OFFICE OF THE AUDITOR

Transcription

1 OFFICE OF THE AUDITOR CABLE FRANCHISE AGREEMENT COMPLIANCE AUDIT JANUARY 2006 Dennis J. Gallagher Auditor

2 Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado , FAX January 5, 2006 Mr. Dave Haverkate, President and COO Mr. Darryn Zuehlke, Director Champion Broadband, LLC Office of Telecommunications 380 Perry Street, Suite 230 City and County of Denver Castle Rock, CO Dear: Mr. Haverkate and Mr. Zuehlke: Attached is the Auditor s Office Internal Audit Division s report of their compliance audit of Champion Broadband, LLC (Champion) Cable Franchise Agreement dated January 1, The audit period was from January 1, 2003 through March 31, The purpose of the audit was to determine whether Champion complied with the terms of the agreement and whether internal controls in place were adequate under the circumstances. The Internal Audit Division found non-compliance with certain contract conditions as described in this report. If you have any questions, please contact Mike Clark, Director of Internal Audit, at Sincerely, DJG/kh Dennis J. Gallagher Auditor cc: Honorable John W. Hickenlooper, Mayor Honorable Members of City Council Members of Audit Committee Cole Finegan, City Attorney and Acting Chief of Staff Lauri Dannemiller, City Council Staff Director The prudent stewardship of Denver s finances, resources and financial records! We are also committed to improving accountability, efficiency, effectiveness and performance in city government. We will scrupulously protect the taxpayer s interests and work collaboratively with all concerned to improve our city and its government 1

3 TABLE OF CONTENTS Transmittal Letter 1 Table of Contents 2 Internal Auditor s Report 3 Executive Summary 4 Background, Scope, Objective, and Methodology 5 Findings, Recommendations, and Responses 6 Schedule of Amounts Due and Paid 8 2

4 Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado , FAX INTERNAL AUDITOR S REPORT We have completed a compliance audit of the Cable Franchise Agreement dated January 1, 2001, between Champion Broadband, LLC (Champion) and the City and County of Denver. The audit period was from January 1, 2003 through March 31, The purpose of the audit was to determine whether Champion complied with the terms of the franchise agreement and whether internal controls in place were adequate under the circumstances. This audit was included in the Auditor s Office Internal Audit Division s 2004 Annual Audit Plan in connection with the audit of the Office of Telecommunications (OTC), and is authorized pursuant to the City and County of Denver Charter, Article V, Part 2, and the contract. We conducted our audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether Champion was in compliance with the terms of the franchise agreement. An audit includes examining, on a test basis, evidence supporting compliance with the franchise agreement and the accounting and administrative internal controls in place, as we considered necessary in the circumstances. Our conclusion from the audit was that Champion did not calculate gross revenue properly. Champion did not comply with the requirement to submit a written annual report. Also, their Letter of Credit was not in the name of Champion Broadband, LLC, as required. We extend our appreciation to the personnel who assisted and cooperated with us during the audit. Internal Audit Division Date: January 5, 2006 Michael Clark, CPA Director of Internal Audit Staff: Dick Wibbens, CPA, Audit Manager John Finamore, CPA, Audit Supervisor Anita Thompson, Lead Auditor Norine Reigan, CPA, Senior Auditor The prudent stewardship of Denver s finances, resources and financial records! We are also committed to improving accountability, efficiency, effectiveness and performance in city government. We will scrupulously protect the taxpayer s interests and work collaboratively with all concerned to improve our city and its government. 3

5 EXECUTIVE SUMMARY FOR THE PERIOD JANUARY 1, 2003 THROUGH MARCH 31, 2004 This summary highlights the findings of the audit, which are fully described in the Findings, Recommendations, and Responses section beginning on page 6. The Findings, Recommendations, and Responses section also includes the responses of Champion Broadband, LLC (Champion). 1. Balance Due City and County of Denver During the audit period, January 1, 2003 through March 31, 2004, Champion was not calculating gross revenue in compliance with Section 1.3 of the franchise agreement. This resulted in gross revenue being understated and franchise fees being underpaid. 2. Annual Report Champion did not comply with Section 7.4 of the franchise agreement that requires Within sixty (60) days after the end of the calendar year, Grantee shall submit to the City a written report. 3. Letter of Credit The name on Champion s Letter of Credit as required by the franchise agreement has not been changed from WideOpenWest Colorado to Champion Broadband, LLC. 4

6 BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY FOR THE PERIOD JANUARY 1, 2003 THROUGH MARCH 31, 2004 Background The City and County of Denver granted to WideOpenWest Colorado, LLC (WideOpenWest) a franchise to own, construct and operate a cable television system in the City and County of Denver effective January 1, WideOpenWest entered into an agreement to have its cable television system serving Denver acquired by Champion Broadband, LLC (Champion). The City consented to the change of control of the Cable Franchise Agreement from WideOpenWest to Champion in June Champion was formed in February 2003 to acquire and operate broadband and cable television. In the Denver market, they offer a cable television package and multiple high-speed Internet packages. The Cable Franchise Agreement defines gross revenue of which Champion pays 5% to the City as a franchise fee. Also, this agreement specifies what reports Champion must provide to the City. Scope We audited the Office of Telecommunications (PeopleSoft fund 01010/org ). As part of that audit, we audited the compliance of Champion with the Cable Franchise Agreement and reported on both OTC and Champion separately. Objective The objective of our audit was to determine whether Champion complied with the terms of the franchise agreement. Methodology To meet the audit objective the following evidence gathering and analysis techniques were used, including, but not limited to: Discussions with management and staff Limited onsite physical inspections Verification of evidence of insurance and fidelity bonding Verification and review of required reports Review of internal controls Verification and recalculation of franchise fees paid to the City 5

7 FINDINGS, RECOMMENDATIONS, AND RESPONSES FOR THE PERIOD JANUARY 1, 2003 THROUGH MARCH 31, Balance Due City and County of Denver During the audit period, we determined that Champion Broadband, LLC (Champion) was not calculating gross revenue in compliance with Section 3.1 of the Cable Franchise Agreement. Champion did not include revenue received from late fees and home shopping when calculating their gross revenue amount. Champion also did not exclude allowable net bad debt expenses when calculating gross revenue. Champion is to pay the City an amount equal to 5% of the gross revenues. Gross revenues were understated $800 for the audit period. This resulted in the franchise fees being underpaid by $40. Recommendation We recommend Champion comply with the contract for reporting gross revenue and calculate the franchise fees due the City in accordance with the contractual conditions as required. We recommend that the Office of Telecommunications bill Champion $40 for the underpayment of the franchise fees for the audit period January 1, 2003 through March 31, 2004 and determine if additional amounts are due for the periods after March 31, Auditee Response Champion agrees with the findings of the Auditor s department and subsequent calculations of the amount due. Champion immediately revised the method of franchise fee calculation based on discussions with the auditor at the time of the audit 2. Annual Report Champion did not submit the annual reports as required by Section 7.4 of the Cable Franchise Agreement. The agreement states, Within sixty (60) days after the end of the calendar year, Grantee shall submit to the City a written report, in a form acceptable to the City, which shall include, but not necessarily be limited to, the following information for the City: A Gross Revenue statement, as required by subsection 3.5 of this Franchise; A summary of the previous year s activities in the development of the Cable System, including, but not limited to, Cable Services begun or discontinued during the reporting year, and the number of Subscribers for each class of Cable Service ; The number of homes passed, beginning and ending plant miles, any services added or dropped, and any technological changes occurring in the Cable System; and A statement of planned construction, if any, for the next year. 6

8 FINDINGS, RECOMMENDATIONS, AND RESPONSES Section 3.5 of the franchise agreement states, Grantee shall, within sixty (60) days after the end of each year, furnish to the City a statement stating the total amount of Gross Revenues for the year and all payments, deductions and computations for the period. Such statement shall be audited by a certified public accountant, who may also be the chief financial officer or controller of Grantee, prior to submission to the City. Recommendation We recommend Champion comply fully with Section 7.4 of the franchise agreement and submit the required written report within sixty (60) days after the end of the calendar year. As part of this report, Champion should furnish a statement stating the total amount of gross revenue payments, deductions, and computations for the year. This statement should be audited by a certified public accountant, who may also be the chief financial officer or controller of Champion. Auditee Response Champion has subsequently submitted the annual report for 2004 and will submit future reports as required by the franchise and as identified by the audit. 3. Letter of Credit The City and County of Denver consented to the change of control of the Cable Franchise Agreement from WideOpenWest Colorado, LLC (WideOpenWest) to Champion Broadband, LLC (Champion) in June The name on the required Letter of Credit has not been changed from WideOpenWest Colorado to Champion Broadband, LLC. This situation may put the City at unnecessary risk and fails to meet the contract requirement. Recommendation We recommend Champion have the name changed on their Letter of Credit to Champion Broadband, LLC to protect the best interests of the City and ensure the validity and enforcement of the document. Champion should provide a copy of the revised document to the City. Auditee Response Champion Broadband, LLC purchased 100% of the stock of WideOpenWest Colorado, Inc. WideOpenWest Colorado, Inc. is the sole member of WideOpenWest Colorado, LLC, the entity identified by the subject letter of credit, and the entity identified on the franchise agreement. Champion Broadband Colorado, LLC is the company currently operating in the City and County of Denver. Champion Broadband Colorado, LLC is a trademark name change from WideOpenWest Colorado, LLC. Ordinance No. 490 provided for consent to the change of control of the franchise agreement to Champion Broadband, LLC. The franchise agreement is in the name of WideOpenWest Colorado, LLC as is the Letter of Credit. 7

9 SCHEDULE OF AMOUNTS DUE AND PAID FOR THE PERIOD JANUARY 1, 2003 THROUGH MARCH 31, 2004 SCHEDULE OF AMOUNTS DUE AND PAID FRANCHISE FEES (Amounts rounded to the nearest dollar) Amount Amount Reported Per Audit Difference Gross Revenue (Note 1) $710,457 $711,257 $800 Amount Paid Amount Due Balance Due Franchise Fees (Note 2) $35,523 $35,563 $40 The accompanying notes are an integral part of this schedule. 8

10 NOTES TO SCHEDULE OF AMOUNTS DUE AND PAID 1. Gross Revenues Section 1.30 of the franchise agreement provides the following definition for Gross Revenue: Gross Revenues means any and all revenue received by the Grantee, or by any other entity that is a Cable Operator of the Cable System including Grantee s Affiliates, from the operation of the Grantee s Cable System to provide Cable Services. Gross Revenue include, by way of illustration and not limitation, monthly fees charged Subscribers for Basic Service; any expanded Tiers of Cable Service; optional Premium Services; installation, disconnection, reconnection and change-in-service fees; Leased Access Channel fees; remote control rental fees; all Cable Service lease payments from the Cable System; late fees and administrative fees; fees, payments or other consideration received by the Grantee from programmers for carriage of programming on the Cable System and accounted for as revenue under GAAP, revenues from rentals or sales of converters or other Cable System equipment; advertising revenues; the fair market value of consideration received by the Grantee for use of the Cable System to provide Cable Service and accounted for as revenue under GAAP; revenues from program guides; revenue from data transmissions to the extent these transmissions are considered Cable Services under federal law; additional outlet fees; revenue from Cable Internet Service to the extent this service is considered a Cable Service under federal law; franchise fees; revenue from interactive services to the extent they are considered Cable Services under federal law; revenue from the sale or carriage of other Cable Services; and revenue from home shopping, bank-at-home Channels and other revenue-sharing arrangements. Gross Revenues shall include revenue received by any entity other than the Grantee where necessary to prevent evasion or avoidance of the obligation under this Franchise to pay the franchise fees. Gross Revenues shall not include (i) to the extent consistent with GAAP, Bad Debt; provided, however, that all or part of any such Bad Debt that is written off but subsequently collected shall be included in Gross Revenues in the period collected; (ii) the Capital Contribution specified in subsection 9.3; or (iii) any taxes on services furnished by the Grantee which are imposed directly on any Subscriber or user by the State, City or governmental unit and which are collected by the Grantee on behalf of said governmental unit. The franchise fee is not such a tax. The parties intend for the definition of Gross Revenues to be as inclusive as possible consistent with existing applicable law. If there is a change in federal law subsequent to the Effective Date of this Franchise, such change shall not impact this Gross Revenues definition unless the change specifically preempts the affected portion of the definition above. 2. Franchise Fees Section 3.1 of the franchise agreement requires Champion to pay to the City an amount equal to five percent of Champion s gross revenues throughout the duration of the franchise. 9