Audit Report on the Compliance of Lakeside Restaurant Corporation With Its License Agreement

This audit determined whether Lakeside Restaurant Corporation (Lakeside) 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 March 25, 2002, the City of New York, through the Department of Parks and Recreation (Parks), entered into a 10-year license agreement with Lake Restaurant Development, Ltd. for the renovation and operation of a restaurant (known as the Lake Club), snack bar, and row boat rental in Staten Island, New York. Subsequently, on January 18, 2005, Lake Restaurant Development, Ltd. assigned its agreement to a new operator, Lakeside. The agreement requires Lakeside to operate, renovate, and maintain the existing structure of the restaurant, snack bar, and row boat rental.

Under the agreement, for operating year 2009, Lakeside was required to pay the higher of either a minimum annual fee of $64,245 plus an additional 8 percent of gross receipts over $500,000 or the total annual fee paid in the previous year. In addition, Lakeside is required to maintain the required security deposit with the City, maintain certain types and amounts of insurance coverage, submit monthly statements of gross receipts and annual income and expense statements, and pay all utility charges.

For operating year 2009, Lakeside reported $1,304,314 in gross receipts and paid $130,209 in license fees and late charges to the City.

Audit Findings and Conclusions

Lakeside maintained the required property and liability insurance that named the City as an additional insured party and maintained the required security deposit. However, because of significant internal control weaknesses and deficiencies over the collecting, recording, and reporting of revenue, we could not be assured that Lakeside accurately reported all of its gross receipts from its banquet, restaurant, snack bar, and boat rental operations or that it paid the appropriate fees to the City. Although the internal control weaknesses were so extensive as to raise red flags concerning the potential for fraud, we were able to conservatively calculate that Lakeside underreported revenues by at least $87,494, resulting in $8,041 in additional fees and related late charges due the City.

Lakeside also did not maintain the premises in a sanitary condition, had unpaid water and sewer charges totaling $3,973 (which were subsequently paid), did not pay its fees on time, and failed to submit timely annual income and expense statements to Parks. Furthermore, Lakeside employed “off-the-books” employees, violated the New York State Labor Law, and did not accurately report wait staff gratuities to the Internal Revenue Service.

Audit Recommendations

We make 17 recommendations—14 to Lakeside concerning the operation of the Lake Club and 3 to Parks concerning the oversight of this concession. The following are some of the recommendations.

Lakeside should:

• Immediately remit the $8,041 in additional license fees and late charges.
• Take immediate action to strengthen its internal controls.
• Ensure that the proceeds generated from the banquet, snack bar, and boat rental operations, the sales of gift certificates, and all special events are accurately reported to Parks.
• Cease employing “off-the-books” employees, report all employees on its payroll records, and comply with all laws governing unemployment insurance, workers’ compensation, social security, tax withholding, temporary disability insurance, minimum wage, and overtime.
• Distribute all gratuities to its wait staff in accordance with Labor Law Section 196-d, Division of Labor Standards, New York State Department of Labor.

Parks should:

• Issue a Notice-to-Cure to Lakeside requiring that it pay the $8,041 in additional license fees and late charges assessed in this audit report and mandating that Lakeside’s management:
• Establish and implement an adequate system of internal controls over the banquet, restaurant, snack bar, and boat rental operations,
• Cease employing “off-the-books” employees and report all employees on its payroll records,
• Distribute all gratuities in accordance with Labor Law Section 196-d, Division of Labor Standards, New York State Department of Labor, and
• Accurately report the wait staff gratuities to the Internal Revenue Service.
• Calculate the total amount of banquet gratuities that were distributed to Lakeside’s owners prior to operating year 2009 and assess Lakeside for the additional license fees and late charges owed.