INTERNAL AUDIT REPORT 
Limited Contract Compliance Audit 
McDonald's USA, LLC 

July 2016  June 2019 

Issue Date: March 23, 2020 
Report No. 2020-02 




INTERNAL AUDIT

McDonald's USA, LLC 
July 2016  June 2019 

TABLE OF CONTENTS 

Executive Summary ................................................................................................................................................ 3 
Background ............................................................................................................................................................. 4 
Schedule of Findings and Recommendations ....................................................................................................... 6 
Appendix A: Risk Ratings ....................................................................................................................................... 8 














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McDonald's USA, LLC 
July 2016  June 2019 
Executive Summary 
Internal  Audit  (IA)  completed  an  audit  of  the  Seattle-Tacoma  International  Airport  Lease  and
Concession Agreement (Agreement) between McDonald's USA, LLC (McDonald's) and the Port of
Seattle (Port). McDonald's pays the Port approximately one million dollars in annual concession fees. 
The period audited was July 2016 through June 2019. The audit was performed to determine whether
McDonald's complied with significant provisions in the Agreement including whether reported gross
revenues and percentage fees were complete and accurate. 
Our audit identified the following issues: 
(Medium)  McDonald's paid the July 2016 percentage fee late and was not assessed a late fee of
$1,574. McDonald's underreported gross revenue in June 2017, resulting in an underpayment of
$890. Additionally, non-product sales were not billed by the Port, resulting in $7,801 of percentage
fees underbilled by the Port. 
This issue is discussed in more detail beginning on page six. 
We extend our appreciation to management and staff of the Aviation Commercial Management
Department and the Accounting and Financial Reporting Department for their assistance and
cooperation during the audit. 


Glenn Fernandes, CPA 
Director, Internal Audit 







Responsible Management Team 
Rudy Caluza, Director, Accounting and Financial Reporting 
Dawn Hunter, Senior Manager, Airport Dining & Retail 
Linda Nelson, Assistant Director, Financial Reporting Revenue Services 
Jim Schone, Director, Aviation Business Development 

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McDonald's USA, LLC 
July 2016  June 2019 
Background 
In September of 2012, the Port entered into an Agreement with McDonald's. The terms of the
Agreement provide for a Minimum Annual Guarantee (MAG) equal to 85% of the total amount paid to
the Port for the previous agreement year. The MAG is payable, in advance, on or before the first day
of each month. Additionally, the Agreement requires payment of a Percentage Fee equal to a
percentage of gross revenue, provided the fee is higher than the MAG. The Percentage Fee is due on
or before the fifteenth day of each succeeding month, according to the following schedule: 
Annual Gross Revenue                                        Percentage (%) of Gross Sales 
$1 to $2,780,000                                                                             9% 
$2,780,001 to $3,630,000                                                                   11% 
Over $3,630,000                                                                         13% 
Within 60 days after the close of each Agreement Year, McDonald's is required to provide the Port an
annual report reflecting the amount of Gross Sales for the preceding Agreement Year. The annual
report shall be accompanied by a signed certificate of an independent Certified Public Accountant or a
Director  of  McDonald's  that  specifically  states  a)  he/she  examined  the  annual  report,  b)  the
examination  included  such  tests  that  were  considered  necessary  or  appropriate  under  the
circumstances, c) the information was presented fairly, and d) conforms with and was computed in
compliance with the definitions set forth in the Agreement. 
The table below reflects the total concession revenue and percentage fees billed: 
Agreement Year                                  Gross Revenue*           Concession Fees 
July 2016 - June 2017                                    $5,785,728                   $699,947 
July 2017 - June 2018                                      7,373,808                     920,671 
July 2018 - June 2019                                      8,854,096                   1,126,413 
Total                                                                  $22,013,632                     $2,747,031 
Data Source: PeopleSoft Financials, AFR YE documents 
*Non-product sales deducted 







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McDonald's USA, LLC 
July 2016  June 2019 
Audit Scope and Methodology 
We conducted the engagement 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 conduct an engagement to obtain sufficient, appropriate evidence
to provide a reasonable basis for our findings and conclusions based on our engagement objectives.
We believe that the evidence obtained provides a reasonable basis for our findings and conclusions
based on our engagement objectives. 
The period audited was July 2016 through June 2019 and included the following procedures: 
Revenue Completeness, Accuracy, Timeliness 
Agreed monthly revenue reports provided to the Port, to McDonald's general ledger. 
Validated that the annual report was submitted and signed by an independent CPA or a
director from McDonald's. 
Reviewed the Agreement definition of Gross Sales, including exclusions, and reviewed
McDonald's records such as the chart of accounts, revenue reports, and general ledger, to
determine the completeness of prior years' reporting. 
Recalculated the MAG and Percentage Fees to verify accuracy. 
Verified timeliness of payments for all months in the audit period. 












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McDonald's USA, LLC 
July 2016  June 2019 
Schedule of Findings and Recommendations 
1) Rating: Medium 

McDonald's paid the July 2016 percentage fee late and was not assessed a late fee of $1,574.
McDonald's underreported gross revenue in June 2017, resulting in an underpayment of $890. 
Additionally, non-product sales were not billed by the Port, resulting in $7,801 of percentage
fees underbilled by the Port. 
Late Payment 
Internal Audit reviewed timeliness of payments and found the July 2016 concession fees payment was
paid six days late. Section 8 of the lease agreement states, in part: "if any installment of Rent or any
other sum due from Lessee shall not be received by the Port within ten (10) days after such amount
shall be due, then, without any requirement for notice to Lessee, Lessee shall pay the Port a late
charge equal to five percent (5%) of such overdue amount." The payment amount was $31,489; 
therefore, the late fee is $1,574. 
Revenue Understatement 
Profit and Loss statements were obtained from McDonald's for the audit scope period. Upon review,
Internal Audit found June 2017 gross revenue was understated by $6,410. Percentage fees totaling
$890 has not been paid to the Port. 
Non-Product Sales 
At the end of each agreement year, "non-product" sales were removed from gross revenue. This
reduced the percentage fee amount billed. Internal Audit determined that "non-product" sales were not
allowable deductions per the Agreement. Although AFR did not bill percentage fees on the "nonproduct"
sales, McDonald's paid percentage fees on these sales and has a credit balance on their
account. 
Agreement Year                  Deductions       Percentage Fee 
July 2016 - June 2017              $16,954                   $2,356 
July 2017 - June 2018               24,809                    3,448 
July 2018 - June 2019               14,369                    1,997 
Total                                         $56,132                      $7,801 
Recommendations: 
1.  AFR should collect $1,574 in unpaid late fees. 
2.  AFR should seek and recover $890 in unpaid percentage fees. Assess the applicability of a
one-time late charge and any accrued interest. 
3.  AFR should bill $7,801 in percentage fees resulting from the deduction of non-product sales at
year-end, reducing the credit balance on McDonald's account. 
Management Response/Action Plan: 
Aviation Commercial Management will seek to recover the late fee for July 2016 concession fees,
which Internal Audit calculated as $1,574. Aviation Commercial Management will also reach out to the
tenant to ensure awareness that payments should be received by the due date stated in the
agreement or outstanding amounts will be subject to late fees. Currently, Port contracts have varying
terms regarding due dates and grace periods, among others, which complicates the potential for 

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McDonald's USA, LLC 
July 2016  June 2019 
automating the calculation of late fees. These complications contribute to the current manual process
which occurs three times a month and which calculates fees on prescribed dates. Thus, there is a risk
of missed late fees, such as the one identified in this audit report, due to the varying terms in the Port's
agreements. Aviation Commercial Management will work with the Port's Accounting and Financial
Reporting department, which runs the late fee process, to find opportunities to standardize agreement
terms when contracts are executed or renewed. 
Aviation Commercial Management will seek to recover the revenue understatement for June 2017,
which Internal Audit calculated as $890. 
Accounting and Financial Reporting (AFR) will recover 2016-2018 unbilled revenue, which Internal
Audit calculated as $7,801. The customer's certified annual report excluded items from gross sales
that were product sales resulting in unbilled amounts. AFR will work with customer to match existing
credits on account to clear these items. Aviation Commercial Management will work with the Port's
Accounting and Financial Reporting department, which trues up annual reporting, to find opportunities
to standardize reporting when contracts are executed or renewed. 













DUE DATE: 6/30/2020 

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McDonald's USA, LLC 
July 2016  June 2019 
Appendix A: Risk Ratings 
Findings identified during the audit are assigned a risk rating, as outlined in the table below. Only one
of the criteria needs to be met for a finding to be rated High, Medium, or Low. Findings rated Low will
be evaluated and may or may not be reflected in the final report. 
Financial      Internal                                               Commission/
Rating                                   Compliance      Public 
Stewardship  Controls                                         Management 
High probability
Non-compliance
Missing or not                       for external audit   Requires
with Laws, Port
High       Significant     followed                          issues and / or     immediate
Policies, 
negative public     attention 
Contracts 
perception 
Partial              Potential for
Partial controls 
compliance with   external audit
Requires
Medium   Moderate                  Laws, Port       issues and / or
Not functioning                                          attention 
Policies             negative public
effectively 
Contracts          perception 
Functioning as
Low probability
intended but     Mostly complies                       Does not
for external audit
could be        with Laws, Port                       require
Low      Minimal                                    issues and/or
enhanced to     Policies,                            immediate
negative public
improve        Contracts                           attention 
perception 
efficiency 











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