Audit Report on the Compliance of Time Warner Cable of New York City, Queens Inner Unity Cable System, With Its Franchise Agreement

EXECUTIVE SUMMARY

In 1989, the Department of Parks and Recreation (Parks) entered into a 10-year license agreement with Toto’s South Shore Country Club, Limited (Toto’s), for the maintenance and operation of a restaurant, catering facility, and snack bar on the South Shore Golf Course, Staten Island. The license was renewed for a five-year period ending September 30, 2004. The agreement requires that Toto’s pay the City a minimum annual fee ranging from $48,000 in the first year to $138,064 in the 15^th and final year, and an annual percentage fee of 6 percent of its annual gross receipts over $800,000, 7 percent of its annual gross receipts over $1,500,000, 8 percent of its annual gross receipts over $2,000,000, and 8.5 percent of its annual gross receipts over $3,000,000. In addition, the agreement requires that Toto’s post a $25,000 security deposit with the City; maintain certain types and amounts of insurance coverage that names the City as an additional insured; and pay for its utilities use.

This audit determined whether Toto’s maintained adequate internal controls over the recording and reporting of its gross receipts; properly reported its total gross receipts, and correctly calculated and paid its license fees due the City; and complied with certain non-revenue-related requirements of its license agreement.

To achieve our audit objectives, we reviewed the license agreement between Parks and Toto’s and analyzed the Parks Concessionaire Ledger. We evaluated Toto’s internal controls over its revenue functions and familiarized ourselves with Toto’s operations, accounting, sales, and record keeping procedures. We conducted sampled testing for restaurant, catering, and snack bar revenue––the sources of revenue that are included in the license agreement. In addition, we conducted unannounced observations of Toto’s operations during the summer of 2001. Finally, we determined whether Toto’s complied with certain non-revenue-related terms and conditions of its agreement (i.e., remitted the proper security deposit; carried the proper amounts and types of insurance policies; and paid for its water and sewer use).

To conduct our audit of the license agreement between Toto’s and the City, we requested specific data and detailed documentation to verify whether Toto’s reported all revenue and paid the City the appropriate fees. Toto’s failed to provide: banquet calendars for the period October 1, 1999, through August 18, 2000; 42 of 72 of specifically requested banquet contracts; and daily cashier report envelopes, computerized guest checks, and sales summary reports needed to determine the accuracy of the snack bar’s reported revenue.

Our audit was conducted in accordance with Generally Accepted Government Auditing Standards (GAGAS) and included tests of the records and other auditing procedures considered necessary. This audit was performed in accordance with the City Comptroller’s audit responsibilities as set forth in Chapter 5, § 93, of the New York City Charter.

For the year ending September 30, 2000, Toto’s reported $3,225,343 in gross receipts and paid the City $270,454 in fees. Based on our observations of the facility and the available records, we determined that Toto’s did not include, at the very minimum, an estimated $1,829,320 in revenues on its gross receipts statements to Parks, and therefore owes the City at least $256,872 in additional fees and late charges. Because Toto’s failed to provide critical documents to support its reported revenues, and because of serious internal control weaknesses, we could not determine the full amount of revenue that Toto’s should have reported to Parks and upon which it should have paid the required corresponding fees to the City.

There were also serious internal control weaknesses that prevented us from verifying to what extent Toto’s reported all of its gross receipts to Parks, and paid the appropriate fees to the City. Toto’s did not provide banquet calendars from October 1, 1999, through August 18, 2000; 42 banquet contracts covering the six-month period reviewed; or any of its original source documentation to support reported snack bar revenue. Moreover, Toto’s did not properly segregate duties over its accounting functions. Toto’s bookkeeper counts the cash, reconciles the cash to the cashier’s report envelopes, prepares the deposit slips, makes the bank deposits, prepares the bank reconciliations, keeps the original books of entry (including the General Ledger), and prepares the monthly Gross Receipts Statements. Finally, there were 20 instances in which different contracts had the same contract number, and there were gaps in the numbering of contracts that were revealed when we compared the contract numbers on the banquet contracts to the General Ledger and to the banquet calendars that were provided.

By reviewing the respective insurance certificates, we verified that Toto’s had the required general liability insurance from May 28, 1999, to May 28, 2002, and workers’ compensation insurance coverage from April 1, 1999, to April 1, 2003. In addition, we verified that Toto’s remitted an additional $10,000 in security to Parks, as required by its agreement.

• Toto’s should pay the City $256,872 in additional license fees and late charges owed.
• Given the audit findings noted in this report, it is obvious that Parks must consider terminating all agreements with Toto’s if Parks believes that Toto’s is either unwilling or unable to keep books and records, and account for all revenue, as required by the agreement. At a minimum, Toto’s must address its failure to report all its revenues on its Gross Receipts Statements, its failure to maintain the necessary supporting documentation and its lack of the internal control issues mentioned in this report. Accordingly, if Parks decides not to terminate its agreement with Toto’s, Parks should require that Toto’s:
  • Ensure that all revenues generated at the facility are reported on its monthly Gross Receipts Statements to Parks, including revenue from the Thursday Night Deck Parties, catering, restaurant, snack bar, and special events, and pay all required fees due the City.
  • No longer use stand-alone registers and ensure that all receipts from the Thursday Night Deck Parties are processed into its point-of-sales system and are properly recorded in its books and records.
  • Maintain all source documents to support and adequately evidence the gross revenues reported to Parks.
  • Report all banquet revenue on its books and records in the month that the event was held.
  • Maintain all banquet calendars and contracts, in accordance with its agreement.
  • Maintain all original source documents pertaining to the snack bar, including the daily cashier’s report envelopes, the computerized daily customer receipts, and the computerized daily summary tapes.
  • Properly segregate all duties over its revenue functions.

As stated above, if Parks decides not to terminate Toto’s agreement, then we recommend that Parks ensure that Toto’s:

• Pays the City $256,872 in additional license fees and late charges due.
• Complies with the remaining recommendations made in this report.
• Is periodically audited and inspected by Parks to ensure that it is adhering to the terms of the agreement.

The matters covered in this report were discussed with officials from Toto’s and Parks during and at the conclusion of this audit. A preliminary draft report was sent to Toto’s and Parks officials and discussed at an exit conference on June 3, 2002. On June 5, 2002, we submitted a draft report to Toto’s and Parks officials with a request for comments. We received written responses from Parks on June 17, 2002, and from Toto’s on June 19, 2002.

Toto’s responded that it will pay the City $256,872, and stated that it has taken steps to ensure that all revenue, including receipts from the Thursday Night Deck Parties, is reported to the City. In addition, Toto’s stated that the cash registers used during the Thursday Night Deck Parties will be linked to its point-of-sales system, that banquet calendars and all related source documents for banquets will be properly maintained, and that the revenue and accounting functions will be properly segregated.

Parks responded that it agreed with the recommendations and stated that it has issued a Notice to Cure requiring that Toto’s ‘remedy all deficiencies noted in the Comptroller’s audit report. Toto’s is required to pay the total audit assessment of $256,872 (Recommendation 1) under a three (3) month payment plan. To comply with Recommendation 2, Toto’s must take immediate action to implement the noted internal control recommendations.’ Parks also stated that it will ‘conduct a follow-up review in two months to verify that Toto’s has fully complied with all audit recommendations.’