Sky Chef
Internal Audit Report Sky Chefs, Inc Lease and Concession Compliance Audit January 1, 2008 through December 31, 2009 Issue Date: October 05, 2010 Report No. 2010-15 Internal Audit Sky Chefs, Inc; Agreement No. 716 Audit Period: January 1, 2008 December 31, 2009 Audit Period: July 1, 2005 June 30, 2008 Table of Contents Internal Auditor's Report ................................................................................................... 3 Executive Summary ........................................................................................................... 4 Background ........................................................................................................................ 5 Audit Objectives ................................................................................................................ 5 Audit Scope ........................................................................................................................ 5 Audit Approach .................................................................................................................. 6 Conclusion ......................................................................................................................... 6 Schedule of Findings and Recommendations ................................................................ 7 1. Disallowed Revenue Deductions 2 Internal Audit Sky Chefs, Inc; Agreement No. 716 Audit Period: January 1, 2008 December 31, 2009 Audit Period: July 1, 2005 June 30, 2008 Internal Auditor's Report We have completed an audit of the Lease and Concession Agreement, as amended, between the Port of Seattle and Sky Chefs, Inc. The purpose of the audit was to determine the following: 1) Reported concession was complete, properly calculated and remitted timely to the Port. 2) Port and the lessee complied with provisions of the Lease and Concession Agreement. 3) Lease and Concession Agreement, as amended, complies with applicable state and Port requirements. We examined information related to a two-year period from January 1, 2008, through December 31, 2009. We conducted our audit using due professional care. We planned and performed the audit to obtain reasonable assurance as to compliance with significant provisions of the agreement, including complete and timely reporting of concessionable revenues. Sky Chefs materially complied with the terms of the Lease and Concession agreement, with an exception of disallowed revenue deductions. The agreement itself complies with applicable state and Port requirements. We extend our appreciation to the management and staff of the Aviation Business Development, and Accounting & Financial Reporting for their assistance and cooperation during the audit. Joyce Kirangi, CPA Director, Internal Audit 3 Internal Audit Sky Chefs, Inc; Agreement No. 716 Audit Period: January 1, 2008 December 31, 2009 Audit Period: July 1, 2005 June 30, 2008 Executive Summary Audit Scope and Objective The purpose of the audit was to determine the following: 1) Reported concession was complete, properly calculated and remitted timely to the Port. 2) Port and the lessee complied with provisions of the Lease and Concession Agreement. 3) Lease and Concession Agreement, as amended, complies with applicable state and Port requirements. We examined the books and records of Sky Chefs, Inc., for a two-year period from January 1, 2008 through December 31, 2009. Aviation Business Development has the primary responsibility for administering and monitoring the agreement to ensure compliance with agreed-upon terms. Agreement Terms Sky Chefs, Inc. 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 terms of the agreement provide for a 7% concession fee on the gross sales for catering services to airlines, and a 3.5% concession fee on the gross sales to non-airline parties, with only the following acceptable offsets or deductions: 1) Returns and refunds 2) Taxes imposed and collected by Lessee as agent for its taxing body 3) Meals furnished to employees of Lessee A monthly rent is payable in advance, on or before the first day of each month, without notice from the Port. The concession is due monthly within 15 days following the end of each calendar month. For untimely payments, the agreement provides interest to be accrued from the due date until paid. Audit Result Summary Sky Chefs materially complied with the terms of the Lease and Concession agreement, with the exception of disallowed revenue deductions. The lessee offset its gross revenue with approximately $888,964 of disallowed discounts resulting in underpaid concessions of approximately $6,890. The agreement itself complies with applicable state and Port requirements. 4 Internal Audit Sky Chefs, Inc; Agreement No. 716 Audit Period: January 1, 2008 December 31, 2009 Background Audit Period: July 1, 2005 June 30, 2008 The agreement was originally signed with Marriott in November 1980, but later assigned to Caterair International Corporation in July 1995. Caterair subsequently subleased the agreement to Sky Chefs in September 2001. Sky Chefs began its operations in the 1940s as a catering arm of American Airlines. Through acquisitions over time, the company became a wholly owned subsidiary of Lufthansa. The company is officially known as LSG Sky Chefs, and currently operates in 49 countries. The concession fee per the agreement is defined as 7% and 3.5% of gross sales from airline and nonairline customers, respectively. Gross sales subject to the concession include all revenue streams from the lessee's operation at Seattle-Tacoma InternationalAirport, with the exception of three expressly allowed sales deductions: 1) Returns and refunds 2) Taxes imposed and collected by Lessee as agent for its taxing body 3) Meals furnished to employees of Lessee Financial Highlights Reported Paid Year Gross Concession Revenue 2006 19,771,729 $1,032,199 2007 16,225,964 908,508 2008 20,480,996 1,351,834 2009 24,207,455 1,654,627 Total $80,686,144 $4,947,168 Source: PROPworks and PeopleSoft Audit Objectives The objective of our audit was to determine the following: 1) Reported concession was complete, properly calculated and remitted timely to the Port. 2) Port and the lessee complied with provisions of the Lease and Concession Agreement. 3) Lease and Concession Agreement, as amended, complies with applicable state and Port requirements. Audit Scope The scope of the audit covered the period January 1, 2008 through December 31, 2009. 5 Internal Audit Sky Chefs, Inc; Agreement No. 716 Audit Period: January 1, 2008 December 31, 2009 Audit Approach Audit Period: July 1, 2005 June 30, 2008 To achieve our audit objective, we performed the following procedures: Read and analyzed the lease agreement, as amended. Reviewed applicable state and local rules and regulations. Identified significant provisions in the agreement. Obtained necessary financial and non-financial data from the lessee. Assessed relevant risks associate with the agreement. Designed and executed audit procedures based on risk. Analyzed data (internal & external) to determine completeness & compliance, including: o Reconciliation of the reported gross receipts to the lessee's accounting records to ensure completeness and consistency. o Reconciliation of the certified Audited Schedule of Gross Receipts to lessee's accounting records to ensure completeness. o Verification that concession fee were paid timely and intact. o Recalculation of concessions and related fees to ensure accuracy. Conclusion Sky Chefs materially complied with the terms of the Lease and Concession agreement, with the exception of disallowed revenue deductions. The lessee offset its gross revenue with approximately $888,964 of disallowed discounts resulting in underpaid concessions of approximately $6,890. The agreement itself complies with applicable state and Port requirements. 6 Internal Audit Sky Chefs, Inc; Agreement No. 716 Audit Period: January 1, 2008 December 31, 2009 Schedule of Findings and Recommendations Audit Period: July 1, 2005 June 30, 2008 1. Disallowed Revenue Deductions This is a repeat finding. In 2007, we audited Sky Chefs records and suggested a recovery of approximately $30,000 because Sky Chefs was netting its gross revenue with disallowed discounts. Management disagreed with the finding and did not pursue collection. Gross revenue is defined under Section 3.d iii as: "thetotal selling price, fee or charge, whether for cash, credit or otherwise, of all prepared meals, food or other products, and of all related food catering services or other services, and all other receipts whatsoever, resulting from or attributable to Lessee's operations on the Premises, regardless of delivery point or place of payment, without offset or deduction of any kind except (i) returns and refunds; (ii) the amount of any sales tax or other excise tax imposed on the purchaser and collected by Lessee as agent for their taxing body item; and (iii) meals furnished to employees of Lessee..." Except for the following three specific allowances to offset gross revenue, there are no other reductions allowed in the agreement: Returns and refunds The amount of tax collected on behalf of taxing body Meals furnished to employees of Lessee. During this audit, we reviewed the lessee's general ledger in detail. We noted that the lessee continues to reduce its gross revenue with discounts such as Quick-Pay and Group Volume Discount. These discounts amounted to $518,094 and $370,870 in 2008 and in 2009, respectively. These discounts were inconsistently applied to gross revenue. Sometimes the discounts were offset against gross revenue, and in other months they were not. Based on the audit finding from 2007, which resulted in a disagreement concerning the definition of gross revenue, we expected to see clarifying language in 2010, but we found none. The effect of offsetting gross revenue with the disallowed discounts is documented below. The auditor's calculation shows Sky Chefs owes the Port an additional $6,890 in concession fees for this audit period. The relatively small additional concession amount is a result of Sky Chefs inconsistent treatment of the discounts. 7 Internal Audit Sky Chefs, Inc; Agreement No. 716 Audit Period: January 1, 2008 December 31, 2009 Type of Actual Gross Total Total Additional Reported Concession Year Gross Audit Period: July 1, 2005 Revenue Per Rate June 30, 2008 Concession Concession Gross Due Per Revenue Audit Paid Due Audit Airline 19,984,923 19,948,315 7.0% 1,396,382 2008 Non- 1,416,307 2,436 Airline 496,074 638,877 3.5% 22,361 Airline 23,464,866 23,502,920 7.0% 1,645,204 2009 Non- 1,668,531 4,454 Airline 742,589 793,748 3.5% 27,781 6,890 Recommendation We recommend management collect approximately $6,890 in additional concession fees. Further for the upcoming lease agreement RFP, we recommend management clarify the definition of gross revenue. Management Response Aviation Business Development (AVBD) staff disagrees with this Internal Audit finding. In response to the 2007 audit of Sky Chefs where this same issue was identified, AVBD staff consulted Port Legal staff on the audit finding. Legal staff concluded that Internal Audit's interpretation of the lease was incorrect and that Sky Chef did not owe the Port this money. Since there have been no new developments to change this conclusion, AVBD staff see no reason to bill the tenant for this money. Internal Audit did, however, note some irregularities in the reporting of the revenue deductions. Therefore AVBD staff will request corrected reports from Sky Chefs. In addition, since the current lease language relating to gross revenues is perceived by Internal Audit to be unclear, staff will work to clarify this language in terms of what is included and excluded from gross revenue in the up-coming lease negotiations. AVBD staff will also add a provision in the lease requiring an Annual Report and more specific language about late fees and interest charges. 8
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