Department of Aviation Revenue Contract Management Performance Audit

Transcription

1 Department of Aviation Revenue Contract Management Performance Audit March 2011 Office of the Auditor Audit Services Division City and County of Denver Dennis J. Gallagher Auditor

2 The Auditor of the City and County of Denver is independently elected by the citizens of Denver. He is responsible for examining and evaluating the operations of City agencies for the purpose of ensuring the proper and efficient use of City resources and providing other audit services and information to City Council, the Mayor and the public to improve all aspects of Denver s government. He also chairs the City s Audit Committee. The Audit Committee is chaired by the Auditor and consists of seven members. The Audit Committee assists the Auditor in his oversight responsibilities of the integrity of the City s finances and operations, including the integrity of the City s financial statements. The Audit Committee is structured in a manner that ensures the independent oversight of City operations, thereby enhancing citizen confidence and avoiding any appearance of a conflict of interest. Audit Committee Dennis Gallagher, Chair Maurice Goodgaine Jeffrey Hart Timothy O Brien Robert Bishop Robert Haddock Bonney Lopez Audit Staff John Carlson, Internal Audit Deputy Director, JD, MBA, CIA Chris Horton, Internal Audit Supervisor, MA Marcus Garrett, Lead Internal Auditor, CIA, CGAP Anna Hansen, Senior Internal Auditor, CICA Jessica Quintana, Senior Internal Auditor You can obtain free copies of this report by contacting us at: Office of the Auditor 201 West Colfax Avenue, Department 705 Denver CO, (720) Fax (720) Or download and view an electronic copy by visiting our website at:

3 City and County of Denver 201 West Colfax Avenue, Department 705 Denver, Colorado FAX Dennis J. Gallagher Auditor March 17, 2011 Ms. Kim Day, Manager Department of Aviation City and County of Denver Dear Ms. Day: Attached is the Auditor s Office Audit Services Division s report of its audit of revenue contract management for the Department of Aviation (Aviation). The audit s objectives were to assess whether a sample of revenue contracts exhibited key elements, such as current bond and insurance information, and whether the system for managing contracts adequately mitigated risk of inaccurate revenue reports. The audit s sample of revenue contracts showed that evidence of many key contract elements was in place. However in the process of this finding, my auditors also determined that the revenue contract management system has not adequately controlled the risk of inaccurate payments. The audit team has collaborated with your staff to develop a set of strong, feasible recommendations to bolster Aviation s internal controls. The audit also found contract management staff could more effectively use the PropWorks system to maintain contract documentation and enhance efficiency. Finally, one of Aviation s contractors has stymied audit efforts to review revenue documentation, and consequently has incurred a penalty of $23,100. I know that you share my concern regarding this matter, and I look forward to the collection of penalties from this contractor as a reminder to all City contractors that the City of Denver will rigorously enforce the terms of its contracts. I greatly appreciate the proactive interest that you and your staff have taken in response to these audit findings. If you have any questions, please call Kip Memmott, Director of Audit Services, at Sincerely, Dennis J. Gallagher Auditor DJG/cnh cc: Honorable Bill Vidal, Mayor Honorable Members of City Council 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 Ms. Kim Day, Manager March 17, 2011 Page Two Members of Audit Committee Mr. Jack Finlaw, Chief of Staff Mr. Claude Pumilia, Chief Financial Officer Mr. David Fine, City Attorney Mr. L. Michael Henry, Staff Director, Board of Ethics Ms. Lauri Dannemiller, City Council Executive Staff Director Ms. Beth Machann, Controller

5 City and County of Denver Dennis J. Gallagher Auditor 201 West Colfax Avenue, Department 705 Denver, Colorado FAX AUDITOR S REPORT We have completed a performance audit of the Department of Aviation s (Aviation) revenue contract management system including a sample of revenue contracts. This performance audit is authorized pursuant to the City and County of Denver Charter, Article V, Part 2, Section 1, General Powers and Duties of Auditor, and was conducted in accordance with generally accepted government auditing standards. 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. While the audit provided a level of assurance regarding the composition of contract files, it also revealed systemic weaknesses that raise the risk of Aviation receiving inaccurate revenue reports from its contractors. We found that very little in-depth review of contractors self-reported revenue is occurring, despite previous findings by Aviation s Internal Audit section regarding revenue under-reporting. After consulting with Aviation staff, we propose a comprehensive set of recommendations that will help to strengthen the revenue contract internal control system. We also determined that Aviation should improve its use of the PropWorks electronic contract management system to better meet recommendations provided to Aviation by an outside consultant, and to facilitate more efficient contract management. We also determined that many, though not all, of the 148 contract files that we reviewed contained evidence of key contract elements. However a few contract files were missing evidence of elements such as sureties and insurance. Finally, we found that in a judgmental sample of revenue contracts, Aviation and contractors have defined gross revenues as being equivalent to gross receipts, or the actual funds collected from a business transaction. We extend our appreciation to the Manager of the Department of Aviation and all Aviation personnel who assisted and cooperated with us during the audit. Audit Services Division Kip Memmott, MA, 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.

6 TABLE OF CONTENTS EXECUTIVE SUMMARY 1 INTRODUCTION & BACKGROUND 5 SCOPE 9 OBJECTIVES 9 METHODOLOGY 10 FINDING 1 11 Aviation s Contract Management Process is Unable to Determine the Accuracy of Contractor Revenue Reports and Results in Increased Risk 11 RECOMMENDATIONS 17 FINDING 2 19 Review of Random Sample of Contracts Shows Some Enhancements Should Be Made to Ensure Key Elements Are in Place 19 RECOMMENDATIONS 21 FINDING 3 22 One Company Failed to Provide Gross Revenue Documentation in the Required Timeframe 22 RECOMMENDATION 22 OTHER PERTINENT INFORMATION 23 Some Contractors Pay Concession Fees Based on Total Funds They Receive 23 APPENDICES 25 Appendix A Rental Car Customer Discounts and Potential Revenue Lost 25 Appendix B Wally Park Customer Discounts and Potential Revenue Lost 26 AGENCY RESPONSE 27

7 EXECUTIVE SUMMARY Aviation s Contract Management Process is Unable to Determine the Accuracy of Contractor Revenue Reports and Results in Increased Risk Audit work revealed that the Department of Aviation s (Aviation) contract management process raises the risk of inaccurate revenue reporting. In addition, Aviation s contract administrators do not effectively use the internal electronic contract management system, called PropWorks, which increases inefficiency within contract oversight practices. Auditors reviewed a random sample of 148 contracts and found evidence of key contract elements in many of the files. However, Aviation should make some enhancements to better ensure that important contract elements, such as evidence of current surety and insurance, are in place for all revenue contracts. Finally, auditors found that the definition of gross revenues in some contracts is synonymous with gross receipts, or the amount of funds taken in at a point of sale. Aviation does not effectively verify that contractors accurately report revenue information Aviation s revenue contract administrators and Finance Division staff review most contractors revenue reports at a high level, using monthly self-reported revenue information and performing a reconciliation of these monthly reports to an annual statement. Because Aviation s contract management business model involves directly overseeing its approximately 347 revenue contracts, rather than delegating this responsibility to one or more master concessionaires 1, Aviation s contract administrator staff have less time to review contract financial information at a detailed level. Aviation s most substantive control for detecting inaccurate reporting is through audits performed by Aviation s Internal Audit section; however, this unit only reviews a low percentage of total Aviation revenue contracts each year and can only detect reporting issues after the fact. Further, in 2008 Aviation eliminated its daily revenue reporting system, called Datascape, and did not reinstate a compensating control such Financial information is not effectively reviewed. as a requirement for contractors to provide certified annual statements. 2 This further weakened Aviation s ability to ensure that contractors are reporting revenues accurately. Auditors worked with Aviation officials to craft a set of feasible recommendations that will address the areas of heightened risks. Specifically, we recommend that Aviation develop an array of risk factors to identify contractors in need of greater scrutiny, and that Aviation develop a range of risk mitigation approaches to 1 Master concessionaires are contractors who are hired to oversee some or all other concessionaires. Depending on the contract terms, master concessionaires might take on the responsibility of receiving revenue information from other concessionaires and ensuring the quality of the revenue information received. 2 The requirement to provide certified annual financial statements was discontinued for Datascape program participants when the Datascape program began in P a g e 1 Office of the Auditor

8 address different levels of identified risks. We also recommend that Aviation require contractors to pay a reasonable portion of the cost to mitigate the risk of inaccurate reporting, including paying a greater amount of the cost of any tests that determine contractors have under-reported revenues. Aviation does not adequately maintain its revenue contract information and should use PropWorks for all contract documents Aviation s PropWorks system should be used as the primary repository for all of Aviation s contract information. Maintaining a central source for contract information makes contract administration more efficient, since it removes the need to locate relevant documents in disparate locations. A centralized database also enables contract administrators to quickly access summary data in management reports. While auditing a random sample of 148 revenue contract files, auditors found that some key contract documents were not in PropWorks, which was also noted in a 2009 Auditor s Office review of Aviation s contract management. 3 Documents missing from PropWorks included some contract agreements and amendments, Request for Proposal documents, contract control forms, such as a Form 42, bond and insurance information, and a management letter announcing the end of the daily revenue reporting program previously created through a contract amendment. This means that contract administrators must use a hybrid of electronic and paper documents to manage their contracts, resulting in unnecessary inefficiency. The inefficiency that results from not using PropWorks as the repository of all contract documents is highlighted by the fact that paper files containing bond and insurance information could not be accessed easily. Some bond documents were ultimately located at various locations in the airport, while others were not found at all. Further, an inconsistent file naming convention for insurance files made finding all the relevant files difficult and time consuming. These issues would be addressed by fully utilizing PropWorks as a central repository for all contract information, as a 2009 external assessment recommended to Aviation. We reiterate this recommendation. Review of Random Sample of Contracts Shows Some Enhancements Should Be Made to Ensure Key Elements Are in Place Auditors randomly sampled 148, or 43 percent, of Aviation s 347 revenue contracts active in The purpose of the sample was to determine if these contracts contained key elements required for effective contract procurement and administration. Auditors selected elements for testing based on contract requirements set forth in Executive Order 3 Office of the Auditor. (2009). Department of Aviation Revenue Management and Business Development Performance Audit. (Accessed January 13, 2011). 4 A contract between Aviation and Wally Park was part of the judgmental review, but not part of the random sample. Consequently, auditors reviewed a total of 149 contracts, but only 148 of the contracts were included in the team s random sample for the presence of key contract attributes. The Wally Park contract was originally reviewed by another audit team within the Auditor s Office as part of a fraud-related inquiry, and the fruits of that team s initial work were subsumed into this audit for further analysis. City and County of Denver P a g e 2

9 8, or because the elements mitigate risk to the City. Specifically, we reviewed contract information contained in PropWorks and in paper files for elements such as timely receipt of Request for Proposal (RFP) documents, appropriate contract control forms, the presence of required signatures on the contract and amendments, the presence of current surety and insurance documentation, and evidence of contract monitoring. Audit work found that some attributes required by Executive Order 8 were not present in all contract files reviewed. For example, testing confirmed ninety-two percent of contracts had required signatures; eighty-two percent of contract files maintained some evidence of contract monitoring; and eighty-nine percent had required control forms, such as Form 42. Auditors noted that certain contracts without signatures and the accompanying control forms were older contracts; typically these contracts were executed several years ago. Further, we could not provide full assurance for contractually required surety and insurance documentation, which exist to mitigate risk to Aviation and the City. Specifically, during audit fieldwork Aviation was unable to locate current surety documentation for four percent of contracts in the sample. Further, Aviation could not provide proof of current insurance for three percent of sampled contracts. 5 Auditors provided Aviation with these findings during the course of the audit, and Aviation began taking steps to find or obtain the required documentation. Finally, auditors found that Aviation could not document that all contract work had begun after contract execution, nor could it demonstrate that all RFP response documents were received prior to the bid deadline. Maintaining evidence of these elements in all contracts will help ensure that Aviation complies with Executive Order 8, as well as mitigating risk to Aviation and the City. One company failed to provide gross revenue documentation in the required timeframe While evaluating contract management practices, auditors also sought to gather financial information regarding six revenue contracts to assess whether these contractors showed evidence of under-reporting revenues. 6 Three of these contracts are held by Mission Yogurt, a company that operates several restaurants at Denver International Airport. However, Mission Yogurt notified the Auditor s Office that it was unable to fully provide 2009 gross revenue supporting documentation for any of the three contracts we requested because the relevant records were inadvertently shredded. Under audit provisions in the terms of each contract for which revenue data was requested, Mission Yogurt owes the City a penalty totaling $23,100 for its failure to provide in a timely manner records requested by the Office of the Auditor. 7 Aviation should ensure that it collects these monies, as provided under the terms of its contract with Mission Yogurt. 5 Surety documents were not required for 23 of 148 contracts tested. 6 For further information on the results of this testing, see Other Pertinent Information, page 23. These six contracts were selected judgmentally for further testing based on audit concerns developed while testing 148 revenue contracts active in The audit provisions of each contract call for a $350 per day penalty for each day beyond a fourteen day timeframe that a contractor does not provide records requested by the City Auditor, the Manager of Aviation, or their representatives. In the instance reported here final resolution occurred twenty-two days after the fourteen day timeframe elapsed. The delay created a penalty of $7,700 per contract a total of $23,100. P a g e 3 Office of the Auditor

10 Some Contractors Pay Concession Fees Based on Total Funds They Receive Many revenue contracts call for a concession fee to be paid to Aviation based on gross revenues. Auditors reviewed a judgmental sample of six revenue contracts, along with associated financial information, and found that each contract Allowing contractors to treat gross revenues as gross receipts could be abused by contractors acting in bad faith. defined actual revenue received, or gross receipts, as synonymous with gross revenues. A 2008 assessment provided by the City Attorney s Office, as well as a prior Colorado Supreme Court opinion, supports this practice. However, while equating gross revenues with gross receipts is a supportable practice, Aviation should be mindful that this practice results in lower concession fees than would be paid if contractors reported gross revenues based on the full value of goods or services sold, irrespective of any point of sale discounts. Further, Aviation should be aware that treating gross receipts as gross revenues could be abused by contractors acting in bad faith to shield revenues and improperly diminish the concession fee paid to Aviation. For example, contractors might receive rebates from business partners, such as credit card companies whose card-holders received point of sale discounts from the airport contractor. These rebates would not fall under the definition of gross revenues as shown in the six revenue contracts reviewed. Developing a set of risk factors and a range of mitigation approaches, as recommended in Finding 1, will help to address possible under-reporting. Finally, Aviation should be aware that a review of contractual definitions of gross revenues may be needed to ensure that all contractors have the correct understanding regarding how to report gross revenues. City and County of Denver P a g e 4

11 INTRODUCTION & BACKGROUND Denver International Airport The City and County of Denver owns the Municipal Airport System which includes the Denver International Airport (DIA) and the former Stapleton International Airport. 8 The Department of Aviation (Aviation) operates DIA, and the Airport System is an enterprise fund of the City and County of Denver. 9 An enterprise fund is established and operated in a manner similar to a for-profit business, where fees are charged to external parties to cover the costs of providing goods and services. An enterprise fund uses the accrual basis of accounting, which recognizes revenues as they are earned and expenses as they are incurred. Opened in February 1995, DIA comprises six runways, a terminal building, and three concourses (Concourse A, B and C) that provide access to ninety-three airline gates, and hosts thirty passenger airlines. 10 In 2009, the facility accommodated more than fifty million passengers. 11 The Revenue Management and Business Development Division Aviation s Revenue Management and Business Development Division provides concessions management, properties management, and other landside services. The Division is responsible for maximizing revenues from airport tenants and comprises the following two major sections: Concessions Management The Concessions Management section is responsible for managing all airport concessions, including master planning, awarding of spaces, and contract administration. 12 This group administers contracts for food and beverages; news and general merchandise; vending machines and news racks; and retail spaces, such as clothing stores, specialty shops, or premises selling pre-packaged foods. Property Management The Property Management section provides oversight for all airport properties, including airline leases, car rentals, oil and gas production, farming, and commercial development activities. Telecommunications contract management responsibilities are split between Property Management and Concessions Management. Other functions within Property Management include: 8 Stapleton International is still part of the Municipal Airport System for financial purposes. For example, according to Aviation s Chief Financial Officer, Aviation still owns certain property located at the former Stapleton airport site. 9 The Department of Aviation is sometimes informally referred to as DIA. To avoid confusion, this report refers to the Department of Aviation by its official name and uses DIA to refer to the physical airport site (Accessed December 2, 2010). 11 Airports Council International, Passenger Traffic 2009 FINAL, (Accessed December 3, 2010). 12 City and County of Denver 2010 Budget Book, page 452. P a g e 5 Office of the Auditor

12 Airline Activity Monitoring airline activity involves overseeing national, regional, and foreign airline activities such as: o Signatory and non-signatory airline lease agreements 13 o o o o o o o Operating permits for airline contractors operating on the airfield Operating permit letters for non-signatory airlines Site access permits Facility space and gate assignment Space relocation Joint use spaces, which are specified areas assigned to multiple airlines, and Invoice initiation and change forms to assess the appropriate charges for tenant billing Car Rental Activity Car Rental Properties Management is responsible for car rental facility leases and subleases, concession agreements, operating and site access permits. In addition, Car Rental Properties Management oversees: o o o o o Monthly revenue reports Usage fees Facility rent notification letters and invoice initiation and change forms to reflect the concession rate change for each tenant Financial reporting, such as monthly airport revenue reports, car rental revenue analysis, revenue forecasting, and periodic tenant file review, and Contract administration of some flight services contracts, parking facility contracts, and telecommunication agreements. Farming Activity and Oil and Gas Production The Car Rental Properties contract administrator also oversees four individual farming agreements. Retaining farms on DIA land allows for raising some crops, weed control, and wildlife minimization. 14 The contract administrator also oversees a consultant which manages the day-to-day oil and gas operations Signatory: Airlines doing business with Aviation are called a signatory when they sign a valid and effective Airport Use and Lease Agreement with the City for a minimum term of five years with leasing on a preferential basis at one or more gates. (Accessed December 8, 2010) Non-Signatory airlines can operate at the airport after executing an Operating Permit. 14 Wildlife on or near DIA runways may disrupt takeoffs and landings. 15 PetroPro Engineering, Inc. assists Aviation in the management of its oil and gas wells. Included in the firm s scope of services are: inspections of active oil and gas wells; operations of water flood pilot project with one water well and four injection wells; liaising with the Colorado Oil and Gas Conservation Commission; and submitting monthly written status reports on production and operations activities to Aviation management. The agreement with PetroPro started in April 2006 and will terminate in April City and County of Denver P a g e 6

13 Commercial Development This function is responsible for managing Aviation s asset development through lease agreements, licenses, site access permits, and business logo signage. Aviation Revenue Contract Process Aviation s basic contract process, outlined below, mirrors the City s Executive Order 8 and requires the following elements: Request for Proposal (RFP) After Aviation has decided on the type of business or commercial development project, the agency issues an RFP detailing the requirements and qualifications for the bidders and the required rental rates. RFPs are advertised in local newspapers, the Denver Business Journal, and on Aviation s website. Aviation analysts perform a financial analysis on prospective contractors to ensure that they are financially able to fulfill the obligations laid out in the RFP. As proposals are submitted, an evaluation committee reviews, evaluates, and grades them. The Manager of Aviation issues final approval to enter a contract, after which all entities who submitted a proposal are notified of Aviation s final contracting decision. Figure 1 Overview of the Contract Procurement Process Request for Proposal (RFP) Completion of a Contract Control Form (Form 42) Form 42 Prior to completing an agreement, Aviation generates a contract control form called Form 42, which is the formal request to Airport Legal Services to create an agreement and track the required signatures for approval. 16 Airport Legal Services is a unit of the City Attorney s Office. Form 42 accompanies the agreement through the entire review and approval process. Surety Accepted Certificate of Insurance Accepted Surety Before commencing operation at DIA, the contractor must obtain and submit to the airport a current surety in the form of a performance bond, irrevocable letter of credit, or Finalization of the Lease Agreement deposit of funds. The amount of surety is specified in the airport s Rules and Regulations. 17 For the airlines, the surety amount is the lesser of $3 million or an amount equal to three months of rates and charges; for the other tenants, the surety amount is equal to six months of the negotiated rental fees. All surety renewals are handled within the Concessions Management section. 16 For more detail regarding the function of the Form 42 process, see Office of the Auditor (2009), Department of Aviation Revenue Management and Business Development Division, DIA%20Revenue%20Management%20and%20Business%20Development%20Report% pdf. 17 Section 120: Schedule of Fees and Charges P a g e 7 Office of the Auditor

14 Certificates of Insurance Contractors must also submit an original and valid Certificate of Insurance to the airport. Revenue Management and Business Development personnel request a Certificate of Insurance from the Risk Management Division, which identifies the required amount and type of insurance coverage as part of the contract. Certificate of Insurance renewals are administered by the Concessions Management section. Lease Agreement After approval by the Manager of Aviation, lease agreements must be approved by the Mayor and City Council. Agreements also require review and approval by the City Auditor. Other Types of Revenue Generating Agreements In addition to revenue contracts, Aviation has other types of revenue generating agreements, including licenses, permits, and site access permits. Licenses Licenses are issued to entities requiring access to DIA property for projects such as detention ponds, utilities, and fiber optic conduits. Licenses are usually issued for long terms, such as a twenty-year license. Permits Operating Permits are generally issued for business generating revenue that could be shared with Aviation. Such businesses include ground handling companies, aircraft cleaners, deicing companies, aircraft fuelers, or existing rental car agencies in need of short term usage of some vacant land adjacent to their current leased lot. Operating permits are issued for short-term use. City Council and Mayoral signatures are required for operating permits when a percent of revenue is shared with Aviation or the permit grants exclusive use for more than thirty days. If the Operating Permit does not require these approval signatures, the approval and signature process will be limited to the Manager of Aviation and the Deputy Manager of Revenue Management and Business Development. Site Access Permits Site access permits are generally issued for a non-revenue generating transaction, and allow access to or across DIA property for a limited period of time. Other Groups Also Play a Role in the Revenue Contract Cycle The setup and relocation of a contractor at DIA involves coordination between the contract administrator and other groups within Aviation as briefly described below: The Marketing Division This division attracts new tenants, including airlines, and is the liaison between the potential tenant and the Revenue Management and Business Development Division. Airport Legal Services This group is part of the City Attorney s Office and aids in the drafting of new agreements, amendments, Operating Permits, or Site Access Permits. In addition, Airport Legal Services assists contract administrators with legal counsel and legal interpretations of provisions. City and County of Denver P a g e 8

15 Finance and Administration Division This division calculates and handles fees and charges for tenants, provides billing code numbers, handles billing invoices, receives payments to Aviation, and tracks project funding. Aviation s Internal Audit This section audits Aviation contractors, including airlines, and provides possible solutions and recommendations to problems identified within their audits. Contract Management Technology Aviation uses PropWorks as its electronic contract management system. PropWorks is a web-based database application with the purpose of tracking and monitoring the different lease agreements, licenses, permits, and their related revenue contract data. According to Aviation personnel, PropWorks is a property management database tool that allows contract administrators to store significant contract documents, such as a copy of the agreement, insurance certificates, and bonds, link them to a shared drive, and create critical tickler functions to monitor deadlines for the renewal of documents related to the contract. SCOPE The audit reviewed Aviation revenue contracts active in calendar year Additionally, the team analyzed current contract management processes, policies and procedures, and systems. The team excluded the process for issuing and monitoring licenses and permits from its review. OBJECTIVES The audit had two objectives: To determine if the Department of Aviation s contract management processes and systems effectively address the risk of inaccurate revenue reporting. To determine if the Department of Aviation s current contract management process provides reasonable assurance that evidence of key required contract elements are present in contract files. P a g e 9 Office of the Auditor

16 METHODOLOGY The audit team reviewed the Department of Aviation s revenue contract process to identify possible improvements using a variety of methodologies, which included the following: Analyzing the City Charter, applicable Executive Orders, and the Denver Revised Municipal Code Reviewing selected revenue contracts on a sample basis. Specifically, the audit team randomly selected 148 of 347 active revenue contracts for 2009 for assurance testing and to establish risks for further detailed testing on a judgmental basis Reviewing and evaluating findings and recommendations from prior internal and external reviews, including audits conducted by the Auditor s Office, the Department of Aviation s Internal Audit section, and assessments conducted by a third party contractor, Jefferson Wells Reviewing key internal documentation related to the oversight, monitoring, and administration of revenue contracts, including documentation found in PropWorks and documentation found in paper contract files Obtaining and reviewing available policies and procedures Analyzing processes and applicable contract databases Obtaining information from other airport internal auditors affiliated with the Association of Airport Internal Auditors regarding their airport s lease management methodology, and Interviewing various Aviation staff, including contract administrators charged with monitoring contract compliance and revenues generated by concessionaires, vendors, and contractors. Auditors also obtained best practice information established by the federal government regarding contract administration. 18 However, this information was ultimately not referenced in the audit report. 18 The following sources of authority for best practice criteria were used: U.S. Office of Management and Budget, Office of Federal Procurement Policy (October 1994), A Guide to Best Practice for Contract Administration. U.S. Office of Management and Budget, Office of Federal Procurement Policy (May 2000), Best Practices for Collecting and Using Current and Past Performance Information. Office of Inspector General (September 2006), FDIC s Contract Administration Evaluation Report, Report No City and County of Denver P a g e 10

17 FINDING 1 Aviation s Contract Management Process is Unable to Determine the Accuracy of Contractor Revenue Reports and Results in Increased Risk Aviation s system for administering revenue contracts heightens the risk that contractors inaccurately report revenues. Aviation s method of reviewing contractor financial information results in few comprehensive assessments to substantiate reported revenues. In fact, some previous audits conducted by the Auditor s Office and Aviation s Internal Audit section have documented problems with financial monitoring, and in some cases found that contractors have under-reported revenues. Further, effective contractor oversight is impeded by the lack of some key controls for some revenue contracts, such as requiring certified financial statements. Finally, Aviation is not using its centralized contract management database (PropWorks) for all contract-related documents, as was recommended by an external 2009 assessment. This creates unnecessary inefficiency in the contract management process. Aviation Does Not Effectively Verify Contractors Accurately Report Revenue Information Auditors determined that Aviation does not effectively review revenue contract financial information, in part due to Aviation s decentralized contract administration system. Audit analysis shows that the contract administration process involves Aviation contract administration staff, individuals from the Finance Division, and Aviation s Internal Audit section. Audit work determined that the main financial information used to oversee revenue contracts are monthly self-reported revenue reports and annual financial statements. 19 Aviation generally only reviews and reconciles contractors self-reported financial information at a high level Most entities that have revenue contracts with Aviation provide monthly revenue information. After a contract year has ended, the contractor provides an annual financial statement and an Aviation contract staff member reconciles the monthly revenue reports against the contractor s annual financial statement. The reconciliation involves adding up the monthly totals to determine if they match the yearly total provided. Monthly revenue reports are the most detailed financial information used to oversee revenue contractors. According to one contract staff member, Aviation lacks sufficient time to delve further into the monthly revenue report numbers to assess their accuracy. 19 Airline contracts do not require airlines to provide monthly revenue reports. The airlines provide monthly information regarding landing fees. However, airlines provide revenue to Aviation beyond landing fees, such as rental fees. According to a 2009 external assessment, 2008 airline rental fees accounted for about fifty-eight percent of all revenues derived from airline, car rental, oil and gas production, farming, and commercial development activities. P a g e 11 Office of the Auditor

18 Aviation s approach of directly overseeing its contractors helps explain why contract administrators only have limited time to perform financial reviews. 20 In 2009, there were approximately 350 revenue contracts requiring ongoing contract administration, and there are a significant number of financial and operational requirements that can be time-consuming to monitor. For example, some contract administrators do spot checks of restaurant menu prices to ensure that concessionaires are not charging more for food and beverage items than they have agreed to charge. The Finance Division provides an additional layer of review, but this review is generally at a high level also. Specifically, once Aviation receives payments from contractors, Finance Division staff enters payment information into an accounts receivable database called AMS Advantage. 21 The Finance Division calculates applicable rates, and both interview and documentary evidence show that the Finance Division follows a monthly process to communicate rate change information with contract administrators to verify accuracy. Further, contract administrators receive some information from the Finance Department to aid in reconciling annual financial statements. Finally, the Finance Division makes quarterly reconciliations to Aviation s General Ledger. However, while the Finance Division helps to ensure that contractors are paying correct rates, the information that it provides to contract administrators for year-end reconciliation specifies only monthly contractor payments to Aviation, meaning that contract A previous audit found that Aviation s contract review and monitoring was neither adequate nor timely. contract compliance. administrators cannot use more detailed data for their year-end reconciliations. The Finance Division does not delve further into the accuracy of monthly or annual revenue reports. While Aviation reviews monthly reports it has not always used these reports effectively Although Aviation generally limits its financial reviews to monthly reports, current and previous audit work shows that Aviation has not always used these monthly reports effectively. In 2009, the Auditor s Office released a report that reviewed operational practices including contract management. 22 The audit found that Aviation s contract review and monitoring was neither adequate nor timely. Specifically, the report noted that Aviation s Revenue Management and Business Development staff members rarely reviewed monthly concession reports and other financial data for Similarly, during the current audit, we found that monthly revenue reports from FreeFi, which provides wireless internet services in the DIA facility, were either not provided or lost for January 2009 through August This failure to provide critical information may 20 An alternative method of obtaining businesses to provide goods and services at DIA is contracting with one or a few companies who then subcontract with the remainder of vendors. International airports in Tampa, Philadelphia, and Boston (Logan) are among airports in the United States who use master concessionaires for some or all of their contract oversight. Under this scenario, the contractor is responsible for many of the administrative responsibilities, including contract oversight. 21 AMS is a software program created by the CGI Group, Inc. The Aviation Finance Division uses the AMS accounts receivable module. 22 Office of the Auditor (2009), Department of Aviation Revenue Management and Business Development Division, DIA%20Revenue%20Management%20and%20Business%20Development%20Report% pdf. City and County of Denver P a g e 12

19 be partly attributable to organizational change that occurred in the area overseeing the contract, which resulted in a change in contract administrators. However, the lack of revenue information makes it impossible to ensure that a contractor is paying Aviation the correct concession fee. Aviation over-relies on its Internal Audit section to assess accuracy of revenue reports Because the contract administration staff and the Finance Division do not deeply examine revenue information reported by contractors, Aviation must rely on its Internal Audit section for a more exhaustive review of the revenue reports. For example, Finance relies on Internal Audit to determine whether deductions from gross revenues are taken in accordance with contract provisions. However, the Internal Audit section has only six employees with which to perform detailed financial audits of approximately 350 revenue contracts. In October 2010, Aviation s Internal Audit section reported performing seven audits from January 2009 through October 2010, and plans another six revenue audits for Due to limited resources, Aviation s Internal Audit section is not well-positioned to provide in-depth reviews of revenue information by itself. Further, because Aviation uses auditors as the only substantive control over revenue accuracy, the clear division that should exist between audit work and operational management work is blurred, putting the appearance of the credibility and independence of the Internal Audit section at risk. 23 While the Internal Audit section has assessed only a limited number of revenue contracts recently, the audits it has performed in 2009 and 2010 identified some contracts for which revenues were under-reported. Further, these audits have also identified other problems attributable to inadequate contract monitoring. 24 Using auditors to verify revenue information blurs the line between audit work and operational management. Chelsea Catering An audit of Chelsea Catering, a component of Continental Airlines, found that Continental had underpaid the Department of Aviation by $31,121, and recommended recovery of these monies plus interest of $5,048. In addition, the audit found that Continental had used $812 of bad debt as a deduction, and recommended recovery of these monies plus interest of $139. The audit noted that the eligibility of bad debt as a deduction, and the inclusion of recovery fees as revenue, was not provided for in Continental s lease agreement (revenue contract). However, Continental disagreed that it owed Aviation approximately $36,200, and Aviation management reported that it would not pursue recovery of the monies inappropriately deducted from revenues. 23 Aviation s Internal Audit section provides the Manager of Aviation with independent, objective assurances derived from the results of audits conducted in accordance with both the International Standards for the Professional Practice of Internal Auditing and the Code of Ethics of the Institute of Internal Auditors. To maintain complete objectivity, Aviation Internal Audit will not perform any operational duties for the Department, develop or install procedures, prepare records or engage in any other activity which it normally would be expected to review and appraise, and which could reasonably be construed to compromise its independence. See Department of Aviation Internal Audit Charter dated February 25, The Auditor s Office did not validate the results of the Aviation Internal Audit section s audit findings. P a g e 13 Office of the Auditor

20 Signature Flight An audit of Signature Flight, which provides fixed base operations at DIA, found that not all revenue related to landing and fuel fees was being reported as required by the contract (a lease agreement). The audit report recommended that Signature report its revenue as required by the lease agreement, and that Signature should pay compensation on all applicable revenue sources. Aviation management reported that it would address these areas with Signature Flight Support and monitor revenue reporting more closely, but did not commit to obtaining Aviation s compensation on these underreported revenues. Cingular An audit of New Cingular Wireless found that this company owes the Department of Aviation $73,332 in rental, utility, and interest charges. The audit noted that improvements were needed by the contract administrator to provide a better, timelier review and reconciliation of payment amounts by this contractor. In its response, the contractor agreed to pay Aviation $59,687 in back rent. Aviation has discontinued some important tools previously used to verify accuracy of contractor information Aviation formerly required some revenue contractors to participate in a revenue reporting process, which used an automated system, called Datascape. Aviation intended the Datascape system to provide airport concessionaires with an efficient, cost-sensitive mechanism to report daily revenues and to allow Aviation a way to certify the accuracy of such revenues. Specifically, concessionaires had the option to participate in Datascape, meaning instead of submitting a required annual statement of gross revenues certified by an independent Certified Public Accountant (CPA), the annual statement may be signed by an officer of the concessionaire. Aviation discontinued this program in 2008, shortly after the issuance of an Aviation did not implement an alternative control when the Datascape system was terminated. audit performed by the Auditor s Office that identified unreliable information within the Datascape system. 25 Specifically, the audit found that Datascape did not have effective internal controls in place to provide reasonable assurance regarding the accuracy of revenue. The audit also found that Datascape program monitoring was very limited. However, when Aviation terminated the Datascape program in 2008, it did not reinstitute a requirement that program participants provide annual financial statements certified by a CPA. According to Aviation data, contractors holding 142 different revenue contracts participated in the daily sales reporting program, and are now exempted from providing certified annual financial statements. According to an Aviation official involved in contract oversight, the certified annual financial statement requirement was not reinstituted in part due to concern that the cost of compliance would weigh too heavily on contractors. 25 Office of the Auditor. (2008). Department of Aviation-Concessions Management Division Daily Revenue Reporting Program (Datascape) Performance Audit. (Accessed January 25, 2011). City and County of Denver P a g e 14

21 Aviation should develop a more comprehensive system of controls to help verify the accuracy of revenue reports To address the heightened risk of inaccurate reporting inherent in its present system for reviewing revenue information, the Manager of Aviation should compel the development and implementation of a more comprehensive system of controls. First, the Manager of Aviation should develop a system for assessing the level of risk revenue contractors present for reporting their revenues inaccurately. This system s risk factors should include, at a minimum, contractors compliance with other contractual requirements and the accuracy of contractors previous revenue reports. During the course of the audit, Aviation management began the process of creating such a set of risk factors. Second, the Manager of Aviation should develop and implement a system of enhancements to the current system for controlling the risk of inaccurate revenue reporting. This system should set a range of risk mitigation approaches, including certified annual financial statements, internal control assessments, and full revenue audits conducted by external parties. Third, the Manager of Aviation should develop and implement a guide, such as a risk mitigation matrix, that identifies the appropriate mitigation approach to use regarding contractors who present a heightened risk of inaccurate reporting. This guide should adopt more intensive risk mitigation approaches for contractors who present relatively high risks of inaccurate reporting. Aviation management should also strive to minimize the cost to the City of these risk mitigation strategies. Consequently, the Manager of Aviation should ensure that when revenue contracts expire or when Aviation contractors request a contract amendment, new contract language incorporates requirements that contractors bear a reasonable part of the cost of any risk mitigation approaches undertaken when enhanced risk is found. Further, the Manager of Aviation should ensure that contract language provides that contractors pay a greater portion of the risk mitigation costs if material underreporting is found. Aviation Does Not Adequately Maintain its Revenue Contract Information and Should Use PropWorks for All Contract Documents Aviation maintains its contract data through electronic storage in the PropWorks system, augmented by paper files. However, while the PropWorks system should be the system of record for contract data, auditors found that some information is not stored in PropWorks at all. Aviation is not ensuring that PropWorks is the central source for all contract information The PropWorks system should be the primary repository for all contract information. Maintaining a central source for contract information makes contract administration more efficient. A central repository removes the need to locate relevant documents in disparate locations, and offers other advantages such as the ability to generate comprehensive management reports. With approximately 350 revenue contracts, the number of files to maintain, and potentially lose, is very large, creating significant risk for inefficient contract administration. An external assessment completed by Jefferson Wells P a g e 15 Office of the Auditor