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

AUDIT REPORT IN BRIEF

On January 8, 1990, the City of New York, through the Department of Parks and Recreation (Parks), entered into a 10-year license agreement with Café-on-the-Green Restaurant Corporation to operate and manage a restaurant, known as Caffé-on-the-Green in Bayside, Queens. On May 8, 1991, Café-on-the-Green Restaurant Corporation assigned its agreement to Merissa Restaurant Corporation (Merissa). On August 12, 1992, Parks extended the license agreement with Merissa to February 28, 2010.

Under the extended agreement, Merissa is required to pay a minimum annual fee and an additional 10 percent of gross receipts in excess of $750,000 in each operating year. In addition, each month Merissa is required to pay one-twelfth of the minimum annual fee. It is also required to post a security deposit with the City; maintain certain types and amounts of insurance coverage; submit statements of gross receipts and annual income and expense statement; and pay all utility charges and applicable taxes.

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

During operating years 2006 and 2007, Merissa reported $9,785,410 in gross receipts and paid $958,541 in license fees.

Audit Findings and Conclusions

Merissa paid its minimum annual fees on time, maintained the required liability insurance that named the City as additional insured party, maintained the required security deposit, and paid utility charges. However, significant weaknesses in Merissa’s internal control procedures as well as a lack of supporting documentation prevented us from determining whether Merissa accurately reported all of its gross receipts from its restaurant and banquet operations and whether it paid the appropriate fees to the City. Specifically, Merissa:

• May have circumvented its point-of-sales system to misreport transactions;
• Did not provide banquet event calendars for calendar years 2005 and 2006 to evidence that all events held were represented by a properly authorized and executed contract and that all banquet revenue was reported to Parks;
• Does not maintain the point-of-sales system deletion reports for more than 10 days, which would have maintained an audit trail and allowed us to review whether any restaurant transactions were inappropriately deleted thereby reducing the revenue reported to Parks; and
• Could not provide a la carte party contracts to evidence that all a la carte parties were entered in the point-of-sales system. Merissa officials claimed that they discard these contracts a week after the events take place.

Taken as a whole, these weaknesses compromise the reliability of Merissa’s reported gross receipts. However, based on the documentation provided, Merissa took $900,182 in improper deductions from gross receipts resulting in $120,607 in additional fees and related late charges due the City. Finally, Merissa did not submit its income and expense statements to Parks for operating years 2006 and 2007 within 30 days after the end of its operating year as required.

Audit Recommendations

Given the seriousness of the audit findings, we make nine recommendations—seven to Merissa concerning the operation of Caffé on the Green and two to Parks concerning the oversight of this concession. Compliance with these recommendations will ensure that Parks collects all license fees due; that controls over the operation are adequate for the recording of all gross receipts on Merissa’s books and records and the accurate reporting of gross receipts to Parks; and that Parks more closely monitors Merissa’s compliance with the terms of the agreement.