INTERNAL AUDIT REPORT LEASE AND CONCESSION AGREEMENT AUDIT CLEAR CHANNEL OUTDOOR, INC. DBA CLEAR CHANNEL AIRPORTS August 2012 July 31 2015 ISSUE DATE: arch 24, 201 REPORT NO. 201 EXECUTIVE SUMMARY The purpose of the audit was AUDIT RESULT BACK GROUND AUDIT OBJECTIVES AND SCOPE TABLE OF CONTENTS EXECUTIVE SUMMARY TRANSMITTAL LETTER Audit Committee Port of Seattle Seattle, Washington AUDIT TEAM RESPONSIBLE MANAGEMENT TEAM Margaret Songtantaruk, Senior Auditor Jim Schone, Director Business Development Lionel Vincenti, Sr. Manager ADR, A Business Development Rudy Caluza, Director, Accounting Financial ��CLEAR CHANNEL OUTDOOR, INC. DBA CLEAR CHANNEL AIRPORTS 2012 2015 INTERNAL AUDIT Lease a greement number 000 950 authori zes Clear Channel Outdoor, Inc., dba Clear Channel Airports (Clear Channel) to management the publicly advertisement at the Seattle Tacoma International Airport. The terms of the agreement provide for fixed Minimum Annual Guarantee (MAG) at $5 million annually. In additional, the agreem ent requires a concession fee equal to 70% of gross receipts, provided the concession percentage fee is higher than the MAG payment. The following are the only agreed upon deductions allowed in the agreement: a. Standard commissions paid by Concessionaire to a recognized advertising agency Customary allowances for discounts actually made by Concessionaire to its advertising customers Reimbursements made to Concessionaire for actual, out pocket costs associated with telephone services on any traveler’s inf ormation boards or courtesy van information boards The amount of any sales tax or other excise tax imposed upon the customer and collected by Concessionaire as agent for the taxing body imposing the tax and billed to the customer as a separate item KEY FINANCIAL RESULTS FOR CLEAR CHANNEL AIRPORTS AGREEMENT PERIOD REPORTEDGROSS REVENUES CONCESSION PAID 2012 2013 $3,956,648 $5,000,000 2013 2014 $5,122,345 5,000,000 2014 2015 $7,842,258 5,489,580 TOTAL $16,921,252 580 ta Source PeopleSoft Financials & Propworks BACKGROUND NANCIAL HIGHLIGHTS ��CLEAR CHANNEL OUTDOOR, INC. DBA CLEAR CHANNEL AIRPORTS 2012 2015 INTERNAL AUDIT reviewed information for the period August 1, 2012 July 31, 2015, utilizing a risk based approach from planning to examination. We gathered information through document requests, research, interview, observations, and data analysis. We applied detailed audit procedures to areas with the highest likelihood of significant negative impact as follows: 1. Determine whether Port management monitoring controls are adequate and effective to ensure reported concession fee s were properly calculated and remi tted timely to the Port. Reviewed the Lessee’s chart of accounts to determine whether all applicable revenue accounts were included in the revenues reported to the Port Validated General Ledger ross eceipts agreed to le dger a ccounts eceivable Reconciled the reported revenue to Lessee’s general ledger and financial statement by account Test a risk based sample: To determine if revenue deductions were valid Verif ied the Accounts Receivable were consistent with the contract AUDIT SCOPE AND METHODOLOGY CONCLUSION ��CLEAR CHANNEL OUTDOOR, INC. DBA CLEAR CHANNEL AIRPORTS 2012 2015 INTERNAL AUDIT SCHEDULE OF FINDINGS AND RECOMMENDATIONS GROSS REVENUES WERE UNDERRPORTED The lease agreement, Section 1.10, stipulates: "Gross Receipts" shall mean the aggregate gross amount of revenue derived by Concessionaire from operation of the Airport advertising and/or promotions concession, including the installation, placement, display, maintenance and operation of advertising display locations at the Airport, and all charges for servic es performed by Concessionaire or any persons, firms or corporations on its behalf, or any subtenants, licensees or concessionaires of Concessionaire, from, in or the Premises.... The analysis of the lessee’s financial records and detailed transaction test ing determined the lessee did not report the following three categories of gross receipts not excluded by the lease agreement: Production Transit Revenue Revenue derived from reimbursement by Clear Channel clients for out of pocket expenses on behalf of th e advertiser for a third party to produce the advertising graphics to be posted. Installation Services Revenue Reimbursement by clients for out of pocket expenses incurred by Clear Channel, on behalf of the advertiser, for a third party to install their advertisement. Gross Receipts Deduction Clear Channel lacked evidence to support a reduction to gross revenue related to a customer refund. FINANCIAL RESULTS FOR CLEAR CHANNEL AIRPORTS AGREEMENT YEAR REPORTED GROSS REVENUES UNDER REPORTED REVENUE IMPACT TO CONCESSION FEE DUE TO PORT 3,956,648 78,036 5,122,346 19,219 7,842,258 11,172 7,821 CONCESSION FEE UNDERPAID DUE TO PORT 7,821 Data Source: PeopleSoft Financials and PropWorks ��CLEAR CHANNEL OUTDOOR, INC. DBA CLEAR CHANNEL AIRPORTS 2012 2015 INTERNAL AUDIT ECOMMENDATIONS We recommend management: Seek recovery of $ 7,821 for the underpaid concession fees and a ssess applicability of the one time late fee and accrued interest, and seek recovery as appropriate. Work with Clear Channel to ensure gross receipts subject to concession fees are completely reported. Management Response Management concurs with the audit finding that the tenant did not report Gross Revenue in accordance with the lease. As a result, percentage rent remitted to the Port was low er than the amount due under the lease for lease year 2014/2015. Management will work with the tenant to recover rent and interest due to the Port in accordance with the lease