Internal Audit Report
Third-Party Arrangements Operational Audit
Club International Lounge
March 5, 2010 to present
Issue Date: September 7, 2011
Report No. 2011-15
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Club International Lounge
Third-Party Arrangements Operational Audit
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Table of Contents
Transmittal Letter .................................................................................................................................... 3
Executive Summary ................................................................................................................................ 4
Background .............................................................................................................................................. 5
Audit Objective ........................................................................................................................................ 5
Department Highlights and Accomplishments .................................................................................... 6
Audit Scope and Methodology ............................................................................................................... 6
Conclusion ............................................................................................................................................... 7
Schedule of Findings and Recommendations ..................................................................................... 8
1. Payroll Reimbursements Based on Estimates ................................................................... 8
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Club International Lounge
Third-Party Arrangements Operational Audit
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Transmittal Letter
We have completed an audit of a third-party management agreement of Club International
Lounge at the airport. The purpose of the audit was to determine whether Port management has
established adequate controls to ensure that operating expenses are effectively managed and
the contractor has complied with the third-party agreement.
Management has the primary responsibility to establish and implement effective controls. Our
role was to assess and test those controls in order to establish whether the controls were
adequate and operating effectively.
We conducted the audit using due professional care. The audit was planned and performed to
obtain reasonable assurance that department controls are adequate and operating effectively as
intended.
Port management has adequate and effective controls to ensure compliance with the third-party
agreement. Operating expenses were effectively managed with the exception of payroll.
We extend our appreciation to management and staff of VIP Hospitality, Aviation Customer
Services, and Aviation Business Development for their assistance and cooperation during the
audit.
Joyce Kirangi, CPA
Internal Audit, Director
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Executive Summary
Audit Scope and Objective Our audit objective was to determine if management implemented
adequate controls to assure:
1.) Compliance with the management agreement
2.) Monitoring of the operating expenses was adequate
We reviewed information from the date of the start of the agreement March 5, 2010 to July
2011.
Background The Port owns Club International Lounge at Sea-Tac Airport. The Port pays for all
the Lounge operating expenses, including costs related to compensation, benefits, and payroll
taxes for the contractor’s employees working at the Lounge. All revenue generated by the
Lounge is remitted to the Port.
In March of 2010, a three-year management agreement was entered into with VIP Hospitality
LLC to manage the day-to-day services of the Lounge. The management agreement provides
that at a fee the contractor will operate, manage, and maintain lounge services on a per-flight
basis for designated airline passengers.
The Lounge currently services two airlines - Asiana and Condor Airlines - with plans to expand
the number of airlines serviced. Operating revenues were approximately $92,000, and operating
expenses were approximately $46,000 for the first seven months of 2011.
Audit Result Summary Management has adequate controls to ensure that Club International
Lounge operations are effectively managed and in compliance with the third-party agreement.
We; however, noted a control exception over payroll reimbursements in that payroll benefits and
taxes were reimbursed based on budget estimates rather than actual expenses incurred.
.
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Background
The Port owns Club International Lounge at Sea-Tac Airport. The Port pays for all the Lounge
operating expenses, including costs related to compensation, benefits, and payroll taxes for the
contractor’s employees working at the Lounge. All revenue generated by the Lounge is remitted
to the Port.
In March of 2010, a three-year management agreement was entered into with VIP Hospitality
LLC, through a request for proposal (RFP) process, to manage the day-to-day services of the
Lounge. The management agreement provides that the contractor will operate, manage, and
maintain lounge services on a per-flight basis for designated airline passengers in consideration
of a management fee.
The Lounge currently services two airlines - Asiana and Condor Airlines - with plans to expand
the number of airlines serviced. The Port bills monthly the airlines for the number of passengers
that patronize the lounge. All the assets of the operation including inventory are owned by the
Port. Operating revenues were approximately $92,000, and operating expenses were
approximately $46,000 for the first seven months of 2011.
The lounge is located in the South Satellite and consists of a serving area and office area with
internet hook-up and printer access for passengers. Currently a variety of food and other than
alcohol beverage are available to patrons. In an effort to promote sales growth, a liquor license
application has been submitted to the Washington Liquor Control Board.
As part of the 2011 Work Plan, management requested an audit of this third-party management
agreement. Although the operation is still small, Port management plans to expand the airport
lounge services and patrons. Based on the risks we have encountered with the other Port
management agreements, Internal Audit concurred to include this audit in the 2011 Work Plan.
Highlights of Revenues and Expenses for the Last Two Calendar Years:
2010
2011 thru
July
Revenue
105,500
92,320
Operating Expenses
114,188
46,108
Management Fee
42,672
36,847
Net Income
(51,360)
9,365
Audit Objective
The purpose of the audit was to determine if management has implemented adequate controls
to assure:
1.) Compliance with the management agreement
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2.) Monitoring of the operating expenses was adequate
The scope of the audit covered the period from of March 2010 to present.
Department Highlights and Accomplishments
The Club International Lounge started off with one airline and has grown to serve two airlines.
Passenger counts and revenue have increased by 30 percent since its inception. The lounge is
a profitable model in 2011. There are plans to add liquor service and additional airlines.
Audit Scope and Methodology
We conducted the audit to determine whether the contractor was in compliance with the terms
of the management agreement. We utilized a risk-based audit approach from planning to test
sampling. We performed a multitude of information gathering methods including research,
interviews, observations, and analytical reviews in order to obtain a complete understanding of
the Club International Lounge operations. We conducted an assessment of significant risks
associated with the Port’s management of the third-party agreement, and identified controls to
mitigate those risks. We evaluated whether the implemented controls were functioning as
intended. Based on the risk assessment, we established the area of audit focus.
We applied additional detailed audit procedures to areas with the highest likelihood of significant
negative impact as follows:
1. Compliance with the management agreement
• To determine compliance with contract procurement requirements, we reviewed
documentation related to the advertisement for request for proposal (RFP), submitted
proposals, and the selection process including a scoring summary.
• To determine compliance with the spending limitations set by the agreement, we
compared budgeted to actual expenditures for the first six months of 2011.
• We selected and reviewed a risk-based sample of 28 checks to determine if expenses
were valid, legitimate and related to lounge operations.
• To determine the propriety of payroll expense reimbursements, including benefits, we
reviewed January and April of 2011 reimbursements. Each transaction was analyzed,
recalculated, and agreed to the reimbursements.
• To determine compliance with insurance requirements, we reconciled insurance
requirements to the coverage reflected in the certificate of insurance in force for a 12-
month period ending 3/15/2012.
2. Management Monitoring
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• To assess the effectiveness of inventory controls, we reviewed management monitoring
processes and June 2011 inventory reconciliation. In addition, we performed an
inventory count and reviewed the result for reasonableness.
• To determine the effectiveness of management controls to ensure continuing
adequate/sufficient insurance coverage over Port’s assets, we reviewed the insurance
policies for adequacy and sufficiency in insurance coverage, as defined in the
agreement.
• To determine the effectiveness of management controls over revenue, we reviewed the
invoicing and receipt of funds for the first six months of 2011.
• To determine whether the monitoring of operating expenses was adequate, we reviewed
28 checks and related invoices for the evidence and extent of management review.
Conclusion
Management has adequate controls to ensure that Club International Lounge operations are
effectively managed and in compliance with the third-party agreement. We; however, noted a
control exception over payroll reimbursements in that payroll benefits and taxes were
reimbursed based on budget estimates rather than actual expenses incurred.
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Third-Party Arrangements Operational Audit
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Schedule of Findings and Recommendations
1. Payroll Reimbursements Based on Estimates
Under Section 24 a.2.(ii) of the agreement, the Port agreed to reimburse all operating expenses
including compensation costs (e.g., benefits and taxes) for all employees working full or part-
time at the lounge. We noted that the contractor, VIP Hospitality, included a flat percentage of
payroll expenses for taxes and benefits, as opposed to actual costs incurred. Specifically, the
Port reimbursed VIP Hospitality for payroll expenses based on a budget estimate of 33% and
28% for administrative and lounge staff, respectively.
Employing estimates in operating expenses could result in over/under reimbursements. If
reimbursements to the contractor are based on estimates during the year, a true-up
reconciliation need to be performed at the yearend. Close review and monitoring by Port
management should ensure that yearend reconciliations are performed.
Recommendation
We recommend the management:
• Review and recalculate prior months’ payroll expenses based on actual expenses
incurred by VIP Hospitality.
• Consider implementing a true-up process whereby estimated charges are compared and
trued up with actual expenses over a reasonable time period (e.g., annually).
Management Response
Management agrees that employing estimates for payroll expenses could result in either an
underpayment or overpayment. In order to remove the risk of either occurrence, management
will implement a true-up process to reconcile the estimated payroll benefit expenses with the
actual expenses. The true-up process shall occur annually prior to January 31. The difference
of the amounts shall be paid by either the Port of Seattle to VIP in cases of underpayment and
conversely by VIP to the Port of Seattle in cases of overpayment. This year’s true-up process
shall include a reconciliation of all payroll expenses, dating back to the agreement
commencement date, March 5, 2010.
