Audit Report on the Compliance of Fitmar Management, LLC With Its License Agreement

AUDIT REPORT IN BRIEF

This audit determined whether Fitmar Management, LLC (Fitmar) accurately reported its gross receipts, properly calculated the license fees due, paid its license fees on time, and complied with certain major non-revenue terms of the license agreement.

On December 11, 2004, the Department of Parks and Recreation (Parks) signed a 20-year license agreement with Fitmar to operate, maintain, and manage a state-of-the-art athletic facility, Paerdegat Athletic Club, and two snack bars (licensed premises) in Brooklyn. Fitmar also operates a children’s center, Kidsports, at the licensed premises that provides infant care, day schooling, after-school programs, and day camps.

Under the terms of the agreement, Fitmar is required to pay the City the greater of either a minimum annual fee or seven percent of its gross receipts derived from the operation of the licensed premises. On or before the first day of each month, Fitmar is required to pay one-twelfth of the minimum annual fee. A two-percent late charge is applied if fees are 10 days overdue plus an additional charge of two percent of the total of such fees and arrears shall be charged each month. In addition, Fitmar is required to complete capital improvements costing a minimum of $2,850,902 during the 20-year-term of the license agreement, maintain a $73,750 security deposit with the City, maintain certain types and amounts of insurance coverage, submit monthly statements of gross receipts and an annual income and expense statement, and pay water and sewer charges and applicable taxes.

For operating year 2007, Fitmar reported $3,035,940 in gross receipts and paid $212,617 in fees and late charges to the City

Audit Findings and Conclusions

Fitmar’s management of the Paerdegat Athletic Club was rife with internal control weaknesses and deficiencies, and its flagrant disregard for accountability and transparency resulted in a litany of abuses, which contributed to employee theft and prevented us from determining the full extent to which gross receipts were underreported and City fees underpaid. Fitmar failed to ensure that basic accounting records were in place for tracking daily business transactions and substantiating reported receipts. In addition, Fitmar did not accurately record all gross receipts in its general ledger and did not use a segregated bank account for depositing gross receipts.

Based on the limited documentation available, we were able to calculate that, at a minimum, Fitmar underreported at least $585,879 in gross receipts for operating years 2005 through 2007. As a result, Fitmar owes the City $68,689 in additional fees and late charges.

Additionally, Fitmar did not expend required minimum amounts for capital improvements, did not maintain the premises in a safe and sanitary condition, had unpaid water and sewer charges totaling $17,997 (which were subsequently paid), failed to submit timely monthly gross receipts statements to Parks, and allowed unauthorized businesses to operate from the premises. Finally, there was insufficient documentation to determine whether Fitmar conducted required background checks for all its Kidsports employees as required under the New York State Social Services Law.

Fitmar paid minimum annual fees on time, maintained required property and liability insurance that named the City as an additional insured party, and maintained the required security deposit.

Parks did not fully exercise its responsibility to ensure that Fitmar complied with the terms and conditions of the agreement. Parks’s insufficient monitoring of the agreement has contributed to the findings disclosed in this report, which are discussed in greater detail in the following sections. Nevertheless, our review of Fitmar’s operations revealed a total failure on the part of Fitmar to implement even basic internal controls over the collecting, recording and reporting of revenues generated from the licensed premises. These widespread deficiencies and utter lack of record keeping lead us to conclude that Fitmar breached its license agreement in material respects, and also raise the prospect of possible fraud against the City if Fitmar’s failure to implement adequate controls was intentional for purposes of hiding revenue from the City. Accordingly, Parks should study the results of this audit and decide whether it is in the City’s best interest to allow Fitmar to continue operating the licensed premises.

Audit Recommendations

Given the seriousness of the audit findings, Parks must consider terminating the agreement. Should Parks decide not to terminate Fitmar’s agreement, we make 22 recommendations—12 to Fitmar concerning the operation of Paerdegat Athletic Club and 10 to Parks concerning the oversight of this concession. The following are some of the recommendations.

Fitmar should:

• Immediately remit the remaining $22,803 in additional license fees and late charges.
• Hire a reputable outside consultant to implement the necessary internal controls that would conform to the requirements of the license agreement.
• Coordinate with Parks and develop a needs assessment of capital improvements to help determine how the $380,450 in unexpended capital improvements for operating years 2005 through 2007 should be used, and develop a specific timetable to complete each improvement.
• Maintain the facility in a clean, neat, and litter-free condition at all times, as required by the license agreement.

Parks should:

• Issue a Notice-to-Cure to Fitmar requiring that it pay the remaining $22,803 in additional license fees and late charges.
• Determine whether Fitmar underreported any income for operating years 2005, 2006, and 2008.
• Revise the capital improvements schedule with specific capital improvements that would make the licensed premises a state-of-the-art athletic facility. In addition, develop a specific timetable and cost estimate to complete each improvement.
• Assign a Parks employee to closely monitor Fitmar’s operation to ensure that it adheres to the terms of the license agreement. Specifically, Parks should evaluate Fitmar’s internal control procedures to ensure that Fitmar maintains an adequate system of internal controls, maintains detailed and accurate books and records, reports all revenue, and pays the appropriate license fees.

Compliance with these recommendations may ensure that Parks collects all license fees due, that Fitmar’s controls over the operation are adequate for recording of all gross receipts on its books and records and the accurate reporting of gross receipts to Parks, and that Parks more closely monitors Fitmar’s compliance with the terms of the agreement.