Internal Audit Report 

Borders, Inc. 
Lease and Concession Compliance Audit 

June 1, 2006 through May 30, 2009 




Issue Date: February 2, 2010 
Report No. 2010-03

Internal Audit 
Borders, Inc. (Agreement No. 622) 
Audit Period: June 1, 2006  May 30, 2009 

Table of Contents 

Internal Auditor's Report ...................................................................................................... 3 
Executive Summary ............................................................................................................. 4 
Background .......................................................................................................................... 5 
Audit Objectives ................................................................................................................... 5 
Audit Scope .......................................................................................................................... 6 
Audit Approach .................................................................................................................... 6 
Conclusion ........................................................................................................................... 6 
Schedule of Findings and Recommendations ...................................................................... 7 
1)   Noncompliance with Lease Terms 
2)   Late Payments 











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Internal Audit 
Borders, Inc. (Agreement No. 622) 
Audit Period: June 1, 2006  May 30, 2009 

Internal Auditor's Report 
We audited the Lease and Concession Agreement between the Port of Seattle (Port) and Borders, Inc., for the
period June 1, 2006 through May 2009. The purpose of the audit was to determine whether the lessee properly
reported gross revenue and that the provisions of the lease and the concession agreement were adequately
monitored by Port management. 
We conducted our audit using due professional care, and we planned and performed the audit to obtain
reasonable assurance as to whether the Port and the lessee had complied with the provisions of the
agreement. 
The lessee materially complied with the terms and conditions of the agreement but did not fully comply with the
proper reporting of all gross receipts. We also noted that Borders was not timely in remitting monthly
concession fees which Port management could have monitored more effectively to ensure compliance.
We extend our appreciation to the management and staff of the Aviation Business Development and
Accounting & Financial Reporting (AFR) for their assistance and cooperation during the audit. 


Joyce Kirangi, CPA 
Director, Internal Audit 








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Internal Audit 
Borders, Inc. (Agreement No. 622) 
Audit Period: June 1, 2006  May 30, 2009 

Executive Summary 
Audit Scope and Objective  The purpose of our audit was to determine the level of compliance with the
provisions of Borders, Inc (Lessee) Lease and Concession Agreement No. 622. We examined the books and
records of the Lessee in order to verify the accuracy and completeness of reported gross receipts and
concession fees paid from June 1, 2006 through May 30, 2009. We also evaluated Port controls in order to
determine whether lease and concession contract provisions were adequately monitored. The Aviation
Business Development Department has the primary responsibility for monitoring and implementing effective
controls for the Borders lease agreement. 
Agreement Terms  Lease and Concession Agreement No. 622 authorizes Borders, Inc. to operate a retail
book store at the Airport. In accordance with the terms of the lease, the Lessee pays the Port a rental fee of
7% on its gross receipts and a 5% concession fee. 
Audit Result Summary  The lessee materially complied with the terms and conditions of the agreement but
did not fully comply with the proper reporting of all gross receipts. We also noted that Borders was not timely in
remitting monthly concession fees which Port management could have monitored more effectively to ensure
compliance.











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Internal Audit 
Borders, Inc. (Agreement No. 622) 
Audit Period: June 1, 2006  May 30, 2009 

Background 
The Port's lease and concession agreementwith Borders, Inc. authorizes the Lessee to operate a branded
retail book store at Sea-Tac airport.
Borders Group, Inc. is a publicly held company with 2008 consolidated sales of $3.2 billion and operates over
515 superstores in the U.S. Borders Group owns London-based Paperchase Products Limited, a retailer of
stationery, cards and gifts with 124 locations outside the U.S., including stand-alone stores and concessions.
Borders operating goal is to engage customers with a rich shopping experience and provide them with books,
music, movies, and other entertainment items. 
Borders occupancy date at Sea-Tac occurred on January 21, 2005. That was the effective date of the
agreement which has an expiration date of 5/31/2015. 
The agreement requires twelve monthly payments of a Minimum Annual Guarantee (MAG) due in advance by
the first of each month. There has been routine annual maintenance activities pertaining to insurance and
surety bond requirements and annual adjustments to the MAG based on prior year's sales activity. 
The total lease concession fee revenue generated for the Port is as follows: 

FY Ended May 30     Amount 
2007     576,422 
2008     592,139 
2009     562,101 
Total              $1,730,662 
Source: PeopleSoft and Borders, Inc. reporting 

Audit Objectives 
The purpose of the audit was to determine whether: 
1.  The lessee complied with the terms and conditions of the concession lease agreement in terms of
completeness, accuracy and timeliness including: 
The accurate and complete reporting of gross receipts and payment of concession fees. 
Monthly gross receipts statement and computation of required rent, concession and related
leasehold taxes were reported accurately. 


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Internal Audit 
Borders, Inc. (Agreement No. 622) 
Audit Period: June 1, 2006  May 30, 2009 
Monthly payments of Minimum Annual Guarantee and Payments of Percentage Fees were made 
timely. 

2. Lease and concession agreement provisions were adequately enforced by Port management including: 
Required insurance coverage and surety. 
Timely submittal of annual attested reports. 
Any unique provisions in the Agreement, such as Quality Assurance Audits. 
Audit Scope 
The scope of the audit covered the period of June 1, 2006 through May 30, 2009. 

Audit Approach 
To achieve our audit objectives, we performed the following procedures: 
Obtained an understanding of the lease agreement and the significant compliance requirements 
Reviewed Port internal controls and monitoring activities over lease requirements 
Obtained relevant financial data from the Lessee, including Bank and Profit and Loss Statements, ztapes
, and sales reports to the Washington State Department of Revenue 
Analyzed data (internal & external) to determine completeness & compliance. 
Conclusion 
The lessee materially complied with the terms and conditions of the agreement but did not fully comply with the
proper reporting of all gross receipts. We also noted that Borders was not timely in remitting monthly
concession fees which Port management could have monitored more effectively to ensure compliance.




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Internal Audit 
Borders, Inc. (Agreement No. 622) 
Audit Period: June 1, 2006  May 30, 2009 

Schedule of Findings and Recommendations 
1) Noncompliance with Lease Terms 
The lease agreement in Section 1.8 stipulates all the provisions for reporting gross receipts. The agreement
makes the following allowances for not including in gross receipts: 
Section 1.8.1  Refunds because of unacceptable or unsatisfactory goods. 
Section 1.8.2  Discounts actually granted. 
Section 1.8.3  Sales taxes imposed and collected as agent for the taxing body. 
We reviewed Borders Profit and Loss statements for the audit period and noted that credit card fees were 
recognized as reduction to concessionable gross receipts. Such fees are not included in the allowed
deductions, and thus the reduction resulted in underreporting of concession fees as follows: 
FFF                 Disallowed        Additional
Credit Card Fees   Concession (12 %)
owed to the Port 
2007          $ 83,673         $ 10,041 
2008          $ 72,716          $ 8,726 
2009          $ 70,307          $ 8,437 
Total           $ 226,696           $27,204 
Source: Borders, Inc. Profit and Loss Statements 
Per Section 7 of the lease agreement, audit costs are borne by the Port of Seattle unless the results reveal a
discrepancy of more than two percent reported in accordance with Section 4 for any twelve month period. In
the event of such discrepancy, the full cost of the audit shall be borne by the Lessee. For each of the three
years audited, the two percent threshold was exceeded as follows: 
Fiscal   Gross    Rent and   2% of Rent  Discrepancy  Discrepancy
Year Receipts Concession   and     due to   Exceeds the
Ended Reported  Reported  Concession Credit Card   2%? 
May 30                  Reported     Fees 
2007   $ 4.5 M   $ 576,422    $ 11,528    $ 83,673    Yes 
2008   $ 4.9 M   $ 592,139    $ 11,842    $ 72,716    Yes 
2009   $ 4.8 M   $ 562,101    $ 11,242    $ 70,307    Yes 
Source: Borders, Inc. Profit and Loss Statements 

As a result, Borders is responsible for the audit cost of $9,287. 


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Internal Audit 
Borders, Inc. (Agreement No. 622) 
Audit Period: June 1, 2006  May 30, 2009 
In addition, the lease agreement defines in Section 1.8 gross receipts to include any "retail display allowances" 
or other promotional or advertising income received.  Borders entered into agreements with magazine
cooperatives beginning in February 2007 for the placement of their magazines in more prime locations in all
Borders stores. However, income received (approximately $225,000 during the audit period for all Border's
stores) was not allocated from these agreements to individual stores. Consequently, none of the display
allowances were reported as part of concessionable receipts in the audit period. Due to lack of an allocation
base, the display allowances attributable to the location at the airport cannot be estimated. 
Recommendations 
We recommend management: 
1.  Bill Borders, Inc. for $27,204 in lost concession. 
2.  Bill Borders $9,287 for audit cost. 
3.  Review periods prior to the audit period for potential underreporting of concessionable gross receipts
due to credit card fees. 
4.  Work with Borders to establish an equitable formula to be allocated for all retail display allowances.
Further, seek reimbursement, of any concession fee owed to the Port as a result of this display
allowance or gross receipts that were not reported to the Port. 
Management Response: 
The Concessions group was pleased to hear about the great degree of cooperation by the Borders
accounting staff with the Port's internal audit staff. We understand that they complied with all requests on
a timely basis and were readily forthcoming with information. 
Underreporting of concessions sales 
The audit revealed that Borders had deducted credit card fees from gross reported sales. The Concessions
group commends the efforts of Internal Audit in discovering this non-compliance with the provisions of the
Borders lease agreement. We agree (along with the management of Borders Books) that they must pay the
Port for the lost concession revenue. 
Audit Costs 
The recoverable from this audit exceeded the allowable for the Port to incur the cost of the audit.
Therefore, we agree that the Port should bill Borders the costs for this audit, in accordance with the lease
agreement. 
Review Prior Periods for Lost Revenue 
The Borders lease agreement states that the lessee "shall not be required to maintain such enumerated
records for more than three years." For this reason, concessions does not believe that it is possible to
audit records prior to those already subject to audit. However, Borders did begin reporting credit card fees
in reported sales, when this non-compliant practice was first brought to Borders attention (some
agreements may allow this practice, but the Port lease agreement does not). Borders also has agreed to
submit revised sales reporting for the lease year beginning June 2009. 
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Internal Audit 
Borders, Inc. (Agreement No. 622) 
Audit Period: June 1, 2006  May 30, 2009 

Retail Display Allowance 
As is common with magazine and booksellers, publishers pay a retail display allowance for more prominent
display in stores. Such allowances should be reported as gross sales. Borders did receive such allowance
during the audit period, but it was not allocated to specific stores. Concessions commits to working with
Borders staff and Port Legal to determine a method of allocating future allowances as gross sales. 

2) Late Payments 
The lease agreement requires concession/rent fees be paid within fifteen (15) days following the end of
each calendar month. For late payments, the agreement provides under Section 8 a penalty of 5% and
interest to be accrued at 18% per annum or the maximum allowed by the law, whichever is less. 
We reviewed Borders, Inc. payment history for the audit period and noted the following: 
We noted 22 instances of late concession/rent fees exceeding the 10 day grace period.
We applied 5% to overdue amounts and an annual interest of 18% to the balance until paid for our
calculation. 
Our calculation resulted in penalty/interest of $11,113 for the period June 1, 2006 through May 30,
2009. 

Recommendation 
We recommend the management bill Border's, Inc. $11,113 in late fees and interest charges.
Management Response: 
The audit documented instances when Borders submitted payment and/or reporting more than 10 days
(grace period) after the 15th of the month following the sales month. The lease agreement stipulates a 5%
penalty and interest accrued at 18% per annum until payment of sales and penalty is made. Different from
lease/rental payments which facilitate predetermined amounts to bill regularly, the amount to bill on
concession agreements is variable and not known until the concessionaires submit reporting (and
payment) to the Port. The Port's central financial system does not provide an automated mechanism to
support after-the-fact variable computation and billing of late fees. In 2009, the Port implemented a manual
solution using a desktop application to compute and bill late fees. With this solution in place, all tenants
were notified in 2009 that moving forward they could expect to be billed penalty and/or interest accrued. All
tenants are now being billed for any applicable late fees according to the terms of their lease. As for the
retroactive considerations, management will work toward resolution with guidance from the Port Legal
department. 

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