Audit Report on the Compliance of Telebeam Telecommunications Corporation With Section 4 of Its City Franchise Agreement

AUDIT REPORT IN BRIEF

On September 30, 1999, the City of New York entered into a franchise agreement with Telebeam Telecommunications Corporation (Telebeam) to install, operate, repair, maintain, upgrade, remove, and replace public pay telephones (PPTs). Section 4 of this agreement gives Telebeam the right and consent to place advertising, through a media representative, on the exterior rear and side panels of PPT kiosks; and requires that Telebeam pay the City 26 percent of its net commission advertising revenue. The audit determined whether Telebeam or its agents properly reported total net commission advertising revenue; correctly calculated and paid fees owed to the City; and complied with the public service announcement requirements in according with Section 4 of the Franchise Agreement.

Audit Findings and Conclusions

In accordance with Section 4.9 of the Franchise Agreement, Telebeam, through its media representatives, provided the required public service advertising. However, Telebeam did not ensure that its media representatives complied with Section 4.8 in that they did not properly report their total net commission advertising revenue, nor did they correctly calculate and pay fees owed to the City. Telebeam’s media representatives underreported $4,781,564 on behalf of Telebeam-$4,764,117 related to bonus free kiosk advertising (the rate card value was used to calculate the fair market value of the bonus free kiosk advertising) and $17,447 related to excessive deductions for agency commissions, advertising exchanged for non-cash items not reported; and, revenue for production of advertising not reported. Also, Telebeam’s media representatives underreported an additional $11,436,768 on behalf of another 14 PPT operators that they represent-$11,402,929 related to bonus free kiosk advertising based on calculations using the rate card, and $33,839 related to excessive deductions for agency commissions, advertising exchanged for non-cash items not reported; and, revenue for production of advertising not reported. Consequently, the 15 PPTs owe the City $5,250,707 of which Telebeam owes $1,547,456 in fees and related interest–$1,541,886 related to bonus free kiosk advertising and $5,569 related to excessive deductions for agency commissions, the value of advertising exchanged for non-cash items not reported; and, the revenue for production of advertising not reported.

Audit Recommendations

Telebeam should:

• Pay the City $1,541,886 in additional franchise fees and related interest based on the rate card value of bonus free kiosk advertising or establish the fair market value of the bonus free kiosk advertising using an alternate methodology, and pay the City the franchise fees due including related interest;

• Pay the City $5,569 in additional franchise fees and related interest associated with; the excessive deductions for agency commissions; the value of advertising exchanged for non-cash items not reported; and, the revenue for production of advertising not reported.

• Ensure that its media representatives are properly reporting their total net commission advertising revenue and correctly calculating and paying fees owed to the City according to their franchise agreements.

The Department of Information, Technology and Telecommunications (DoITT) should:

• Ensure that Telebeam either pays the City $1,541,886 in additional franchise fees based on rate card or pays additional fees and related interest based on an alternate methodology. In that regard, if Telebeam establishes the fair market value, DoITT should review Telebeam’s analysis and all supporting documentation to determine the validity of Telebeam’s methodology;

• Ensure that Telebeam pays the City $5,569 in additional franchise fees and related interest associated with; the excessive deductions for agency commissions; the value of advertising exchanged for non-cash items not reported; and, the revenue for production of advertising not reported;

• Pursue the collection of either the franchise fees and related interest based on the fair market value determined above from the 14 other companies that Van Wagner and Vector represent or the $3,692,449 calculated by using rate card information;

• Pursue the collection of the $10,802 in additional franchise fees and related interest associated with; the excessive deductions for agency commissions; the value of advertising exchanged for non-cash items not reported; and, the revenue for production of advertising not reported from the 14 other companies that Van Wagner and Vector represent;

•Establish a system to monitor the discounting and bonusing of kiosk panels to ensure that the City is receiving its share of franchise fees in accordance with the franchise agreement.