Audit Report on the Compliance of Time Warner Cable of New York City, Staten Island Division, With Its Franchise Agreement
EXECUTIVE SUMMARY
In September 1998, the City, through the Department of Information Technology and Telecommunications (DOITT), and Time Warner Cable of New York City, Staten Island Division (Time Warner) agreed to a renewed franchise agreement for 10 years. Section nine of the renewed agreement requires that Time Warner pay the City five percent of its gross revenue, less the mandatory payments made to the New York State Public Service Commission (NYSPSC).In addition, Time Warner is required to carry certain insurance coverage; maintain a security fund deposit of $710,000; and provide specified annual payments to the NYSPSC and the Community Access Organization (CAO).
This audit determined whether Time Warner maintained adequate internal controls over the recording and the reporting of its gross revenue; reported accurately its gross revenue, and calculated and paid the appropriate franchise fees due, paying those fees on time; and complied with certain other non-revenue-related requirements of its franchise agreement. For the audit period––October 1, 1998, through December 31, 2001––Time Warner reported gross revenues totaling $264 million and paid the City $12.9 million in franchise fees.
Time Warner had an adequate system of internal controls over its revenue collection process. However, Time Warner underreported its gross revenues by $6,854,294 for the period October 1, 1998, to December 31, 2001. This resulted in Time Warner’s owing the City $353,336 in additional franchise fees and calculated interest.
From January 1, 2001, to December 31, 2001, Time Warner separately identified the cost of franchise fees in its bills to subscribers and improperly excluded the franchise fee portion, totaling $4,464,804 of the billed amount, in its gross revenues reported to the City. Prior to January 2001, Time Warner reported the total amount collected from subscribers (including franchise fees) on its gross revenue statements and paid the pertinent fees on these amounts.
Moreover, Time Warner did not report on its gross revenue statements to the City: $223,684 relating to trip charges that it imposed on its subscribers for delinquent payments collected at their residences by Time Warner personnel; $71,556 relating to the value of free cable and on-line connection services provided to its employees and apartment managers; and $24,775 relating to Non-Sufficient Fund check charges where a processing fee was charged to each customer whenever a check was returned by the bank as uncollectible.
As a result of this audit and three other audits of Time Warner cable franchise agreements—Time Warner’s Northern Manhattan Division, Southern Manhattan Division, and Queens Inner Unity Cable System––Time Warner, through an agreement with the City, paid the City $7,677,521 on May 31, 2002. This payment covered franchise fees that were excluded from gross revenue calculations to May 31, 2002, and owed under the seven Time Warner cable franchise agreements with the City. (Of the total amount paid, $335,278 pertained to the Staten Island Cable Division.) Therefore, this report recommends only that Time Warner pay the City $18,058 in franchise fees and interest owed under its franchise agreement for its Staten Island Cable Division for excluding $320,015 in Trip Charges, Non-Sufficient Fund Check Charges, and the Value of Free Services on its gross revenue statements from October 1, 1998, through December 31, 2001.
In their response, Time Warner officials stated that they are currently processing the payment for and have no further comments on this audit. DoITT officials responded that "the financial issues brought forward during the audit have been addressed and are now being correctly reported as gross revenue. The appropriate franchise fees will be paid quarterly. Franchise fee payments will continue to be reviewed and monitored by this agency accordingly."