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OFFICE OF THE AUDITOR DEPARTMENT OF AVIATION AYALA’S INCORPORATED REVENUE AND CONTRACT COMPLIANCE AUDIT OCTOBER 2004 Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 • Denver, Colorado 80202 • 720-913-5000, FAX [phone] www.denvergov.org/auditor Dennis J. Gallagher Auditor October 15, 2004 Ms. Vicki Braunagel, Co-Manager Mr. Dan R. Ayala, President Mr. Turner West, Co-Manager Ayala’s Incorporated Department of Aviation 145 East Reno Avenue, Suite E-6 City and County of Denver Las Vegas, Nevada 89119 Dear Ms. Braunagel, Mr. West, and Mr. Ayala: Attached is the Auditor’s Office Internal Audit Division’s report of their revenue and contract compliance audit of Ayala’s Incorporated (Ayala) for operations at Denver International Airport. The purpose of the audit was to determine whether Ayala properly reported gross revenues and paid the City’s percentage, space rent, and other charges in accordance with their contracts and associated amendments. The Internal Audit Division found one reportable condition as detailed in the accompanying report. We commend Ayala for their timely payments of monthly compensation fees. If you have any questions, please call Mike Clark, Director of Internal Audit at 720-913-5029. Sincerely, Dennis J. Gallagher Auditor DJG/kh cc: Honorable John Hickenlooper, Mayor Honorable ...

Informations

• Publié par: Naphang
• Nombre de lectures: 33
• Langue: English

Extrait

OFFICE OF THE AUDITOR

D

EPARTMENT OF

A

VIATION

A

YALA

’

S

I

NCORPORATED

R

EVENUE

A

ND

C

ONTRACT

C

OMPLIANCE

A

UDIT

O

CTOBER

2004

Dennis J. Gallagher

Auditor

The prudent stewardship of Denver’s finances, resources and financial records!

We are also committed to

improving accountability, efficiency, effectiveness and performance in city government.

We will scrupulously

protect the taxpayer’s interests and work collaboratively with all concerned to improve our city and its government.

1

City and County of Denver

201 West Colfax Ave., Dept. 705

•

Denver, Colorado 80202

•

720-913-5000, FAX [phone]

www.denvergov.org/auditor

Dennis J. Gallagher

Auditor

October 15, 2004

Ms. Vicki Braunagel, Co-Manager

Mr. Turner West, Co-Manager

Department of Aviation

City and County of Denver

Mr. Dan R. Ayala, President

Ayala’s Incorporated

145 East Reno Avenue, Suite E-6

Las Vegas, Nevada 89119

Dear Ms. Braunagel, Mr. West, and Mr. Ayala:

Attached is the Auditor’s Office Internal Audit Division’s report of their revenue and contract

compliance audit of Ayala’s Incorporated (Ayala) for operations at Denver International Airport.

The purpose of the audit was to determine whether Ayala properly reported gross revenues and

paid the City’s percentage, space rent, and other charges in accordance with their contracts and

associated amendments.

The Internal Audit Division found one reportable condition as detailed in the accompanying

report. We commend Ayala for their timely payments of monthly compensation fees.

If you have any questions, please call Mike Clark, Director of Internal Audit at 720-913-5029.

Sincerely,

Dennis J. Gallagher

Auditor

DJG/kh

cc:

Honorable John Hickenlooper, Mayor

Honorable Members of City Council

Ms. Cheryl Cohen-Vader, Chair, Audit Committee

Mr. Cole Finegan, City Attorney

Mr. John Bennett, City Council Staff Director

Mr. Pete Gingras, Assistant Deputy Manager of Aviation/Property

Mr. Stan Koniz, Assistant Deputy Manager of Aviation/Finance

Mr. John Noe, Assistant Deputy Manager of Aviation/Technical Service

TABLE OF CONTENTS

Transmittal Letter

1

Table of Contents

2

Internal Auditor’s Report

3

Executive Summary

4

Background, Scope, Objective, and Methodology

5

Findings, Recommendations, and Responses

6

Schedule of Amounts Due and Paid and Related Notes

8

2

The prudent stewardship of Denver’s finances, resources and financial records!

We are also committed to

improving accountability, efficiency, effectiveness and performance in city government.

We will scrupulously

protect the taxpayer’s interests and work collaboratively with all concerned to improve our city and its government.

3

City and County of Denver

201 West Colfax Ave., Dept. 705

•

Denver, Colorado 80202

•

720-913-5000, FAX [phone]

www.denvergov.org/auditor

Dennis J. Gallagher

Auditor

INTERNAL AUDITOR’S REPORT

We have completed a revenue and contract compliance audit for Ayala at Denver International

Airport for the year ended December 31, 2003.

The purpose of this audit was to determine if

Ayala properly reported gross revenue and paid the City’s percentage, space rent, and other

charges in accordance with their contracts and associated amendments with the City and County of

Denver. We also determined whether rules and regulations as required under the circumstances

were complied with and the internal controls in place were adequate. This audit was included in

the Auditor’s Office Internal Audit Division’s 2003 Annual Audit Plan and is authorized pursuant

to the City and County of Denver Charter, Article V, Part 2, §5.2.1.

We conducted our audit in accordance with generally accepted government auditing standards.

Those standards require that we plan and perform the audit to obtain reasonable assurance about

whether the enclosed Schedule of the Amounts Due and Paid is free of material misstatement. An

audit includes examining, on a test basis, evidence supporting the revenue amounts received and

disclosures reported.

Our conclusion from the audit is that there is evidence of existing contract language discrepancies

and the Schedule of Amounts Due and Paid is free of material misstatement.

We extend our appreciation to all personnel who assisted and cooperated with us during the course

of our examination.

Internal Audit Division

Michael Clark, CPA

Director of Internal Audit

Date: October 15, 2004

Staff: Dick Wibbens, CPA, Audit Manager

Marcus Richardson, Audit Supervisor

Adeniyi Kelani, Ph.D., Lead Auditor

Freddie Martin, Staff Auditor

AYALA’S INCORPORATED

EXECUTIVE SUMMARY

FOR THE YEAR ENDED DECEMBER 31, 2003

This summary highlights the finding identified in this revenue and contract compliance audit

report which is more fully described in the Finding, Recommendation, and Response section

beginning on page six.

The Finding, Recommendation, and Response section also includes the

responses of Denver International Airport (DIA).

Ayala’s Incorporated (Ayala) declined to

respond.

Performance Guarantee

We found a discrepancy in contract language for the City’s performance guarantee amount.

Additionally, Ayala’s submission of the performance guarantee was late.

4

AYALA’S INCORPORATED

BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY

FOR THE YEAR ENDED DECEMBER 31, 2003

Background

Ayala has two agreements and one storage space lease to operate at DIA.

A brief description of

each agreement and the storage lease is noted below.

Ayala has a nonexclusive right to occupy and use concession spaces to sell food and beverages at

DIA.

The company serves gourmet coffees, bakery goods, and croissant sandwiches in the main

terminal and concourse B.

In addition, the concessionaire has a storage space lease with the

City.

Ayala is required to pay $792 annually for storage space.

Ayala is required to pay the City monthly the greater of 16% and 17% of its gross revenues, or a

minimum monthly guarantee of $3,994 and $2,533, derived from its main terminal and

Concourse B locations, respectively.

Scope

Our audit of Ayala at DIA (PeopleSoft fund and organization number 73800/6013000) was for

the year ended December 31, 2003. The scope of our audit was to determine whether Ayala and

DIA complied with various terms and conditions of the contracts, other City rules and

regulations, and good accounting and administrative internal controls.

Objective

The objective of our audit was to determine if Ayala properly reported gross revenue and paid

the City’s percentage, space rent, and other charges in accordance with the contracts. We also

determined whether Ayala and DIA complied with other City rules and regulations, as

applicable.

Methodology

To meet our audit objectives, the following evidence gathering and analysis techniques were

used:

•

Review of internal controls

•

Search for unrecorded revenues

•

Obtain an understanding of the operating system

•

Conduct a walk-through of operating processes

•

Interview Ayala and DIA representatives

•

Utilize analytical procedures as predictive tests

5

AYALA’S INCORPORATED

FINDINGS, RECOMMENDATIONS, AND RESPONSES

FOR THE YEAR ENDED DECEMBER 31, 2003

1.

Performance Guarantee

During our review of contract language we found a discrepancy in the performance guarantee

amount between Section 8.03 and the applicable summary page of the contract.

Section 8.03 of

the contract requires the company to deliver a $792 letter of credit, or surety, equal to 12 months

of monthly rent. The summary page, however, requires the company to delivery a $396 letter of

credit, or surety, equal to 6 months of monthly rent. Accordingly, during the audit, DIA clarified

this contract language with Ayala on May 10, 2004.

We also found that Ayala did not submit their performance guarantee in accordance to the

contract due date.

Contract Section 8.03 requires Ayala to submit a performance guarantee to

the City on November 12, 2003.

Ayala actually submitted their performance guarantee on

May 17, 2004, which was 187 days late, after DIA notified Ayala of this default on

May 12, 2004.

Recommendation

We recommend that DIA and City Attorney should review and monitor contract language more

closely to minimize potential ambiguity or discrepancies from occurring.

We also recommend

that DIA develop a process to notify Ayala of any deficiencies with contract requirements in a

timely manner.

Department of Aviation Response

“DIA has a contract process in place that in most cases prevents lease contradictions to survive

the process. The process is as follows:

1.

The City Attorney’s Office prepares an initial draft agreement.

2.

The draft is reviewed by the Property Management Section’s assigned Project Manager.

3.

The draft is returned to the City Attorney’s Office with comments and corrections for

final edit.

4.

A signature ready agreement is sent to the second party tenant for review and comment.

In most instances, the tenant’s legal counsel also provides a review for client benefit.

“As noted above, several reviews are performed before the draft agreement is finalized, and it is

a rare exception for a contradiction to occur. However, the Department of Aviation will review

this process and determine if additional checklists are necessary to avoid such contradictions in

the future.

6

FINDINGS, RECOMMENDATIONS AND RESPONSES

AYALA’S INCORPORATED

“Due to the lease contradiction (typographical error regarding twelve months instead of six

months for the performance guarantee) the Property Office Compliance Group delayed sending

stair step letters until the error was corrected. The correction was completed on May 10, 2004

and the first compliance letter was sent May 12, 2004. The cash security deposit was received

May 17, 2004.”

Ayala’s Incorporated Response

Ayala declined to respond.

7

AYALA’S INCORPORATED

SCHEDULE OF AMOUNTS DUE AND PAID

FOR THE YEAR ENDED DECEMBER 31, 2003

Gross Revenue (Note 1)

$1,460,487

Amount

Amount

Due

Due

Balance

(Note 2)

(Note 3)

Due

Compensation Fees

$227,505

$227,505

$

-

Storage Rent

792

792

-

Utility Charges

10,787

10,787

-

Total

$239,084

$239,084

$

-

The accompanying notes are an integral part of this schedule.

8

NOTES TO SCHEDULE OF THE BALANCE DUE AND PAID

AYALA’S INCORPORATED

Note 1.

Gross Revenue

– Gross revenue, as reported in the accompanying schedule, includes

all billings and receipts from sales, services, or doing business from the concession space by the

concessionaire at Denver International Airport.

It includes all transactions whether placed by

telephone, in person or by mail, and regardless of place or time of actual payment.

Reductions to

gross revenues are allowed for returns for credit, sales taxes collected and remitted to the State or

City, tips, and Federal excise taxes that must be separately stated and remitted to the Federal

government.

There are no reductions allowed for bad debts, loss from theft, or any other

deduction except as outlined in Section 5.02 of the Food and Beverage Concession Agreements.

Note 2.

Amounts Due

–

A.

Compensation Fee - According to Sections 5.01, 5.03(A) amended, and 5.03(B) of the

contracts, Ayala agreed to pay the City the greater of a percentage of the gross revenue each

month from its food and beverage operations or the monthly minimum guarantee. The

percentage compensation was greater than the monthly minimum guarantee for the 2003

calendar year.

According to Section 5.08 of the contracts, effective March 1, 2003, the monthly minimum

guarantee increased from $3,768 to $3,994 for the contract dated March 8, 1994, and $2,390

to $2,533 for the contract dated August 4, 1994.

According to amended Section 5.01 of the contracts, effective December 1, 2003, the

percentage fee increased by 1%. Compensation fees, as reported in the accompanying

schedule, include four percentage fees from two food and beverage agreements. We

calculated compensation fee amounts due as follows:

Gross Revenue

(January 1, 2003 to November 30, 2003)

$682,756

Multiplied by Percentage Fee

15%

Compensation Fee Due

$102,413

Gross Revenue

(December 1, 2003 to December 31, 2003)

$

74,617

Multiplied by percentage fee

16%

Compensation Fee Due

$

11,939

Gross Revenue

(January 1, 2003 to November 30, 2003)

$ 637,649

Multiplied by Percentage Fee

16%

Compensation Fee Due

$ 102,024

Gross Revenue

(December 1, 2003 to December 31, 2003)

$

65,465

Multiplied by percentage fee

17%

Compensation Fee Due

$

11,129

The total compensation fee amounts due for 2003 as calculated above was $227,505.

9

NOTES TO SCHEDULE OF THE BALANCE DUE AND PAID

AYALA’S INCORPORATED

B.

Utility Charges – Utility charges, as reported in the accompanying schedule, represent water

and electric amounts due from the two Food and Beverage Agreements. According to

Section 7.02 of the contracts, the company shall pay all utility cost for water used within

concession space. Billings for water charges in the amount of $179 were prepared in

accordance with contract Section 7.02.

According to Section 7.03 of the contracts, the

company is require to maintain an electric meter at a location and type specified by the City

and shall invoice Ayala for the cost of all electricity used in the concession space. Billings

for the electric charges were $10,608.

C.

Storage Rent – According to Section 5.01 of the contract, Ayala agreed to pay the City $792

for the year ended December 31, 2003.

Note 3.

Amounts Paid –

The amounts paid were compiled from Denver International Airport’s

cash receipt records.

10