OFFICE OF THE AUDITOR

Transcription

1 OFFICE OF THE AUDITOR DEPARTMENT OF AVIATION REVENUE AND CONTRACT COMPLIANCE AUDIT JULY 2008 Dennis J. Gallagher Auditor

2 Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado , FAX July 17, 2008 Ms. Kim Day, Manager Department of Aviation City and County of Denver Ms. Mary Dyer CA Concessions of Colorado 8400 Pena Boulevard Room 4766 Denver, CO Dear Ms. Kim Day and Ms. Mary Dyer: Attached is the Auditor s Office Audit Services Division s revenue and contract compliance audit of CA Concessions of Colorado s operations at Denver International Airport. The audit period was for the year ended December 31, The purpose of the audit was to determine whether CA Concessions of Colorado 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, cc: Dennis J. Gallagher Auditor 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 Patrick Heck, Deputy Manager of Aviation for Revenue Management and Business Development Pete Gingras, Assistant Deputy Manager of Aviation/Property Management Bryan Touchstone, Assistant Deputy Manager/Concessions Management 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 recommendation and progress towards their implementation. 1

3 TABLE OF CONTENTS Transmittal Letter 1 Table of Contents 2 Auditor s Report 3 Executive Summary 4 Background, Scope, Objective, and Methodology 5 Finding and Recommendations 7 Exhibit A Department of Aviation Response 10 Exhibit B CA Concessions of Colorado Response 12 2

4 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 CA Concessions of Colorado and the Department of Aviation for the year ended December 31, The purpose of the audit was to determine whether CA Concessions of Colorado 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 Internal Audit 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. As a result of our audit, we determined that the concessionaire was occupying space and operating without a written agreement. Additionally, we documented a lack of written controls over the contract process at Denver International Airport. We extend our appreciation to Airport personnel who assisted and cooperated with us during the course of our examination. Audit Services Division Date: July 17, 2008 Staff: Dick Wibbens, CPA, Audit Manager Marcus Richardson, CICA, Internal Audit Supervisor Kristin Donald, Senior Internal Auditor Kip Memmott, CGAP, CICA Director of Audit Services 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 recommendation and progress towards their implementation. 3

5 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 Recommendations section beginning on page 7. Exhibits A and B starting on page 10 contain the responses from the Department of Aviation and CA Concessions of Colorado to our finding. 1. Concessionaire Operating at Denver International Airport Without Written Agreements CA Concessions occupied space and operated at DIA without a written agreement for several years, largely because the DIA lacks effective controls for monitoring contracts and space at the airport and lacks written procedures for governing this area. We found CA Concessions owes the City $49,219 for the storage space on Concourse A. Both the Department of Aviation and CA Concessions are in violation of Sections 5-13 (a) of the City Charter and of the Airport Rules and Regulations. As a result, the City is susceptible to fraud and may have lost significant revenues. We recommend that the Department improve controls over contract administration and space management. 4

6 BACKGROUND, SCOPE, OBJECTIVE AND METHODOLOGY FOR THE YEAR ENDED DECEMBER 31, 2007 Background CA Concessions of Colorado (CA Concessions) has agreements and leases for retail, office and storage space at the Denver International Airport (DIA). The agreements require CA Concessions 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 CA Concessions at DIA: Contract Name- Location Effective Expiration AC Lefty's Colorado Trails Bar and Grille-Concourse A 12/29/93 07/31/14 AC Lefty's Front Range Grille- Concourse C 12/29/93 07/31/14 AC Lefty's Mile High Grille- Concourse A 12/29/93 02/28/15 AC Red Rocks Bar- Terminal 12/29/93 02/28/15 AR Schlotskys- Concourse A 03/12/07 11/30/14 AR The Coffee Beanery- Concourse B 11/01/05 04/30/13 AirMeals- Concourse C AC Office- Terminal 07/07/94 02/28/05 AC Storage- Terminal 02/28/95 02/28/15 AC Storage- Terminal 12/29/97 02/28/15 AC Storage- Concourse A 03/30/94 07/31/14 AC Storage- Concourse B 03/28/94 02/28/15 AC Storage- Concourse C 07/12/94 07/31/14 Storage- Concourse A Scope Our audit of CA Concessions 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 the Department of Aviation for this audit period. Objective The objective of this audit was to determine whether CA Concessions properly reported gross revenue and paid the proper fee and rent amounts to the City in accordance with contract 5

7 BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY requirements. Additionally, audit work assessed whether the Department of Aviation and CA Concessions 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: Verified and recalculated percentage compensation, rentals, fees, and charges; Reviewed and determined timeliness of cash receipts and determined delinquent interest due; Performed various tests of gross revenue; Reviewed internal controls; Verified evidence of insurance and performance bonds requirements; Performed onsite physical observations, conducted interviews, and discussed with management and staff of CA Concessions and DIA; and Reviewed contracts and City rules and regulations. 6

8 FINDING AND RECOMMENDATIONS FOR THE YEAR ENDED DECEMBER 31, Concessionaire Operating at DIA without Written Agreements Audit work revealed that CA Concessions of Colorado was operating concessions and occupying space at DIA without written agreements. This situation violates City Charter requirements and DIA rules and regulations. Specifically, Section 5-13 subsection (a) of the City Charter states, It shall be unlawful for any person to conduct any business or concession upon Denver Municipal Airport System without first obtaining a written permit from the manager of aviation issued pursuant to rules and regulations of operation, management and control of the airport, or alternatively receiving a written contract from the manager of aviation. Additionally, Airport Rules and Regulations (30.02) state: No person shall conduct business, concession or commercial activity upon the Airport without first obtaining a written permit or contract from the manager. Audit work identified the following specific control issues related to contract administration and space management pertaining to CA Concessions of Colorado. Operating Concessions without a Written Permit or Contract - During our testwork of concession fee revenue, we observed that, while the company paid a concession fee for AirMeals sold on Concourse-C at the airport, there was no written agreement identifying payment terms and fees. Specifically, CA Concessions paid 10% of the gross revenue for this location and reported revenue daily as part of the Daily Revenue Program and submitted a certified annual statement as required by similar contracts CA Concessions has with the City. The company had a temporary permit to operate from September 1, 2003 to December 31, However, the company did not cease operations at the location until October The Department could not provide a written agreement for the company to operate at the airport for that space after the expiration date of the initial permit through October Occupying Space without a Written Permit or Contract Audit work determined that CA Concessions occupies storage space on Concourse A at DIA without a written agreement related to the usage of the space. Specifically, The Department constructed the 2,625 square foot space for the company to use for storage space. The Company moved into the storage space in April However, the company did not make any payments to DIA for the use of the space from April through December Accordingly, the DIA Rules and Regulations (120.13) establish the rate per square foot for storage at concourse A at $25. Therefore based on the square footage of the space (2,625 square feet), the DIA square foot rate ($25), the company owes the City $49,219 for the nine months it occupied the space during Occupying Space Under an Expired Contract - Audit work also identified a situation where the company occupied other space at DIA where while an original written agreement was executed, the agreement had expired and was not renewed. Specifically, the original contract expired on February 28, However, even though the expired contract included a hold over clause which gives the City the right to charge 150% of the rent amount until the lease is renewed, DIA continued to bill and the company continued to pay the standard rent amount for more than two 7

9 FINDING AND RECOMMENDATIONS years after the agreement had expired (see the difference of actual rent paid compared to potential rent due per the hold over clause in the table below): Rent- Office Space- Terminal Hold Over Clause Amounts Paid Difference Contract Expired 2/28/05 to 12/31/05 49, , , During expiration period 1/1/06 to 12/31/06 52, , , During expiration period 1/1/07 to 12/31/07 52, , , , , , Several Factors Contributed to Inadequate Oversight - Audit work determined that the following internal control weaknesses hindered DIA management from identifying this issue: 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 or not in place. Lack of Written Agreements Negatively Impacts City - The lack of controls resulted in several negative effects. These include: Loss of Revenue; Legal Liability Exposure; Increased Susceptibility to Fraud; and Lack of Proper Safeguarding of City s assets. Recommendation: 1. The Department of Aviation should ensure compliance to the City Charter and Airport Rules and Regulations by establishing a comprehensive policies and procedures manual and provide training to appropriate staff to address all recommended items noted below and other aspects of the properties management function: a. Developing written procedures to monitor continuation and termination of operation. The procedures should include a process for notifying companies when agreements are about to expire and for observing and documenting that rented space is no longer occupied after agreements expire. If the space is still occupied after expiration, the defined amounts stated in hold over section of the contract should be billed until the contract is renewed or terminated.; b. Developing written procedures for leasing a new space by requiring a written agreement which includes the amount of the rent to be paid before the space is occupied; and c. Developing a procedure to periodically review rented space at DIA. 8

10 FINDING AND RECOMMENDATIONS 2. The Department of Aviation should enter into a written agreement for the storage space on Concourse A. Additionally, DIA should a bill and collect rent for the storage space and charge any interest due. 3. DIA should exercise its right to charge 150% of the rent amount per the hold over section of the contract for the office space or renew the lease with a new contract or amendment. See Exhibits A and B starting on page 10 for responses 9

11 EXHIBIT A DEPARTMENT OF AVIATION RESPONSE 10

12 EXHIBIT A DEPARTMENT OF AVIATION RESPONSE 11

13 EXHIBIT B CA CONCESSIONS OF COLORADO RESPONSE 12

14 EXHIBIT B CA CONCESSIONS OF COLORADO RESPONSE 13