INTERNAL AUDIT REPORT 

LSG Sky Chefs Inc. 
Lease and Concession Compliance Audit 

MARCH 1, 2011  FEBRUARY 28, 2014 

ISSUE DATE: August 11, 2015 
REPORT NO. 2015-09

LSG SKY CHEFS INC.                                             INTERNAL AUDIT 
MARCH 1, 2011  FEBRUARY 28, 2014 
TABLE OF CONTENTS 


TRANSMITTAL LETTER.................................................................................................................................................. 3 
EXECUTIVE SUMMARY ................................................................................................................................................. 4 
BACKGROUND ............................................................................................................................................................... 5 
FINANCIAL HIGHLIGHTS .............................................................................................................................................. 5 
AUDIT SCOPE AND METHODOLOGY ............................................................................................................................ 5 
CONCLUSION ................................................................................................................................................................ 5 
SCHEDULE OF FINDINGS......7 

UNTIMELY RESPONSE 











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LSG SKY CHEFS INC.                                             INTERNAL AUDIT 
MARCH 1, 2011  FEBRUARY 28, 2014 

TRANSMITTAL LETTER 
Audit Committee 
Port of Seattle 
Seattle, Washington 
We have completed a compliance audit of LSG Sky Chefs Inc. We reviewed information for the period
March 1, 2011  February 28, 2014. 
We conducted this performance audit in accordance with Generally Accepted Government Auditing
Standards and the International Standards for the Professional Practice of Internal Auditing. 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. 
We extend our appreciation to the management and staff of Aviation Business Development
Department and Accounting and Financial Reporting for their assistance and cooperation during the
audit. 


Joyce Kirangi, CPA, CGMA 
Internal Audit, Director 

AUDIT TEAM                      RESPONSIBLE MANAGEMENT TEAM 
Jack Hutchinson, Audit Manager          Jim Schone, Director  Aviation Business Development 
Roneel Prasad, Auditor                James Jennings, Manager  Aviation Properties Group 





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LSG SKY CHEFS INC.                                             INTERNAL AUDIT 
MARCH 1, 2011  FEBRUARY 28, 2014 
EXECUTIVE SUMMARY 

AUDIT OBJECTIVES AND SCOPE 

The purpose of the audit was to determine whether: 
1.  The reported concession fees were complete, properly calculated, and remitted timely to the
Port. 
2.  The Port and lessee complied with provisions of the Lease and Concession Agreement, as
amended. 
We reviewed information for the period March 1, 2011  February 28, 2014. Details of our audit's scope
and methodology are on page 5. 

BACKGROUND 

LSG Sky Chefs, Inc. (Sky Chefs) is a subsidiary of LSG Lufthansa Service Holding AG and currently
operates in 54 countries. Sky Chefs provides in-flight catering service, including the preparation and
distribution of in-flight foods, beverages, and related services to domestic and overseas airlines at
Seattle Tacoma International Airport 
The agreement requires two forms of payments from Sky Chefs: rent (Land and Building) and
concession fees. Rent is computed based on square footage and is due monthly. Annual rent for Land is
$169,611 and for the building is at $286,000. Concession fees are 7% of gross revenue for airline
operations and 3.5% of gross revenue for non-airline operations. 

AUDIT RESULT

The reported concession fees were complete, properly calculated, and remitted timely to the Port. Sky
Chefs also complied with the provisions of the Lease and Concession Agreement that we deemed
significant to the audit objectives. However, Lessee's response to audit requests was unreasonably
untimely. See Findings 1 under the Schedule of Findings. 




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LSG SKY CHEFS INC.                                             INTERNAL AUDIT 
MARCH 1, 2011  FEBRUARY 28, 2014 

BACKGROUND 
Sky Chefs Inc. and the Port entered into the lease and concession agreement in November 1980. 
Commencing on March 1, 2011 Sky Chefs renewed its contract for three years ending on February 28,
2014 with 2 consecutive years extension. Instead of exercising Lessee's extension options under this
Lease, a new 3-year lease with 2 1-year extension options was executed, effective March 1, 2014. 
Sky Chefs provides in-flight catering service, including the preparation and distribution of in-flight
foods, beverages, and related services to domestic and overseas airlines at Seattle Tacoma
International Airport. 
The agreement requires two forms of payments from Sky Chefs: rent (Land and Building) and 
concession fees. Rent is computed based on square footage and is due monthly. Annual rent for Land is
$169,611 and for the building is at $286,000. Concession fees are 7% of gross revenue for airline
operations and 3.5% of gross revenue for non-airline operations. 

FINANCIAL HIGHLIGHTS 

KEY FINANCIAL RESULTS FOR LSG SKY CHEFS INC. 
AGREEMENT  REPORTED GROSS          CONCESSION
RENT 
YEAR       REVENUES                PAID 
2011-2012           $28,564,832     $455,611       $1,993,992 
2012-2013           34,362,522    455,611       2,399,376
2013-20141           39,127,474     455,611        2,733,797 
TOTAL           $102,054,828   $1,366,832     $7,127,165
Data Source: PeopleSoft Financials 
Data Note: 1 as of 02/28/2014 

AUDIT SCOPE AND METHODOLOGY 
We reviewed information for the period March 1, 2011  February 28, 2014. We utilized a risk-based
audit approach from planning to testing. We gathered information through document requests,
interviews, observations, and data analysis, in order to obtain a complete understanding of the
financial requirements of the agreement between the Port of Seattle and Sky Chefs Inc. 
We applied additional audit procedures to areas with the highest likelihood of significant negative
impact as follows: 
1)  To determine whether the reported concession was complete, properly calculated, and remitted
timely to the Port. 

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LSG SKY CHEFS INC.                                             INTERNAL AUDIT 
MARCH 1, 2011  FEBRUARY 28, 2014 

Reviewed the lessee's chart of accounts to determine whether all revenue accounts were
included in the reported revenues to the Port. 
Reconciled the reported revenues to: 
o  Revenue Detail Report by revenue items. Additionally, the revenue items were reviewed
to determine whether all items subject to the concession fee were included in the
reported revenue. 
o  Certified Audit Statement of Gross Revenues, which is a statement of revenues
independently verified by a CPA. 
Analyzed deductions to determine whether they were correctly classified and properly deducted
from gross concession revenue. 
Selected risk-based sample of 18 Customer Invoices to determine whether: 
o  All revenue items on the face of the Customer Invoice agreed to the amount posted to the
Revenue Detail Report. 
o  Disallowed deductions reduced revenues subject to the concession fee. 
Reviewed all payment records for the audit period to determine whether remitted by the
required due date. 

2)  To determine whether the Port and the lessee complied with the significant provisions of the Lease
and Concession Agreement. 
Reviewed the Certified Audited Statement of Gross Revenues for compliance with the timely
and complete submission requirements. 
Reviewed required insurance coverage in force for the audit period. 
Determined if the surety bond amount complied with the requirements in the agreement, as
amended. 

CONCLUSION 
CONCLUSION 

The reported concession fees were complete, properly calculated, and remitted timely to the Port. Sky
Chefs also complied with the provisions of the Lease and Concession Agreement that we deemed
significant to the audit objectives.  However, Lessee's response to audit requests was unreasonably
untimely. See Findings 1 under the Schedule of Findings. 




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LSG SKY CHEFS INC.                                             INTERNAL AUDIT 
MARCH 1, 2011  FEBRUARY 28, 2014 
SCHEDULE OF FINDINGS AND RECOMMENDATIONS 
FINDING #1 
1. SKY CHEFS DID NOT PROVIDE AUDIT RESPONSE TIMELY 
Receiving audit records and/or audit clarification from the lessee was difficult and untimely. 
As the table below shows, there have been unreasonable delays in receiving lease records and/or
providing clarification to audit questions. The delays have caused inefficiencies and duplication
of efforts in the audit process. Port management tried to intervene, but it too had little success. 

Below are examples of the unreasonable delays 
Action                         Date        Date Responded 
Responded 
Requested 
(No. of Days) 
Preliminary data request *             July 9, 2014    Dec 4, 2014           148 
Requested Additional information *      Dec 16, 2014   Feb 9, 2015           55 
Accounts Inquiry *                  Feb 17, 2015    Mar 23, 2015           34 
Lessee's GL Account Inquiry *           Feb 24, 2015    Mar 23, 2015           27 
Account Inquiry *                   Feb 24, 2015    Apr 15, 2015           50 
Invoice Inquiry *                     Feb 27, 2015    Mar 23, 2015            24 
Penalty deductions and Incentives from   May 11,2015    July 8, 2015           58 
3rd Party agreements * 
* Port Management Assisted to facilitate 
Recommendations: 
We recommend Port management: 
Educate and hold the lessee accountable for lack of timely response to audit requests. 
For future contract define lessee's obligations on response timeliness. 
Management Response: 
In most audits, the lack of a timely response to requests for information from Internal Audit has
not been an issue. Unfortunately, in this case, the Lessee underwent significant staff turnover in
their accounting department during the course of this audit, contributing to the significant delays
noted above. Port management assisted Internal Audit with these requests when informed that
Lessee was not responding. With this specific agreement, the Port's only remedy to cure this
situation was to place the tenant in formal default of their Lease, a severe measure that is
normally reserved for more egregious transgressions. 
Port management has begun incorporating language into leases that puts a specific time limit on
lessees to respond to information requests from Internal Audit or they are required to pay the full
cost for a Port representative to travel to the site where the financial records are
maintained. Port management will continue efforts to incorporate this language into all new
leases. 

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