Internal Audit Report Fox Rent-A-Car Lease and Concession Compliance Audit January 1, 2008 through December 31, 2009 Issue Date: February 1, 2011 Report No. 2011-01 Internal Audit Fox Rent-A-Car Agreement No. 940 and 1285 Audit Period: January 1, 2008 - December 31, 2009 Table of Contents Internal Auditor's Report .................................................................................................. 3 Executive Summary .......................................................................................................... 4 Audit Approach ................................................................................................................. 5 Conclusion ......................................................................................................................... 6 Schedule of Findings and Recommendations ................................................................ 7 1. Underreported and Reduction of Gross Receipts 2. Underpaid Customer Facility Charge (CFC) 3. Untimely Payments Schedule A - 2008 Underreporting of Gross Revenue ....................................................... 11 Schedule B - 2009 Underreporting of Gross Revenue ....................................................... 12 Schedule C - Underreporting of Customer Facility Charge (CFC) ..................................... 13 2 Internal Audit Fox Rent-A-Car Agreement No. 940 and 1285 Audit Period: January 1, 2008 - December 31, 2009 Internal Auditor's Report We have completed an audit of the Lease and Concession Agreement,, as amended, between the Port of Seattle and Fox Rent-A-Car. Rent The purpose of the audit was to determine whether: 1) Reported concession was complete, properly calculated, calculated and remitted timely to the Port. 2) Port and the lessee complied with provisions of the Lease and Concession Agreement. 3) Lease and Concession Agreement Agreement, as amended, complies with applicable state and Port requirements. ustomer Facility Charges (CFC) were properly p collected and remitted timely to the Port. 4) Customer We examined information related to a two-year year period from January 1, 2008, 200 through December 31, 2009. it using due professional care. We We planned and performed the audit to We conducted our audit obtain reasonable assurance as to compliance with significant provisions of the agreement agreement, including complete and timely reporting of concessionable revenues. revenues Fox Rent-A-Car materially complied with the terms of the Lease and Conce Concession agreement. The agreement itself also complies with applicable state and Port requirements. As reported in the subsequent pages of this report, the audit disclosed instances of late payments, underreported gross receipts,, and underreported Customer Facility Charge (CFC) (CFC). We extend our appreciation to the management and staff of Aviation Business Development, Development and Accounting & Financial Reporting for their assistance and cooperation during the audit. Joyce Kirangi, CPA Director, Internal Audit 3 Internal Audit Fox Rent-A-Car Agreement No. 940 and 1285 Audit Period: January 1, 2008 - December 31, 2009 Executive Summary Audit Scope and Objective The purpose of the audit was to determine the following: 1. 2. 3. 4. Reported concession was complete, properly calculated and remitted timely to the Port. Port and the lessee complied with provisions of the Lease and Concession Agreement. Lease and Concession Agreement, as amended, complies with applicable state and Port requirements. Customer Facility Charges (CFC) were properly collected and remitted timely to the Port. We examined the books and records of Fox Rent-A-Car for a two-year period from January 1, 2008 through December 31, 2009. Aviation Business Development, in conjunction with Accounting and Financial Reporting (AFR), has the primary responsibility for administering and monitoring the agreement to ensure compliance with agreed-upon terms. Agreement Terms The agreement requires Fox Rent-A-Car to pay the Port a monthly percentage fee of 4% of its Gross Revenue that is greater than $40,000. The allowed $40,000 monthly deduction is adjusted annually to reflect changes in the Consumer Price Index (CPI). The following agreed-upon deductions are allowed in the RAC lease agreement: a. Any amounts received as insurance proceeds or for damage to vehicles or other property, or for loss, conversion or abandonment of such vehicles. b. The wholesale transfer of salvage vehicles. c. Non-revenue rentals to employees. d. Fees paid to other governmental agencies (excluding the Port). e. Any tax imposed or collected on behalf of taxing authority. The privilege fee is payable to the Port no later than 30 days after the end of each month. For untimely payments, the agreement provides a one-time late fee of 5% of the overdue amount and interest to be accrued at the rate of 18% per annum from the due date until paid. Audit Result Summary Fox Rent-A-Car materially complied with the terms of the Lease and Concession agreement. The audit; however, disclosed Fox Rent-A-Car underreported gross revenues and Customer Facility Charges (CFC) to the Port. Additionally, we noted instances of late payments ranging from 2 to 37 days where no late fee charges had been assessed. These exceptions resulted in underreporting to the Port, and the auditor recommends Port management seek and recover approximately $129,291 in additional concession fees, CFC, and late fee charges. 4 Internal Audit Fox Rent-A-Car Agreement No. 940 and 1285 Audit Period: January 1, 2008 - December 31, 2009 Background Fox Rent-A-Car is a franchise car rental. The agreement between the Port of Seattle and Fox Rent-A-Car became effective in August 2007. The agreement is operated on a month-to-month basis. The Fox Rent-A-Car is a California corporation, with many independent car rentals in the United States, Canada and around the world. Fox Rent-A-Car agreement does not require a monthly MAG payment to the Port. It requires the rental car agency to pay the Port a monthly concession percentage fee of 4% of its Gross Revenue in excess of $40,000.The allowed $40,000 monthly deduction is adjusted annually to reflect changes in the Consumer Price Index (CPI). The concession fee is payable to the Port no later than 30 days after the end of each month. For untimely payments, the agreement provides a one-time late fee of 5% of the overdue amount and interest to be accrued at the rate of 18% per annum from the due date until paid. Below is Fox Rent-A-Car financial highlights for the last two years: Year 2008 2009 Total Reported Gross Revenue 6,603,567 5,976,073 12,579,640 Less Allowable Net Deduction Concessionable (480,000) 6,423,567 (485,420) 5,490,653 (965,420) 11,614,220 Paid Concession 217,979 234,926 452,905 Source: PROPWorks and PeopleSoft The scope of the audit covered the period of January 1, 2008 through December 31, 2009. Audit Approach To achieve our audit objective, we performed the following procedures: • • • • • • • Read and analyzed the lease agreement, as amended. Reviewed applicable state and local rules and regulations. Identified significant provisions in the agreement. Obtained necessary financial and non-financial data from the lessee. Assessed relevant risks associate with the RAC agreement. Designed and executed audit procedures based on risk. Analyzed data (internal & external) to determine completeness & compliance. This included performing the following additional procedures: o Reconciliation of the reported gross receipts to the RAC agency accounting records to ensure completeness and consistency. 5 Internal Audit Fox Rent-A-Car Agreement No. 940 and 1285 Audit Period: January 1, 2008 - December 31, 2009 o o o Verified that concession fees were paid timely to the Port. Recalculated concession revenue and related fees to ensure accuracy. Selected the test months that deemed high risks for further details tests. Conclusion Fox Rent-A-Car materially complied with the terms of the Lease and Concession agreement. The audit; however, disclosed Fox Rent-A-Car underreported gross revenues and Customer Facility Charges to the Port. Additionally, we noted instances of late payments ranging from 2 to 37 days where no late fee charges were assessed. The noted exceptions in total resulted in underreporting to the Port, and the auditor recommends Port management seek and recover approximately $129,291 in additional concession fees, CFC, and late fee charges. 6 Internal Audit Fox Rent-A-Car Agreement No. 940 and 1285 Audit Period: January 1, 2008 - December 31, 2009 Schedule of Findings and Recommendations 1. Underreported and Reduction of Gross Receipts Gross revenue is defined under Section 1.E as: "... all charges, including, but not limited to, time and mileage charges and separately stated fees for rental of vehicles and other related or incidental services or merchandise, and any other items or services, made at or from Concessionaire's Rental Car Concession, regardless of where the vehicles or services are delivered to or returned; personal accident insurance; any vehicle originally rented at Concessionaire's Rental Car Concession which exchanged at any other location; the long-term lease; all amount charged to concessionaire's customers and which are separately stated on the rental agreement as an optional charge for waiver; personal property (including, but not limited to, mobile phones, child seats, ski racks, etc; furnishing and/or replacing fuel; all monies, fees, or other consideration received from airlines, travel agents or other; intercity or drop charges; and recovery fee" All gross revenues from operations are subject to concession, except for the following agreed-upon exclusions: a. Any amounts received as insurance proceeds or for damage to vehicles or other property, or for loss, conversion or abandonment of such vehicles. b. The wholesale transfer of salvage vehicles. c. Non-revenue rentals to employees. d. Fees paid to other governmental agencies (excluding the Port). e. Any tax imposed or collected on behalf of taxing authority. We reviewed Fox Rent-A-Car financial records including monthly sales summary, and noted the following gross revenues were underreported to the Port: • • • • • • • • • • • • • Time & mileage Recovery Fee Drop charges Child seat Additional Driver Navigation Towing Miscellaneous Fuel Age different Class upgrade Insurance Road side assistant In addition, we noted customer discount/rebate was an offset against gross revenues reported to the Port. The un-allowed discount/rebate offset against reported gross revenue amounted to approximately $6,631 in 2008 and $25,518 in 2009. 7 Internal Audit Fox Rent-A-Car Agreement No. 940 and 1285 Audit Period: January 1, 2008 - December 31, 2009 The table below summarizes underreported and offset gross revenues. Description 2008 2009 Total Fox Reported Gross Revenue 6,306,567 5,976,073 12,282,640 Plus Underreported 162,714 58,720 221,434 Plus Discount/Rebate 6,631 25,518 32,149 Less Allowance (480,000) (485,420) (965,420) Concessionable Revenue Net of Allowance 5,995,912 5,574,891 11,570,803 Percentage Fees Payable @4% 239,836 222,996 462,832 Less Concession Fee Paid (233,063) (219,843) (452,906) Underpaid 6,773 3,153 9,926 Interest (18%/yr) 1,778 737 2,598 Grand Total Owed 8,551 3,890 12,441 Recommendation We recommend that management: • Seek and recover approximately $12,441 in underpaid concession fees and late fee interest charges • Work with the Fox Rent-A-Car to ensure that all receipts subject to concession fee are accurate and completely reported. Management Response Aviation Business Development agrees with Internal Audit's finding and will forward an invoice to Fox for $12,441 to collect the underreported gross receipts and associated interest. Management will also notify Fox by letter that the deductions are not allowed per the lease, and as such, this practice should be immediately discontinued. 2. Underpaid Customer Facility Charge (CFC) Section 5.25.A of the agreement states, in part, that the company "...must collect the CFC at the time the first payment is made under a Rental Car Contract, and must remit the full amount of the CFC to the Port regardless of whether or not the full amount of such CFC is actually collected by the Concessionaire..." 8 Internal Audit Fox Rent-A-Car Agreement No. 940 and 1285 Audit Period: January 1, 2008 - December 31, 2009 Further, the Port notification letter sent out to Fox Rent-A-Car on July 03, 2008, gave the rental car company a 45-day notice to start collecting the CFC charges effective on August 18, 2008. We reviewed the monthly transaction totals against the CFC payment history and noted that from August 2008 through December 2009, Fox Rent-A-Car inconsistently collected the CFC charges, and or did not properly remit all CFC owed the Port. The total CFC underreported to the Port was $58,756. We further applied 18% on the underreported CFC payments, and this totaled to $21,615 of late fee financial charges. A grand total of $80,371 of additional CFC and late fee charges is now owed the Port. Recommendation We recommend Port management: • Seek recovery of approximately $80,371 of underpaid CFC and late fee interest charges. Management Response Aviation Business Development agrees with Internal Audit's finding and will forward an invoice to Fox for $80,371 to collect underpaid CFC and associated interest. Management will also remind Fox by letter that of the lease requirements pertaining to the collection and remittance of the CFC. 3. Untimely Payments The agreement, as amended under Section 4.a, stipulates specific payment terms for percentage fee payments as follows: • Percentage fee is due no later than thirty (30) days after the end of each month. Late payments, as stipulated under Section 8 of the agreement, are to be assessed a onetime late fee of 5% on the overdue amount, and interest of 18% per annum or the maximum allowed by the law, whichever is less. We reviewed payment history, and noted six and four instances of late payments in 2008 and 2009, respectively, where no late fee financial charges had been applied. 9 Internal Audit Fox Rent-A-Car Agreement No. 940 and 1285 Audit Period: January 1, 2008 - December 31, 2009 The table below summarizes untimely payments and related late fee and interest charges Year 2008 2009 Type of Payment Concession CFC Concession CFC Range of Days Late 3 to 37 2 to 32 # of Instances of Late Payments 6 4 4 4 One-Time Charge @ 5% 6,007 12,430 1,859 7,810 28,106 Interest Charge (18%/yr) 918 4,099 669 2,687 8,373 Total 6,925 16,529 2,528 10,497 36,479 Recommendation We recommend that Port management: • Seek and recovery approximately $36,479 in one-time late charge and in interest/finance charges. • Work with the Fox Rent-A-Car to ensure timely payments. Management Response Aviation Business Development (AVBD) and Accounting & Financial Reporting (AFR) staff appreciate the insight provided by Internal Audit regarding late fees. The audit documented instances when the tenant submitted payments and/or reporting past the due date. The lease agreement stipulates a 5% penalty and interest accrued at 18% per annum until concession payment and penalty is made. Different from lease/rental payments which facilitate predetermined amounts to bill regularly, the amount to bill on concession agreements is variable and the exact amount above the Minimum Annual Guarantee (MAG) is not known until the concessionaires submit final reports and AFR completes year end reconciliations. The Port's central financial system does not provide an automated mechanism to support after-the-fact variable computation and billing of late fees. In 2009, the Port implemented a manual solution using a desktop application to compute and bill late fees in AFR. With this solution in place, all tenants were notified in 2009 that moving forward they could expect to be billed penalty and/or interest accrued. All tenants are now being billed for any applicable late fees according to the terms of their lease. As for the retroactive considerations, management will work toward resolution with guidance from the Port Legal department. 10 56 217 Total Add'l Concession Payable and Interest Payable 23 22 10,045 10,048 (3) 251,121 219,067 8,763 8,601 161 291,121 (40,000) 259,067 (40,000) 674 162 21 12,247 11,734 513 306,172 346,172 (40,000) 12,820 (87) 4,032 12,079 37 Mar-08 333,352 703 (87) Feb-08 291,208 2,008 151 1,874 Jan-08 255,035 Interest Rate Annually 18% or 1.5% Per Month # of Months to Current Concession Fee Payable - 4% Concession Fee Reported by Fox Add'l Concession Payable Adjusted Gross Revenue Less Allowance Concessionable Revenue net of allowance FINDINGS: ADD Time & Mileage Customer Rebate Child Seat Navigation Fuel Age Different Add'l Driver GARS Late charge Recovery Fee Towing Insurance Class Upgrade Road Assistant (transporation) VLF Miscellaneous (P Type) Airport transfer fee (TRANS) LMV17 TAI & TRAI Discount Total Additions Dates Fox Reported Gross Revenue FOX RENT A CAR SCHEDULE A - 2009 GROSS REVENUE UNDERREPORTING FOR THE TWELVE MONTHS ENDED DECEMBER 2008 INTEREST CALCULATED AS OF 11/30/10 632 146 20 11,352 10,866 486 283,802 323,802 (40,000) 12,144 948 11,246 (50) Apr-08 311,658 856 190 19 17,423 16,757 666 435,580 475,580 (40,000) 16,646 937 15,193 516 May-08 458,934 42,110 4,177 37,933 Jul-08 1,040,433 50,833 5,244 45,590 Aug-08 1,227,145 1,028 219 18 22,079 21,269 810 551,977 11 2,114 430 17 41,702 40,017 1,684 1,042,543 2,521 488 16 49,519 47,486 2,033 1,237,979 591,977 1,082,543 1,277,979 (40,000) (40,000) (40,000) 20,240 93 338 19,809 Jun-08 571,737 173 32 15 26,907 26,765 142 672,663 712,663 (40,000) 3,539 (70) 3,436 173 Sep-08 709,124 255 44 14 13,957 13,746 211 348,921 388,921 (40,000) 89 5,276 700 12 622 69 2,885 14 145 189 260 15 90 (63) 250 Oct-08 383,645 36 6 13 10,719 10,688 30 267,964 307,964 (40,000) 400 757 (8) 75 290 Nov-08 307,207 49 7 12 15,125 15,084 41 378,124 418,124 (40,000) 189 600 1,034 10 150 (235) 320 Dec-08 417,089 8,552 1,778 239,836 233,063 6,774 5,995,912 6,475,912 (480,000) 231 5,542 14 145 226 260 15 90 (141) 145,827 1,037 12 622 69 14,109 10 189 1,089 169,345 Total 6,306,567 Total Add'l Concession Payable and Interest Payable Interest Rate Annually 18% or 1.5% Per Month 23 99 25 13,596 13,522 73 Concession Fee Payable - 4% Concession Fee Reported by Fox Add'l Concession Payable # of Months to Current 280,204 339,889 97 24 22 11,208 11,135 73 320,204 (40,000) 1,821 25 536 379,889 (40,000) 130 1,835 21 250 245 59 21 11,203 11,016 187 280,073 320,615 (40,542) 25 5,209 9 (75) 369 1,065 3,996 Mar-09 315,406 114 1,260 Feb-09 318,382 15 (205) 1,330 Jan-09 378,054 Adjusted Gross Revenue Less Allowance Concessionable Revenue net of allowance FINDINGS: ADD Time & Mileage Customer Rebate Child Seat Navigation Fuel Age Different Add'l Driver Drop Charge GARS Late charge Recovery Fee Towing Insurance Class Upgrade Road Assistant (transporation) VLF Miscellaneous Claim ASV17 LMV17 TAI & TRAI UAF17 AHC17 FSS17 WRS17 WPD17 Discount Total Additions Dates Fox Reported Gross Revenue FOX RENT A CAR SCHEDULE B - 2009 GROSS REVENUE UNDERREPORTING FOR THE TWELVE MONTHS ENDED DECEMBER 2009 INTEREST CALCULATED AS OF 11/30/10 76 17 20 11,131 11,073 58 278,277 318,819 (40,542) 2,000 931 (82) (100) 746 505 Apr-09 316,819 117 26 19 13,799 13,708 91 344,975 385,517 (40,542) 2,823 23 (300) (11) 3,587 (476) May-09 382,694 309 66 18 21,981 21,738 243 549,522 590,064 (40,542) 248 6,621 1,061 335 188 38 17 38,291 38,141 150 957,264 997,806 (40,542) 4,285 (428) 26 28 33 47 297 (295) 31 6 1,316 3,655 Jul-09 993,521 (104) 264 220 (60) 4,227 Jun-09 583,443 12 391 76 16 43,125 42,809 316 1,078,122 1,118,664 (40,542) 8,432 225 16 22 75 1,507 6,586 Aug-09 1,110,232 762 140 15 24,186 23,565 622 604,657 645,199 (40,542) 16,086 (20) 314 900 818 353 9 100 7,020 5,225 77 133 640 260 125 133 Sep-09 629,113 752 131 14 15,090 14,469 621 377,252 417,794 (40,542) 1,083 16,079 610 170 (303) 12,528 1,991 Oct-09 401,715 474 77 13 9,159 8,762 397 228,984 269,526 (40,542) 10,466 (9) (60) 7,243 102 2,390 800 Nov-09 259,060 379 58 12 10,227 9,905 322 255,672 296,214 (40,542) 8,581 549 (22) 4,700 98 845 2,411 Dec-09 287,633 3,890 737 222,996 219,843 3,153 5,574,891 6,060,311 (485,420) 25,750 24,032 77 135 745 480 65 24,679 (963) 742 922 416 381 42 138 (75) 1,309 511 786 1,696 335 549 1,485 84,238 Total 5,976,073 2,469.60 8,349.60 Total Add'l CFC Payable and Interest 28 19,560 19,560 5,880 26 79,471 79,471 6,374 34,120.09 8,859.86 9,835.33 2,485.86 27 78,535 78,535 24,285 1,309.95 357.26 25 70,207 70,207 953 340.00 90.00 24 70,210 70,210 250 289.18 74.18 23 57,255 57,255 215 13,479.55 3,344.55 22 47,780 47,780 10,135 21 13 43,915 43,915 (170) 71.50 16.50 20 42,070 42,070 55 10,286.43 2,281.43 19 45,310 45,535 8,005 508.00 108.00 18 62,560 62,560 400 17 87,275 87,275 (115) 632.40 122.40 16 91,780 91,780 510 1,598.63 293.63 15 72,780 72,780 1,305 471.90 81.90 14 63,440 63,440 390 244.98 39.98 13 42,370 42,370 205 94.40 14.40 12 46,605 46,605 80 80,371 21,615 1,021,349 58,756 08/08 09/08 10/08 11/08 12/08 01/09 02/09 03/09 04/09 05/09 06/09 07/09 08/09 09/09 10/09 11/09 12/09 Total 5,088 20,564 17,169 14,232 14,092 11,494 11,583 8,749 8,425 10,708 12,592 17,432 18,458 14,817 12,766 8,515 9,337 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 25,440 102,820 85,845 71,160 70,460 57,470 57,915 43,745 42,125 53,540 62,960 87,160 92,290 74,085 63,830 42,575 46,685 1,080,105 # of Months to Current Interest Rate Annually 18% or 1.5% Per Month Per activity reported CFC Payment Add'l CFC Payable Month # of Transaction Days $ Rate CFC Payable FOX RENT A CAR SCHEDULE C - CFC UNDERREPORTING FOR THE SEVENTEEN MONTHS ENDED DECEMBER 2009 INTEREST CALCULATED AS OF 11/30/10