Audit of the Internal Controls and Operating Practices of the Lower Eastside Business Improvement District (BID)

Executive Summary

The Lower Eastside Business District Improvement (the BID) entered into a contract with the New York City Department of Business Services (DBS) in January 1993. This contract represents an agreement between the BID and the City regarding requirements for supplemental services (e.g., security and sanitation) and capital improvements for the district. The BID represents more than 400 stores, restaurants, and historic sites in Southeastern Manhattan, bounded by East Houston Street (north), Canal Street (south), Allen Street (west), and Suffolk Street (east).

Financially, the BID is relatively small. Measured by revenue derived from assessments, it ranked 27th of all the 42 BIDs in New York City in Fiscal Year 2001, with assessments totaling $211,677. In addition, the BID rents on a monthly basis two parking lots from which it derives revenues. Assessments, parking lot revenues, and funding obtained by the BID through various grants provided for an operating budget of $476,327 in Fiscal Year 2001.

The audit objectives were to:

• Determine whether the BID has provided the services called for in its District Plan;
• Assess the BID’s compliance with certain provisions of its contract with the Department of Business Services; and
• Evaluate the adequacy of the BID’s internal controls over its funds and operations.

The audit scope period was Fiscal Year 2001. To meet the audit objectives, we interviewed the BID’s Executive Director, President, and Certified Public Accountant (CPA). Among other documents, we reviewed the BID’s District plan; its contract with DBS; and minutes of Board of Directors and Executive Committee meetings during Fiscal Year 2001.

To determine whether the BID effectively provided services called for in its District Plan, we toured the district on various occasions, making observations on street cleanliness, and conducted a door-to-door survey of 30 randomly selected businesses in the district. In addition, we reviewed samples of the BID’s promotional materials and visited its web site (www.LowerEastsideNY.com).

To assess the BID’s compliance with provisions of its contract with DBS, we determined whether funds were used for supplemental services that benefited the district and verified that receipts and disbursements were valid, accurately recorded, and accounted for. We reviewed the BID’s financial transactions, related books and records pertaining to revenues and expenses in Fiscal Year 2001, and the BID’s certified financial statements and annual report for Fiscal Year 2001.

To assess the BID’s internal controls, we compared its procedures to internal control standards set forth in the New York City Comptroller’s Directives, in its contract with DBS, and with DBS guidelines.

This audit was conducted in accordance with Generally Accepted Government Auditing Standards (GAGAS) and included tests of the records and other auditing procedures considered necessary. This audit was performed in accordance with the City Comptroller’s audit responsibilities as set forth in Chapter 5, § 93, of the New York City Charter.

Since its formation in 1993, the BID has successfully provided supplemental sanitation, security, and graffiti-removal services to the district. As a result, the area covered by the BID is a cleaner and safer place today than it was in 1993. In addition, the BID has been successful in promoting the district. Its promotional services include quarterly newsletters, advertisements in local and major newspapers, radio advertisements, brochures, and shopping guides. The BID also provides free assistance to district business and property owners on topics ranging from obtaining financing to business expansion strategies. During Fiscal Year 2001, the BID spent 37 percent of its total expenditures to promote and advertise the district, eight percent of its total expenditures for sanitation, street cleaning, and graffiti-removal service, and five percent of its total expenditures for security services.

We conducted a door-to-door survey during December 2001 of 30 randomly selected district merchants to determine their level of satisfaction with the various services provided by the BID. Overall, the responses to our questions were positive. Appendix A of this report provides a complete listing of our survey questions and a summary of responses.

While the BID is in compliance with most provisions of the DBS contract, it had no documentation in its files to verify whether its contract for sanitation services, totaling $21,900, had been awarded through a competitive bid process. The Executive Director stated that this contract was in place prior to the time he was hired, in November 1999. Furthermore, even though the Executive Director stated that complaints to the BID from district merchants are addressed and resolved expeditiously, the BID did not maintain a log to record complaints dealing with security, sanitation, illegal street vendors, etc., as required by its contract with DBS.

Although the BID maintained adequate accountability over its receipts and disbursements, it has a number of internal control weaknesses, as follows:

• The BID bank records as of June 30, 2001, showed that $375,298 was on deposit in three separate banks. Of this amount, approximately, $224,000 (59.6%) was not covered by the Federal Deposit Insurance Corporation.
• The BID is not investing its cash reserve in a manner to maximize potential return. From June 2000 through July 2001, the BID maintained an average balance of $311,194 in its checking account. Based on our analysis of the BID’s average monthly cash receipts of $39,907, the BID sufficiently covered its average monthly cash disbursements for expenses of $38,823. Therefore, the excess cash could be deposited in a higher-yielding bank account.
• The BID does not have adequate segregation of duties. The Executive Director is responsible for most of the bookkeeping, accounting, and purchasing functions. He records all accounting transactions, prepares checks for payment, prepares and records cash deposits, takes the deposits to the bank, prepares bank reconciliations, and orders and receives supplies.
• Although the number of voided or outstanding checks is not significant, the BID discarded five checks that were recorded as “void” on its cash disbursement transaction report. Furthermore, it has no written policies for tracking outstanding checks. As of June 30, 2001, three checks, in the amounts of $200, $200, and $300, remained outstanding for longer than six-months. Good accounting practices dictate that all checks be accounted for.
• The BID’s invoices were not canceled or stamped “paid” after being paid. In an environment where the segregation of duties is limited, this would be a good control to prevent duplicate payments.
• The BID has not formally audited Central Parking’s books and records to determine whether revenues and expenses are accurately reported. By conducting a formal audit of Central Parking, the BID could obtain reasonable assurance that Central Parking maintains adequate internal controls over cash, accurately reports gross revenues and operating expenses for the parking lot—and that the BID receives its fair share of Central Parking’s income.

The audit made 10 recommendations. The major ones are that the Lower Eastside BID should:

• Place deposits of funds exceeding $100,000 in collateralized accounts.
• Invest or deposit its excess reserve funds in low-risk, higher-interest-yielding accounts, to maximize interest revenue.
• Formally and periodically audit Central Parking’s books and records to ensure that adequate controls are maintained over cash and that revenues and expenses are accurately reported.

The matters covered in this report were discussed with BID officials during and at the conclusion of this audit. A preliminary draft report was sent to BID officials and was discussed at an exit conference held on April 16, 2002. On May 14, 2002 a draft report was issued to Lower Eastside BID officials with a request for comments. We received a written response from BID officials on May 30, 2002. The BID generally agreed with eight of the 10 recommendations made in this audit. However, it did not address the two recommendations (#2 and #4) that concern maintaining records of all bids solicited for individual contracts greater than $10,000 and placing deposits exceeding $100,000 in collateralized accounts. In its response, the BID implied that it is in compliance with contracting requirements and has taken alternative steps to safeguard its bank deposits exceeding $100,000.

The BID also stated: “Thank you for taking your time to review these points, and for conducting a thorough audit of our operations.”