ADR Program Attest, ADR Program Attest Eng
INTERNAL AUDIT REPORT ATTESTATION ENGAGEMENT AN EXAMINATION OF PORT MANAGEMENT'S ASSERTIONS RELATED TO THE AIRPORT DINING AND RETAIL (ADR) PROGRAM AT SEATTLE-TACOMA INTERNATIONAL AIRPORT OCTOBER 1, 2012 SEPTEMBER 30, 2013 (and other) ISSUE DATE: FEBRUARY 10, 2015 REPORT NO. 2015-01 AIRPORT DINING AND RETAIL PROGRAM INTERNAL AUDIT OCTOBER 1, 2012 SEPTEMBER 30, 2013 TABLE OF CONTENTS INDEPENDENT INTERNAL AUDITOR'S REPORT ......................................................................................................... 3 BACKGROUND............................................................................................................................................................... 4 TESTING METHODOLOGY ............................................................................................................................................ 4 EXHIBIT A RESULTS OF TESTING ............................................................................................................................. 5 2 AIRPORT DINING AND RETAIL PROGRAM INTERNAL AUDIT OCTOBER 1, 2012 SEPTEMBER 30, 2013 INDEPENDENT INTERNAL AUDITOR'S REPORT Luis Navarro Director, Office of Social Responsibility Port of Seattle We have examined management's assertions related to the Airport Dining and Retail (ADR) Program at the Seattle-Tacoma International Airport (STIA), for the period October 1, 2012 September 30, 2013, and other periods as stated in the assertions (Exhibit A). The Aviation Business Development Department management is responsible for the assertions. Our responsibility is to express an opinion on the assertions based on our examination. Our examination was conducted in accordance with Generally Accepted Government Auditing Standards, and, accordingly, included examining, on a test basis, evidence supporting the assertions related to the Airport Dining and Retail Program and performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. Exhibit A identifies the assertions and the results of our testing for each assertion. In our opinion, management's assertions are fairly stated, in all material respects, for the period October 1, 2012 September 30, 2013, and other periods, as stated in the assertions. Joyce Kirangi, CPA, CGMA Internal Audit, Director ENGAGEMENT TEAM RESPONSIBLE MANAGEMENT TEAM Ruth Riddle, Senior Auditor, Lead Mark Reis, Managing Director, Aviation Division Jack Hutchinson, Audit Manager James Schone, Director, Aviation and Bus. Development 3 AIRPORT DINING AND RETAIL PROGRAM INTERNAL AUDIT OCTOBER 1, 2012 SEPTEMBER 30, 2013 BACKGROUNDBACKGROUND On February 14, 2012, the Port of Seattle Commission directed the CEO and staff to create a "Concession Master Plan" to guide the successful redevelopment of the Seattle-Tacoma International Airport (STIA) concessions program for 2015 2017. On May 27, 2014, the Airport Dining and Retail (ADR) program staff briefed the Commission on the Master Plan, which was built on the foundations of the Port's Century Agenda. On November 4, 2014, the staff of the Airport Dining and Retail Program provided the Commission with 1 more information and a "Fact Sheet" about the ADR program. On December 15, 2014, on behalf of the Commission and the CEO, the Director of the Office of the Social Responsibility engaged the Internal Audit Department to examine and validate the accuracy of certain assertions made by Port management related to the ADR program. TESTING METHODOLOGYTESTING METHODOLOGY For each management assertion, we examined evidence provided by management or third parties in support of the assertion. We performed additional objective procedures to determine the validity of the assertions, which included: Observations Independent analyses Verification against reliable, external sources of information The assertions tested and the results of the testing are provided in Exhibit A. 1 The statements in the "Fact Sheet" are the management's assertions, to which we refer in our opinion. 4 AIRPORT DINING AND RETAIL PROGRAM INTERNAL AUDIT OCTOBER 1, 2012 SEPTEMBER 30, 2013 EXHIBIT A RESULTS OF TESTINGEXHIBIT A RESULTS OF TESTING * Although the assertion could be a true statement, independent 3rd party information or additional analyses from management, with which to validate the assertion, was not available. CONCLUSION Separate Cannot Assertion Not Assertion Assertion Statements Valid Objectively Auditor's Comments Letters Valid Statements Validate * The Port of Seattle operates a successful ACDBE program as part 1 of the overall Dining and Retail X program at Seattle-Tacoma a International Airport. Airport Dining and Retail (ADR) 2 generates nearly $200 million in X annual sales. In 2013, ACDBE sales totaled $43.1 3 X million 4 from 16 ACDBE tenants, X which equated to 20.5% of the 5 b total Airport Dining and Retail X sales at Sea-Tac. This exceeded the FAA approved 6 goal of 19.56% for the period from X 2011-2014 For the fiscal year 2012-13, Sea- Total sales of $43.1 million (see Assertion Tac's ACDBE's participation in 3b) are accurate. However, we cannot gross sales breakdown was: verify the allocation of gross sales among African-American - $13.4 million, the three minority ethnic groups. Asian-Pacific - $13 million, and We verified 4 of the 5 women-owned Women - $16.7 million. businesses, based on the certification letters from the OMWBE. We also verified the designation for Wendy's 7 c X (refer to Assertion 24j) via other appropriate means. Thus, we verified 6 of the 16 minority designations. We could have submitted a public records request to the OMWBE, but that process would have taken a minimum of 30 days, which was longer than the time available for this engagement. 5 AIRPORT DINING AND RETAIL PROGRAM INTERNAL AUDIT OCTOBER 1, 2012 SEPTEMBER 30, 2013 * Although the assertion could be a true statement, independent 3rd party information or additional analyses from management, with which to validate the assertion, was not available. Separate Cannot Assertion Not Assertion Assertion Statements Valid Objectively Auditor's Comments Letters Valid Statements Validate* The new plan for 2014-17 has 8 raised the goal to 21.2% of total X sales and Sea-Tac is well on its way to 9 d X achieve this goal with the addition of three new 10 ACDBE's and the continued record X numbers seen in airport sales. A 2014 audit report of 64 U.S. airports by the Office of the Inspector General of the U.S. Department of Transportation specifically mentioned Sea-Tac's success in unbundling large contracts. It notes "the Seattle 11 e X airport directly contracted or leased to over 20 disadvantaged firms since 2005" and noted further that "direct award or leasing can be the most effective means for bringing new ACDBE participation to an airport." Inaccurate reports about a low ranking from the OIG report failed to note that the exhibit ("C") in the back of the audit put Sea-Tac 59th out of 64 airports, not as a ranking, but rather as an alphabetical listing of airport names. More substantively, the report notes that 33 out of 64 airports had no new DBE or ACDBE 12 contracts in the one year X reviewed, 2012 (this includes such f major airports as Dallas/Fort Worth, Denver and Newark, as well as Seattle). The report noted this "does not indicate a lack of support for DOT's DBE/ACDBE program" as those airports did not have contract opportunities during that year as contracts were signed during previous years. With 90% of Sea-Tac's leases expiring in the next 2 years, there 13 X will be significant new opportunity opportunities 6 AIRPORT DINING AND RETAIL PROGRAM INTERNAL AUDIT OCTOBER 1, 2012 SEPTEMBER 30, 2013 * Although the assertion could be a true statement, independent 3rd party information or additional analyses from management, with which to validate the assertion, was not available. CONCLUSION Separate Cannot Assertion Not Assertion Assertion Statements Valid Objectively Auditor's Comments Letters Valid Statements Validate* Sea-Tac Airport's ADR program redevelopment in 2004/5 shifted the airport's offering of restaurants and shops from one major concessionaire for the entire airport to a leasing 14 X structure of large operators of multiple units and direct leases with independent operators. This brought about an open bid process g for spaces during the central terminal renovation in 2005. During the next few years, those 15 X leases will expire and a renovation of airport space is 16 projected to nearly double sales X by 2025. a renovation of airport space is We were unable to obtain documented 17 projected to increase jobs by X evidence of management's analysis to 40% by 2025 support this assertion. Another false assertion claimed an With the arrival of McDonald's, sales ACDBE tenant [Quiznos] went out decreased 11% in July, 16% in August, of business due to the arrival of and 10% in September, as compared to McDonald's. The entrance by the same months in the prior year. 18 McDonald's to Concourse B was X Whether the cause was McDonald's or not the cause of this business's other factors, we could not validate. The struggles. Office of Social Responsibility will conduct further follow up on this assertion. In fact, the business's monthly After the introduction of McDonald's, sales were relatively stable after gross sales fluctuated as follows, which h the introduction of McDonald's in does not present a stable pattern: June 2013, increased 5% in July 19 X decreased 6% in August decreased 15% in September decreased 23% in October decreased 9% in November increased 15% in December but ended the year with a 3.4% 20 X decrease in sales Through September of 2014, Sales decreased approximately 8%. 21 X [there was] a 30% loss in sales. 7 AIRPORT DINING AND RETAIL PROGRAM INTERNAL AUDIT OCTOBER 1, 2012 SEPTEMBER 30, 2013 * Although the assertion could be a true statement, independent 3rd party information or additional analyses from management, with which to validate the assertion, was not available. CONCLUSION Separate Cannot Assertion Not Assertion Assertion Statements Valid Objectively Auditor's Comments Letters Valid Statements Validate* During this same period, every other Concourse B food location 22 i X has experienced sales increases between 15%-41%. It is also worth noting that one of In terms of dollars, Wendy's was the the most successful [quick serve second highest grossing quick serve food food] businesses in the central business in the central terminal (behind terminal is Wendy's, Qdoba), with sales of $3.9M, (2012), 23 X $3.6M (2013) and $3.5M (2014). j However, Wendy's gross sales also decreased 4.4% (2012), 2.3% (2013) and 7.5% (2014). an African-American family-owned 24 X business sales of $3.8 million in 2013 25 X [calendar period]. From a rent standpoint, 26 all [food] tenants pay rent as a X percentage of gross sales. Some leases provide lower rent based on branded restaurants or services which require the 27 franchisee to pay additional fees X k of between 2 to 10% to the franchisor for the use of the brand name product. Businesses operating their own brand (as is the case for some of 28 X the ACDBE tenants) do not have to pay these franchise fees. The Host subtenant ACDBEs 29 received significant rent relief and X two year lease extensions in 2005. This relief was provided in tiers 30 X over the term of the lease. For much of the lease term, the 31 ACDBEs paid significantly less rent X than their lessor, Host. l An analysis in early 2013 showed Of the 37 food service locations on the that of all food service tenants analysis provided by management, only 3 32 regardless of rent schedule X had average rents within the cited range. (category, tiered or flat) paid similar percentage rent, 12.5-13%. Tenants serving high-margin 33 alcohol pay somewhat higher rent, X about 15% 8 AIRPORT DINING AND RETAIL PROGRAM INTERNAL AUDIT OCTOBER 1, 2012 SEPTEMBER 30, 2013 * Although the assertion could be a true statement, independent 3rd party information or additional analyses from management, with which to validate the assertion, was not available. CONCLUSION Separate Cannot Assertion Not Assertion Assertion Statements Valid Objectively Auditor's Comments Letters Valid Statements Validate* Anthony's [has a] current 8% flat 34 X rent. However, as an anchor tenant for the central terminal, they had very 35 X high investment costs in a location that was at the time unproven, 36 serves fresh cooked food X with glassware and silverware 37 X rather than plastic m and has daily operational costs far We were unable to obtain documented exceeding those for other food evidence from management for the 38 X and beverage units. operational costs of Sea-Tac food and beverage units. The location has proven to be the We were unable to obtain documented highest grossing restaurant in any evidence from management to support U.S. airport. this assertion. Subsequent to this 39 X engagement, Port management reached out to its peer airports to support the assertion, but that information was not available when the assertion was made. 9
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