Tuesday, September 18, 2007

Alternative Accreditation: The Financial Services Regulatory Approach

By Richard Vedder

When you go to a bank and give a complete stranger (the teller) money as a deposit, you are taking a risk -- the risk that the teller and/or his boss will take your money and run with it. Similarly, if you buy life insurance from a company, how do you know that the company will not simply pocket your premium payments and not pay off on the policy at death?

To deal with these concerns, we regulate financial service companies, and have an enforcement mechanism to root out fraud and theft. The same problem exists in academia: you pay a stranger tuition money assuming that you will be educated appropriately. Sometimes job applicants claim they have a bachelor's degree from XYZ University, and the employer wants assurance that XYZ offers a decent education that offers the equivalent of the instruction traditionally associated with a baccalaureate degree. Hence, the need for some regulation, some oversight.

Why not have the equivalent of the Comptroller of the Currency or Federal Deposit Insurance Corporation assure that colleges are not defrauding the public? And how would that differ from current accreditation practice?

First, bank examiners and regulators work for an independent agency, not for competing firms. Under current practice, accreditation teams come to campus made up of employees of competing institutions. It would be the equivalent of a bank examiner from JP Morgan Chase coming in to examine the books, cash reserves, etc., of Citibank or Bank of America. Bad idea. Yet that is what we do in higher education. Why not give the accreditor agency (the academic equivalent of the Comptroller of the Currency or FDIC) the power not only to say some institutions are acceptable ("accredited"), but that other institutions must go out of business because they are diploma mills? Bank examiners can threaten the revoking on charters of unsafe banks, or force them to merge with sound ones. Can accreditors do that?

Second, bank examiners spend relatively little time examining how things are done, but rather what is done -- what are the results? Are there a lot of overdue loans? Is the cash in the vault what the bank claims it to be? Bank examiners and insurance regulators are primarily interested in the safety of depositors and others with financial dealings with the bank. They don't care what the ratio of loan officers to deposits is, for example. In colleges, accreditors are worried about student-faculty ratios, the number of Ph.D.s on the faculty, etc., when they should be more worried about the end product -- did the students get a reasonably sound degree?

Third, bank examiners demand transparency. Banks must make available financial statements, not only to stockholders, but to examiners and depositors. Examiners demand to know the number of overdue loans, the amount of bonds the banks owns that are of sub-prime quality, etc. Yet do accreditors get equivalent information of colleges, and do they insist that it be reported to customers (to the students that are the equivalent of depositors)? What percent of students is unemployed one year after graduation? What did the students learn while in college? Where did the colleges spend their money -- what percent was spent on instruction? etc. Why don't they demand this information be collected and made available to customers?

The FDIC guarantees that if your bank goes broke, you will get your money back. Why don't colleges, perhaps as a condition of accreditation, guarantee that their graduates who successfully complete a degree can achieve their minimal post-graduate objectives -- a job, admission to a professional school, etc.? When a bank fails to give its customers their deposits plus promised interest upon demand, it is typically closed. What happens to universities that do not give their students promised benefits? Nothing, at the moment.

Maybe as we ponder our accreditation system, we can learn something from the financial services industry and its "accreditation" process. Tomorrow: the Underwriters Laboratories/Consumer Union model of accreditation.

1 comment:

gandalf43 said...

I think you are right that we need an independent, accurate, and valid measurement of the education offered by each educational institution.

I would add an evaluation of each college, department, and professor within these schools, as these can differ substantially from that of the university as a whole.

I recommend that if a school wishes its tax exemption continued, that it be required to open if books. For each course, how many students are registered? How much tuition is paid by each student (divided by the number of courses each student is taking)? What percentage of the professor's (or graduate student's) working time is devoted to the course? From these numbers, one could derive the cash flow associated with each course.

I have heard it said that tuition does not cover the costs of an undergraduate's education. I am skeptical. Perhaps the people who say that are construing the full salary of the professor instead of just the percentage of his or her time devoted to undergraduates.

I think it would be easier for an outside testing agency to evaluate the students knowledge rather than evaluating the university itself. I recommend that all undergraduate students in a given subject be given the same test by an outside agency. I would publish the results and the value of each university's education would be exposed.

Your analogy to the Office of the Comptroller of the Currency is flawed. Banks have a choice between a national charter (with the OCC as regulator) and a State charter (with a state as regulator). The bank pays the regulator for the exam and can change regulators when it wishes. Particularly when a large bank switches regulators, it cuts the regulator's revenue. Who is regulating whom?

You state that bank examiners spend little time examining how things are done but rather what is done. Where is your empirical evidence for this statement? Perhaps this is how bank examiners should spend their time. Or maybe you mean that in the United Kingdom banks are regulated that way by the FSA.

You say that colleges don't guarantee that their graduates can achieve certain objectives. I think you are referring to so-called "non-profit colleges and universities." I believe the for profit (proprietary) colleges are sometimes evaluated on that basis.

My own view is that the corporation whether for profit or not for profit is a legal fiction. I would focus on what is real -- the dollars paid and the measured achievement of each student.