INTERNAL AUDIT REPORT
Limited Contract Compliance Audit
McDonald’s USA, LLC
July 2016 – June 2019
Issue Date: March 23, 2020
Report No. 2020-02
INTERNAL AUDIT
McDonald’s USA, LLC
July 2016 – June 2019
2
TABLE OF CONTENTS
Executive Summary ................................................................................................................................................ 3
Background ............................................................................................................................................................. 4
Schedule of Findings and Recommendations ....................................................................................................... 6
Appendix A: Risk Ratings ....................................................................................................................................... 8
McDonald’s USA, LLC
July 2016 – June 2019
3
Executive Summary
Internal Audit (IA) completed an audit of the Seattle-Tacoma International Airport Lease and
Concession Agreement (Agreement) between McDonald’s USA, LLC (McDonald’s) and the Port of
Seattle (Port). McDonald’s pays the Port approximately one million dollars in annual concession fees.
The period audited was July 2016 through June 2019. The audit was performed to determine whether
McDonald’s complied with significant provisions in the Agreement including whether reported gross
revenues and percentage fees were complete and accurate.
Our audit identified the following issues:
(Medium) – McDonald’s paid the July 2016 percentage fee late and was not assessed a late fee of
$1,574. McDonald’s underreported gross revenue in June 2017, resulting in an underpayment of
$890. Additionally, non-product sales were not billed by the Port, resulting in $7,801 of percentage
fees underbilled by the Port.
This issue is discussed in more detail beginning on page six.
We extend our appreciation to management and staff of the Aviation Commercial Management
Department and the Accounting and Financial Reporting Department for their assistance and
cooperation during the audit.
Glenn Fernandes, CPA
Director, Internal Audit
Responsible Management Team
Rudy Caluza, Director, Accounting and Financial Reporting
Dawn Hunter, Senior Manager, Airport Dining & Retail
Linda Nelson, Assistant Director, Financial Reporting Revenue Services
Jim Schone, Director, Aviation Business Development
McDonald’s USA, LLC
July 2016 – June 2019
4
Background
In September of 2012, the Port entered into an Agreement with McDonald’s. The terms of the
Agreement provide for a Minimum Annual Guarantee (MAG) equal to 85% of the total amount paid to
the Port for the previous agreement year. The MAG is payable, in advance, on or before the first day
of each month. Additionally, the Agreement requires payment of a Percentage Fee equal to a
percentage of gross revenue, provided the fee is higher than the MAG. The Percentage Fee is due on
or before the fifteenth day of each succeeding month, according to the following schedule:
Annual Gross Revenue
Percentage (%) of Gross Sales
$1 to $2,780,000
9%
$2,780,001 to $3,630,000
11%
Over $3,630,000
13%
Within 60 days after the close of each Agreement Year, McDonald’s is required to provide the Port an
annual report reflecting the amount of Gross Sales for the preceding Agreement Year. The annual
report shall be accompanied by a signed certificate of an independent Certified Public Accountant or a
Director of McDonald’s that specifically states a) he/she examined the annual report, b) the
examination included such tests that were considered necessary or appropriate under the
circumstances, c) the information was presented fairly, and d) conforms with and was computed in
compliance with the definitions set forth in the Agreement.
The table below reflects the total concession revenue and percentage fees billed:
Agreement Year
Gross Revenue*
Concession Fees
July 2016 - June 2017
$5,785,728
$699,947
July 2017 - June 2018
7,373,808
920,671
July 2018 - June 2019
8,854,096
1,126,413
Total
$22,013,632
$2,747,031
Data Source: PeopleSoft Financials, AFR YE documents
*Non-product sales deducted
McDonald’s USA, LLC
July 2016 – June 2019
5
Audit Scope and Methodology
We conducted the engagement 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 conduct an engagement to obtain sufficient, appropriate evidence
to provide a reasonable basis for our findings and conclusions based on our engagement objectives.
We believe that the evidence obtained provides a reasonable basis for our findings and conclusions
based on our engagement objectives.
The period audited was July 2016 through June 2019 and included the following procedures:
Revenue Completeness, Accuracy, Timeliness
• Agreed monthly revenue reports provided to the Port, to McDonald’s general ledger.
• Validated that the annual report was submitted and signed by an independent CPA or a
director from McDonald’s.
• Reviewed the Agreement definition of Gross Sales, including exclusions, and reviewed
McDonald’s records such as the chart of accounts, revenue reports, and general ledger, to
determine the completeness of prior years’ reporting.
• Recalculated the MAG and Percentage Fees to verify accuracy.
• Verified timeliness of payments for all months in the audit period.
McDonald’s USA, LLC
July 2016 – June 2019
6
Schedule of Findings and Recommendations
McDonald’s paid the July 2016 percentage fee late and was not assessed a late fee of $1,574.
McDonald’s underreported gross revenue in June 2017, resulting in an underpayment of $890.
Additionally, non-product sales were not billed by the Port, resulting in $7,801 of percentage
fees underbilled by the Port.
Late Payment
Internal Audit reviewed timeliness of payments and found the July 2016 concession fees payment was
paid six days late. Section 8 of the lease agreement states, in part: “…if any installment of Rent or any
other sum due from Lessee shall not be received by the Port within ten (10) days after such amount
shall be due, then, without any requirement for notice to Lessee, Lessee shall pay the Port a late
charge equal to five percent (5%) of such overdue amount.” The payment amount was $31,489;
therefore, the late fee is $1,574.
Revenue Understatement
Profit and Loss statements were obtained from McDonald’s for the audit scope period. Upon review,
Internal Audit found June 2017 gross revenue was understated by $6,410. Percentage fees totaling
$890 has not been paid to the Port.
Non-Product Sales
At the end of each agreement year, “non-product” sales were removed from gross revenue. This
reduced the percentage fee amount billed. Internal Audit determined that “non-product” sales were not
allowable deductions per the Agreement. Although AFR did not bill percentage fees on the “non-
product” sales, McDonald’s paid percentage fees on these sales and has a credit balance on their
account.
Agreement Year
Percentage Fee
July 2016 - June 2017
$2,356
July 2017 - June 2018
3,448
July 2018 - June 2019
1,997
Total
$7,801
Recommendations:
1. AFR should collect $1,574 in unpaid late fees.
2. AFR should seek and recover $890 in unpaid percentage fees. Assess the applicability of a
one-time late charge and any accrued interest.
3. AFR should bill $7,801 in percentage fees resulting from the deduction of non-product sales at
year-end, reducing the credit balance on McDonald’s account.
Management Response/Action Plan:
Aviation Commercial Management will seek to recover the late fee for July 2016 concession fees,
which Internal Audit calculated as $1,574. Aviation Commercial Management will also reach out to the
tenant to ensure awareness that payments should be received by the due date stated in the
agreement or outstanding amounts will be subject to late fees. Currently, Port contracts have varying
terms regarding due dates and grace periods, among others, which complicates the potential for
1) Rating: Medium
McDonald’s USA, LLC
July 2016 – June 2019
7
automating the calculation of late fees. These complications contribute to the current manual process
which occurs three times a month and which calculates fees on prescribed dates. Thus, there is a risk
of missed late fees, such as the one identified in this audit report, due to the varying terms in the Port’s
agreements. Aviation Commercial Management will work with the Port’s Accounting and Financial
Reporting department, which runs the late fee process, to find opportunities to standardize agreement
terms when contracts are executed or renewed.
Aviation Commercial Management will seek to recover the revenue understatement for June 2017,
which Internal Audit calculated as $890.
Accounting and Financial Reporting (AFR) will recover 2016-2018 unbilled revenue, which Internal
Audit calculated as $7,801. The customer’s certified annual report excluded items from gross sales
that were product sales resulting in unbilled amounts. AFR will work with customer to match existing
credits on account to clear these items. Aviation Commercial Management will work with the Port’s
Accounting and Financial Reporting department, which trues up annual reporting, to find opportunities
to standardize reporting when contracts are executed or renewed.
DUE DATE: 6/30/2020
McDonald’s USA, LLC
July 2016 – June 2019
8
Appendix A: Risk Ratings
Findings identified during the audit are assigned a risk rating, as outlined in the table below. Only one
of the criteria needs to be met for a finding to be rated High, Medium, or Low. Findings rated Low will
be evaluated and may or may not be reflected in the final report.
Rating
Financial
Stewardship
Internal
Controls
Compliance Public
Commission/
Management
High Significant
Missing or not
followed
Non-compliance
with Laws, Port
Policies,
Contracts
High probability
for external audit
issues and / or
negative public
perception
Requires
immediate
attention
Medium Moderate
Partial controls
Not functioning
effectively
Partial
compliance with
Laws, Port
Policies
Contracts
Potential for
external audit
issues and / or
negative public
perception
Requires
attention
Low Minimal
Functioning as
intended but
could be
enhanced to
improve
efficiency
Mostly complies
with Laws, Port
Policies,
Contracts
Low probability
for external audit
issues and/or
negative public
perception
Does not
require
immediate
attention