OFFICE OF THE AUDITOR

Transcription

1 OFFICE OF THE AUDITOR DEPARTMENT OF AVIATION AIRPORT MANAGEMENT SERVICES, LLC REVENUE AND CONTRACT COMPLIANCE AUDIT OCTOBER 2008 Dennis J. Gallagher Auditor

2 Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado , FAX October 23, 2008 Ms. Kim Day, Manager Department of Aviation City and County of Denver Mr. Joseph DiDomizio Airport Management Services, LLC One Meadows Plaza, Suite 902 East Rutherford, NJ Dear Ms. Kim Day and Mr. Joseph DiDomizio: Attached is the Auditor s Office Audit Services Division s revenue and contract compliance audit of the Airport Management Services, LLC. operations at Denver International Airport. The audit period was for the year ended December 31, The purpose of the audit was to determine whether Airport Management Services, LLC and the City and County of Denver complied with the terms and conditions of the contracts and whether internal controls were adequate. The audit identified a reportable condition which is fully described in the accompanying report. If you have any questions, please call Kip Memmott, Director of Audit Services, at Sincerely, DJG/et Dennis J. Gallagher Auditor cc: Honorable John Hickenlooper, Mayor Honorable Members of City Council Members of Audit Committee Kelly Brough, Chief of Staff Claude Pumilia, Chief Financial Officer Chris Henderson, Chief Operating Officer David Fine, City Attorney Lauri Dannemiller, Executive Staff Director, City Council Beth Machann, Controller Stan Koniz, Deputy Manager of Aviation for Business and Technologies To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation. 1

3 Kim Day and Joseph DiDomizio October 23, 2008 Page Two Patrick Heck, Deputy Manager of Aviation for Revenue Management and Business Development Bryan Touchstone, Assistant Deputy Manager/Concessions Management 2

4 TABLE OF CONTENTS Transmittal Letter 1 Table of Contents 3 Auditor s Report 4 Executive Summary 5 Background, Scope, Objective, and Methodology 6 Finding and Recommendations 8 Schedule of Amounts Due and Paid and Related Notes 10 Exhibit A Department of Aviation Response 12 3

5 Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado , FAX AUDITOR S REPORT We have completed a revenue and contract compliance audit of Airport Management Services, LLC and the Department of Aviation for the year ended December 31, The purpose of the audit was to determine whether Airport Management Services, LLC and the Department of Aviation complied with the terms and conditions of the contracts, complied with City rules and regulations, and whether internal controls were adequate. This audit was included in the Auditor s Office Audit Services Division s 2007 Annual Audit Plan and is authorized pursuant to the City and County of Denver Charter, Article V, Section 1, General Powers and Duties of the Auditor. We conducted this audit in accordance with generally accepted government auditing standards. Audit 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. The audit identified a reportable condition which is fully described in the accompanying report. We extend our appreciation to Airport personnel who assisted and cooperated with us during the course of our examination. Audit Services Division Kip Memmott, CGAP, CICA Director of Audit Services Date: October 23, 2008 Staff: Dick Wibbens, CPA, Audit Manager Marcus Richardson, CICA, Internal Audit Supervisor Adeniyi Kelani, PhD, CICA, CAPPP Lead Internal Auditor Kristin Donald, Senior Internal Auditor To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation. 4

6 AIRPORT MANAGEMENT SERVICES, LLC EXECUTIVE SUMMARY FOR THE YEAR ENDED DECEMBER 31, 2007 This summary highlights the finding of this revenue and contract compliance audit, which is more fully described in the Finding and Recommendation section beginning on page seven. Exhibit A on page 12 contains the response from the Department of Aviation to our finding. Finding: Concessionaire Operating at Denver International Airport Under Expired Agreements Audit work determined that AMS operated at DIA under expired contracts for several years. Specifically, we found that AMS has occupied an office space without a contract since February 28, 2003 and a storage space without a contract since July 31, Further, rent amount per hold-over clause in the contract was not charged and information in Prop Works, the DIA contract management software system, had inaccurate expiration dates of August 31, 2012 for the office and storage leases. As a result, the City is susceptible to fraud and a loss of revenues. We recommend that the Department improve controls over contract administration and space management. 5

7 AIRPORT MANAGEMENT SERVICES, LLC. BACKGROUND, SCOPE, OBJECTIVE AND METHODOLOGY FOR THE YEAR ENDED DECEMBER 31, 2007 Background AMS entered into agreements and leases for retail, office and storage space at DIA. The agreements require AMS to pay the City a percentage of their annual gross revenues derived from operations at DIA or a minimum annual guaranteed amount, whichever is greater. The agreements require timely rent and concession fee payments for leased spaces or additional interest charges may apply. The airport also charges additional fees for utilities, security screening and airport identification badges. Below is a listing of the food and beverage operations and space occupied by AMS at DIA: Contract No AC38024 AC38025 AC38026 AC38027 AC38028 AC93004 AC47004 Agreement Type Retail News- Terminal Retail News- Conc. C Retail News- Conc. B Retail News- Conc. B Retail News- Conc. A Office Space- Conc. A Storage Space- Terminal Scope Our audit of AMS covers the year ended December 31, 2007 and is limited to determining compliance with agreements and compliance with City rules and regulations. The procedures performed included a determination of compliance with the contracts and rules and regulations and review of internal controls related to financial information reported to DIA for this audit period. Objective The objective of this audit was to determine whether AMS properly reported gross revenue and paid the proper rental fees and concession payments to the City in accordance with contract requirements. Additionally, audit work assessed whether DIA and AMS complied with other terms and conditions of the contracts and applicable City rules and regulations. Methodology To meet the audit objectives, we utilized several methodologies. These evidence gathering and analysis techniques included, but were not limited to: Verification and recalculation of compensation percentages, rentals, fees, and charges; 6

8 BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY AIRPORT MANAGEMENT SERVICES, LLC Reviewing and determining the timeliness of cash receipts and delinquent interest due; Performing various tests of gross revenue; Reviewing AMS s internal controls; Verifying evidence of insurance and performance bonds requirements; Performing onsite physical observations, by conducting interviews, and participating in discussions with management and staff of AMS and DIA; and Reviewing contracts and City rules and regulations. 7

9 AIRPORT MANAGEMENT SERVICES, LLC. FINDING AND RECOMMENDATIONS FOR THE YEAR ENDED DECEMBER 31, 2007 Finding: Concessionaire Operating at Denver International Airport Under Expired Agreements Audit work determined that AMS operated at DIA under expired contracts for several years. Specifically, we found that AMS has occupied an office space without a contract since February 28, 2003 and a storage space without a contract since July 31, This issue was not detected by DIA because of inaccurate contract data in Prop Works, the DIA contract management software system, and weaknesses with the DIA process for monitoring contracts. For example, Prop Works had inaccurate expiration dates of August 31, 2012 for the office and storage space leases, meaning the agreements potentially would not have been renewed until eight years after they expired. Further, the rent amount per hold-over clause in the contract was not charged in accordance with the contract s hold-over clause, which states that, if the lease is not renewed and the company still occupies the space then 150% of the rent amount should be due on a month to month basis. per section 4.03 of the contract. Instead, DIA only billed the company the original rent amount in the contract during the expiration period and did not take steps to renew the contract. The difference in amounts per the hold rate is as follows: AC Office Space Concourse A Expiration Amount Billed Period Rent per Hold- Over Rate Difference 2/28/ /31/03 $ 29,752 $ 44,628 $ 14, ,703 53,555 17, ,703 53,555 17, ,703 53,555 17, ,703 53,555 17,852 Total $ 172,564 $ 258,848 $ 86,284 AC Storage Space Terminal Expiration Amount Billed Period Rent per Hold- Over Rate Difference 7/31/02-12/31/02 $ 7,395 $ 11,093 $ 3, ,748 26,622 8, ,748 26,622 8, ,748 26,622 8, ,748 26,622 8, ,748 37,157 19,409 Total $ 96,135 $ 154,738 $ 58,603 8

10 FINDING AND RECOMMENDATIONS AIRPORT MANAGEMENT SERVICES, LLC Several Factors Contributed to Inadequate Oversight Audit work determined that the following internal control weaknesses hindered DIA management from identifying this issue: Lack of adequate controls and oversight for ensuring Prop Works contains, accurate up to date contract data; Lack of written policies and procedures; Inadequate oversight of contracts by DIA; Inadequate monitoring of space usage by DIA; and Failure of vendor to notify DIA that agreements were expired. Lack of Written Agreements Negatively Impacts the City The lack of controls resulted in several negative effects. These include: Concessionaires operating at the airport for extended periods under expired contracts; Loss of revenue; Legal liability exposure; Increased susceptibility to fraud; and Lack of proper safeguarding of City s assets. Recommendations: The Department of Aviation should improve its controls over expiring contracts and comply with the agreements by: a. Properly training staff on the procedures for monitoring expiring contracts and Prop Works data entry. b. Confirming the accuracy of expiration dates in Prop Works for concessionaires with office and storage space leases. c. Charging 150% of the rent amount per the hold over section of the contract and collecting any interest that would be due; and renew the lease with a new contract or amendment. See Exhibit A for Department of Aviation response (page 12) 9

11 AIRPORT MANAGEMENT SERVICES, LLC. SCHEDULE OF AMOUNTS DUE AND PAID FOR THE YEAR ENDED DECEMBER 31, 2007 Gross Revenue (Note 1) $ 8,289,847 Concession Fees Amount Due (Note 2) Amount Paid (Note 3) Difference AC38024 $ 171,421 $ 171,421 $ - AC , ,377 - AC , ,617 - AC , ,886 - AC , ,176 - Total Concession Fees 1,243,477 1,243,477 - Rent- AC Office 35,703 35,703 - AC Storage 24,771 24,771 - Total Rent 60,474 60,474 - City Utility Charges 24,685 24,685 - Miscellaneous City Charges 13,079 13,079 - Interest Charges Total Charges 37,944 37,944 - Total $ 1,341,895 $ 1,341,895 $ - The accompanying notes are an integral part of this schedule 10

12 NOTES TO SCHEDULE OF AMOUNTS DUE AND PAID AIRPORT MANAGEMENT SERVICES, LLC 1. Gross Revenue (Note 1) Gross revenue, as shown in the accompanying schedule, includes all billings and receipts from sales or services or doing business from the concession space, whether for cash or credit, regardless of collection in the case of the latter, and whether for retail or wholesale. It includes all transactions whether placed by telephone, in person or by mail, and regardless of place or time of actual payment. Deductions are allowed for bona fide returns for credit, sales taxes collected for remittance to the state or city, tips, and federal excise taxes collected. 2. Amount Due (Note 2) The agreements require AMS to pay the City a percentage of their annual gross revenues derived from operations at DIA or a minimum annual guaranteed amount, whichever is greater for concession fees. AMS pays monthly rent for office and storage. In addition to the rent and concession fee payment, AMS pays fees for utilities, security screening and airport identification badges. 3. Amount Paid (Note 3) All amounts paid in the schedule of amounts due and paid were compiled from DIA s cash receipts records. Amounts paid include those billed and due during the audit period and collected in the ordinary course of business whether or not within the audit period. 11

13 EXHIBIT A DEPARTMENT OF AVIATION RESPONSE AIRPORT MANAGEMENT SERVICES, LLC 12

14 EXHIBIT A DEPARTMENT OF AVIATION RESPONSE AIRPORT MANAGEMENT SERVICES, LLC 13