Port
07C Seattle



internal Audit Report


Bell Street Pier & Fishermen's Terminal
Mad Anthony's Restaurant Lease Compliance Audits

January 1, 2007 through December 30, 2008





Issue Date: July 7, 2009
Report No. 200911

m
PortW          Internal Audit
ofSeale   Bell Street Pier & Fishermen's Terminal (Agreement No. 294 & 43)
Audit Period: January 1, 2007  December 31, 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
Findings and Recommendations ......................................................................................... 7
1.  Disallowed Reductions of Concessionable Revenue

W
PortW          Internal Audit
of Seattle    Bell Street Pier & Fishermen's Terminal (Agreement No. 294 & 43)
Audit Period: January 1, 2007  December 31, 2008

--____

lnternal Auditor's Report

We have completed the audits of the Restaurant Lease Agreements between the Port of Seattle
(Port) and Mad Anthony's, lnc. for the Bell Street Pier and Fishermen's Terminal locations.

We conducted our audits using due professional care and we planned and performed the audits to
obtain reasonable assurance as to whether the lessee and the Port had complied with the
provisions of the lease agreements.

The objectives of the audits were to verify gross sales were properly reported to the Port in
accordance with the terms of the lease agreement and the Lessee properly calculated and paid the
appropriate concession fees due to the Port on time. We also reviewed the effectiveness of Port
management's monitoring system over the lease agreement.

Management monitoring of the agreement was effective, and the lessee reported and paid the
concession timely. We, however, found instances of improper deductions from gross receipts
which resulted in underreporting of concessionable gross receipts by $45,053.83 and $20,929.50
for Bell Street Pier & Fishermen's Terminal, respectively. As a result, the lessee underpaid the
concession by $4,106 for the period under audit. The specific issues are discussed in the
subsequent sections of this report.

We extend our appreciation Seaport Property Management and staff for their assistance and
cooperation during the audit.


Joyce Kirangi, CPA
Internal Audit Manger

m

m
Port                         Internal Audit
of Seattle    Bell Street Pier & Fishermen's Terminal (Agreement No. 294 & 43)
Audit Period: January 1, 2007  December 31, 2008

_----________

Executive Summary

udit SCOoe and Ob'ectiv- The purpose of the audits was to determine the level of
compliance with the provisions of the Bell Street Pier & Fishermen's Terminal Restaurant Leases
No. 294 and 43 respectively.  We examined the books and records of Mad Anthony's, lnc.
(Lessee) in order to verify gross sales were properly reported to the Port in accordance with the
terms of the lease agreement and the Lessee properly calculated and paid the appropriate
concession fees due to the Port on time.  We also reviewed the effectiveness of Port
management's monitoring system over the lease agreement.

TheRestaurant Lease Agreements No. 294 and 43 authorize Mad
Anthony's, lnc. to operate restaurants at Bell Street Pier and Fishermen's Terminal. In accordance
with the lease, the Lessee pays the Port six percent (6%) of gross sales of food and beverage,
alcohol beer & wine, and as well as any other gross sales from the restaurant at Bell Street Pier
and six and a quarter percent (6.25%) of gross sales at the Fishermen's Terminal restaurant.

' udit Result Summa
1 Management monitoring of the agreement was effective, and the lessee
reported and paid the concession timely. We, however, found instances of improper deductions
from gross receipts which resulted in underreporting of concessionable gross receipts by
$45,053.83 and $20,929.50 for Bell Street Pier & Fishermen's Terminal, respectively. As a result
the lessee underpaid the concession by $4,106 for the period under audit.

m

m
W
Port                         Internal Audit
ofseale   Bell Street Pier & Fishermen's Terminal (Agreement No. 294 & 43)
Audit Period: January 1, 2007  December 31, 2008

________

Background

Mad Anthony's, Inc. is the owner and operator of the family of Anthony's Restaurants located in the
Puget Sound region, including locations at Bell Street and Fishermen's Terminal.

The lease agreement requires the following twotier concession fees:

.
Bell Street Pier  six percent (6%) of gross sales up to $7,967,844 and six and a quarter
percent (6.25%) for gross sales in excess of $7,967,844 for 2007.
.
Fishermen's Terminal  six and a quarter percent (6.25%) of gross sales up to $5,391,643
and eight percent (8%) for gross sales in excess of $5,391,643 for 2007.

The agreement requires an annual adjustment of the percentage thresholds according to the
consumer price index (CPI).

The gross sales information as reported to the Port for the respective lease years under review
are
as follows:

2007    2008
Bell Street Pier 7,922,759 7,416,418
Fishermen's Terminal  6,898,000  6,847,849
Source: PeopleSoft and Mad Anthony's, Inc. reporting

Audit Objectives

We reviewed the Lessee's records in order to verify that the Lessee had:

.   Properly reported its gross sales to the Port in accordance with the terms of the lease
agreement
.   Properly calculated and paid the appropriate concession fee due to the Port

.   Paid concession fees on time and in accordance with the terms of the agreement.

We also reviewed the effectiveness of Port management's monitoring system over the lease
agreement.

Audit Scope

The scope of the audit covered the period of January 1, 2007 through December 31, 2008.

W
PortW          Internal Audit
ofSeale   Bell Street Pier & Fishermen's Terminal (Agreement No. 294 & 43)
.
Audit Period: January 1, 2007  December 31, 2008

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 the lease requirements

0  Obtained relevant financial data from the Lessee

.  Analyzed data (internal & external) to determine completeness and compliance

Conclusion

Management monitoring of the agreement was effective, and the lessee reported and paid the
concession timely. We, however, found instances of improper deductions from gross receipts
which resulted in underreporting of concessionable gross receipts by $45,053.83 and $20,929.50
for Bell Street Pier & Fishermen's Terminal, respectively. The lessee underpaid the concession by
$4,106 for the period under audit.

W

W
PortW          Internal Audit
of Seattle    Bell Street Pier & Fishermen's Terminal (Agreement No. 294 & 43)
Audit Period: January 1, 2007  December 31, 2008

__________________
I                                    Findings and Recommendations

1.  Disallowed Reductions of Concessionable Revenue

Section 4.0. of the lease states:

"Gross sales shall not include income from provision of employee meals"

The lease does not specifically define provision for employee meals. However, the Internal
Revenue Service defines provision for employee meals as meals provided by an employer to
its employees while on shift (i.e., during working hours) on the employer's premises for the
convenience of the employer. it is also a restaurant industry practice to provide employee
meals while onshi for the convenience of the employer at no cost or at a reduced cost to the
employee.

The lessee took a deduction from gross sales for offshift (i.e., during nonworking hours)
employee meals at 100%. For example if an employee came into the restaurant offshift with
family members or friends and had a total bill of $400.00, the Lessee would deduct $400 or
100% from gross sales. As a result of such deductions, the lessee, underreported
concessionable gross sales and underpaid the concession fees for the period under audit as
follows:

.  $45,053.83 in gross amount (or $2,703 in concession fees) for Bell Street Pier.

.   $20,929.50 in gross amount (or $1,403 in concession fees) for Fishermen's Terminal.

Recommendations

We recommend that management:

1.  invoice Mad Anthony's, Inc. for the additional concession related to the offshift meals
employee (i.e., during non-working hours) deductions for the period under audit.

2.  Review and invoice, as necessary, for additional concession related to the offshift
meals employee (i.e., during nonworking hours) deductions for the period prior and
subsequent to the audit.

Management Response

Management will diligently pursue recovery of underrepon'ed concession fees.