Audit Report on the Cemusa NY LLC’s Payment of Franchise Fees in Compliance with Its Coordinated Street Furniture Franchise Agreement with the Department of Transportation

Audit Report in Brief

This audit determined whether Cemusa NY LLC (Cemusa) (1) accurately recorded and reported gross advertising revenue and paid the appropriate cash component of the franchise fee and (2) provided the alternative compensation and no-cost advertising panels to the City in compliance with the franchise agreement.

On May 19, 2006, the New York City Department of Transportation (DOT) entered into a 20-year franchise agreement with Cemusa, Inc. (subsequently assigned to Cemusa, a wholly-owned subsidiary) to design, construct, install, and maintain coordinated street furniture throughout the City, including at least 3,300 bus stop shelters, 330 newsstands, automatic public toilets, trash receptacles, news-racks, and other public service structures. DOT is responsible for overseeing the franchise agreement.

As compensation for being granted the exclusive right to sell and place advertising on panels affixed to the bus stop shelters and newsstands, Cemusa agreed to pay and/or provide the City with a franchise fee totaling $1.39 billion over the 20-year term of the agreement, consisting of a minimum cash component of $999 million and a non-cash component (alternative compensation) valued at nearly $400 million in the form of advertising promoting New York City in Cemusa’s like-kind markets outside of the City and abroad. The cash and non-cash components of the franchise fee are to be rendered to the City in annual amounts specified in the agreement.

In addition to the franchise fee, for each year of the agreement, Cemusa agreed to provide at no cost to the City or its marketing partner and agent, New York City and Company (NYC & Co.), up to 22.5 percent of the inventory of advertising panels citywide for NYC & Co. advertising purposes and public-service advertising.

Audit Findings and Conclusions

This audit concluded that, with the exception of the value of bonus panels provided under certain contracts, Cemusa accurately recorded and reported advertising revenue and paid the appropriate amount of the cash component of the franchise fee to the City in compliance with the franchise agreement for Calendar Year 2011. It also provided up to 22.5 percent of its inventory of advertising panels within the City to NYC & Co. for their purposes.

Cemusa reported advertising revenues totaling $52.3 million for Calendar Year 2011 and paid to DOT the guaranteed minimum of $42.6 million, which represented the cash component of the franchise fee. The audit also determined that, in all material respects, the total revenues recorded in Cemusa’s sales and accounting records for Calendar Year 2011 matched the amount reflected in revenue reports submitted to DOT. Further, Cemusa submitted monthly revenue reports and remitted quarterly payments to DOT in a timely manner. It also maintained adequate internal controls to provide reasonable assurance that revenues derived from advertising sales were appropriately recorded, accounted for, and reported to DOT. In addition, Cemusa followed the accrual basis of accounting to record transactions in accordance with Generally Accepted Accounting Principles and appropriately booked all sales revenue for the New York market.

However, with regard to the alternative compensation component of the franchise fee, the audit determined that Cemusa needs to provide the City an additional $11,792,442 in alternative compensation (out-of-home advertising) because it mistakenly included value-added taxes in its calculation of advertising promoting New York City placed in Spain, Italy, and Portugal for the first six years (Fiscal Years 2007 – 2012) of the franchise agreement. Also, the audit found that there was limited proof of placement of advertisements in the foreign markets. Therefore, only limited assurance could be obtained about the extent and value of alternative compensation actually provided during the same period. Further, Cemusa did not report to DOT the fair market value of “no-charge” bonus panels extended to its customers.

Audit Recommendations

To address these weaknesses, the audit recommended that Cemusa should:

• Compensate the City for the additional $11.79 million in alternative compensation resulting from mistakenly including value-added taxes for years 1-6 of the franchise agreement.
• Going forward, exclude any value-added taxes when calculating the value of alternative compensation in accordance with the franchise agreement.
• Track and value bonus panels extended to its customers and report the value of such bonuses in its monthly/quarterly gross revenue reports to DOT.

In addition, the audit recommended that DOT should:

• Meet with Cemusa and NYC & Co. to work out an acceptable plan for Cemusa to compensate the City for the $11.79 million due in alternative compensation for years 1-6 of the franchise agreement.
• Improve its monitoring of the valuation of alternative compensation each year and require a greater level of assurance in the proof of performance, such as independent verification of proof of performance of advertising in out-of-home markets that Cemusa is obligated to provide each year of the franchise agreement.

Agency Response

Cemusa did not directly address the three audit recommendations directed to it. However, it tacitly disagreed with the recommendations through its disagreement with the audit findings that it mistakenly included value-added taxes in the valuation of alternative compensation and that it did not track and report the fair market value of “no-charge” bonus panels to DOT as part of its gross revenue periodic reports. Similarly, of the two recommendations made to DOT in this audit, DOT did not directly address them. Instead, based on the comments included in its response, DOT appears to support Cemusa’s disagreement with the findings. After carefully reviewing the positions of Cemusa and DOT, we stand by our findings.