04 Audit%20Committee%20Response%20Feb%202014, 04 Audit%20Committee%20Respon
PORT OF SEATTLE MEMORANDUM DATE: January 27, 2014 TO: Port of Seattle Commission Audit Committee FROM: James R. Schone, Director, Aviation Business Development Deanna Zachrisson, Manager, Concessions Business SUBJECT: Audit Summary for HMS Host and Seattle Restaurant Associates (SRA) At the Port of Seattle Audit Committee Meeting on October 3, 2013, Internal Audit staff reported findings of an audit of the HMS Host (Host) and Seattle Restaurant Associates (SRA) concessions leases at Seattle-Tacoma International Airport for the years 2009-2011 (see attached audit reports for additional details regarding the findings and associated management responses). In summary, those findings were: 1) HMS Host did not use the correct concession rate resulting in an additional $635,704 owed to the Port. The Port auditors determined that Host incorrectly reported sales as "Branded Food and Beverage" for the three Great American Bagel Bakery (GABB) and Diva Espresso locations. While both concepts are clearly "branded," to qualify as Branded Food per the lease, Host had to pay a royalty payment of at least 3% of its gross sales to the franchisor. The auditors determined that the royalty payment to the franchisor was below the 3% minimum. As a result, sales for the locations did not meet the definition of Branded Food and Beverage. The effect of this noncompliance is that the concession fee paid to the Port was 2% lower than required by the agreement. In addition, because the audit revealed a discrepancy of more than 2% of the rent and concession fee owed for any 12 month period, Host is required to pay for the full cost of the audit. The cost of the audit was $34,029. The table below summarizes the additional fees owed for the period 1/1/2009-12/31/2011 Total Underreported Concession 2009 121,514 2010 132,546 2011 141,040 Total Additional Concession Due 395,100 Late Charge (5% Per Agreement Terms) 19,755 Interest Accrued Through 9/30/2013 220,849 Subtotal 635,704 Cost of Audit 34,029 Total Amount Due to Port $669,733 Port of Seattle Commission Audit Committee January 27, 2014 Page 2 2) Host/SRA did not provide adequate documentation to support gross sales, as required by the agreement. The Port auditors determined that the gross receipts for SeaTac Bar Group, one of the subtenants operating under both agreements between the Port and Host and SRA, were underreported. In addition, the lessee's documentation of sales was less than required in the lease. The auditors determined that the amount owed to the Port for the audit period, including applicable late fees and interest is $7,491. 3) Host/SRA did not transmit accounting records and other requested documents in a timely manner. Port auditors experienced multiple delays in securing financial information necessary from Host to conduct the audit. PROPOSED RESOLUTION AND SETTLEMENT STRATEGY Over the past 4 months, Port staff has worked diligently to resolve the issues identified in the audit. Following is a proposed strategy for settling the Port's claims against Host and SRA and the rationale for this strategy. With concurrence by the Audit Committee, this proposed settlement would be presented to the full Commission for approval. 1) Recover 1% of the gross sales (instead of 2% as recommended by Internal Audit) for 2009- 2011 which is the period of this audit. This is the amount that Host should have paid to GABB in order to qualify as branded food. If Host had understood as a result of the earlier audit that its license agreement was non-compliant, presumably they would have paid 1% in additional royalty, rather than 2% additional concession fee to the Port for the non-branded food. This also includes a minor amount for miscalculated percentage rent stemming from the ACDBE subtenant Diva Espresso. The proposed settlement for the additional concession (1%) for 2009- 2011 is $197,550. 2) Waive interest and late penalties as a consequence of not identifying the GABB royalty issue in a Port audit of the Host/SRA agreements in 2006-2007. If this discrepancy had been understood as part of the earlier audit, it would have been corrected much earlier, as described in the audit findings report. 3) Recover underpayment for 2012 of $66,571 with the same terms and conditions as above (1%, no late fees or interest) for the continued issue of underreporting concession sales for GABB. Port staff has since obtained an amended franchise agreement between Host and GABB that now complies with the 3% royalty requirement, effective January 1, 2013. There are likely smaller amounts due for 2012 and 2013 for Diva Espresso, but these amounts are still currently being calculated by Host for payment to the Port. Port of Seattle Commission Audit Committee January 27, 2014 Page 3 4) Require Host/SRA to pay the unreported percentage rent as well as interest and late charges for the amount stemming from the audit of the SeaTac Bar Group. This amount totals $7,491. 5) Require Host to pay the costs of the audit, which totals $34,029. 6) Require Host/SRA to provide evidence that they have conducted a December 2013 audit of SeaTac Bar Group's records retention procedure and that it is compliant with the prime agreement. Host/SRA must also audit SeaTac Bar Group at least 2 additional times in 2014. 7) Execute a Settlement Agreement that stipulates the above, and if accepted, Host will be released from future claims related to this particular audit. MANAGEMENT SUMMARY Management believes it is important to acknowledge the collaborative effort that took place between Airport and Internal Audit staff in order to achieve compliance when Host/SRA failed to provide timely responses. Audit staff encountered many delays due to Host's concern about company-competitive information contained in the license agreements that the Port requested to review. For some agreements, Host was particularly reluctant to allow review without a Non- Disclosure Agreement in place. In the future, management will establish new protocols with Host/SRA for the review of license agreements, including pre-negotiated confidentiality agreements. In conclusion, below are the proposed settlement and resolution amounts: Total Amount Owed to Port Additional Concession 2009-2011 197,550 Cost of Audit 34,029 SeaTac Bar Group underreporting 7,491 Additional Concession 2012* 66,571 Total Amount Due to Port $305,641 *Additional Concession is for GABB. Diva is yet to be determined for 2012 and 2013.
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