basis over the term, cash received ahead of the term sits in deferred revenue, and refunds follow the institution's refund policy and applicable law.
Tuition discounts and aid. Tuition and fees are reported net of scholarships and tuition discounts. Aid can be funded from restricted scholarship money or be "unfunded," where the institution gives up revenue to lower the student's price. The presentation question for the auditor is which aid reduces revenue and which, if any, is a separate expense. Test the classification rule against the aid policy, and test that gross tuition, discounts and net tuition agree to the student information system and to the general ledger. Scholarships or discounts that apply only to future tuition are a separate performance obligation when they give the student a material right.
Refunds and withdrawals. A student who withdraws mid-term receives a refund under the refund policy, federal and state rules and accreditor standards. The institution estimates expected refunds and nets them against revenue. Unpaid balances from withdrawn students that are not reasonably collectible are recognized as revenue when cash is received. See variable consideration and the constraint and the deferred revenue schedule.
What Title IV adds
Return of Title IV funds. When a student receiving Title IV aid withdraws, the institution calculates the aid the student earned. Under 34 CFR 668.22, a student who completes 60 percent of the payment period has earned 100 percent of the aid, and before that point the earned percentage equals the percentage of the period completed. The institution must return its share of unearned funds as soon as possible, and no later than 45 days after it determines the student withdrew. Funds are returned in a fixed order, starting with unsubsidized Direct loans, then subsidized loans, then PLUS loans, then Pell and the other grants. If the student earned more than was disbursed, the difference is a post-withdrawal disbursement, with grants disbursed before loans.
The 90/10 test for proprietary institutions. Under 34 CFR 668.28, a proprietary institution must derive at least 10 percent of its revenue from sources other than federal funds, computed on a cash basis by the formula in the regulation's Appendix C. For fiscal years beginning on or after January 1, 2023, federal funds include Title IV funds and other educational assistance from federal agencies. An institution that fails in two consecutive years loses Title IV eligibility for at least two fiscal years, and one failure leads to provisional certification. The failure must be reported within 45 days after year-end. The audit footnote must disclose the percentage of revenue derived from federal funds.
Financial responsibility. Under 34 CFR 668.171 an institution must show it is financially responsible, mainly through a composite score of at least 1.5 based on the equity, primary reserve and net income ratios. An adverse, qualified or disclaimed opinion, or a going concern disclosure, can prevent a finding of financial responsibility. Triggering events, such as a significant judgment, accreditor probation or a creditor default, can require financial protection.
Compliance audit requirements. Under 34 CFR 668.23, institutions submit a compliance audit and audited financial statements no later than the earlier of 30 days after the later of the two auditor report dates, or six months after fiscal year-end. Financial statements are audited under generally accepted government auditing standards, prepared on an accrual basis under GAAP, and include the supplemental schedule required by the financial responsibility regulations and a related party note. The Department of Education's Office of Inspector General published a 2023 Title IV audit guide for proprietary schools and third-party servicers, applicable to fiscal years beginning on or after January 1, 2023. It covers financial statement audits and compliance attestation examinations. Public and nonprofit institutions are audited under 2 CFR part 200 (see the Single Audit walkthrough). For a paragraph-by-paragraph read of 668.23, including servicer audits, records access and repayment, see Title IV compliance audits under 34 CFR 668.23.
Risk areas
- Net tuition revenue. Aid classification and the gross-to-net bridge.
- Refund and withdrawal estimates. The estimate affects revenue and the liability.
- Return of Title IV funds. Date of determination, the calculation and timeliness.
- Student receivables. Collectibility for withdrawn students and unpaid balances.
- 90/10 and composite score. Management has incentives to manage the timing of cash and the reported ratios.
- Related parties. Entities that own property, provide services or originate loans.
Typical audit procedures
For tuition, agree gross charges, discounts and refunds to the student information system for a sample of terms. Recompute deferred revenue at year-end from term dates. Test the refund estimate against actual refunds in prior terms. Agree institutional aid to the aid policy and award letters, and test the classification of restricted-fund aid.
For Title IV, select withdrawn students across terms. Recompute the earned percentage, the unearned amount and the institution's and student's shares. Test post-withdrawal disbursements and notices. For proprietary institutions, recompute the 90/10 ratio from the ledger and the Title IV records, and test that cash received and receipts in the numerator follow the cash basis rules, including funds received before and after year-end. Agree the footnote disclosure. Recompute the composite score from the financial statements.
For receivables, test aging, subsequent collections and write-off practice. Read related party agreements and test the note. Read accreditor and Department of Education correspondence, program reviews and provisional certification letters, and evaluate the effect on going concern (see going concern assessment).
Worked example (illustrative numbers)
A student's payment period is 100 days. The student withdraws on day 30, having received $5,000 of Direct loans and no other aid. The percentage completed is 30 percent, so 30 percent of the aid is earned: $1,500. Unearned aid is $3,500 and is returned in the required order, with the split between school and student depending on the institutional charges. The institution has 45 days from its determination to return its share. A student who withdrew on day 65 completed more than 60 percent and has earned all the aid, so no return is due.
For 90/10, assume a proprietary institution has $20,000,000 of qualifying revenue on the regulation's formula, of which $17,500,000 is federal funds. Federal funds are 87.5 percent, and non-federal revenue is 12.5 percent, which meets the 10 percent minimum. A shift of $1,000,000 of qualifying cash from non-federal to federal, as federal funds received before year-end, would move the percentages to 92.5 and 7.5, and the institution would fail for the year.
PBC items
- Student information system extracts: charges, discounts, refunds, withdrawals
- Academic calendar and refund policy
- Institutional aid policy and award listings
- Return of Title IV calculations and proof of timely return
- Title IV reconciliation to the Department of Education's records
- 90/10 workpaper and composite score calculation
- Program participation agreement and any program review correspondence
- Related party agreements and third-party servicer contracts
Red flags
- Discount rates that rise while net tuition revenue is stable
- Returns of Title IV funds paid after the 45-day deadline
- Federal funds credited to student accounts shortly before year-end
- Large unpaid balances for withdrawn students carried at full value
- Composite score near the minimum with a triggering event pending
- Aid awards without supporting award letters
Sources
- FASB ASC 606-10-32-5 through 32-14, Revenue from Contracts with Customers (variable consideration and the constraint)
- Cornell Law School Legal Information Institute, 34 CFR 668.22, Treatment of title IV funds when a student withdraws
- Cornell Law School Legal Information Institute, 34 CFR 668.23, Compliance audits and audited financial statements
- Cornell Law School Legal Information Institute, 34 CFR 668.28, Non-title IV revenue (90/10)
- Cornell Law School Legal Information Institute, 34 CFR 668.171, General standards of financial responsibility
- US Department of Education, Federal Student Aid, Availability of 2023 Title IV Audit Guide for Proprietary Schools and Third-Party Servicers
- SEC EDGAR, Perdoceo Education Corporation revenue recognition note
- BDO, What Higher Education Institutions Need to Know About Tuition Discounting
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