Audit Report on the Compliance of Statue Cruises, LLC with Its License Agreement

AUDIT REPORT IN BRIEF

On December 12, 2007, the City of New York (City), through its Department of Parks and Recreation (Parks), entered into a 10-year license agreement with Statue Cruises, LLC (Statue Cruises) for the operation and maintenance of three landing facilities (slips 3, 4, and 5) and adjacent walkways in Battery Park, Manhattan.

Statue Cruises operates ferries between Battery Park and Liberty and Ellis Islands (Ferry), a sightseeing cruise (Harbor Cruise), and other ferry operations such as day and night charters¹ .   In addition, Statue Cruises, with Parks’ approval, may operate charter events from slips 1 and 2 in Battery Park. Statue Cruises maintains multiple point-of-sales (POS) locations, including ticket offices at Battery Park and Liberty State Park, New Jersey, a call center, a group sales call center, and a web store (Statue Cruises’ website).  In addition, Harbor Cruise tickets are sold at a portable kiosk located at slip 3 of Battery Park.

For operating year 2011 (January 1, 2011, to December 31, 2011), Statue Cruises reported approximately $39.6 million in gross receipts to Parks and paid approximately $3.2 million in license fees.

Audit Findings and Conclusion

Our review found that Statue Cruises did not have adequate internal controls to properly account for its revenue reporting activities.  As a result, we were not able to ascertain whether all revenue is being reported.  For example, there were 108 instances from March through August 2012 where Statue Cruises could not account for a total of 45,569 ticket numbers in the monthly Sales Journals for its Ferry operation, resulting in estimated unreported revenue of at least $592,397.  Also, Statue Cruises does not use a POS system or a functioning cash register to record and process transactions at the Harbor Cruise slip.  Furthermore, there was $217,529 in verifiable charter event and Temporary Use Authorization (TUA) revenue that was not reported² .   However, due to control issues and the reliability of the information provided, there could be additional unreported revenue.  At a minimum, Statue Cruises underreported a total of $809,926 and owes the City $83,369—$64,794 in additional license fees plus $18,575 in late fees (see Appendix).

Additionally, Statue Cruises does not segregate its books and records from its New Jersey operation and other affiliates, and claims it did not have to pay certain City and State taxes in 2011.  However, this claim conflicts with a New York State Tax Advisory Opinion (TSB-A-03(7)S), which could result in a multi-million dollar tax liability for Statue Cruises.

In addition, Statue Cruises did not maintain portions of the perimeter fencing in good order.  Finally, Statue Cruises and Parks have not established guidelines for issuing and reporting complimentary tickets to the City.
Statue Cruises maintained the required security deposit, carried the required insurance, and submitted the required reports in a timely manner.

Audit Recommendations

Statue Cruises should:

• Immediately remit $83,369 in additional license fees and late charges due the City.
• Hire a reputable outside consultant to implement the necessary internal controls that would conform to the requirements of the license agreement.
• Hire a fiscal monitor, to be approved by Parks, that would ensure adherence to established internal controls and proper reporting of gross revenue and license fees.

Parks should:

• Coordinate efforts with the appropriate taxation authorities to address Statue Cruises’ non-payment of taxes.  If found that Statue Cruises must pay the necessary tax, Parks should ensure immediate payment of any taxes, interest, and penalties that may be assessed.
• Ensure that Statue Cruises hires an independent consultant to implement the necessary internal controls and that it hires a competent fiscal monitor for the duration of the agreement to ensure proper reporting of gross revenue and license fees in accordance with the license terms.
• Issue a Notice-to-Cure requiring that Statue Cruises pay the $83,369 in additional license fees and late charges due the City, and take action to ensure that Statue Cruises corrects the internal control deficiencies identified in this report.
• In conjunction with the National Park Service, consider exercising its rights under section 3.3 (a) of the license agreement if Statue Cruises does not comply with the Notice-to-Cure.
• Periodically evaluate Statue Cruises’ internal control procedures to ensure that Statue Cruises maintains an adequate system of internal controls, reports all revenue, and pays the appropriate license fees.

Statue Cruises’ Response

In its response, Statue Cruises disagreed with most of the report’s findings and did not respond to the report’s recommendations.  Specifically, Statue Cruises disagreed with the amount of missing ticket numbers and the related estimated unreported revenue, claiming that “The calculated estimated revenue of $592,397 never existed.”  In addition, Statue Cruises disagreed with the questionable exemption for City and State taxes, stating it “fully complies with all federal, State and City tax laws” and the unreported TUA fees, stating, “Temporary Use Authorization (TUA) or permit fees were fully paid” and “[s]uch claim that Statue Cruises must pay twice is illogical….”

However, Statue Cruises did agree that it underreported charter event revenue, resulting in $1,034 additional license fees due.  Further, “Statue Cruises acknowledges that the small number of our IT staff limits the effectiveness of internal controls, particularly those relating to segregation of duties.  We appreciate the Audit Report suggestion to enhance and improve our internal controls by engaging an independent IT/Ticketing system professional to assist in the implementation of such additional controls that may be determined for ticketing issuance and processing, as well as to periodically review the ongoing effectiveness of such controls.”

Parks’ Response

In its response, Parks agreed with all of the report’s recommendations, stating, “Parks has requested payment from Statue for the full amount due of $83,369” and “Parks has referred the recommendation to the appropriate taxation authority to pursue the determination with Statue Cruises.”