Follow-up Audit Report on the Compliance of Lakeside Restaurant Corporation with Its License Agreement

AUDIT REPORT IN BRIEF

REPORT IN BRIEF

This follow-up audit determined whether the 17 recommendations made in the prior audit, Audit Report on the Compliance of Lakeside Restaurant Corporation with Its License Agreement (Audit No. FM09-130A, issued January 29, 2010), were implemented. Fourteen of these recommendations were made to Lakeside Restaurant Corporation (Lakeside), and three were made to the New York City Department of Parks and Recreation (Parks).

The prior audit determined whether Lakeside accurately reported its gross receipts, properly calculated license fees due, paid its license fees on time, and complied with certain major non-revenue terms of the license agreement.

The prior audit found that Lakeside had significant internal control weaknesses and deficiencies over the collecting, recording, and reporting of revenue. As a result of these weaknesses, we could not be assured that Lakeside accurately reported all of its gross receipts from its banquet, restaurant, snack bar, and boat rental operations or that it paid the appropriate fees to the City. Although the internal control weaknesses were so extensive as to raise red flags concerning the potential for fraud, we were able to conservatively calculate that Lakeside underreported revenues by at least $87,494, resulting in $8,041 in additional fees and related late charges due the City.

Lakeside also did not maintain the premises in a sanitary condition, had unpaid water and sewer charges totaling $3,973 (which were subsequently paid), did not pay its fees on time, and failed to submit annual income and expense statements to Parks on a timely basis. Furthermore, Lakeside employed “off-the-books” employees, violated New York State Labor Law, and did not accurately report wait staff gratuities to the Internal Revenue Service.

Audit Findings and Conclusions

This follow-up audit determined that of the 17 recommendations originally made (14 recommendations to Lakeside and three recommendations to Parks), five were implemented, one was partially implemented, six were not implemented, three we were unable to determine if implemented, and two were no longer applicable. While Lakeside has now improved its internal controls related to the weaknesses cited in the previous report, there are still several outstanding issues. It currently uses a point of sales system to collect, record, and report revenue over banquet and restaurant sales. Lakeside now has a cash register that records the boat and snack bar sales. However, Lakeside still does not issue contracts for special events, did not amend its prior years’ sales tax returns, does not apply one accounting method in preparing its books and records, does not always maintain the facility in a sanitary condition, and does not pay its license fees on time. As of July 1, 2011, Lakeside owes $59,264 in license fees. In addition, it appears Lakeside has not ceased employing “off-the-books” employees.

Audit Recommendations

To address the issues that still exist, we recommend that Lakeside should:

• Remit the $59,264 in license fees and late charges;
• Enter into written agreements with all operators and vendors who use Lakeside’s facilities;
• Amend its New York State sales tax filings to include the banquet gratuities as taxable sales and pay the additional sales tax plus interest and penalties for all the periods (including prior operating years) that banquet gratuities were not fully distributed to the wait staff;
• Maintain the facility in a sanitary condition;
• Pay its minimum annual fees and applicable percentage fees on time;
• Submit annual income and expense statements to Parks within 30 days after the end of each operating year; and
• Report all current employees on its payroll records and comply with all laws governing unemployment insurance, workers’ compensation, social security, tax withholding, temporary disability insurance, minimum wage, and overtime as well as regularly update the Positouch employee list when employees are hired or terminated.

We recommend that Parks should:

• Issue a Notice-to-Cure to Lakeside requiring that it pay $59,264 in license fees and late charges assessed, and
• Ensure that Lakeside complies with all of the recommendations in this report.

Agency Response

In its response, Lakeside stated it has complied with, or is in the process of complying with, the recommendations set forth by the Comptroller’s Office. However, Lakeside took exception with the audit’s findings related to maintaining the facility in a sanitary condition and employing off-the-books employees.

Parks officials agreed with the audit findings and recommendations.