Follow-up Audit Report on the Compliance of Fitmar Management, LLC with Its License Agreement

This follow-up audit determined whether the 22 recommendations made in the previous audit entitled Audit Report on the Compliance of Fitmar Management, LLC With Its License Agreement (Audit No. FM08-104A, issued September 4, 2009) were implemented. Twelve of those recommendations were made to Fitmar Management, LLC (Fitmar) and 10 were made to the New York City Department of Parks and Recreation (Parks).

The previous audit determined whether Fitmar accurately reported its gross receipts, properly calculated the license fees due the City, paid its license fees on time, and complied with certain major non-revenue terms of the license agreement (i.e., completing required capital improvements, maintaining the required security deposit, carrying the required insurance, submitting the required reports, and paying its water and sewer charges).

The previous audit found that Fitmar’s management of the Paerdegat Athletic Club was rife with internal control weaknesses and deficiencies, and its flagrant disregard for accountability and transparency resulted in a litany of abuses, which contributed to employee theft and prevented us from determining the full extent to which gross receipts were underreported and City fees underpaid. Fitmar failed to ensure that basic accounting records were in place for tracking daily business transactions and substantiating reported receipts. In addition, Fitmar did not accurately record all gross receipts in its general ledger and did not use a segregated bank account for depositing gross receipts. Based on the limited documentation available, we were able to calculate that, at a minimum, Fitmar underreported at least $585,879 in gross receipts for operating years 2005 through 2007. As a result, Fitmar owed the City $68,689 in additional fees and late charges.

Additionally, Fitmar did not expend required minimum amounts for capital improvements, did not maintain the premises in a safe and sanitary condition, had unpaid water and sewer charges totaling $17,997 (which were subsequently paid), failed to submit timely monthly gross receipts statements to Parks, and allowed unauthorized businesses to operate from the premises. Finally, there was insufficient documentation to determine whether Fitmar conducted required background checks for all its Kidsports employees as required under the New York State Social Services Law.

Audit Findings and Conclusions

Fitmar’s management of the Paerdegat Athletic Club continues to be rife with internal control weaknesses and deficiencies, and its flagrant disregard for accountability and transparency results in a litany of abuses, which prevented us from determining the full extent to which gross receipts were underreported. Fitmar’s continued failure to comply with the terms of the license agreement, including operating the facility in an unsafe and unsanitary manner as well as not properly maintaining its books and records, leads us to strongly recommend that Parks terminate this license agreement.

This follow-up audit determined that of the 22 recommendations originally made (12 recommendations to Fitmar and 10 recommendations to Parks), two were implemented, one was partially implemented, 18 were not implemented, and one recommendation we were unable to determine if Fitmar complied with. Fitmar paid $22,803 to Parks as recommended in the last audit. As of May 2011, Fitmar had a computerized point-of-sale (POS) system to record sales at only two of its four revenue points. However, the POS system had gaps in the receipt numbers. Additionally, Fitmar intentionally continues to circumvent its internal controls by using cash registers that are not linked to the POS system at two of its four revenue points. Therefore, we have no assurance that Fitmar’s current system for recording revenue is any better in capturing all revenue earned than the old system. Having a POS system that has gaps in receipt numbers and using standalone cash registers shows poor internal controls and suggests the possibility of improprieties.

Fitmar continues to: 1) underreport its gross receipts to Parks (specifically, Fitmar underreported at least $123,369 in gross receipts for operating year 2011), 2) inaccurately record gross receipts in its general ledger, 3) not pre-number all of its contracts, 4) not have contracts for all special events, and 5) not have a sub-license agreement for the karate studio and real estate management company to operate within the facility. In addition, since the prior audit, Fitmar officials have incorporated yet another company, Harmony Outreach, LLC, using the Paerdegat Athletic Club address, and have done so without requesting a properly authorized sub-license agreement from Parks.

Furthermore, Fitmar currently owes the City $177,736 in unpaid license fees and continues to fall far short of expending the required minimum amounts for capital improvements, and does not maintain the premises in a safe and sanitary condition, while still being given the privilege of operating on City property.

In addition, Parks has not fully exercised its responsibility to ensure that Fitmar complied with all the terms and conditions of the agreement. The widespread deficiencies cited in this report lead us to conclude that Fitmar continues to breach its license agreement in material respects. Parks has fallen short of its fiduciary duty of monitoring the performance of this concessionaire and ensuring its compliance with the terms of the license agreement. Accordingly, Parks needs to revisit the position and consider the matters discussed herein.

Audit Recommendation

Based on the findings of this audit, Fitmar has a total disregard for adhering to the terms of its license agreement and continues to be in serious breach. Therefore, we recommend that Parks issue a “Notice to Cure” to Fitmar requiring that it immediately remit the $177,736 in unpaid license fees and late charges due the City and terminate the agreement.

Agency Response

In their response, Fitmar officials agreed with most of the report’s findings and stated that “[o]ur goal is to do a much better job following your recommendations in the future and be 100% compliant with the terms [of] our license agreement with [the] NYC Department of Parks & Recreation and to be in full compliance for future audits by your department.”

Parks stated in its response that it “has informed Fitmar of the Department’s intent to re-solicit this concession”. In addition, “Parks will insist that Fitmar repay the $177,736 in outstanding fees, as endorsed by the Report.”