OFFICE OF THE AUDITOR

Transcription

1 OFFICE OF THE AUDITOR DEPARTMENT OF AVIATION 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 Ms. Tammy Branham Director, Airport Operations Thrifty Rent-A-Car System, Inc East 31 st Street Tulsa, OK Dear Ms. Day and Ms. Branham: Attached is the Auditor s Office Audit Services compliance audit report of Thrifty Rent-A-Car System, Inc. (TRAC) Concession Agreement and Terminal Building Premises Lease dated October 1, 1993 and Special Facilities and Ground Lease dated September 1, 1999 and applicable amendments (Agreements), for operations at Denver International Airport. The audit period was for the year ended December 31, The purpose of the audit was to determine whether TRAC and the City and County of Denver complied with the terms of the agreements, and whether internal controls in place were adequate. The Audit Services Division noted that TRAC paid the City all 2007 amounts due and submitted the required revenue reports by the stipulated due date. However, we did identify instances of non-compliance to contract conditions as 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 W. Hickenlooper, Mayor Honorable Members of City Council Members of Audit Committee David Fine, City Attorney 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 Ms. Day. and Ms. Branham October 23, 2008 Page Two Kelly Brough, Chief of Staff Claude Pumilia, Chief Financial Officer Chris Henderson, Chief Operating Officer 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, Revenue and Business Development Pete Gingras, Assistant Deputy Manager of Aviation/Properties 2

4 TABLE OF CONTENTS Transmittal Letter 1 Table of Contents 3 Internal Auditor s Report 4 Executive Summary 5 Background, Scope, Objective, and Methodology 6 Findings, Recommendations, and Responses 8 Schedule of Amounts Due and Paid and Related Notes 11 Exhibit A: Department of Aviation response 14 Exhibit B: Thrifty Rent-A-Car System, Inc. response 21 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 contract compliance audit of the Thrifty Concession Agreement and Terminal Building Premises Lease dated October 1, 1993 and its First and Second amendments dated December 19, 1996, and September 1, 1999 respectively; and the Special Facilities and Ground Lease dated September 1, 1999 and its First amendment dated March 22, 2001, (Agreements) between Thrifty Rent-A-Car System, Inc. (TRAC) and the City and County of Denver. The purpose of this audit was to determine whether the accompanying Schedule of Amounts Due and Paid for the year ended December 31, 2007 is presented in accordance with the Agreements. We also determined whether TRAC and the Department of Aviation complied with various other terms and conditions of the Agreements, City rules and regulations, and whether internal controls were adequate. This audit was included in the Auditor s Office Internal Audit Division s 2008 Annual Audit Plan, and authorized pursuant to the City and County of Denver Charter, Article V, Part 2, 5.2.1, General Powers and Duties of Auditor. 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 the Schedule of Amounts Due and Paid is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the revenue amounts. Audit work determined that reported gross revenue was accurately calculated and all amounts due the City for the audit period were paid in full. However, we did identify instances of noncompliance to contract conditions as described in the accompanying report. We extend our appreciation to the personnel who assisted and cooperated with us during the audit. Audit Services Date: October 23, 2008 Staff: Dick Wibbens, CPA, Audit Manager Sonia Montano, CGAP, CICA, Internal Audit Supervisor Wayne Leon Sanford, CICA, Senior Internal Auditor Rudy Lopez, Staff Internal Auditor Kip R. 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 recommendations and progress towards their implementation. 4

6 EXECUTIVE SUMMARY FOR THE YEAR ENDED DECEMBER 31, 2007 This summary highlights the finding of the contract compliance audit, which is more fully described in the Finding and Recommendations section beginning on page eight. Exhibit A and B starting on page 14 include responses to our finding from the Department of Aviation and Thrifty Rent-A-Car System, Incorporated. Finding: Several Areas of Non-Compliance Identified with Agreement and Lease Terms Audit work determined that Thrifty Rent-A-Car System, Inc. (TRAC) was not in full compliance with several agreement and lease terms. Specifically, the 2007 TRAC annual certified concession revenue statement is inaccurate. Additionally, the TRAC 2007 annual usage fee statement provided to the City and County of Denver does not include rental transaction days by month. Further, TRAC certificates of insurance do not provide the City the required 45-day cancellation notice provision and TRAC has not furnished to the City Treasurer financial statements audited by an independent CPA within 120 days after the end of each fiscal year. We determined that internal control weaknesses with DIA contract monitoring processes prevented DIA from properly monitoring this agreement to ensure TRAC fully complied with terms. As a result, the City is denied critical financial and insurance information related to this vendor. Without accurate financial statement information, the Department of Aviation s ability to properly analyze and compare TRAC gross revenue activity is negatively impacted. Additionally, non-compliance with insurance cancellation coverage terms can increase the financial risk level of property damage loss for the City. We recommend the Department of Aviation improve the internal controls for reviewing the annual revenue statement and annual usage fee statement for agreement compliance and obtain corrected 2007 statements that comply with agreement terms. The Department of Aviation should obtain from TRAC the proper insurance cancellation notice time period. Additionally, the Department of Aviation should contact TRAC in writing and enforce the agreement section requiring TRAC to furnish the City Treasurer an annual company audited financial statement. 5

7 Background BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY FOR THE YEAR ENDED DECEMBER 31, 2007 Thrifty Rent-A-Car System, Inc. (TRAC) operates a nonexclusive concession for the rental of motor vehicles to the public at the Denver International Airport (DIA) under the terms of a Concession Agreement and Terminal Building Premises Lease dated October 1, 1993 between the City and County of Denver (City) and TRAC. TRAC is required to report to the City all TRAC rentals of motor vehicles and all other authorized items or services from each customer of TRAC who has arrived at the Airport within 24 hours prior to entering into a motor vehicle rental agreement with TRAC within a 20-mile driving distance of the Terminal Building (curbside) at the Airport. TRAC is required to pay the City 10% of the Company s annual gross revenues (as defined in the Concession Agreement) derived from its operation or the Minimum Annual Guaranteed (MAG) amount, whichever is greater. The Percentage Compensation Fee of $1,570,579 was greater than the MAG of $1,281,289 for TRAC is also required to pay rent for a counter located in DIA s terminal building. The details of the counter rent are outlined in the accompanying notes to the Schedule of Amounts Due and Paid. Concession agreement terms provide for specific rental rate categories to be excluded from reported gross revenues. Corporate rebates are not authorized as reductions from reported gross revenues. In addition to the Concession Agreement and Terminal Building Premises Lease noted above, TRAC operates under the terms of the Special Facilities and Ground Lease dated September 1, 1999 between the City and TRAC. This agreement allows TRAC to occupy a ground facility near the terminal building at Denver International Airport for the purpose of renting motor vehicles to the public. The rent for the ground rental areas are noted in the accompanying notes to Schedule of Amounts Due and Paid. Audit Scope The audit scope was to examine and evaluate the adequacy and effectiveness of internal controls and to determine whether TRAC and the City complied with the agreements. The audit period was for the year ended December 31, Audit Objective The objective of our audit was to determine whether TRAC properly reported gross revenue, usage fees, and paid the City the correct amounts for percentage compensation fees, space rent, and ground rent in accordance with the agreements. The objective included examination of all rental activity applied as reductions to reported gross revenue. Additional objectives included determining whether TRAC and the Department of Aviation complied with various other terms and conditions of the agreements, as well as other City rules and regulations, and assessing the adequacy of accounting and administrative internal controls. 6

8 BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY Audit Methodology To meet the audit objective, we utilized several methodologies. These evidence gathering and analysis techniques included but were not limited to: Review of internal controls; Verification of monthly and annual reportable gross revenue, reductions of gross revenue applied by TRAC, and usage fees charged; Recalculation of 10% compensation fee and rental agreement transactions; Recalculation of sales tax assessed using the combined sales tax rate applied by TRAC; Review of TRAC annual statement of gross revenues; Review of monthly and annual compensation fee amounts due; Review of monthly and annual minimum guarantee amounts due; Assessment of payment timeliness of amounts due; Discussions with Airport and TRAC management and staff; Review of evidence of insurance and bonding requirements; Examination of annual usage fee statement for compliance with facilities lease terms and conditions; and On-site physical inspections. 7

9 FINDINGS, RECOMMENDATIONS, AND RESPONSES FOR THE YEAR ENDED DECEMBER 31, 2007 Finding: Several Areas of Non-Compliance Identified with Agreement and Lease Terms The audit identified several internal control weaknesses resulting in non compliance with contract terms including: inaccurate annual revenue statements, incomplete annual usage fee statements, no provision of a required insurance cancellation notice, and the failure of TRAC to provide an annual audited financial statement to the City Treasurer. These issues are discussed in greater detail below: Inaccurate Annual Revenue Statement The TRAC 2007 certified annual revenue statement provided the City is inaccurate and does not comply with TRAC agreement terms. Specifically, the TRAC certified annual revenue statement Monthly Minimum Guarantee (MMG) reported for February 2007 was $87,426; however the correct MMG amount should have been identified as $108,533. This reporting and payment discrepancy occurred because the TRAC accounting quality control process failed to prevent the incorrect MMG payment from being paid to the City and failed to prevent the TRAC annual revenue statement from being incorrectly prepared and submitted to the City. As a result, TRAC initially paid the City $87,426 for February MMG and did not remit the remaining amount owed of $21,107 until June The Department of Aviation identified the MMG payment error during regular monthly payment processing but did not contact TRAC to obtain a corrected 2007 annual revenue statement. Incomplete Annual Usage Fee Statement The 2007 annual usage fee statement which TRAC provided to the City does not include rental transaction days by month though required by agreement terms. Department of Aviation internal controls did not identify this reporting error and TRAC has not been contacted by the Department of Aviation to obtain a revised 2007 annual usage fee statement. Special Facilities and Ground Lease Section 5.08, Books of Account and Auditing stipulates the following, Not later than March 31 of each year, TRAC shall furnish to the City a true and accurate statement of the total of all usage fees charged, collected, and remitted during the preceding year (including a breakdown of usage fees and rental car transaction days on a month-by-month basis.) Lack of Proper Insurance Cancellation Notice TRAC is not in compliance with Special Facilities and Ground Lease , and Colorado Revised Statue CRS Notice of intent prior to cancellation of certain policies of insurance. TRAC certificates of insurance do not provide the City the required 45-day insurance cancellation notice even though TRAC has provided a 30-day notice of cancellation of insurance. Failure to Provide Annual Financial Statements TRAC has not furnished to the City Treasurer financial statements audited by an independent CPA within 120 days after the end of each fiscal year, and the Department of Aviation has not notified TRAC of this noncompliance issue. 8

10 FINDINGS, RECOMMENDATIONS AND RESPONSES Non-Compliance Issues Have Several Negative Impacts In addition to general concerns regarding contract compliance and DIA contract administration practices, the effects of inadequate controls identified by audit work are noted below: The delayed payment of funds to the City denied the City the use of those funds for approximately 134 days; The usage fee annual statement reporting error prevented the City from properly analyzing the Usage Fee because monthly usage fee activity cannot be recalculated; A 30-day non-compliant insurance cancellation notice reduces the City reaction period to respond to a cancellation of insurance coverage; and City is denied the financial information required by the concession agreement and is unable to therefore analyze this required information. The Treasurer is not able to review the independent accounting firm s opinion and related notes to the statement which could impact the City s ability to fully understand the financial condition of the company. Contract Monitoring Control Weaknesses Prevented Adequate Oversight and Enforcement of Contract Provisions Audit work determined the following internal control weaknesses impeded Department of Aviation management from exposing and responding to the agreement non-compliance issues noted above: Inadequate oversight regarding TRAC annual revenue statement accuracy and completeness. Department of Aviation has not requested TRAC to provide a 2007 annual revenue statement that complies with agreement terms; Inadequate enforcement of agreement terms for the 2007 usage fee annual statement. The Department of Aviation does not have adequate internal controls in place for monitoring agreement compliance for annual usage fee statement; Insufficient controls in place for enforcement of agreement terms for insurance cancellation notice; and No procedure in place to monitor compliance with the agreement requirement for TRAC to provide the City Treasurer with the annual audited financial statement. Recommendations The Department of Aviation should improve its agreement compliance monitoring by: 1. Improving the accounting controls and oversight in place for analyzing and reviewing the TRAC annual revenue statement and the annual usage fee statement for compliance with agreement terms and for accuracy and completeness. 2. Additionally, the Department of Aviation should contact TRAC and obtain a 2007 certified concession revenue statement and usage fee statement that is in compliance with the reporting requirements stipulated in the concession agreement. 3. Enhancing controls for monitoring compliance with agreement insurance terms by applying stronger follow-up procedures for enforcement of the cancellation notice 9

11 FINDINGS, RECOMMENDATIONS AND RESPONSES requirement. The Department of Aviation should contact TRAC and obtain the required 45-day insurance cancellation notice that complies with the agreement terms. 4. Informing TRAC that agreement 7.1, Financial Statements of Company, is to be complied with and the specified financial information is to be provided to the City Treasurer as soon as possible. See Exhibit A (pg 14) for Department of Aviation response See Exhibit B (pg 21) for TRAC response 10

12 SCHEDULE OF AMOUNTS DUE AND PAID FOR THE YEAR ENDED DECEMBER 31, 2007 Reportable Gross Revenue (Note 1) $15,705,787 Amount Due Amount Paid Balance Due (Note 2) (Note 3) City/ (TRAC) Concession Fees $1,570,579 $1,570,579 $ Ground Rent 117, ,937 Additional Rent 135, ,207 Usage Fee 594, ,773 Terminal Space 5,148 5,148 Total $2,423,644 $2,423,644 $0 The accompanying notes are an integral part of this schedule 11

13 NOTES TO SCHEDULE OF AMOUNTS DUE AND PAID. 1. Reportable Gross Revenue Gross Revenue includes all charges for time and mileage and other authorized charges for services or rentals of motor vehicles made by customers who arrived at DIA within 24 hours. Other authorized items or services include: Additional equipment Change of equipment Personal accident insurance Uninsured motorist protection Underage fee Additional driver fee Drop off charges Supplemental liability insurance Additional equipment Airport recovery fee Supplemental liability insurance Allowed reductions to gross revenues include: CDW (Collision Damage Waiver) and LDW (Loss Damage Waiver) Gasoline Usage fees Amounts received as insurance proceeds Non-revenue rentals to employees As part of our examination of gross revenues, we determined if any category of business activity applied as a reduction to gross revenues is not authorized, such as corporate discounts or rebates. All deductions applied to gross revenues by TRAC were authorized and in agreement with the concession agreement. 2. Amounts Due Concession Fees Section 6.2 (a) of the Concession Agreement states that TRAC agrees to pay as Concession Fees to the City an amount equal to 10% of the Company s annual gross revenues (Percentage Compensation Fee) derived from its operations or a minimum annual guaranteed amount, whichever is greater. Thrifty s amount due was derived from 10% of accrued gross revenue as required by this contract condition. 12

14 NOTES TO SCHEDULE OF AMOUNTS DUE AND PAID Ground Rentals According to section 5.02 (a) in conjunction with section 5.02 (g) of the Special Facilities and Ground Lease, Denver Municipal Airport System Rules and Regulations section , TRAC agreed to pay the following as Ground Rentals to the City: Area Description Square Feet Annual Rate Per Square Feet Period Lease Area 130,678 $0.90 January 1, 2007 to September 1, 2007 Lease Area 130,678 $0.91 October 1, 2007 to December 31, 2007 Additional Rental In accordance with section 5.02 (c) of the Special Facilities and Ground Lease, the Special Facilities and Ground Lease Payment Schedule dated September 1, 1999 and the Department of Aviation billing invoices, TRAC agreed to pay as additional rentals an amount of $135,207 per annum. Additional rentals shall be re-established on every fifth anniversary commencing October 1, These amounts are established by the Special Facilities and Ground Lease, and Denver Municipal Airport System Rules and Regulations section These additional fees are to cover additional ground lease, construction, and improvement costs. Terminal Building Premises Rental section 6.1 (a) of the Concession Agreement and Terminal Building Premises Lease states that TRAC agreed to pay as Terminal Premises Rentals to the City an amount equal to $60 per square foot per year. The space TRAC occupied in the Terminal Building Premises was 85.8 square feet for the year ended December 31, Amounts Paid The amounts paid were compiled from the Department of Aviation s cash receipt records and reports provided. 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. Amounts paid also include credit memos issued by Department of Aviation Accounting related to prior period overpayments. 4. Usage Fees In accordance with the section 5.01 of the Special Facilities and Ground Lease, TRAC agreed to charge and collect usage fees for each rental car transaction day from all airport customers entering into car rental agreements. Such fees are intended to cover the costs of the bonds issued to construct the facilities and are paid to the trustee of the car rental revenue fund monthly. For the period January 1, 2007 through November 30, 2007 the rental car transaction daily usage fee was $1.70. Effective December 1, 2007, the transaction day rate was reduced to $1.60. Per section 5.08 of the Special Facilities and Ground Lease., not later than March 31 of each year, TRAC should furnish to the City, to the Trustee, and to the Independent Consultant a true and accurate statement of the total of all usage fees charged, collected, and remitted during the preceding year (including a breakdown of usage fees and rental car transaction days on a monthby-month basis). Such statement should be prepared and certified by an independent certified public accountant. 13

15 EXHIBIT A DEPARTMENT OF AVIATION RESPONSE 14

16 EXHIBIT A DEPARTMENT OF AVIATION RESPONSE 15

17 EXHIBIT A DEPARTMENT OF AVIATION RESPONSE, 16

18 EXHIBIT A DEPARTMENT OF AVIATION RESPONSE 17

19 EXHIBIT A DEPARTMENT OF AVIATION RESPONSE 18

20 EXHIBIT A DEPARTMENT OF AVIATION RESPONSE 19

21 EXHIBIT A DEPARTMENT OF AVIATION RESPONSE 20

22 EXHIBIT B THRIFTY RENT-A-CAR RESPONSE 21

23 EXHIBIT B THRIFTY RENT-A-CAR RESPONSE 22