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INTERNAL AUDIT BRIEFING PRESENTED TO THE PORT OF SEATTLE AUDIT COMMITTEE AND MR. TAY YOSHITANI, CEO JOYCE KIRANGI, CPA, CGMA DIRECTOR, INTERNAL AUDIT TUESDAY, JULY 29, 2014 AGENDA INTERNAL AUDIT Audit Report 1. Lease and Concession Audits Dollar Rent-A-Car 2. Operational Audits Central Processing System None Comprehensive Operational Audit/Departmental Audit Aviation Business Development Department Terminal 91 Maritime Operations Shilshole Bay Marina Limited Operational Audit CPO Efficiency Review outsourced to Mobius Industries 3. Third-Party Audit Club International and Cascade Lounge World Trade Center West Briefing/Update The Internal Audit Department of the Port of Seattle is hosting the 27th Annual Conference of the Association of Airport Internal Auditors (AAIA) in 2016 2014 Flexible Work Plan Update LIMITED OPERATIONAL AUDIT CENTRAL PROCUREMENT OFFICE EFFICIENCY INTERNAL AUDIT OUTSOURCED TO MOBIUS INDUSTRIES BACKGROUND Mobius Industries was awarded the contract in February 2014. Work began March 3, 2014. AUDIT OBJECTIVES AND SCOPE The purpose of the audit was to: Assess whether the established processes, procedures, management controls, and established practices are efficient, economical, and result in an effective way to provide procurement and contracting services. Acknowledge risk and evaluate risk management practices to ensure the Port enters into sound contracts with qualified firms at fair and reasonable contract rates. Identify and evaluate best practices in government procurement for delivering procurement and contracting services. Benchmark Port procurement practices with other government agencies best practices, including applicable private sector practices and the Federal Acquisition Regulation (FAR). The review was for the period January 1, 2010 - May 11, 2014. LEASE AND CONCESSION AUDIT INTERNAL AUDIT DOLLAR RENT-A-CAR BACKGROUND CMC Investments, Inc. dba Dollar Rent-A-Car is a private company categorized under Automobile Renting and Leasing in Mercer Island, WA. Dollar Rent-A-Car entered into the initial lease and concession agreement with the Port of Seattle on November 1, 1999. The current lease agreement is from June 1, 2012 - May 31, 2014. The terms of the agreement provide for a Minimum Annual Guarantee (MAG) of 80% of the total amount paid to the Port in the previous agreement year. Additionally, the agreement requires a Percentage Fee equal to 10% of gross revenues, provided the fee is higher than the monthly MAG payment. FINANCIAL HIGHLIGHTS KEY FINANCIAL RESULTS FOR DOLLAR RENT-A-CAR AGREEMENT AGREEMENT YEAR 1 REPORTED GROSS REVENUES CONCESSION PAID 2010-2011 $ 14,402,658 $1,440,303 2011-2012 2 4,995,787 518,657 TOTAL $ 19,398,445 $ 1,958,960 Data Source: PeopleSoft Financials Data Notes: 1 Agreement Year from November 1 October 31 2 November 1, 2011 - 05/16/2012 LEASE AND CONCESSION AUDIT INTERNAL AUDIT DOLLAR RENT-A-CAR AUDIT OBJECTIVES AND SCOPE The purpose of the audit was to determine whether: The reported concession fees were complete, properly calculated, and remitted timely to the Port. The Port and lessee complied with provisions of the Rental Car Lease and Concession Agreement, as amended. Customer Facility Charges (CFC) were properly collected and remitted timely to the Port. We reviewed information for the period November 1, 2010 - May 16, 2012. LEASE AND CONCESSION AUDIT INTERNAL AUDIT DOLLAR RENT-A-CAR AUDIT RESULT Dollar Rent-A-Car materially complied with the terms of the Rental Car Lease and Concession Agreement. However, the audit determined that certain gross receipts and CFC were underreported. We recommend Port management seek recovery of $62,804 in additional concession fees, CFC, late fees, and interest charges. There were two reportable findings: 1. Certain gross revenues were underreported. 2. Customer Facility Charge (CFC) was underreported. COMPREHENSIVE OPERATIONAL AUDIT INTERNAL AUDIT AVIATION BUSINESS DEVELOPMENT DEPARTMENT BACKGROUND The Aviation Business Development Department (AVBD) is responsible for generating non- aeronautical revenues from Seattle-Tacoma International Airport (STIA) operations, which include retail concessions, rental cars, and local property development. It develops, manages, and terminates lease agreements for diverse customers including airlines, rental cars, concessionaires, and other airport-related businesses. The business agreements developed and managed by AVBD generate over $48 million in non-aeronautical revenues annually for the Port. FINANCIAL HIGHLIGHTS TOP 5 SOURCES OF AVIATION BUSINESS DEVELOPMENT REVENUE AND PERCENT-SHARE RANK REVENUE SOURCE 2011 2012 2013 2013 SHARE 1 1 Retail 2 $ 8,726,299 $ 9,219,223 $ 9,716,575 20 % 2 In-Flight Meals 3,732,987 4,486,312 4,813,815 10 3 Food & Beverage 3,928,609 4,239,946 4,617,400 10 4 General Space Rentals 3,390,479 3,353,147 3,150,403 6 5 Advertising Display 4,409,560 3,246,209 2,696,593 6 Data Source: PeopleSoft Financials Data Notes: 1 The percent-share is based on the FY 2013 departmental revenues of $48,533,161.34. 2 Retail includes multiple PeopleSoft Financial accounts described as 'retail'. COMPREHENSIVE OPERATIONAL AUDIT INTERNAL AUDIT AVIATION BUSINESS DEVELOPMENT DEPARTMENT AUDIT OBJECTIVES AND SCOPE The purpose of the audit was to determine whether Aviation Business Development management has adequate and sufficient controls to develop and manage its agreements. We reviewed information for the period January 1, 2013 June 30, 2014. COMPREHENSIVE OPERATIONAL AUDIT INTERNAL AUDIT AVIATION BUSINESS DEVELOPMENT DEPARTMENT AUDIT RESULT Management controls are adequate and sufficient for developing and managing agreements. No Reportable Findings. COMPREHENSIVE OPERATIONAL AUDIT INTERNAL AUDIT TERMINAL 91 MARITIME OPERATIONS BACKGROUND Cruise & Maritime Operations, a group within the Seaport Division, operates Terminal 91, which includes two large piers, the Smith Cove Cruise Ship Terminal with room to berth two cruise ships, and an extensive landside area with leased premises for seafood processors and related businesses and storage areas for containers, trailers, and vehicles. FINANCIAL HIGHLIGHTS MAJOR SOURCES OF REVENUE FOR TERMINAL 91 REVENUE SOURCE FISCAL YEAR 2012 FISCAL YEAR 2013 Dockage Tariff 21% 17% Dockage Preferential 28 30 Wharfage 13 14 Equipment Rental 3 3 Electrical 12 12 Space Rental 12 17 Other 3 3 100% 100% TOTAL $ 3.9 MILLION $ 4.2 MILLION Data Source: PeopleSoft Financials COMPREHENSIVE OPERATIONAL AUDIT INTERNAL AUDIT TERMINAL 91 MARITIME OPERATIONS AUDIT OBJECTIVES AND SCOPE The purpose of the audit was to determine whether management has implemented adequate controls to ensure: All applicable revenue is properly recorded on a timely basis. Rates charged comply with the tariff or preferential agreement. We reviewed information for the period January 1, 2013 May 31, 2014. COMPREHENSIVE OPERATIONAL AUDIT INTERNAL AUDIT TERMINAL 91 MARITIME OPERATIONS AUDIT RESULT Management has implemented adequate controls to ensure all applicable revenue is recorded on a timely basis and the rates charged are in accordance with the tariff or preferential agreement. No Reportable Findings. COMPREHENSIVE OPERATIONAL AUDIT INTERNAL AUDIT SHILSHOLE BAY MARINA BACKGROUND Harbor Services within the Port of Seattle's Real Estate Division operate Shilshole Bay Marina. The Commission-approved Moorage Tariff No. 6 governs the Department's revenue streams. The tariff specifies the rates and charges for services provided by the Marina, including berthage and moorage, electricity, live-aboard fees, equipment rental, and other services. FINANCIAL HIGHLIGHTS SHILSHOLE BAY MARINA DEPARTMENTAL REVENUES BY FISCAL YEAR AGREEMENT YEAR 2011 2012 2013 Berthage & Moorage: Monthly Moorage $ 7,257,424 $ 7,201,171 $ 7,372,506 Guest Moorage 203,579 233,988 211,776 Dry Moorage 160,213 172,647 182,661 Other Moorage 18,197 8,987 12,440 Parking 10,802 14,931 10,356 Other Revenue 592,412 607,835 658,695 TOTAL $ 8,242,627 $ 8,239,560 $ 8,448,434 Data Source: PeopleSoft Financials COMPREHENSIVE OPERATIONAL AUDIT INTERNAL AUDIT SHILSHOLE BAY MARINA AUDIT OBJECTIVES AND SCOPE The purpose of the audit was to determine whether Shilshole Bay Marina management controls are adequate to ensure: Guest Moorage, Dry Moorage, and Parking revenue is complete and charged at the appropriate rate. Rates are charged in accordance with the approved tariff. Customer liability insurance complies with requirements. We reviewed information for the period January 1, 2013 - June 30, 2014. COMPREHENSIVE OPERATIONAL AUDIT INTERNAL AUDIT SHILSHOLE BAY MARINA AUDIT RESULT Management controls are adequate to ensure Guest Moorage, Dry Moorage, and Parking revenue is complete and charged appropriately. Management controls are also adequate to ensure compliance with the approved tariff and customer insurance requirements. No Reportable Findings. THIRD-PARTY MANAGEMENT AGREEMENT AUDIT INTERNAL AUDIT CLUB INTERNATIONAL AND CLUB CASCADE LOUNGES BACKGROUND The Port owns and operates Club International (CI) and Club Cascade (CC) Lounge at Seattle- Tacoma International Airport. CI is located at the southeast end of the South Satellite, and CC is located at the southeast end of the A Concourse. In March 2010, the Port entered into a three-year management agreement with VIP to manage the day-to-day operations of CI. In 2013, the Port extended the agreement to include CC. THIRD-PARTY MANAGEMENT AGREEMENT AUDIT INTERNAL AUDIT CLUB INTERNATIONAL AND CLUB CASCADE LOUNGES FINANCIAL HIGHLIGHTS KEY FINANCIAL RESULTS OF CLUB INTERNATIONAL AND CLUB CASCADE CLUB INTERNATIONAL CLUB CASCADE DESCRIPTION FISCAL YEAR 2012 FISCAL YEAR 2013 FISCAL YEAR 2013 PASSENGERS SERVED 13,000 33,500 550 AIRLINES SERVED 4 6 1 GROSS REVENUES $ 390,000 $ 1,097,000 $ 18,000 EXPENSES MANAGEMENT FEE $ 73,000 $ 85,900 $ 1,300 INCENTIVE MANAGEMENT FEE 10,600 8,100 - LABOR COST 84,800 204,400 10,400 COST OF GOODS SOLD 61,200 148,400 2,700 OTHER 74,300 88,900 7,500 NET INCOME/(LOSS) TO PORT $ 86,100 $ 561,500 $ (3,900) Data Source: PeopleSoft Financials, VIP Hospitality Profit and Loss Financial Statements THIRD-PARTY MANAGEMENT AGREEMENT AUDIT INTERNAL AUDIT CLUB INTERNATIONAL AND CLUB CASCADE LOUNGES AUDIT OBJECTIVES AND SCOPE The purpose of the audit was to determine whether: Port management controls are adequate to ensure: Revenues are complete, timely recorded, and accurately reported. Expenses are appropriate and reasonable. VIP Hospitality (VIP) complied with the agreement terms in the following areas: Budget Inventory Insurance requirements Customer billings and receipts Expenses We reviewed information for the period January 1, 2012 - December 31, 2013. THIRD-PARTY MANAGEMENT AGREEMENT AUDIT INTERNAL AUDIT CLUB INTERNATIONAL AND CLUB CASCADE LOUNGES AUDIT RESULT Port management controls are adequate to ensure revenues are complete, timely recorded, and accurately reported. Port management controls are inadequate to ensure expenses are reasonable. VIP complied with the agreement terms on budget, inventory, insurance requirements, and customer billings and receipts. VIP did not comply with the terms of the agreement related to payroll expenses. There are two reportable findings: 1. VIP did not maintain adequate accounting records for labor cost. 2. Port management control over employee payroll tax reimbursements is inadequate. THIRD-PARTY MANAGEMENT AGREEMENT AUDIT INTERNAL AUDIT WORLD TRADE CENTER - WEST BACKGROUND The Port of Seattle owns the World Trade Center West building. The Port developed and constructed this property in the mid-1990s. WTC-W is a 69,000 square-foot, four-story commercial office building, located on the east side of Alaskan Way, across from Pier 66. Currently, there are 14 tenants, including the World Trade Center - Seattle on the fourth floor. Kidder Mathews has managed the building since 2010, through the current time. FINANCIAL HIGHLIGHTS WORLD TRADE CENTER - WEST -- THIRD-PARTY MANAGEMENT REVENUE AND EXPENSE DESCRIPTIONS 2010 2011 2012 2013 Third-Party Lease Revenue $954,699 $990,773 $1,187,505 $1,135,584 Management Fee Expense 45,600 47,880 50,274 45,600 Third-Party Management Operating Expense 456,372 460,551 481,990 518,786 Revenue Over (Under) Expense $452,726 $482,341 $655,241 $571,198 Data Source: PeopleSoft Financials THIRD PARTY MANAGEMENT AGREEMENT AUDIT INTERNAL AUDIT WORLD TRADE CENTER - WEST AUDIT OBJECTIVES AND SCOPE The purpose of the audit was to determine whether management controls over the Third-Party Management Agreement with Kidder Mathews (KM) for the management of World Trade Center- West (WTC-W) are adequate to ensure: KM properly bills, collects, and remits tenant receipts to the Port. Payments by KM, reimbursed by the Port, are properly supported and related to WTC-W activity. KM complies with the significant requirements of the management agreement. We reviewed information for the period January 1, 2012 December 31, 2013. THIRD-PARTY MANAGEMENT AGREEMENT AUDIT INTERNAL AUDIT WORLD TRADE CENTER - WEST AUDIT RESULT Management controls over the third-party management agreement are adequate. KM properly bills, collects, and remits tenant receipts to the Port. The payments by the Port to KM are properly supported and related to WTC-West activity. KM complies with the significant requirements of the management agreement. No Reportable Findings. BRIEFING/UPDATE INTERNAL AUDIT The Internal Audit Department of the Port of Seattle is hosting the 27th Annual Conference of the Association of Airport Internal Auditors (AAIA) in 2016 2014 Flexible Work Plan Update
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