INTERNAL AUDIT REPORT LIMITED CONTRACT COMPLIANCE CMC INVESTMENTS, INC. DBA DOLLAR RENT-A-CAR JUNE 2014 - MAY 2017 ISSUE DATE: MAY 30, 2018 REPORT NO. 2018-04 INTERNAL AUDIT CMC Investments, Inc. d/b/a Dollar Rent A Car June 01, 2014 - May 31, 2017 TABLE OF CONTENTS EXECUTIVE SUMMARY ..........................................................................................................................................3 BACKGROUND .......................................................................................................................................................4 AUDIT SCOPE AND METHODOLOGY ......................................................................................................................5 SCHEDULE OF FINDINGS AND RECOMMENDATIONS ..........................................................................................6 APPENDIX A: RISK RATINGS..................................................................................................................................8 2 INTERNAL AUDIT CMC Investments, Inc. d/b/a Dollar Rent A Car June 01, 2014 - May 31, 2017 EXECUTIVE SUMMARY Internal Audit (IA) completed a rental car concession agreement audit of CMC Investments, Inc. d/b/a Dollar Rent A Car, Inc. (Concessionaire), for the period June 1, 2014 through May 31, 2017. The audit objective was to determine whether the Concessionaire complied with significant financial provisions of the concession agreement, including whether reported gross revenues and the Customer Facility Charges (CFC) paid to the Port were complete and reasonable. We concluded that the Percentage Fees paid to the Port materially complied with the terms of the Rental Car Lease and Concession Agreement. However, we determined that the Concessionaire underreported certain gross revenue items and over-reported the CFC: 1) The Concessionaire did not report $343,326 in incidental gross revenues to the Port, resulting in $34,333 in Percentage Fees owed to the Port. 2) The CFC was over-reported to the Port, by $19,596 for the audit period. This was primarily due to a mistake by Concessionaire in November 2015, which resulted in an overpayment of that month's CFC to the Port. These two items resulted in an underpayment to the Port of approximately $14,737 for the three-year period ended May 31, 2017. These issues are discussed in more detail beginning on page six of this report. We extend our appreciation to management and staff of the Aviation Commercial Management Department, the Concessionaire, and the Accounting and Financial Reporting Department for their assistance and cooperation during the audit. Glenn Fernandes, CPA Director, Internal Audit RESPONSIBLE MANAGEMENT TEAM Lance Lyttle, Managing Director Aviation Jim Schone, Director AV Commercial Management James Jennings, Sr. Manager, AV Properties Group 3 INTERNAL AUDIT CMC Investments, Inc. d/b/a Dollar Rent A Car June 01, 2014 - May 31, 2017 BACKGROUND CMC Investments, Inc. is a private company categorized under Automobile Renting and Leasing, in Mercer Island, WA. The company was established in 1987, and operates under the name Dollar-Rent-A Car at Seattle Tacoma International Airport and Portland International Airport. The terms of the agreement provide for a Minimum Annual Guarantee (MAG) of the higher of: (1) 85% of the total amount paid to the Port in the previous agreement year, or (2) the Initial MAG bid by the Concessionaire of $1,333,399. Additionally, the agreement requires a Percentage Fee equal to 10% of Concessionaire's gross revenues, provided the fee is higher than the monthly MAG. The MAG is payable in advance, on or before the first day of each month, without notice from the Port. The Percentage Fee, if applicable, is due on or before the 20th of the following month. The agreement states that the Concessionaire must collect a Customer Facility Charge (CFC) of $6 per rental day. The table below reflects total gross revenue, concession fees, and CFC fees: REPORTED GROSS REVENUE AND CONCESSION CALCULATION AGREEMENT YEAR 2014 - 2015 2015 - 2016 2016 - 2017 TOTAL REPORTED GROSS REVENUES CUSTOMER FACILITY CHARGE CONCESSION FEES REPORTED CFC FEES $1,609,327 1,607,168 1,655,563 $4,872,058 $1,943,754 2,042,244 2,207,856 $6,193,854 $16,093,271 16,071,679 16,555,626 $48,720,576 Data Source: PeopleSoft Financials and Propworks 4 INTERNAL AUDIT CMC Investments, Inc. d/b/a Dollar Rent A Car June 01, 2014 - May 31, 2017 AUDIT SCOPE AND METHODOLOGY We conducted this audit 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 perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The period audited was June 1, 2014 - May 31, 2017. After identifying significant provisions in the Agreement, we performed the following audit procedures: Insurance & Security Deposit • Identified the insurance requirements in the agreement. • Verified the insurance certificates, as required in the agreement, were provided to the Port for the audit period. • Tested three years of insurance coverage and endorsements as required. • Identified the Security requirement in the agreement. • Verified and tested three years of Security amounts as required Customer Facility Charge (CFC) • Calculated a number of transaction (i.e., rental) days and CFC from the Concessionaire's system reports. • Reconciled the reported amount to those certified by Concessionaire's Controller. • Reconciled the calculated numbers to what the Concessionaire reported for the audit period. • Tested a risk-based sample of 113 closed rental agreements to determine whether the CFC calculation was based on the correct checkout and return date, and was accurate. Revenue completeness and reasonableness • Reviewed the Concessionaire's chart of accounts, to determine whether unusual revenue accounts were included in the determination of Gross Revenue reported to the Port. • Reconciled the reported revenues to: o The Daily Business Report (DBR) GL by revenue item. Additionally, the revenue items were reviewed to determine whether all items subject to the Percentage Fee were included in the reported Gross Revenue. o The Certified Audit Statement of Gross Revenues, independently verified by a CPA. • Tested a risk-based sample of 16 closed rental agreements in the audit period to determine whether: o All revenue items on the face of the rental agreement agreed to the amount posted to the DBR. o Disallowed commercial discounts/rebates reduced reported Gross Revenues. • Analyzed Port records to determine whether payments were received in a timely manner and were complete. 5 INTERNAL AUDIT CMC Investments, Inc. d/b/a Dollar Rent A Car June 01, 2014 - May 31, 2017 SCHEDULE OF FINDINGS AND RECOMMENDATIONS 1) RATING: MEDIUM The Concessionaire did not report $343,326 in incidental Gross Revenues to the Port, resulting in $34,333 in Percentage Fees owed to the Port. This is a repeat finding from a previous audit, which the Concessionaire acknowledges and has agreed to incorporate into their monthly gross revenue reporting to the Port. The amounts cited in the table below summarize the underreported gross revenues. Year-Ended May 31 2015 2016 2017 Reported Gross Audited Revenue Gross Revenue 16,196,832 16,093,271 16,184,932 16,071,679 16,682,138 16,555,626 Concession Revenue Underreported Under Reported $ 103,561 113,253 126,512 343,326 Concession Fees Underpaid $34,333 Data Source: CMC Investments' DBR records, PROPworks & PeopleSoft Financials Our analysis of the Concessionaire's financial records and ensuing detail transaction testing, determined that Gross Revenues from the following account line items were not reported to the Port: • • • • • • Admin. Fees Pickup Fees Roadside Services Fees Lost/Found Handling Fees Cleaning Fees Lost Key Charges Recommendations: 1. Seek and recover approximately $34,333 in underpaid Percentage Fees. 2. Assess the applicability of the one-time late charge and any accrued interest. 3. Communicate with the Concessionaire to assure Gross Revenues are accurately reported and that the associated Percentage Fees are collected. Management Response/Action Plan Aviation Commercial Management will seek to recover the underpaid Percentage Fees, together with any applicable late fees and interest charges. Aviation Commercial Management will also communicate both verbally and in writing that the revenues identified above, are not permitted exclusions from revenue according to the Agreement. Therefore, effectively immediately, those revenue items are required to be included in their monthly reports of gross revenues provided to the Port. Lastly, Aviation Commercial Management will advise Accounting and Financial Reporting that the Minimum Annual Guarantee under the Lease for the 2017-2018 Agreement Year should be increased to $1,417,981.73 to account for these under-reported Gross Revenues in the 2016-2017 Agreement Year. DUE DATE: 9/30/2018 6 INTERNAL AUDIT CMC Investments, Inc. d/b/a Dollar Rent A Car June 01, 2014 - May 31, 2017 2) RATING: MEDIUM The CFC was over-reported to the Port, by approximately $19,596 for the audit period. This was primarily due to a mistake by the Concessionaire in November 2015, which resulted in an overpayment of that month's CFC to the Port. When we reviewed monthly transaction totals against CFC payment history, we also determined that the Concessionaire inconsistently collected the CFC from customers in other months. The lease agreement under Section 6.2.1 stipulates: "Concessionaire shall collect a daily CFC on all vehicle rental transactions originating at the Consolidated Rental Car Facility... Each Concessionaire must collect the CFC at the time of 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 from the person who rented the Automobile under such Rental Car Contract." The Concessionaire acknowledged the amounts cited in the table below, which summarizes the overreported CFC. Additionally, the Concessionaire developed enhancements to their internal controls to prevent their sales representatives from modifying the CFC. Year-Ended May 31 2015 2016 2017 Audited CFC Reported CFC $1,943,754 $1,944,336 2,042,244 2,020,482 2,209,440 2,207,856 Total Due to the Concessionaire. Data Source: CMC Investments' Rental Agreement report & PeopleSoft Financials Recommendations 1. Refund the Concessionaire $19,596 for the CFC overpayment. Management Response/Action Plan Aviation Commercial Management will refund the overpaid CFC's. DUE DATE: 9/30/2018 7 Under Reported $ 582 (21,762) 1,584 $ (19,596) INTERNAL AUDIT CMC Investments, Inc. d/b/a Dollar Rent A Car June 01, 2014 - May 31, 2017 APPENDIX A: RISK RATINGS Findings identified during the course of the audit are assigned a risk rating, as outlined in the table below. The risk rating is based on the financial, operational, compliance or reputational impact the issue identified has on the Port. Items deemed "Low Risk" will be considered "Exit Items" and will not be brought to the final report. Rating Financial Large financial impact HIGH Remiss in responsibilities of being a custodian of public trust Internal Controls Compliance Missing, or inadequate key internal controls Noncompliance with applicable Federal, State, and Local Laws, or Port Policies Partial controls MEDIUM LOW/ Exit Items Moderate financial impact Low financial impact Not adequate to identify noncompliance or misappropriation timely Internal controls in place but not consistently efficient or effective Implementing/enhan cing controls could prevent future problems Inconsistent compliance with Federal, State, and Local Laws, or Port Policies Generally complies with Federal, State and Local Laws or Port Policies, but some minor discrepancies exist 8 Public High probability for external audit issues and/or negative public perception Potential for external audit issues and/or negative public perception Low probability for external audit issues and/or negative public perception Port Commission/ Management Important Requires immediate attention Relatively important May or may not require immediate attention Lower significance May not require immediate attention