Apollo Group Plows Funds Into Compliance Amid Government Scrutiny

Apollo Group Inc. (APOL) has spent more than $100 million on new phone-monitoring software and compliance staff, amid other moves, as it tries to clean up student recruitment practices and its image following a damaging government report that showed admissions officers at for-profit schools using high-pressure tactics to enroll students.

Apollo, which operates University of Phoenix, also has fired employees, but the company declined to reveal how many or at what level. Its top management remains in place.

For-profit schools have come under fire in the past few months, facing new regulations by the U.S. Department of Education and a series of Senate hearings as they capture a growing share of federal student aid dollars and their graduates continue to default on loans at alarming rates.

Most recently, the U.S. Government Accountability Office issued a report showing that recruiters at all 15 schools the agency visited undercover had provided misleading or even fraudulent information to help boost enrollment.

The stocks of the for-profit educators have suffered as a result of the increased scrutiny, with many hitting multiyear lows last month. While the stocks have bounced back a bit--Apollo shares are up 16% from their August low--the schools need to improve their image with the public and investors, among other things, to resurrect depressed valuations and share prices.

Apollo has been reworking its compliance systems for nearly 18 months, reviewing training manuals, improving student services technology and bringing in a team of fraud examiners and lawyers when admissions officers overstep boundaries. But it accelerated the initiative last month after the GAO report fingered two of its campuses for bad recruiting practices, Apollo spokesman Ryan Rauzon said in detailing some of the company's plans.

Among Apollo's most far-reaching programs is its bolstered call-monitoring effort. The company monitors 300,000 phone calls each week--up from 70,000 per month a year ago--after upgrading its voice-recognition software to better detect words like "accreditation" and "borrowing," which recruiters and financial aid officers often discuss as they encourage prospective students to enroll.

The use of those words isn't illegal. But telling students that certain programs are accredited when they aren't, or claiming that graduates will be able to repay large loans with ease, may put schools in murky ethical waters. Colleges are barred from basing recruiters' compensation solely on how many students they enroll, but many schools still give that metric some weight. As a result, recruiters often feel pressured to pitch their products hard.

Apollo said that as of Sept. 1, it no longer ties any compensation to enrollment success, but rather recruiters are paid based on feedback from current and prospective students.

In the past few weeks, Apollo has also reviewed its recruiter training manuals and launched a "search and seizure" operation to remove any materials from admissions offices that may encourage inappropriate behavior, according to Rauzon.

To be sure, Apollo isn't the only school saying it is making changes. But as the largest company in the industry--its student body of 476,000 dwarfs the next-largest, Education Management Corp.'s (EDMC) 138,800--it is both a lightning rod for criticism and seen as a leader for change.

"They've been trying to adhere to the spirit of everything, not just the letter," Trace Urdan, managing director at Signal Hill Capital Group, said of Apollo's reform efforts.

Washington Post Co.'s (WPO) Kaplan University has suspended new enrollment at its two campuses cited in the GAO report and said it will take "all necessary actions" against employees violating its standards and code of conduct.

Corinthian Colleges Inc. (COCO) and Education Management, also featured in the report, have said they run mystery shopping programs. Tony Guida, Education Management's senior vice president of strategic development and regulatory affairs, said the company also is trying to make some information, such as graduation rates and costs, more easily accessible online.

A representative from Corinthian wasn't immediately available to comment.

-By Melissa Korn, Dow Jones Newswires; 212-416-2271; melissa.korn@dowjones.com

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