Hertz Report
INTERNAL AUDIT REPORT
RENTAL CAR CONCESSION AGREEMENT AUDIT
The Hertz Corporation dba Hertz Car Rental
JUNE 1, 2014 MAY 31, 2016
ISSUE DATE: December 6, 2017
REPORT NO. 2017-21
The Hertz Corporation dba Hertz Rent-A-Car INTERNAL AUDIT
June 0 1, 2014 May 31, 2016
TABLE OF CONTENTS
EXECUTIVE SUMMARY .......................................................................................................................................... 2
BACKGROUND ....................................................................................................................................................... 3
FINANCIAL HIGHLIGHTS ....................................................................................................................................... 3
AUDIT SCOPE AND METHODOLOGY ...................................................................................................................... 3
SCHEDULE OF FINDINGS AND RECOMMENDATIONS .......................................................................................... 6
1. NONCOMPLIANCE WITH THE AGREEMENT REQUIREMENT ..................................................XX
APPENDIX A: RISK RATINGS.................................................................................................................................. 9
The Hertz Corporation dba Hertz Car Rental INTERNAL AUDIT
June 01, 2014 May 31, 2016
EXECUTIVE SUMMARY
Internal Audit (IA) completed a rental car concession audit of Hertz Corporation, dba Hertz Car Rental
(Hertz) for the period June 1, 2014 May 31, 2016. The audit was performed to determine whether Port
management's monitoring controls were effective and to assure that: Hertz reported Concession Fees
were complete, properly calculated, and remitted timely to the Port; that Hertz complied with significant
financial provisions of the concession agreement (CA), as amended; and that the Customer Facility
Charge (CFC) was properly collected and remitted.
We concluded that Hertz materially complied with the terms of car rental agreement, and that
management controls were effective to assure the reported concession fees were complete, properly
calculated, and remitted timely to the Port. We noted two exceptions with the CFC:
Hertz did not collect the CFC at their three local locations within a three-mile radius of the airport.
The CA specifically requires Hertz to collect and remit the CFC to the Port for these locations if the
customer arrives by plane within 12 hours. Our audit showed that in most cases a CFC was due to
the Port, amounting to $205,236 during our audit period.
Additionally, Hertz did not consistently comply with their vehicle drop-off policy at the Consolidated
Rental Car Facility location, resulting in approximately $9,210 in CFCs due to the Port
These two items resulted in an underpayment to the Port in the amount of $214,446 during the two year
audit period. These issues are discussed in more detail beginning on page six of this report.
Section 8.2.1 of the Lease Agreement requires "the full cost of the audit be borne by the lessee in the
event an audit reveals a discrepancy of more than 1% of the CFC for any 12-month period." The
discrepancy was greater than 1% for each of the two years in the audit period, thereby requiring Hertz to
absorb the cost of this audit.
We extend our appreciation to the management and staff of the Aviation Commercial Management
Department, and Accounting and Financial Reporting Department for their assistance and cooperation
during the audit.
Glenn Fernandes, CPA Margaret Songtantaruk, CFE, CB
Director, Internal Audit Senior Auditor
RESPONSIBLE MANAGEMENT TEAM
Jim Schone, Director AV Commercial Management
James Jennings, Manager Aviation Properties
Jason Johnson, Aviation Property Manager 3
Linda Nelson, Manager, AV Finance & Budget
Rudy Caluza, Director Accounting & Financial Reporting
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The Hertz Corporation dba Hertz Car Rental INTERNAL AUDIT
June 01, 2014 May 31, 2016
BACKGROUND
The Hertz Corporation (Hertz), a subsidiary of Hertz Global Holdings, Inc., is headquartered in Estero,
Florida. Hertz provides rental cars, trucks, and equipment, operating through Dollar Rent A Car, Inc.,
Hertz Car Rental, Donlen Corporation, and Flexicar. The Hertz Corporation maintains a local
administrative office and fleet maintenance at the Consolidated Car Rental Facility owned by the Port of
Seattle (Port). Hertz operates three local locations within a 3-mile radius (Marriott Hotel, Doubletree
Hotel, and Burien) of the Seattle-Tacoma International Airport boundary in addition to the Consolidated
Rental Car Facility and ASIG facility (which services corporate/general aviation needs) under audit
period.
The terms of the agreement provide for a Minimum Annual Guarantee (MAG) of 85% 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 Percentage Fee is higher than the monthly MAG payment.
FINANCIAL HIGHLIGHTS
REPORTED GROSS REVENUE AND CONCESSION CALCULATION CUSTOMER
FACILITY CHARGE
AGREEMENT REPORTED GROSS
CONCESSION FEES REPORTED CFC FEES
YEAR REVENUES
2014 - 2015 $54,963,037 $5,496,304 $5,379,168
2015 - 2016 55,923,031 5,592,303 5,535,618
TOTAL $110,886,068 $11,088,607 $10,914,786
Data Source: PeopleSoft Financials and Propworks
AUDIT SCOPE AND METHODOLOGY
We conducted this performance audit in accordance with Generally Accepted Government Auditing
Standards and the International Standards for the Professional Practice of Internal Auditing. Those
standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide
a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the
evidence obtained provides a reasonable basis for our findings and conclusions based on our audit
objectives.
We utilized a risk-based approach from the planning phase to the testing phase of our audit. We
gathered information through document requests, research, interviews, observations, and analytical
reviews. We also obtained a complete understanding of the Hertz CA. We applied the following audit
procedures to assess whether Hertz complied with the key terms of the agreement:
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The Hertz Corporation dba Hertz Car Rental INTERNAL AUDIT
June 01, 2014 May 31, 2016
1. To determine whether Port management monitoring controls were effective to assure compliance with
the significant terms of the agreement, we:
a. Read the Concession Agreement between the Port and Hertz, focusing on sections: 4 revenue;
6.2.1 Airport Customer; 9.1.1.4 CFC; 17 Indemnity & Insurance; and 9 Bond or Other Security.
b. Gained an understanding of and documented Port management controls over insurance, surety,
and AFR billing processes.
c. Tested the effectiveness of internal controls to verify that:
o Monthly concessions were reviewed for accuracy prior to billing.
o Annual concession reconciliations were performed to validate completeness of reported gross
revenue.
2. To determine whether reported gross revenues were complete and reasonable, we:
a. Reviewed the lessee's chart of accounts to determine whether all revenue accounts were
included in the determination of gross concession revenue reported to the Port.
b. Obtained monthly concession reports for all months in the engagement period from Accounting
& Financial Reporting (AFR).
c. Obtained Business Daily Reports (BDR) from Hertz for all revenue sources and rental car
facility charges for all months in the engagement period. Revenue reports included separate
revenue listings for local and non-local customers, as well as miscellaneous income accounts.
d. Compared total amounts from revenue reports obtained in step c to corresponding amounts in
the monthly concession reports obtained in step b.
e. Reconciled the BDR to Hertz's independent certified audited statement of gross revenues
report, and to the AFR year-end true up.
f. Selected 84 rental agreements deemed high-risk for the audit period, and determined whether
the revenue on the face of each rental agreement agreed to the amount recorded on the BDR,
and assured that commercial discounts did not reduce concession revenue.
3. To determine whether the Customer Facility Charge (CFC) was properly collected and remitted to
the Port, we:
a. Analyzed and evaluated the Lessee's methodology of the CFC calculation.
b. Tested a risk-based sample of 104 opened & closed car rental agreements to determine
whether the CFC calculation was accurate.
c. Recalculated 100% of the CFC populations based on the Lessee provided BDR records, of all
rental agreements for the audit period.
4. To determine whether MAG/Concession Fee payments were remitted timely, we:
a. Identified payment due dates.
b. Analyzed Port records to determine whether payments were received in a timely manner.
5. To determine whether the Letter of Credit or other Security deposit were maintained as required, we:
a. Identified the Letter of Credit in the agreement.
b. Tested three years of rent security amounts as required.
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The Hertz Corporation dba Hertz Car Rental INTERNAL AUDIT
June 01, 2014 May 31, 2016
6. To determine whether the insurance requirement was maintained, we:
a. Verified that insurance certificates, as required in the agreement, were provided to the Port
during the audit period.
b. Verified and tested two years insurance coverages as required.
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The Hertz Corporation dba Hertz Car Rental INTERNAL AUDIT
June 01, 2014 May 31, 2016
SCHEDULE OF FINDINGS AND RECOMMENDATIONS
Risk: Medium
1. NONCOMPLIANCE WITH THE AGREEMENT REQUIREMENT
Hertz operates car rental facilities at the following three locations, within a three-mile radius of
the SeaTac Airport boundary, which Hertz refers to as location 7340:
SeaTac Marriot Burien Chevrolet
Doubletree
We determined that Hertz was not collecting the CFC at the above three locations during the
period audited because Hertz used the wrong criteria to exclude both local rentals and CFCs,
and this resulted in CFCs that were not remitted to the Port in the amount of $205,236.
Section 9.1.14 of the Concession Agreement ("CA") states:
"At all locations within three miles of the Airport, the Concessionaire's motor vehicle
rental agreements shall be printed or stamped in such form so as to provide a
separate space for its customers to indicate by their signature if they are not an
"Airport Customer" as defined in Attachment 1. Any rental agreement which does not
have a customer signature upon it designating that the customer is not an "Airport
Customer" shall be treated hereunder as though such customer is an
"Airport Customer" for purposes of computing compensation due to the Port under
this Concession Agreement."
Section 1.5, stipulates:
"Airport Customer" shall mean: "(i) any person who comes to the Airport by any
means of transportation and enters into a motor vehicle rental agreement with
Operator at Operator's Rental Car Concession; (ii) any person who flies into the
Airport and within twelve (12) hours thereafter enters into a motor vehicle rental
agreement with Operator at any of Operator's rental car operations located within a
three (3) mile radius of the Airport's boundary line."
Our data analysis and our review of the Hertz's BDR ("Business Daily Report") and detail
transaction testing on activity at the above three locations, showed the following:
85% of car rental agreement drop-offs were at the Port's Consolidated Car Rental
Facility. Indicating that customers most likely flew in via the airport and picked up a
rental car at an alternate airport location, thereby using airport facilities, services and
rental car buses.
25% of the population tested were noted as local customers but customer signatures
were absent on the car rental agreements. Additionally, in seven instances the car
rental agreements showed that the concession fee was collected from the customer,
but the CFC was not collected (if one is collected, the other should be as well).
Of customers classified as "local customers", 84% had had home zip codes outside of
the 3 mile radius of the SeaTac Airport boundary.
Approximately 13% of the car rental agreements lacked the customer signatures
and/or initial certification as to whether the customer arrived by plane or not within the
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The Hertz Corporation dba Hertz Car Rental INTERNAL AUDIT
June 01, 2014 May 31, 2016
past 12 hours.
Additionally, section 1.5 of the CA that defines an "Airport Customer" within a three-mile
radius was not specific enough and thereby unclear.
Section 6.2 states:
"Operator shall collect a daily Customer Facility Charge on all vehicle rental
transactions with Airport Customers Each Operator must collect the Customer
Facility Charge at the time of the first payment is made for a qualifying vehicle rental
transaction, and must remit the full amount of the Customer Facility Charge to the
Port regardless of whether or not the full amount of such Customer Facility Charge is
actually collected by the Operator from the person who rented the Automobile."
In addition, Hertz did not properly collect and remit CFCs of approximately $9,210 from the
Rental Car Facility location 1290, due to inconsistent application of their vehicle drop-off
policy. (See below table for details)
UNDERREPORTED CUSTOMER FACILITY CHARGE (CFC) FOR HERTZ
RENT-A-CAR
REPORTED UNDERAUDITED
CFC FEES (ADJUSTED)
AGREEMENT CFC FEES REPORTED
YEAR 1290 7340 Total 1290 Only CFC FEES
2014 - 2015 $5,383,416 $102,678 $5,486,094 $5,379,168 $106,926
2015 - 2016 5,540,580 102,558 5,643,138 5,535,618 107,520
TOTAL $10,923,996 $205,236 11,129,232 $10,914,786 $214,446
TOTAL DUE TO PORT $214,446
Data Source: The Hertz BDR records & PeopleSoft Financials
Additionally, Section 8.2.1 of the Lease Agreement requires "the full cost of the audit be borne
by the lessee in the event an audit reveals a discrepancy of more than 1% of the CFC for any
12-month period." As indicated below, the discrepancy was greater than 1% of each of the two
years in the audit period as follows:
PERCENTAGE OF
UNDERREPORTED REPORTED CFC UNDERREPORTED
AGREEMENT YEAR CFC FEES FEES CFC FEES
2014 - 2015 $106,926 $5,486,094 1.99%
2015 - 2016 107,520 5,643,138 1.94%
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The Hertz Corporation dba Hertz Car Rental INTERNAL AUDIT
June 01, 2014 May 31, 2016
Recommendations
We recommend that Port Management:
1. Seek and recover $214,446 ($9,210 + $205,236) for the underreported customer facility charge
(CFC).
2. Seek and recover the audit cost of $13,918, for work related to the CFC charge.
3. Assess the applicability of the one-time late charge and any accrued interest caused by the
above underreporting. Seek recovery if appropriate.
4. Work with Hertz to assure that in the future, the CFC is collected and remitted for all locations
within a three-mile radius, unless a valid exception exists.
5. Send a letter to Hertz to clarify and document the following:
a. Non-Local Customer - A customer with a home zip code outside the Airport boundary
and/or from out-of-state.
b. The requirement that all customers place their initials next to the comments, certifying that
they did not arrive by plane within the past 12 hours; Hertz will have the responsibility of
validating related flight information.
c. A reminder that any vehicle rental agreement lacking a customer initial or signature is
immediately reverted to an "Airport Customer" and the appropriate fees are charged.
d. A reminder that any cars dropped-off at the Consolidated Car Rental Facility and/or within
the three-mile radius are charged the appropriate fees if not specifically exempted by items
a. and b. above.
Management Response/Action Plan
Aviation Commercial Management will pursue collection from Hertz for the under-reported CFC's as
stated above, the audit cost, and the applicable late fees and interest. Aviation Commercial Management
will also work with Hertz to assure a mutual understanding of the definition of "Airport Customer" so that
future interpretations are consistent for both the Port and Hertz. The results of these discussions will be
documented in a letter from the Port to Hertz.
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The Hertz Corporation dba Hertz Car Rental INTERNAL AUDIT
June 01, 2014 May 31, 2016
APPENDIX A: RISK RATINGS
Findings identified during the course of the audit are assigned a risk rating, as outlined in the table below. The
risk rating is based on the financial, operational, compliance or reputational impact the issue identified has on
the Port. Items deemed "Low Risk" will be considered "Exit Items" and will not be brought to the final report.
Port Commission/
Rating Financial Internal Controls Compliance Public
Management
Large financial
Noncompliance
impact High probability
with applicable Important
Missing, or inadequate for external audit
Federal, State,
HIGH Remiss in key internal controls issues and/or
and Local Laws, Requires immediate
responsibilities of negative public
or Port Policies attention
being a custodian perception
of public trust
Partial controls Inconsistent Potential for Relatively important
compliance with external audit
Moderate
MEDIUM Not adequate to identify Federal, State, issues and/or May or may not
financial impact
noncompliance or and Local Laws, negative public require immediate
misappropriation timely or Port Policies perception attention
Generally
Internal controls in place Low probability
complies with
but not consistently for external audit
Federal, State and Lower significance
Low financial efficient or effective issues and/or
LOW/ Local Laws or Port
impact negative public
Exit Items Policies, but some May not require
Implementing/enhancing perception
minor immediate attention
controls could prevent
discrepancies
future problems
exist
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