Letter Audit Report on the Compliance of Alley Pond Driving Range, Inc. With Its License Agreement with the New York City Department of Parks and Recreation for the Alley Pond Golf Center

Executive Summary

This Letter Report summarizes the findings of our audit on the compliance of Alley Pond Driving Range, Inc. (Alley Pond) with its license agreement with the New York City Department of Parks and Recreation (Parks) for the Alley Pond Golf Center.  The objective of this audit was to determine whether Alley Pond properly calculated its gross receipts and license fees due to the City, paid the license fees on time, and complied with other major requirements of its license agreement such as insurance coverage, security deposit, utility charges, and capital improvements.  The scope of this audit was Operating Year 2017 (November 1, 2016 through October 31, 2017).

On October 13, 2010, Parks granted Alley Pond a 15-year license agreement to renovate, operate, and maintain the golf driving range and develop or renovate, operate, and maintain the clubhouse and ancillary facilities at the Licensed Premises at 232-01 Northern Boulevard in Alley Pond Park.

The Alley Pond Golf Center, located in the Douglaston section of Queens, offers a full driving range, a miniature golf course, a pro shop, a snack bar and a restaurant known as the Sports Bar and Grill.  Parks is responsible for monitoring the terms of the license agreement.  During our scope period, the license agreement required that Alley Pond pay the higher of the minimum annual fee of $1,200,000 or $1,000,000 plus 25 percent of gross receipts in excess of $2,500,000 per annum.  According to the license agreement, gross receipts include all fees received from the driving range, club rentals, club repairs, miniature golf, merchandise sales, foods and beverages, or services and orders of any kind, placed or made directly or indirectly at the premises.

Alley Pond reported total gross receipts of $2,190,453 for Operating Year 2017 and made payments to the City of $1,200,000 for the minimum annual license fees.

In addition, under the license agreement, Alley Pond is required to maintain appropriate insurance, including a general liability insurance policy with $1,000,000 coverage, naming the City as an additional insured; maintain a $325,000 security deposit with the City; expend or cause to be expended during the term of the license a minimum of $2,208,533 for capital improvements; and pay all required taxes and utilities, including water and sewer, and gas and electric charges.

Audit Findings and Conclusions

 The audit found that, overall, Alley Pond properly operated the golf driving range, calculated license fees due, and paid those fees in a timely manner to Parks.  Alley Pond also maintained the required liability insurance that named the City as the additional insured party, maintained the required security deposit, paid its utility charges timely, and completed its capital improvement requirements.

However, the audit also found that Alley Pond’s internal controls over the recording of revenue derived from special events and from orders filled by the Sports Bar and Grill have a number of weaknesses that need to be improved.  Specifically, Alley Pond did not use pre-numbered contracts for special events and did not maintain an event calendar book for Operating Year 2017.  In 2013, Alley Pond was cited in an audit conducted by Parks for using contracts for catered events that were not sequentially pre-numbered.  Notwithstanding the relevant finding and recommendation of that audit, from that time through March 2018, Alley Pond continued to enter into special events-contracts that were not sequentially pre-numbered.  The pre-numbering of contracts is an accounting control that facilitates the identification of missing contracts.  Similarly, a properly maintained event calendar book that could be compared with the recording of special event revenue would serve as an additional accounting control.

Although we did not identify any unreported events during our audit scope, given the existence of the two abovementioned control weaknesses, we cannot be reasonably assured that Alley Pond properly reported all revenue generated from the activities in question for Operating Year 2017.  Nonetheless, based on the significant difference between Alley Pond’s reported revenue and the license agreement’s threshold for percentage-based license fees—approximately $291,000—we believe it is unlikely that additional fees would be due to the City for Operating Year 2017.  However, the increased possibility of unreported income in any amount is a concern.

In addition, we identified gaps in order numbers from the Sports Bar and Grill Detail Payment reports.  Specifically, 46 (4.5 percent) of 1,017 order numbers were missing from the Order Payment reports for June 2017.  Alley Pond officials attributed the missing order numbers to the Sports Bar and Grill’s POS system’s failure to reflect any zero-dollar transactions in the payment reports.   A zero-dollar transaction occurs when a user manually enters ordered items into the system as opposed to selecting them from the system’s menu.  Items ordered through the POS system’s pre-programmed menu are already priced and reflected on the order number.  Because both types of order receipts—those generated through selections from the system’s pre-programmed menu and those generated through manual entries—have the same appearance, the kitchen staff filling the orders may not be able to readily differentiate between them and report or question any apparent zero-dollar transactions.

Our review determined that all of the 46 missing order numbers were associated with one particular employee.  According to Alley Pond officials, that employee took advantage of the manual-order feature to bypass the automatic-pricing feature of the POS system and fraudulently ordered menu items.  We were informed that the employee was terminated in January 2018.

However, Alley Pond’s management and supervisors were not aware of the zero-dollar transactions or the gaps in the payment reports until we brought them to their attention.  Consequently, it is possible that Alley Pond may not have reported to the City all the Sports Bar and Grill’s revenue for Operating Year 2017—specifically fees Alley Pond should have collected and reported for the zero-dollar orders that may have been generated by employees or others throughout the year.

Nevertheless, based on our estimate of the potential value of those orders, we believe it is unlikely that additional fees would be due to the City for Operating Year 2017 for them, given that Alley Pond’s reported revenue was far below the threshold that would require it to pay percentage-based license fees.  However, now that Alley Pond has been put on notice that the Sports Bar and Grill’s ordering system is vulnerable, Alley Pond is advised to implement heightened control measures to deter unauthorized transactions.

Audit Recommendations

To address these issues, we made the following two recommendations to Alley Pond.

• Alley Pond should ensure that all contracts are sequentially pre-numbered and that an event calendar is maintained.
• Alley Pond should strengthen its internal controls over the Sports Bar and Grill’s operations by ensuring that its management staff properly reviews and approves all transactions periodically to verify that all order numbers are accounted for and are accurately reported in its books and records and in its filings with the City.

 Agency Response

In its response, Alley Pond generally agreed with our recommendations and described the steps it has taken and will take to implement them.  Parks stated in its response that the agency understood that Alley Pond had agreed to implement that audit recommendations and that Parks also had followed up with Alley Pond in writing on these matters.