Internal Audit Report

World Trade Center West Building

Management Agreement No.665

Audit Period

January 1, 2007 through December 31, 2008

Issue Date: May 5, 2009

Report No. 2009-06

Internal Audit Report

World Trade Center West Building Agreement No. 655

Audit Period January 1, 2007 – December 31, 2008

Table of Content

Internal Auditor’s Report .............................................................................................. 3

Executive Summary ...................................................................................................... 4

Background ................................................................................................................... 5

Audit Objectives ............................................................................................................ 5

Audit Scope ................................................................................................................... 5

Audit Approach ............................................................................................................. 5

Conclusion ..................................................................................................................... 6

Summary of Findings and Recommendations ........................................................... 7

I. Inadequate Monitoring Related to the Third-party Employee Compensation Costs Paid

by the Port

Internal Audit Report

World Trade Center West Building Agreement No. 655

Audit Period January 1, 2007 – December 31, 2008

Internal Auditor’s Report

We have completed an audit of World Trade Center West Building (WTC-W). The Port of

Seattle owns the WTC-W, and management of the WTC-W is outsourced to Wright Runstad &

Company (WR&C), a private company that oversees the day-to-day operations of the facility.

The Port Real Estate Property Management Department administers the management services

agreement.

We conducted the audit using due professional care. The audit was planned and performed to

obtain reasonable assurance of Wright Runstad & Company compliance with the management

lease agreement. We also evaluated the effectiveness of Port management’s monitoring system

Port Management has the primary responsibility to establish and implement effective controls.

Our role was to assess and evaluate the controls in order to determine whether the controls

were adequate and operating effectively.

We have identified opportunities to improve the effectiveness of Port management’s monitoring

practices, which are discussed in the subsequent sections of this report.

We extend our appreciation to Real Estate Property Management, Wright Runstad & Company

staff for their assistance and cooperation during the audit.

Joyce Kirangi, CPA

Internal Audit Manager

Internal Audit Report

World Trade Center West Building Agreement No. 655

Audit Period January 1, 2007 – December 31, 2008

Executive Summary

Audit Scope and Objective The purpose of the audit was to determine whether:

1) Port management effectively monitored the agreement with Wright Runstad & Company.

2) Wright Runstad & Company complied with the provisions of the management services

agreement, as well as other applicable laws and regulations.

Agreement Terms

The WTC-W (World Trade Center West Building) management

agreement with WR&C (Wright Runstad & Company) provides a management fee of $4,166.67

per month. All revenue generated by the Facility is remitted to the Port, and the Port pays for all

the Facility operating expenses, including costs related to compensation, benefits, and payroll

taxes for WR&C employees working at WTC-W Facility.

The WR&C is responsible for the overall day-to-day management of WTC-W to include keeping

the building in good, clean and safe condition, handling complaints, maintaining tenant

insurances and collecting rents.

Audit Result Summary Wright Runstad & Company materially complied with the terms of

the agreement; however, we determined that the current Port monitoring system is not effective

in managing the risks associated with WTC-W management lease agreement. Specifically,

management monitoring over third-party employee compensation costs paid by the Port was

ineffective for the period under audit.

Internal Audit Report

World Trade Center West Building Agreement No. 655

Audit Period January 1, 2007 – December 31, 2008

Background

The Port of Seattle (POS) is the owner of the building located at 2200 Alaskan Way, known as

World Trade Center West Building (WTC – W). WTC–W derives its revenues from leasing of

approximately 69,507 net rentable square feet for office and retail spaces.

At a fee, the Port has outsourced the day-to-day management of the WTC-W to Wright Runstad

& Company. All revenue generated by the Facility is remitted to the Port, and the Port pays for

all the Facility operating expenses, including costs related to compensation, benefits, and

payroll taxes for WR&C employees working at WTC-W Facility.

Financial Highlights

Table 1 - Revenue

Description

2006

2007

2008

Lease Revenue $920,405

$1,094,930

$1,281,335

Source: PeopleSoft GL Account 45410

Table 2 - Expense

Description

2006

2007

2008

3rd Party Mgmt

Operating Exp

$858,356

$944,735

$738,880

Source: PeopleSoft GL Account 64100 - 67700

Audit Objectives

The purpose of the audit was to determine whether:

1. Port management effectively monitored the agreement with Wright Runstad & Company.

2. Wright Runstad & Company complied with the provisions of the management services

agreement, as well as other applicable laws and regulations.

Audit Scope

The scope of the audit covered the period 2007 through 2008.

Audit Approach

Internal Audit performed the following audit procedures:

Internal Audit Report

World Trade Center West Building Agreement No. 655

Audit Period January 1, 2007 – December 31, 2008

• Obtained an understanding of Wright Runstad & Co, Accounting Report Financial, and

Real Estate Management operations related to the WTC-W

• Reviewed all applicable state and local laws, rules and regulations, and Port policies

• Analyzed the data (internal and external) to achieve audit objectives

Conclusion

Wright Runstad & Company materially complied with the terms of the agreement; however, we

determined that the current Port monitoring system is not effective in managing the risks

associated with WTC-W management lease agreement. Specifically, management monitoring

over third-party employee compensation costs paid by the Port was ineffective for the period

under audit.

Internal Audit Report

World Trade Center West Building Agreement No. 655

Audit Period January 1, 2007 – December 31, 2008

Summary of Findings and Recommendations

I. Inadequate Monitoring Related to the Third-party Employee Compensation

Costs Paid by the Port

A system of monitoring is necessary to provide management with reasonable assurance of

compliance with agree-upon terms and conditions. Such a system should be based on an

analysis of risks related to the agreement and an identification of key controls that may mitigate

identified risks. Management then determines what controls to monitor and how the controls will

be monitored.

We concluded that the contractor, Wright Runstad & Company, was in compliance with the

terms of the agreement, but observed that the Port management monitoring system of the third-

party employee compensation needs improvement.

As part of the management services agreement, Port management has advanced some working

capital (funds) to Wright Runstand for the payment of the World Trade Center West Building’s

day-to-day expenses. The Port pays for all costs related to the Facility, including costs related to

compensation, benefits, and payroll taxes for the Wright Runstad employees working at the

Facility. Wright Runstad uses the Port working capital (funds) to disburse these payments.

For the Wright Runstad employees working at the Facility, we observed that the Port paid their

benefits based on a certain percentage or estimate. The auditor tested the benefit estimate and

determined it was reasonable, but found no evidence where Port management had reviewed,

questioned, or was aware how employee benefits were calculated.

The auditor also found evidence that Port funds were used to pay for Wright Runstad employee

bonuses, although there was no evidence of a bonus program. Washington State Constitution

does not allow public entities to use public funds to make additional compensation for services

already rendered and compensated.

We acknowledge that Property management group does conduct monthly reviews of WTC-W

expenses, but the review does not seem to address meaningful risks related to this agreement.

Recommendation

• Port management should implement an appropriate level of monitoring and review to

ensure that it is aware of what it pays at the World Trade Center West Facility related to

the third-party employee compensation costs.

Internal Audit Report

World Trade Center West Building Agreement No. 655

Audit Period January 1, 2007 – December 31, 2008

Management Response

• The Management Agreement grants Wright Rundstad & Company (“WR&C”) the

discretion to hire, manage and terminate staff. As described, all personnel hired by

WR&C for the World Trade Center West (“WTC-W”) facility are WR&C employees and

not the Port’s. While employee compensation cost components are not broken out as

separate line items, the Budget submitted by WR&C, and approved by the Port, includes

the total compensation for all employees assisting in the operation of the WTC-W facility.

Port staff agrees that employee compensation should be reviewed with more discrete

detail that identifies the various components of employee compensation. Port staff has

requested such detail as it relates to the 2009 budget and will request such detail in

future budget packages.