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Aramark Sports and Entertainment Services, Inc. Red Rocks Amphitheatre Location Performance Audit January 2010 Office of the Auditor Audit Services Division City and County of Denver Dennis J. Gallagher Auditor The Auditor of the City and County of Denver is independently elected by the citizens of Denver. He is responsible for examining and evaluating the operations of City agencies for the purpose of ensuring the proper and efficient use of City resources and providing other audit services and information to City Council, the Mayor and the public to improve all aspects of Denver’s government. He also chairs the City’s Audit Committee and oversees the City’s Comprehensive Annual Financial Report (CAFR). The Audit Committee is chaired by the Auditor and consists of seven members. The Audit Committee assists the Auditor in his oversight responsibilities of the integrity of the City’s finances and operations, including the integrity of the City’s financial statements. The Audit Committee is structured in a manner that ensures the independent oversight of City operations, thereby enhancing citizen confidence and avoiding any appearance of a conflict of interest. Audit Committee Robert Bishop Maurice Goodgaine Jeffrey Hart Timothy O’Brien Dennis Gallagher Robert Haddock Bonney Lopez Audit Staff John Carlson, Deputy Director, JD, CIA, CICA Sonia Montano, Internal Audit Supervisor, CGAP, CICA Dawn Hume, Internal Audit Supervisor Kristin Donald, Senior Internal Auditor You can obtain free copies of this report by contacting us at: Office of the Auditor 201 W. Colfax Avenue, Dept. 705 Denver CO, 80202 (720) 913-5000 Fax (720) 913-5026 Or view an electronic copy by visiting our website at: www.denvergov.org/auditor City and County of Denver 201 West Colfax Ave., Dept. 705 www.denvergov.org/auditor Denver, Colorado 80202 720-913-5000 FAX 720-913-5247 Dennis J. Gallagher Auditor January 21, 2010 Mr. Jack Finlaw, Director Theatres and Arenas City and County of Denver Dear Mr. Finlaw: Attached is the Auditor’s Office Audit Services Division’s revenue and contract compliance audit of Aramark Sports and Entertainment Services, Inc. operations at the Red Rocks Amphitheatre location. The audit period was for January 1, 2008 through June 30, 2009. The purpose of the audit was to determine whether Aramark Sports and Entertainment Services, Inc, and the City and County of Denver complied with the terms and conditions of the contract and whether internal controls were adequate. The audit identified reportable conditions which are fully described in the accompanying report. If you have any questions, please call Kip Memmott, Director of Audit Services, at 720-913-5029. Sincerely, Dennis J. Gallagher Auditor DJG/ect cc: Honorable John W. Hickenlooper, Mayor Honorable Members of City Council Members of Audit Committee Ms. Roxane White, Chief of Staff Mr. Claude Pumilia, Chief Financial Officer Mr. David T. Roberts, Chief Services Officer Mr. David Fine, City Attorney Ms. Lauri Dannemiller, City Council Executive Staff Director Mr. Beth Machann, Controller Mr. Derek Brown, Manager, General Services To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation. City and County of Denver 201 West Colfax Ave., Dept. 705 www.denvergov.org/auditor Denver, Colorado 80202 720-913-5000 FAX 720-913-5247 Dennis J. Gallagher Auditor AUDITOR’S REPORT We have completed our audit of the Aramark Sports and Entertainment Inc. (Aramark) revenue contract at Red Rocks Amphitheatre for the period January 1, 2008 through June 30, 2009. The purpose of the audit was to determine whether Theatres and Arenas and Aramark complied with the terms and conditions of the contract, complied with City rules and regulations, and whether internal controls were adequate. This performance audit is authorized pursuant to the City and County of Denver Charter, Article V, Part 2, Section 1, General Powers and Duties of Auditor, and was conducted in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Based on our audit work, we determined that the revenue reported and submitted to the City from Aramark was accurate. However, other contract requirements were not adequately monitored or enforced by Theatres and Arenas. We extend our appreciation to Theatres and Arenas and Aramark personnel who assisted and cooperated with us during the audit. Audit Services Division Kip Memmott, MA, CGAP, CICA Director of Audit Services To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation. TABLE OF CONTENTS EXECUTIVE SUMMARY 1 Finding 1: Inadequate Contract Monitoring 1 Finding 2: Contract Terms and Assembly Needs Improvement 1 INTRODUCTION & BACKGROUND 2 Red Rocks Amphitheatre 2 Aramark Contract 3 SCOPE 3 OBJECTIVE 3 METHODOLOGY 3 FINDING 1 5 Inadequate Contract Monitoring 5 RECOMMENDATIONS 6 FINDING 2 7 Contract Terms and Assembly Needs Improvement 7 RECOMMENDATIONS 8 AGENCY RESPONSE 9 EXECUTIVE SUMMARY Finding 1: Inadequate Contract Monitoring The concessionaire contract between Aramark and the City and County of Denver has not been adequately monitored by Theatres and Arenas resulting in non-compliance with all terms related to capital improvements and equipment. The contract terms note that Aramark “shall put $1,050,000 in a grant for the benefit of the City and invest $350,000 in capital improvements and equipment for the Red Rocks Amphitheatre.” However, audit work determined that Theatres and Arenas did not obtain proper documentation for grant and capital improvements, required expenditures were not made by contract deadlines, and the capital assets acquired were not all properly recorded or safeguarded by Theatres and Arenas. Audit work also showed that work began before the contract was executed. The absence of an adequate contract monitoring process and the improper management of assets results in terms of the contract not being met, assets not properly accounted for, and legal liability issues for the City resulting from allowing a third party to operate a City owned venue without a contract in place. Finding 2: Contract Terms and Assembly Needs Improvement The contract contains contradicting language in regards to annual reporting and is a poorly assembled legal document. For example, the City’s concession revenue from Aramark is based on gross revenue; the contract has one requirement for Aramark’s Chief Financial Officer to certify the accuracy of the annual statement of gross revenue while another section of the contract requires an independent Certified Public Accountant to certify this statement. In addition, the contract assembly is unprofessional. For example, the table of contents is missing page numbers and various contract sections are mislabeled. Exhibit A of the contract contains inappropriate information and Exhibit B is not labeled. Contracts are legal, public documents that are a reflection of the City and should be reviewed from a quality assurance perspective to ensure content is consistent and that the document is professionally assembled. Page 1 Office of the Auditor INTRODUCTION & BACKGROUND Red Rocks Amphitheatre Red Rocks Amphitheatre is nestled between large red sandstone spires in the side of a mountain. The geologically formed amphitheatre is known for its unique beauty, wonderful acoustics and it panoramic view of the Denver City lights. The venue has attracted talented performances since the early 20th century with a number of concerts put on by then owner, John Brisben Walker, from 1906 to 1910 on a temporary platform. The City of Denver purchased the Red Rocks area in 1927 from Walker for $54,133. Under Denver Mayor Ben Stapleton, the City enlisted the help of the federally sponsored Civilian Conservation Corp (CCC) and the Work Projects Administration. President Franklin D. Roosevelt created the CCC as part of his New Deal for America to give jobs to young men during the Great Depression. Denver architect Burnham Hoyt completed his design in 1936 and the construction spanned 12 years.1 Since then, Red Rocks Amphitheatre has attracted many performers. The venue has hosted many legendary performances from the Beatles to the Denver Symphony and many artists have chosen to record live albums at the amphitheatre such as Dave Mathews and U2. Red Rocks hosts concerts as well as providing facilities for weddings and meetings. In addition, to the Visitor Center, there is the Trading Post, which has concession and retail sales and provides guided tours. Theatres and Arenas is a division of the City & County of Denver's Department of General Services. They are responsible for the acquisition, construction, maintenance, repair, management and operation of the City's public assembly facilities. Theatres and Arenas oversees Red Rocks Park and Amphitheatre including the concession agreement with Aramark. 1 www.denvergov.org/Red_Rocks_Amphitheatre/RedRocksHistory City and County of Denver Page 2 Aramark Contract Aramark has a concession agreement with the City for services provided at Red Rocks Park and Amphitheatre for a term commencing on April 8, 2003 through January 15, 2011 with two additional one-year extension periods. In 2008, Red Rocks concessions generated over $6.6 million in gross receipts from which the City collected over $2.3 million in commissions. The publicly traded Philadelphia based company Aramark, provides services such as facilities management and food services for several industries. Per the contract, Aramark provides concession and retail services for the Amphitheatre, Trading Post, and Visitor Center, which includes a restaurant. Aramark has other contracts with the City including the concession contract for the Denver Coliseum and a contract to operate vending machines at Denver International Airport. Aramark is required to pay percentages of gross receipts for Red Rocks facilities concessions at an increasing rate throughout the contract life. The Agreement also requires Aramark to perform the following: Submit an annual gross revenue statement Conduct an annual customer survey and submit a marketing plan Make capital improvements which will remain as assets to the City Keep insurance and bond requirements up to date SCOPE This audit included a review of compliance with rules and regulations as they apply to the contract for the period January 1, 2008 through June 30, 2009. OBJECTIVE The objective of this audit was to determine whether Theatres and Arenas and Aramark are in compliance with applicable rules and regulations for the agreement at Red Rocks Amphitheatre and revenue was properly reported. METHODOLOGY We utilized several methodologies to achieve the audit objective. These evidence gathering techniques included, but were not limited to: Reviewing the contract requirements and amendments; Verifying evidence of contract compliance; Page 3 Office of the Auditor Reviewing City rules and regulations; Interviewing Theatres and Arenas’ management and staff; Interviewing Aramark management and staff; Reviewing internal controls for Theatres and Arenas and Aramark; Verifying revenue is properly reported; Performing on-site physical observations, by attending an event at Red Rocks Amphitheatre and conducting interviews with Aramark staff during various phases of the event, and; Verifying Capital Improvements were made in accordance to the contract terms and assets were reported correctly. City and County of Denver Page 4 FINDING 1 Inadequate Contract Monitoring The concessionaire contract between Aramark and the City and County of Denver has not been adequately monitored by Theatres and Arenas resulting in non-compliance with all terms related to capital improvements and equipment. The contract terms note that Aramark “shall put $1,050,000 in a grant for the benefit of the City and invest $350,000 in capital improvements and equipment for the Red Rocks Amphitheatre.” However, audit work determined that Theatres and Arenas did not obtain proper documentation for required grant and capital improvements. We also found that expenditures were not made by contract deadlines and as of October 2009, $29,725 still remained to be expended. Further, the capital assets acquired were not all properly recorded or safeguarded by Theatres and Arenas. Audit work also determined that Aramark commenced work before the contract was executed. Inadequate Monitoring of Capital Improvement Contract Terms Theatres and Arenas lacks an effective contract monitoring process. Audit work found that Theatres and Arenas failed to keep all documentation for the capital improvements. As a result, Aramark was the only entity that retained documentation related to these improvements. In accordance with the terms of the contract, Aramark was required to provide a grant of $1,050,000, in a separate account, for the benefit of the City. The improvements made included concession carts, a restaurant kitchen remodel, a public address system and backstage furniture. The documentation for City approval was missing for the grant expenditures in four instances. In addition, Theatres and Arenas approved these expenditures after the invoice date in three instances. With regard to the capital improvements, the first equipment installment of $250,000 for the Red Rocks Amphitheatre, which included concession carts and an amphitheatre concession stand, lacked documentation for $35,725 of the expenditures. Audit work also found that prior approvals were not signed by Aramark and one approval occurred after the expenditure was made in regards to the Amphitheatre. The $100,000 Trading Post and Visitor Center retail equipment and improvements that occurred in 2003 were not approved until November 2009. In addition, expenditures were not made by contract deadlines. Of the $250,000 equipment improvements to the Amphitheatre due by December 31, 2007, only $84,465 had been expended with $165,535 remaining. As of October 2009, $29,725 still remained. Page 5 Office of the Auditor Improper Recording and Safeguarding of City Assets Per contract requirements, Aramark was required to make capital improvements and equipment purchases that are to be retained by the City at the end of the contract. Theatres and Arenas failed to record the majority of the improvements and purchases within PeopleSoft, the City’s financial system. Audit work found that the PeopleSoft capital assets listing for Red Rocks Amphitheatre contains assets from various Theatres and Arenas locations. An example of assets not recorded were approximately twenty vendor carts valued at approximately $9,800 each. Theatres and Arenas failed to conduct a thorough asset inventory and correct their asset listing which is required for review every year by the Controller’s Office to ensure assets are accurately recorded on the City’s year-end financial statements. The failure to properly record, label and inventory assets does not comply with City Fiscal Accountability Rules. Work Started Before Contract was Executed Theatres and Arenas allowed Aramark to begin work activities without a contract. The execution date of the contract was May 1, 2003 while the term of the contract began on April 8, 2003. Documentation reviewed, notes that capital improvement expenditures were made by Aramark on February 24, 2003, two months prior to the execution date of the concessionaire contract. Inadequate Contract Monitoring and Management of Assets has Several Negative Impacts The absence of an adequate contract monitoring process and improper management of assets has resulted in terms of the contract not being met, assets not properly accounted for, and work commencing before the execution of a contract. These control weaknesses leave the City vulnerable to not receiving all improvements and assets required of the concessionaire. In addition, allowing a third party to operate a City owned venue without a contract increases legal liability risks. RECOMMENDATIONS We offer the following recommendations to assist Theatres and Arenas with improving their contract monitoring process. 1. Theatres and Arenas should implement policies and procedures to ensure all investment contract requirements are met by concessionaires and assets are properly recorded and retained by the City. 2. Theatres and Arenas should follow City Fiscal Accountability Rules by: Properly recording assets as they are acquired; City and County of Denver Page 6 Performing annual asset inventories and communicating with the Controller’s Office about any needed corrections, and; Properly recording Construction in Progress. 3. Theatres and Arenas should conduct a reconciliation of assets with Aramark and report accordingly within PeopleSoft; 4. Theatres and Arenas should ensure the remaining $29,725 in capital improvements are completed as soon as possible, and; 5. Theatres and Arenas should ensure terms start after the execution date of a contract and work does not begin prior to the execution of the contract. FINDING 2 Contract Terms and Assembly Needs Improvement Audit work found that the Aramark contract lacks an efficient structure for monitoring and referencing. We noted contradicting terms, inaccurate section references and poorly assembled exhibits. Contradicting Contract Language Regarding Gross Revenue Reporting The contract contains two contradicting annual gross revenue reporting requirements. One section notes that the Chief Financial Officer of Aramark or another authorized officer of the concessionaire must certify the statement of gross receipts for each year. In addition, the City may hire an independent Certified Public Accountant (CPA) to conduct a review of Aramark’s books and records with respect to the computation of gross receipts. However, another section states that Aramark must furnish a statement prepared by an independent CPA who has audited gross receipts in accordance with Generally Accepted Accounting Principles (GAAP). The Deputy Manager may modify this requirement, if such modification is in the best interest of the City. Inadequate Referencing in the Contract Audit work identified several issues related to the assembly of the contract, which made it difficult to reference because of improper labeling. Specifically, the table of contents does not contain page numbers and the sections numbered in the table of contents do not correspond to the numbered sections in the actual contract. For example, Section 19 in the table of contents is titled as “Insurance, Liability and Bonds” while Section 19 in the contract is labeled “Repairs and Maintenance.” Exhibits to the contract are labeled improperly or in an unprofessional manner. In addition, the exhibits contain unnecessary information such as another company’s bid information from the original request for proposals. Page 7 Office of the Auditor Inadequate Contract Format and Review has Negative Impacts Gross revenue is the basis for the calculation of the commission payment to the City yet the legally binding document does not require Aramark to have a CPA certify their annual gross revenue is in accordance with GAAP. The poor condition of the contract structure makes the contract difficult to review and does not reflect well on the City. The Agency and City Attorney are responsible for the content and assembly of the contract. If proper review and assembly had been performed, the contradicting language would have been identified and the exhibits would only contain necessary information. RECOMMENDATIONS We offer the following recommendations to assist the City to ensure contract terms are clear, concise, and easily referenced and monitored: 1. The City Attorney’s Office and Theatres and Arenas should determine which annual requirement should be included and amend the contract accordingly. 2. The City Attorney’s Office and Theatres and Arenas should systematically review contracts to ensure; Contract requirements do not contradict each other; Contracts are properly assembled with an accurate table of contents, and; Exhibits are properly labeled and assembled. City and County of Denver Page 8 AGENCY RESPONSE Page 9 Office of the Auditor City and County of Denver P a g e 10 P a g e 11 Office of the Auditor City and County of Denver P a g e 12 P a g e 13 Office of the Auditor City and County of Denver P a g e 14