Internal Audit Report 

Portside Cafe 
Management Services Agreement 

Audit Period 

January 1, 2008 through December 31, 2009 




Issue Date: May 4, 2010 
Report No. 2010-07

Internal Audit Report 
Portside Cafe Agreement
Audit Period January 1, 2008  December 31, 2009 

Table of Content 
Compliance Audit 
Internal Auditor's Report ...................................................................................................... 3 Compliance Audit 
Executive Summary .............................................................................................................. 4 
Background ............................................................................................................................ 5 
Audit Scope ............................................................................................................................ 6 
Audit Approach ...................................................................................................................... 6 
Conclusion ............................................................................................................................. 6 
Summary of Findings and Recommendations .................................................................... 7 
I.       Ineffective Monitoring of the Portside Caf Management Agreement 
II.       Noncompliance with State Laws and Regulations 









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Internal Audit Report 
Portside Cafe Agreement
Audit Period January 1, 2008  December 31, 2009 

Internal Auditor's Report 
Compliance Audit 
We have completed Compliance Audit an audit of Portside Caf. The Port of Seattle owns the cafeteria, but the
operation is outsourced to Consolidated Food Management, Inc. (CFM) under a management
services agreement. CFM is  a regional food management company and oversees day-to-day
operations of the facility.     The Port Pier 69 Facility Management Department administers the
management services agreement. 
We conducted the audit using due professional care. The audit was planned and performed to obtain
reasonable assurance of compliance with agreed-upon terms and conditions of the management
services agreement. We also evaluated the efficiency and effectiveness of Port management's
monitoring of the agreement. 
Port management has the primary responsibility to establish and implement efficient and effective
monitoring. Our role was to assess and evaluate the monitoring in order to determine whether the
monitoring was adequate and operating as intended. 
Port management's monitoringsystem was not effective. The audit disclosed significant exceptions
related to payroll outlays, unauthorized expenses, and noncompliance with management agreement.
Collectively, the auditor suggests recovery of more than $70,000. Moreover, the management
agreement itself (as written) does not comply with certain applicable state rules and regulations. 
We extend our appreciation to Pier 69 Facility Management, Consolidated Food Management, Inc.,
and Accounting & Financial Reporting staff for their assistance and cooperation during the audit. 


Joyce Kirangi, CPA 
Internal Audit Director 





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Internal Audit Report 
Portside Cafe Agreement
Audit Period January 1, 2008  December 31, 2009 

Executive Summary 
Audit Scope and Objective   The purpose of the audit was to determine whether Compliance Audit 
Compliance Audit 
1.  Port management has        established a system of adequate monitoring to reasonably ensure
compliance with the agreement. 
2.  Financial transactions were Portside Caf related  and completely  recorded  with proper
supporting documentation. 
3.  The management agreement, as amended, complies with applicable state and Port rules and
regulations. 

Agreement Terms  CFM is a regional, on-site food management company headquartered in
Mercer Island, WA. The company provides food services to more than 20 industry and institutional
facilities including the Port. 
Per the agreement, CFM is responsible for overall management of the cafeteria, including catering
services. The Port is financially responsible for all Caf expenses: cost of food, beverage, labor (i.e.
costs related to compensation for CFM employees working at the cafeteria), supplies, and CFM
management fees. 
Portside Caf generates revenue from two different sources. Most of the revenue (>80%) comes from
providing a full range of food and beverage at the cafeteria, and the rest of the revenue comes from
catering for Port and private social events. The cafeteria has been generating annual revenues of
approximately $280,000 while incurring average expenses of more than $430,000 per year. The
cafeteria for the past several years has been operating at an average net loss of $150,000. 
Port management requested an audit of the Caf operation prior to issuing a Request for Proposal
(RFP) in June of 2010. 

Audit Result Summary  Port Management was not effective in monitoring the agreement. The
audit disclosed exceptions related to payroll outlays, unauthorized expenses, and noncompliance with
the management agreement. Collectively, the auditor suggests recovery of more than $70,000. In
addition, the agreement itself (as written) does not comply with certain state statutory requirements. 
. 




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Internal Audit Report 
Portside Cafe Agreement
Audit Period January 1, 2008  December 31, 2009 

Background 
The Port of Seattle (POS) owns a cafeteria, Portside Caf, located at 2711 Alaskan Way. The day-to-
Compliance Audit 
day operation of the cafeteria is outsourced to Consolidated Food Management, Inc. (CFM) through a
third-party managementCompliance Audit services agreement. The original agreement was solicited and awarded to
Delicor Dinning Services,     Inc (Delicor) in 1992. In 1998, CFM acquired the agreement through
assignment and Port management consented to the assignment. 
CFM is a regional, on-site food management company headquartered in Mercer Island, WA. The
company provides food services to more than 20+ industry and institutional facilities including the Port
of Seattle. CFM runs the Portside Caf on behalf of the Port for a fixed monthly fee. 
Revenue from Portside Caf is generated from two different sources. Most of the revenue (>80%)
comes from providing a full range of food and beverage at the cafeteria and the rest of the revenue
comes from catering services for the Port or private social events. 
The cafeteria generates annual revenue of approximately $280,000, and its expenses are slightly over
$430,000. Per the agreement, any loss where the cost of operation exceeds revenue is borne by the
Port. For the past several years, the Caf has operated at an average annual net loss of $150,000. 
Financial Highlights 
Description             2006       2007       2008       2009 
Revenue 
Catering            $118,362    $91,542    $75,676    $56,443 
Food & Beverage      219,463    195,325    225,438    227,118 
Less WSST        (28,745)    (24,561)    (26,077)    (25,513) 
Coffee Club            7,887      7,132      7,528      5,625 
Total Revenue        $316,967   $269,438   $282.565   $263,673 
Expense 
Food Cost          150,357    141,050    155,177    145,606 
Labor Cost          202,081    189,509    210,911    208,598 
Operating Cost         50,040     50,488     55,835     56,151 
Management Fee      15,000    15,000    15,000     15,000 
Coffee Club            4,220     14,815     16,650     13,754 
Total Expenses         421,698    409,614    453,573    439,109 
Net Loss           ($104,731)  ($140,176)  ($171,008)  ($175,436) 
Source: Portside Caf P&L (Profit and Loss) and PeopleSoft 

Port management requested an audit of the Caf operation prior to issuing a Request For Proposal
(RFP) in June of 2010. 



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Internal Audit Report 
Portside Cafe Agreement
Audit Period January 1, 2008  December 31, 2009 
Audit Objectives 
The purpose of the audit was to determine whether: 
1.  Port management has established a systemCompliance Audit of adequate monitoring to reasonably ensure
compliance with the agreement. Compliance Audit 
2.  Portside Caf expenses were proper, valid, and properly supported. 
3.  The management agreement, as amended, complies with applicable state and Port rules and 
regulations. 

Audit Scope 
The scope of the audit covered the period 2008 through 2009. 

Audit Approach 
To accomplish our objective, we performed the following audit procedures: 
Read and analyzed the management agreement, as amended. 
Reviewed applicable state and local laws, rules and regulations, and Port policy and
procedure. 
Interviewed department and the management company staff. 
Obtained a complete understanding of activities of the cafeteria, applicable systems,
processes and controls, and transactions. 
Analyzed applicable internal and external data. 
Assessed relevant risks associated with the agreement. 
Designed and executed our audit procedures based on risks. 

Conclusion 
Port Management was not effective in monitoring this services agreement. The audit disclosed
exceptions related to payroll outlays, unauthorized expenses, and noncompliance with the
management agreement. Collectively, the auditor suggests recovery of more than $70,000. In
addition, the agreement itself (as written) does not comply with certain state statutory requirements. 



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Internal Audit Report 
Portside Cafe Agreement
Audit Period January 1, 2008  December 31, 2009 
Summary of Findings and Recommendations 

I.   Ineffective Monitoring of the Portside Caf Management Agreement 
Compliance Audit 
Compliance Audit 
A system of monitoring is necessary to provide Port management with reasonable assurance of
compliance with agree-upon terms and conditions. Such a system should be based on an analysis
of risks related to the agreement and implementation of key controls to mitigate identified risks.
Port management  then determines how the controls will be monitored to ensure continuous
compliance. 
Port management's monitoring of the agreement was not effective. The monitoring was cursory
and based on an honor system. Our audit disclosed a number of discrepancies including
disallowed expenses. An effective on-going monitoring system would have identified and
remedied these discrepancies. 
1.  Lack of Adherence to the Agreement Terms 
a.  The original agreement was awarded in 1992 for a term of one year with an option to
extend the agreement up to two (2) times for an additional one (1) year term. Port
management has consented to a number of assignments of this agreement to separate
food services providers including Consolidated Food Management. The original 1-year
agreement has remained in place for 18 years. 
b.  Under Article VII.3 of the agreement, the goal of the Portside Caf was to break-even.
However, the Caf has been operating at a loss for the past several years. To the
extent of the loss incurred, the Port has subsidized Portside Caf patrons who are
mostly Port employees. 
(in thousands) 
Description   2003   2004   2005   2006   2007   2008   2009 
Total Revenue   368    323   323    317    269    283    264 
Total Expense   419    424   398    422    410    454    439 
Net Loss      ($51)  ($101)  ($75)  ($105)  ($141)  ($171)  ($175) 
Source: Portside Caf monthly Profit and Loss (P&L) statements 
It's not clear whether the above increase in loss subsidies fall within the original scope
of the Port Commission intent to operate Portside Caf at a break-even. It's also
unclear whether Port Commission is aware of the heavy subsidies the Port pays to
keep the Caf in operation. Further, we could not find any statutory authority that
allows a Port district to subsidize its employee meals or food. The consumption of food
or nourishment is considered private and personal, and subsidy of employee meals
could be deemed a gift of public funds which is prohibited by Washington State
Constitution. 
c.  Article VII.6 of the agreement specifically disallows certain items from reimbursable
expense. Based on our audit, we noted the Port paid for disallowed expenses as
follows: 
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Internal Audit Report 
Portside Cafe Agreement
Audit Period January 1, 2008  December 31, 2009 
i.  $4,200 ($2,100/year) for accounting expenses. 
ii.  $181 (10.50 hours) for unauthorized overtime. 
iii.  $313 for an unauthorized Point of Sales (POS) maintenance contract. 
Compliance Audit 
d.  Article Compliance Audit III.15 requires purchase and usage records of food and beverages to be
inventoried and submitted to the Port of Seattle on a monthly basis. We observed there 
was no inventory taken during the audit period. Consequently, we could not ascertain
the true Cost of Goods Sold (COGS), spoilage, or loss. 
e.  The Portside Caf offers a 15% sales discounts to patrons including Port employee.
Although Port management may have verbally authorized the discount, the agreement
was not formally amended to reflect the approval. 
f.   CFM did not submit for the audit period a written budget with estimated sales, food
costs, revenues, and expenses, as required under Article III.13. Further, despite
continuous operating loss from Portside Caf operation, we found no evidence of
management analysis of the cause and or alternatives that would make the Caf
operates more efficiently. The required budget would have been used by Port
management to assess Portside Caf operation and efficiency. 

2.  The Port agreed to pay for all direct costs related to the Portside Cafe, including
compensation, benefits, and payroll taxes for CFM employees working at the facility. The audit
discovered that the Port reimbursed CFM for payroll taxes and benefits base on a fixed
percentage/amount, as opposed to the actual cost incurred. 
a.  The Port paid flat 25% for payroll taxes and benefits during the audit period. When
compared to actual expenses per the audit, the percentage payment represented an
overpayment of approx. $1,879/month. If we extrapolate this figure for the 2-year audit
period, the total estimated overpayment on payroll taxes and benefits would be
approximately $45,096 ($1,879 x 24). 
The reimbursement of payroll taxes based on the fixed percentage amount appears to
extend well beyond the audit period as summarized below. 
(In thousands) 
Description             2003   2004  2005  2006  2007  2008  2009 
Wages & Salaries        $145  $152  $146  $146  $139  $151  $150 
Vacation Accrual            1    11     5     4     4     6     6 
Total Gross Payroll         146   163   151   150   143   157   156 
Payroll Tax/Ben Payment     34    38    35    36    34    39    39 
% of Gross             23%   23%  23%   24%  24%   25%  25% 
Source: Portside Caf monthly Profit and Loss (P&L) statements 
b.  The Port paid fixed $750/month for medical insurance. A review of the insurance
payments for six months indicated an overpayment of approximately $386.47. When
we extrapolate this figure for the 2-year audit period, the total estimated overpayment
would be $1,546 ($386.47 x 4). 
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Internal Audit Report 
Portside Cafe Agreement
Audit Period January 1, 2008  December 31, 2009 
3.  CFM charges its catering customers, including the Port, an 18% Setup & Delivery Fee for
necessary time and effort to "set up" venues and "deliver" food. The company does not utilize 
a contract to engage catering events. Rather, a simple invoice is used to bill itemized services. 
Nowhere in the invoice is the fee specified as gratuity; nevertheless, the company has
considered the fee as gratuity and paid Compliance Audit out as bonuses/gratuities to its employees. For the
audit period, there was approximately $18,000 of such fees. Compliance Audit 
4.  CFM has 7 paid   holidays and the Port has 10 holidays. CFM employee, per the company
policy, may choose     to take paid-time-off for Port holidays that do not coincide with CFM paid
holidays. We noted that CFM employees were compensated as hours worked for non-CFM
Port holidays. We observed approximately $2,242 of such payments. 
CFM employee benefits include unused vacation payout at separation and annual cash-out of
unused vacation at year end. Both types of vacation payments have been fully included in
reimbursable expenses by the Port. Thus, incorrectly paid holidays represent an overpayment. 
5.  The following are miscellaneous exceptions noted. 
a.  The company paid for a non-Portside related expense of $514. 
b.  An employee was compensated for 25 hours ($276) related to post-termination dates. 
c.  A payroll error ($1,186) was not credited back to the Port. 

Recommendation 
We recommend Port management: 
a.  Implement controls  to ensure that Portside  Caf expense are proper,  reasonable, and
legitimate. 
b.  Recover $4,695 related to unauthorized expense items. 
c.  Recover $46,642 related to overpayments in payroll taxes and benefits. 
d.  Recover $18,000 related to catering Setup & Delivery Fee. 
e.  Recover $2,242 related to unauthorized expense for holiday pay, 
f.   Recover $1,977 in miscellaneous overpayments. 
g.  Conduct a complete review of accounting records for improper payments during the audit
period. The suggested recovery is only based on audit procedures performed and does not
represent the full extent of potential overpayments. 
h.  Consider reviewing calendar years prior to the audit period for potential overpayments. 

Management Response 
a.  Real Estate Division management appreciates the thorough analysis performed by the Internal
Audit group; division management requested this audit in anticipation of issuing an RFP in Q2
of 2010. Our objective was to use the results of the audit to inform the RFP strategy and
effectively deal with known problems and areas of concern with the existing third party
management agreement. 
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Internal Audit Report 
Portside Cafe Agreement
Audit Period January 1, 2008  December 31, 2009 
Due to audit findings which indicated that the management agreement with CFM is not in
compliance with state rules and regulations, the food service operation was closed on Friday,
April 30, 2010. 
Compliance Audit 
Port staff will begin work immediately to determine the best way to replace the operation, andCompliance Audit 
will structure any related agreements in a manner that will facilitate efficient and effective 
monitoring. 
b.  Staff will attempt to recover the unauthorized $4,200 in accounting expenses and the $181 in 
overtime pay. The $313 for the maintenance contract on the Port owned point-of-sales system
was verbally authorized, so we will not seek to recover that expense. Staff will ensure that any
new food service third party management agreements require more detailed documentation to 
facilitate monitoring of expense items. Staff will discontinue the use of verbal authorizations. 
c.  Staff will attempt to recover the noted overpayments in payroll taxes and benefits, and will
ensure that any new food service third party management agreements require more detailed
documentation to facilitate monitoring of payroll taxes and benefits. 
d.  Staff will attempt to recover the noted "setup & delivery fees," and will ensure that any new
food service third party management agreements require that gratuities are clearly identified in
any catering proposals, and will require more detailed documentation to facilitate monitoring. 
e.  Staff will attempt to recover the noted overpayments for holiday pay, and will ensure any new 
food service third party management agreements require more detailed documentation to
facilitate monitoring of this item. 
f.   Staff will attempt to recover the noted miscellaneous overpayments, and will ensure that any
new food service third party management agreements require more detailed documentation to
facilitate monitoring of miscellaneous expenses. 
g.  A complete review of accounting records for improper payments during the audit period due
will not be conducted due to limited staffing resources. 
h.  A review of calendar years prior to the audit period for potential overpayments will not be
conducted due to limited staffing resources. 

II.  Noncompliance with State Laws and Regulations 
A Port in Washington State is a special purpose district and is subject to numerous state
requirements under RCW. Port management should have controls in place to ensure that
agreement language reflects and complies with applicable state laws and regulations. 
The Portside Caf agreement (as currently written) does not comply with the following state laws
and regulations. 
1.  RCW 43.09.240 and the State Constitution require public receipts be deposited with the public
entity treasurer within twenty-four hours. 

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Internal Audit Report 
Portside Cafe Agreement
Audit Period January 1, 2008  December 31, 2009 
a.  The Port has not established an account for use in connection with receipts and
payments associated with the operation of the Portside Caf. CFM has been
depositing Portside Caf daily receipts into its own account and drawing funds from the
account to cover operating expenses. 
Compliance Audit 
Compliance Audit 
2.  RCW 42.24 requires      1) claims (i.e., expenses) be subject to auditing and be certified by an
auditing officer before payment and 2) the Commission approve all claims against the Port. 
a.  Port management acknowledges Portside operating expenses and approves monthly
net income or loss based on the Profit and Loss statement and other summary
documents submitted by CFM. Individual source documents (i.e. vendor invoices or
employee timesheets) are neither reviewed by management nor certified by the Port
auditing officer.  The Portside Caf expenses also do not go through the Port
Commission for approval as required by state law. 
3.  WAC 458-20-254 and RCW 82.32.070 require sale receipts be retained for a period of five
years, and RCW 40.14  public record retention schedules specify that public records be
maintained on an average of six years.
a.  The agreement is not compliant with the state requirements. Under Article III.14, the
agreement requires record maintenance for the current fiscal year and for a minimum
of one previous year, which is considerably less than the state records retention
requirements. For example, prior to 2009, CFM did not retain Z-tape detailed sales 
register reports. As a result, we could not verify completeness of the 2008 revenue. 
4.  Per RCW 74.18.200, the state Department of Services for the Blind has the primary right to
operate food services/cafeterias in any public building dedicated to the administrative functions
of the state or any political subdivision, unless the Department waives its right. 
a.  The Port did not consult with the Department of Services for the Blind to provide it with
the primary right to run the Portside Caf or to obtain an exemption. 
The operation of the Portside Caf is further complicated by the fact that the Port has
been using public funds to subsidize Portside Caf operation. This subsidy for food
consumption has gone on for many years, and it averages to approximately $150,000
per year. The consumption of nourishment is private, personal, and not an activity that
is undertaken for a public purpose. The  subsidies seem to violate Washington State
Constitution that prohibits gifting of public funds.


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Internal Audit Report 
Portside Cafe Agreement
Audit Period January 1, 2008  December 31, 2009 
Recommendation 
We recommend Port management: 
Compliance Audit 
a.  Implement controls to ensure Compliance Audit 
a. All public funds (receipts) are deposited into Port's bank account within twenty-four 
hours as required by state laws. 
b.  All individual claims and expenses against Portside Caf are properly reviewed,
certified, and subject to the Commission approval. 
c.  Consider establishing a revolving bank account for payment of Portside Caf expenses
this would cure most of the state non-compliance issues that currently exist with this
agreement. 
b.  Amend the record retention requirement in the agreement to make it consistent with applicable
state requirements. 
c.  Work with the Legal Department to re-evaluate the current Portside Caf operating structure,
including the subsidy legal issue. If the subsidies are deemed to be an improper gift of public
funds, these subsidies should cease immediately. To avoid legal complications and excessive
time & effort to monitor this agreement, we would recommend simply leasing the Caf space
including its equipment to an outside vendor.

Management Response 
a.   (a)The need to deposit daily cafeteria receipts into the Port's bank account was brought to
Port management attention by Internal Audit shortly before this audit was conducted. Staff will
implement this control for any new food service third party management agreements. 
(b) Regarding the reference to RCW 42.24, the following clarification is offered to better
describe the protocols followed in regards to the Portside Caf expenses and revenues.
Monthly, CFM provides a "Vendor Detail Supporting Schedule" that lists by Expense Category
(meat, beverage, produce, dairy, paper, transportation, etc.) and then by each Individual
Invoice (by date, vendor, invoice #, amount). This detail is reviewed by Port management as
to the expenses incurred. This is then reconciled to the Profit/Loss statement also provided by
CFM. A monthly payment is then made to pay CFM for the detailed expenses, netted against
revenues for the month, through the Port's standard payments process and included in the
monthly Port Commission payments approval process. Although the detailed invoices/vendor
payments made by CFM to operate the cafeteria are not processed in detail, as noted in the
finding, Port management review is afforded those detailed payments monthly and the
payments made by the Port to CFM do follow the Port auditing officer and Commission
payments approval process. 

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Internal Audit Report 
Portside Cafe Agreement
Audit Period January 1, 2008  December 31, 2009 
Additionally, from the monthly Profit/Loss statements received from CFM, the Port records in
its financial system both monthly revenues and operating expenses on a gross basis, to
completely and accurately reflect all revenues generated and expenses incurred. 
(c) Division management will consult with the Port Treasurer and request the establishment ofCompliance Audit 
a revolving bank account for payment of Portside Caf expenses for any new food serviceCompliance Audit 
third party management agreements. 

b.  Any new food service third party management agreements will state that customer receipts
must be retained for a period of five years. 
c.  Interpretation from the Legal Department will provide division management with needed
direction to help determine future use of the space. 













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