Internal Audit Report. Miscellaneous Revenue

Transcription

1 Internal Audit Report Report Number: Report Date: March 6, 2018

2 Executive Summary Audit Report No.: March 6, 2018 WE AUDITED the agency management controls over miscellaneous revenue. WHAT DID WE FIND? accounts for approximately 1% of Sound Transits total revenues. Typically these streams of revenue are from non-primary activities that are small and non-recurring, and as such they usually receive relatively less management attention, as compared to major revenue categories. (in 000's) Build American Bonds $6,593 $6,603 $6,622 $6,617 AUDIT OBJECTIVE was to determine whether the agency has effective controls to ensure: Revenues from advertising are accurately calculated and appropriately recorded in a timely manner. Miscellaneous revenue receipting processes are working as intended. The audit examined management controls in place as of August Gain or Loss Disposal of Asset 3 5 2,011 0 ORCA Regional Program Billing ,865 Advertising 1,247 1,320 1,319 1,649 ORCA Card Fee Payments Made by Other Transit Agencies for Security and Facility and TVM Maintenance Rental and Lease Properties 629 1,595 1, Use License Fees Operation of REX Judgements and Claims 3 29, Other $484 $145 $166 $101 Total $11,092 $41,185 $14,595 $12,778 Based on our assessment of management control effectiveness, we determined to focus our efforts on management controls over advertising revenue and miscellaneous revenue receipting processes. We concluded that management has implemented controls to ensure advertising revenues are recorded in a timely manner; however, management has not implemented controls to reasonably ensure advertising revenue amounts are complete and accurate. The audit noted opportunities for improvement. Additionally, we noted that management has effective controls over the miscellaneous revenue receipting processes. Jack Hutchinson, CPA, CIA, CISA Internal Audit Director i

3 Table of Contents Executive Summary... i Background... 1 Audit Objectives... 2 Conclusion... 3 Findings and Recommendations Lack of Management Controls Over Advertising Contract... 4

4 Background accounts for approximately 1% of Sound Transits total revenues. (in 000's) Retail Sales and Use Tax $639,890 $699,114 $749,735 $992,526 Rental Car Tax 3,092 3,297 3,506 3,339 Property Tax ,256 Passenger Fare Revenue 60,180 65,426 80,562 90,339 Motor Vehicle Excise Tax 74,166 79,564 85, ,382 11,092 41,185* 14,595 12,778 Investment Income 14,759 5,125 12,630 16,897 Local and State Contributions 10,940 4,607 60, ,308 Federal Grants 184, , ,729 89,339 Total $998,837 $1,046,586 $1,172,324 $1,850,163 * There was a large indemnity settlement. includes, but is not limited to, amounts received from Federal Government for bond interest subsidy, from other regional government agencies for ORCA program, bus service, and security and maintenance services at transit facilities, for advertising, for payments made by other parties to lease or use Sound Transit property and, for ORCA card fees. (in 000's) Build American Bonds $6,593 $6,603 $6,622 $6,617 Gain or Loss Disposal of Asset 3 5 2,011 0 ORCA Regional Program Billing ,865 Advertising 1,247 1,320 1,319 1,649 ORCA Card Fee Payments Made by Other Transit Agencies for Security and Facility and TVM Maintenance Rental and Lease Properties 629 1,595 1, Use License Fees Operation of REX Judgements and Claims 3 29, Other $484 $145 $166 $101 Total $11,092 $41,185 $14,595 $12,778 There are many definitions for miscellaneous revenues. Typically it is a catch-all category for revenues from non-primary activities. Items are generally insignificant and infrequent, and as such they usually receive relatively less management attention, as compared to major revenue categories. 1

5 Audit Objectives To determine whether the agency has effective controls to ensure: Revenues from advertising are accurately calculated and appropriately recorded in a timely manner. Miscellaneous revenue receipting processes are working as intended. Scope and Methodology We conducted this performance audit in accordance with Generally Accepted Government Auditing Standards and the International Standards for the Professional Practice of Internal Auditing. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We gained an understanding of the various types of miscellaneous revenue, and related processes and controls through data analyses, documentation reviews, and personnel interviews. We identified risks and assessed management controls in place to mitigate those risks. Based on the assessment of management control effectiveness, we determined to focus our efforts on management controls over advertising revenue and miscellaneous revenue receipting processes. We reviewed revenues for the period January 2016 to August 2017 and management controls as of August To determine whether the agency has effective controls to ensure that revenues from Advertising are accurately calculated and appropriately recorded in a timely manner, we conducted the following procedures: 1. Reviewed the current advertising contract and identified all applicable financial and monitoring requirements. 2. Reviewed 64 advertising placements on trains and buses, and compared the placements to the current list of contracts/billings to detect any discrepancies. 3. Selected 13 contracts based on various criteria including, type of media, client contracted vs. agency contracted, non-revenue contracts, and varying cost for similar media. Revenue data and contract documentation for the selection was reviewed to confirm: a. appropriate billing rates b. proper revenue calculations c. complete reporting of all revenue to Sound Transit in a timely manner 4. Verified the annual true up for revenue from the vendor was completed and accurate. To determine whether the agency has effective controls over the informal revenue receipting processes, we conducted the following procedures: 1. Interviewed seven agency staff responsible for informal revenue receipting and reviewed their processes to determine whether amounts are recorded completely and timely. We interviewed staff from the following areas, Transportation Planning, Customer Service, Legal, IT Transit Systems, Security and Events and Customer Outreach. 2. Confirmed that cash receipt books were tracked and audited. 2

6 Conclusion Management has implemented controls to ensure advertising revenues are recorded in timely manner; however, management has not implemented controls to reasonably ensure revenue amounts are complete and accurate. See Finding 1 Management has effective controls over the miscellaneous revenue receipting processes. 3

7 Findings and Recommendations 1. Lack of Management Controls Over Advertising Contract Sound Transit has a 10-year contract with Intersection Media to provide advertising placement on ST bus and rail vehicles and at Sound Transit owned facilities. For the past four fiscal years, Sound Transit has generated an annual average of $1.4 million in advertising revenues, as follows: Advertising Revenue Light Rail $405,759 $210,620 $430,444 $1,014,247 ST Express $775,670 $1,083,362 $810,019 $572,684 Sounder Train $65,360 $26,487 $78,261 $61,696 Total $1,246,788 $1,320,470 $1,318,723 $1,648,627 Source: GL data According to the contract, Sound Transit receives the greater of the Minimum Annual Guarantee (MAG) or 64% of the net billing generated from sales. The net billing is defined as the total amount charged to advertisers less commissions to bona fide advertising agencies, and any labor and material charges. In addition, Sound Transit approves the company s Schedule of Rates and Charges, and when advertisers receive less than full commercial rates, the contract requires Sound Transit be provided a set of criteria for such discounts. The audit noted the following instances of significant noncompliance, as well as unclear contract language, which could potentially impact advertising revenues to the agency. However, there were virtually no management controls to detect and mitigate the risk. As a result, opportunities to maximize advertising revenues could have been lost. Intersection does not report "Gross Billing" and "Net Billing" amounts as required in the contract. Intersection separates media costs from production costs, and only reports the media costs as Net Billings to Sound Transit. In addition, the annual schedule of rates and charges does not include fees and direct costs for labor and materials. Production costs are allowed deductions to Gross Billing, but without detailed information, Sound Transit does not have visibility into the cost allowability and reasonableness. Intersection frequently discounts at high rates. A review of 13 media contracts, valued at $485,013, noted that 11 contracts were discounted between 16% and 67% off the commercial rates shown on the annual rate card. Of the 13 contracts, 9 were provided bonus media at no cost, and of the 9, 5 paid effectively no media costs as the cost of bonus media exceeded the actual paid media. Management, however, was aware of neither the specifics nor the levels of discounts and bonuses being provided to the clients. Discounting media and bonus media are common advertising industry practices. The contract has provisions related to discounts but is silent on the use of bonus media. Although required in the contract, the agency has not approved the annual schedule of rates and charges, and Interaction Media has not provided discounting criteria. 4

8 Expired advertisements are not timely removed. A review of 64 ad placements from 33 advertisers identified that 41 ads from 19 advertisers had a contract that had expired. Of the 41 contracts, 20 ads from 7 advertisers were still up more than 120 days past the contract expiration date. The contract is not clear on the timing for the removal of advertising. It simply indicates that it is the responsibility of the contractor. Recommendations: We recommend management: Design and implement a set of monitoring procedures to ensure compliance. The following specific procedures are suggested for management consideration: Review the annual Schedule of Rates and Charges for reasonableness prior to approval. Require and review detailed information on labor and materials costs to ensure they are actual and reasonable. Review monthly revenues to ensure accuracy and completeness. Audit advertising placements periodically to ensure timely removal upon contract expiration. Consider amending the contract to: o Clarify the use of discounts and bonuses. o Establish a reasonable period within which to remove expired adverting placements. Management Response RE: Intersection does not report "Gross Billing" and "Net Billing" amounts as required in the contract. It is correct that Intersection has only been reporting the media costs as Net Billings to Sound Transit. It was their assumption that since the MAG and 64 percent of revenues from media sales were based on net proceeds (the total amount charged to advertisers less commissions, labor and material charges) that the gross billings were not relevant. The intent of the contract was to provide an annual guaranteed revenue from the proceeds of media sold and a share of net revenues derived from media sales once the MAG was exceeded. Regardless, the contract does specify that Intersection needs to provide monthly reports that include gross and net billings. Management will request that Intersection comply with that contract specification. RE: In addition, the annual schedule of rates and charges does not include fees and direct costs for labor and materials. On page 9 the contract states that, The Advertising Company shall submit a proposed 2014 Schedule of Rates and Charges in the level of detail used by the Advertising Company in other market areas as large as or larger than King, Pierce and Snohomish Counties. The proposed schedule shall include all standard rates and charges for each type of advertising space and time available; all time and quantity purchase discounts; all fees and direct costs 5

9 for labor and materials for installation, maintenance, removal and special handling to be charged to advertisers; and terms, conditions and manner of payment by advertisers. For categories of advertisers who qualify for less than full commercial rate, provide the criteria for each category. But on page 20, in the record keeping section the contract simply states that Advertising rates shall be published and a copy of those rates will be provided to Sound Transit to be kept on file throughout the term of this agreement. The Advertising Company shall submit to Sound Transit written notice of any advertising rate change at least 30 days prior to the effective day of the rate changes This section only refers to advertising rates, not installation or materials cost. It is also not clear how often Intersection is expected to provide advertising rate information unless they are changing their advertising rates. The challenge of publishing installation and material costs is that they can vary from job to job based on the types of materials needed for a particular installation. Intersection has an inhouse installation crew, but they occasionally do hire contract firms to perform installations. Regardless, since the contract specifies that Intersection provide the rate and charges schedule that includes standard rates and charges for labor and materials, Management will request that they do so. Management will also ask that Intersection notify ST of and changes in rates 30 days prior to rate changes as stipulated in the contract. RE: Production costs are allowed deductions to Gross Billing, but without detailed information, Sound Transit does not have visibility into the cost allowability and reasonableness. As stated above, Management will request standard rates for installation and materials. It is unclear, however, how allowability and reasonableness of those costs are determined. Installation can be billed based on an hourly rate or a flat rate. Material costs are based on the type of material used and the cost of the materials charged Intersection by third party supply companies. What determines whether a cost is allowable versus not allowable? Finally, the intent of this contract was for Sound Transit and Intersection to generate revenues from advertising sales, not from installation and materials costs. If there is a profit margin in the installation and materials it is insignificant in relation to the revenue ST generates from the advertising media revenue. RE: Intersection frequently discounts at high rates. It is correct that Intersection does discount and bonuses advertising as an incentive to sell inventory, particularly during slow periods. The rationale is that it is better to generate some revenue off from unsold inventory than have it remain unsold. As stated in the audit findings, the contract doesn t restrict the percentage advertising media may be discounted or place limits on ad bonuses. The contract does state that Intersection needs to provide criteria for providing discounts. Management will request that they comply with that stipulation. RE: Expired advertisements are not timely removed. Management is aware that in some cases, expired advertisements are not removed in a timely manner. Intersection is also aware of the issue and has cited personnel changes as one reason for the delays. In addition they cite that, because ST s inventory is spread broadly across three different counties and is located on vehicles managed by three different transit providers, it presents logistical challenges other transit system advertising contracts don t 6

10 have. Unfortunately the contract also does not stipulate a timeframe that advertising must be removed within. Management is working with Intersection to provide monthly reports on what advertising is expiring and a schedule for removal. Final comments The Intersection contract includes a clause to revisit the contract at the five-year mark and reexamine and renegotiate any terms based on changes in the marketplace and/or Sound Transit assets during the first five years. Management proposes using that opportunity to explore clarifying some of the issues identified in this audit including revisiting the definitions of gross versus net revenues and clarifying the intent of the contract to focus on revenues from advertising media sales. Management would also like to clarify the use of discounts and bonuses; and establish a reasonable period within which to remove expired adverting placements. When the board directed ST staff to develop a program to sell ads on ST vehicles and facilities, CEA took the lead to procure and manage the ad sales contracts. The CEA role has always been to assure that the ads placed conformed to the agencies ad polices and restrictions and to act as a liaison between operations at the contractor to facilitate installing ads. CEA has always looked to FIT to oversee the financial side of the contracts. With the multiple findings of this audit, Management would like to explore either transferring management of this contract to FIT or formalizing a division of responsibility between CEA and FIT. 7