Internal Audit Report

Fireworks

Lease and Concession Compliance Audit

June 1, 2006 through May 31, 2008

Issue Date: September 1, 2009

Report No. 2009-12

Internal Audit

Fireworks (Agreement No. 612)

Audit Period: June 1, 2006 – May 31, 2008

Table of Contents

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

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

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

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

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

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

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

Schedule of Findings and Recommendations ..................................................................... 7

1) Late Payments

Internal Audit

Fireworks (Agreement No. 612)

Audit Period: June 1, 2006 – May 31, 2008

Internal Auditor’s Report

We have completed the audit of the Lease and Concession Agreement between the Port of Seattle

(Port) and Fireworks for the period of June 1, 2006 through May 31, 2008.

We conducted our audit using due professional care and we planned and performed the audit to

obtain reasonable assurance as to whether the lessee and the Port had complied with the

provisions of the lease agreement.

The objectives of the audit was to verify gross receipts were properly reported to the Port in

accordance with the terms of the lease agreement and that 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.

The Lessee materially complied with the terms of conditions of the agreement including, but is not

limited to, the proper reporting of gross receipts and accurate/timely remittance of the concession

fees. Additionally Port management effectively monitored the agreement to assure compliance.

However, there were two instances of late payments that resulted in $1,366.14 in late charges and

interest due to the Port.

We extend our appreciation to Aviation Business Development and staff for their assistance and

cooperation during the audit.

Joyce Kirangi, CPA

Sr. Internal Audit Manger

Internal Audit

Fireworks (Agreement No. 612)

Audit Period: June 1, 2006 – May 31, 2008

Executive Summary

Audit Scope and Objective The purpose of the audit was to determine compliance with the

provisions of the Lease and Concession Agreement No. 612. We examined the books and records

of Fireworks (Lessee) in order to verify gross receipts 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.

Agreement Terms The Lease and Concession Agreement No. 612 authorizes Fireworks to

operate a concession at the airport. In accordance with the lease, the Lessee pays the Port a

three-tier concession fee that ranges from ten percent (10%) of gross receipts to twelve percent

(12%) of gross receipts based on the level of gross receipts.

Audit Result Summary The Lessee materially complied with the terms of conditions of the

agreement including, but is not limited to, the proper reporting of gross receipts and accurate/timely

remittance of the concession fees. Additionally Port management effectively monitored the

agreement to assure compliance. However, there were two instances of late payments that

resulted in $1,366.14 in late charges and interest due to the Port.

Internal Audit

Fireworks (Agreement No. 612)

Audit Period: June 1, 2006 – May 31, 2008

Background

Fireworks operates a number of galleries in the Seattle area including a gallery at the Seattle

Tacoma International Airport.

The lease agreement requires the following three-tier concession fees:

• ten percent (10%) of gross receipts under $1,000,000

• eleven percent (11%) of gross receipts between $1,000,000 and $3,000,000

• twelve percent (12%) of gross receipts over $3,000,000

The gross receipts as reported to the Port for the respective lease years under review are as

follows:

2006

2007

2008

$ 3,280,692

$ 3,771,189

$ 4,104,668

Source: PeopleSoft and Fireworks reporting

Audit Objectives

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

• Properly reported its gross receipts 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 June 1, 2006 through May 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

Internal Audit

Fireworks (Agreement No. 612)

Audit Period: June 1, 2006 – May 31, 2008

• Obtained relevant financial data from the Lessee

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

Conclusion

The Lessee materially complied with the terms of conditions of the agreement including, but is not

limited to, the proper reporting of gross receipts and accurate/timely remittance of the concession

fees. Additionally Port management effectively monitored the agreement to assure compliance.

However, there were two instances of late payments that resulted in $1,366.14 in late charges and

interest due to the Port.

Internal Audit

Fireworks (Agreement No. 612)

Audit Period: June 1, 2006 – May 31, 2008

Schedule of Findings and Recommendations

1) Late Payments

The Lessee had two late payments that exceeded the 10-day grace period. Paragraph 8 of the

lease agreement imposes 1) late charge of five percent (5%) on overdue payments by more than

ten days past the grace period, and 2) interest at eighteen percent (18%) per annum on the unpaid

balance. The late charges amounted to $1,080.53 and interest of $285.61 for the two late

payments.

Recommendation:

We recommend that Aviation Business Development bill and collect $1,366.14.

Management Response:

It is not Aviation Business Development’s role or responsibility to bill and collect late fees or

interest from tenants for late payments. Tenants report and submit payments to the Port’s

Accounting department which determines their timeliness and has responsibility for determining

late fees due to the Port. Billing of late fees has, to our knowledge, not been included in the

automated billing processes in Accounting until 2009.

Fireworks has been a tenant since May 2005, and has made approximately 48 payments to the

Port. It is difficult to know what extenuating circumstances may have existed with the two

payments in question. Fireworks achieved sales of more than $4 million in 2008, resulting in

nearly a half million dollars in revenue for the Port. By comparison, a deficiency of less than

$1,400 does not seem significant. However, it is unfortunate that this deficiency could not have

been brought to the tenant’s attention in a more timely fashion.