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Audit Report

Department of Parks and Recreation: Pahaska Tepee Concessions, LLC

This audit examined compliance with key terms of the contract between the City and Pahaska Tepee Concessions, LLC. First, we evaluated the revenue reported by Pahaska to determine whether it was paying the correct percentage to the City under the contract. Next, we examined whether Pahaska was applying the correct sales tax to transactions.

Watch the Audit Committee presentation here when available.

The companies operating concessions for the city at Willis Case Golf Course and the gift shop and café at the Buffalo Bill Museum and Grave are not reporting revenues reliably, according to this audit. While the amount of revenue involved was not overwhelming, this audit matters because poor reporting and outdated point-of-sale systems could be symptoms of a larger problem with a lack of concessionaire monitoring by Denver’s Parks and Recreation Department. The audit team recommends updated systems, more accurate reporting, clarification of contracts and better oversight.

Our audit of the contract between the City and Pahaska Tepee Concessions, LLC, revealed the following deficiencies:

FINDING 1: Pahaska’s Recordkeeping Is Inadequate, and Its Revenue Reporting Does Not Comply with Contract Terms, Making Revenue Unverifiable
• Pahaska’s cash registers are low-end, and all the company’s sales transactions records are printed on paper rolls from the registers. These records are unreliable, inaccurate, and, in some cases, missing.
• Pahaska deducted discounts in its calculations of gross revenues when contract language and other authoritative governance documents defining gross revenues are unclear on whether this is acceptable.
• The company has a lack of basic controls over cash handling and inventory, with registers left unlocked overnight even though some employees spend the night at the mountaintop facility.
• Pahaska has not complied with terms of the contract requiring payments to increase when it is operating on a month-to-month basis while awaiting contract renewal and has not addressed concerns regarding the schedule of payments to the City.
• The company did not correct similar concerns from a 2007 audit.

FINDING 2: The Department of Parks and Recreation Does Not Provide Adequate Oversight of Pahaska’s Contract
• Parks and Recreation has not reviewed Pahaska’s revenue documentation and has not specified what requirements the company’s point-of-sale system needs to have in order to properly record transactions.
• Parks and Recreation did not enforce contract requirements governing payments on a month-to-month contract basis, calculation of gross revenues, or the schedule of payments to the City.

We make a variety of recommendations to Pahaska and the Department of Parks and Recreation to correct revenue reporting deficiencies, reconcile past inaccurate payments, and enhance contract oversight.

1.1 Revenue Reporting – Pahaska Tepee Concessions, LLC, should adjust reporting practices to ensure compliance with the revenue reporting terms established in the contract.

Agency Response: Agree, Implementation Date – 90 days after receipt of signed contract

1.2 Improve Vending Revenue Controls – Pahaska Tepee Concessions, LLC, should design and implement a form for monthly vending machine revenue reporting, collect all vending revenue monthly, begin to document machines with zero balances during the month, and require a witness signature on all cash counts.

Agency Response: Agree, Implementation Date – October 31, 2018

1.3 Correct Errors Through Registers – Pahaska Tepee Concessions, LLC, should ensure managerial corrections of register errors are made through the register and occur at the time of the error, or at least by the end of the business day. Corrections should be well-documented separately from the cash register tapes and be thorough enough to identify all discrepancies.

Agency Response: Agree, Implementation Date – 90 – 120 days after receipt of signed contract

1.4 Acquire Retail Management Software – Pahaska Tepee Concessions, LLC, should acquire retail management software to enable entity-wide reporting, to minimize manual data entry of revenue figures, and to provide more accurate information to calculate percentage payments to the City. The system must be able to provide daily, monthly, and annual revenue reports. New system capabilities should completely remove any estimation out of the percentage payment calculation.

Agency Response: Agree, Implementation Date – 90 days after receipt of signed contract

1.5 Settlement Process – Pahaska Tepee Concessions, LLC, should work with the Department of Parks and Recreation’s Director of Finance and Administration to determine whether a settlement payment is necessary to make up for past inaccuracies. If so, both parties must agree on a mutually satisfactory dollar amount to adjust for inexact payments based on misreported gross revenues. The settlement agreement should consider misreported gross revenues and neglecting to pay 2018 payments according to the “holding over” clause in the contract.

Auditee Response: Disagree
Auditee Narrative: All payments were made on accurate gross receipts.

2.1 Point-of-Sale System’s Functionality – The Department of Parks and Recreation’s Director of Finance and Administration should obtain an understanding of the Pahaska Tepee Concessions, LLC, point-of-sale system’s functionality so Parks and Recreation can properly monitor compliance of gross revenues reported.

Auditee Response: Agree, Implementation Date – December 31, 2018

2.2 Point-of-Sale System’s Requirements – The Department of Parks and Recreation’s Director of Finance and Administration should discuss detailed requirements of the Pahaska Teepee Concessions, LLC, point-of-sale system to ensure accurate reporting of gross revenues.

Auditee Response: Agree, Implementation Date – December 31, 2018

2.3 Communicate Payment Schedule – The Department of Parks and Recreation’s Director of Finance and Administration should communicate the proper payment schedule to the accountant for Pahaska Tepee Concessions, LLC, and offer an opportunity to discuss the appropriate payment schedule.

Auditee Response: Agree, Implementation Date – December 31, 2018

2.4 Amend the Current Contract Definition of Gross Revenues – The Department of Parks and Recreation’s Director of Finance and Administration should amend the definition of gross revenues in the Pahaska Tepee Concessions, LLC, contract to address how discount items should be reported.

Auditee Response: Disagree
Auditee Narrative: The Department disagrees with this recommendation. This Concession License, and all other Parks and Recreation revenue agreements, comply with the definition of Gross Sales as set forth in D.R.M.C Sections 53-23 (14) and 53-23 (21). Both the City Treasurer and the City Attorneys who deal with tax, accounting and treasury issues agree that this definition is clear. As a result, our practice is consistent with how the City defines Gross Revenues. In addition, the City Attorney’s Office reviewed the definition of Gross Revenues in the Concession License and determined that the current language in the agreement is sufficient to reflect the City’s current accounting and calculation practices, including the contractual requirement for the Concessionaire to adhere to all applicable law including the Denver Revised Municipal Code. As a result, the Department believes it is unnecessary to amend these agreements to reiterate the definition provided in D.R.M.C.

Auditor’s Addendum: Although the Department of Parks and Recreation indicates that their concession revenue agreements follow the definition of Gross Sales in the Denver Revised Municipal Code (D.R.M.C.), the Sections mentioned specifically relate to gross sales for sales tax purposes and not gross revenues for revenue contracts. In our follow-up with the City Treasurer for clarification, he indicated that the definition of Gross Sales provided in Chapter 53 in the D.R.M.C. is clear and is consistent with how most jurisdictions define Gross Sales for taxation purposes. However, his opinion had not been offered regarding treatment of discounts in relation to gross revenues, and he had not reviewed the language in the contracts. Therefore, we maintain our original stance that the definition of gross revenues as it relates to discounts is not defined in the contract, nor is it defined in other authoritative City governance documents. It therefore requires clarification.

2.5 Settlement Process – The Department of Parks and Recreation’s Director of Finance and Administration should work with Pahaska Tepee Concessions, LLC, to determine whether a settlement payment is necessary to make up for past inaccuracies. If so, both parties must agree to a mutually satisfactory dollar amount to adjust for inexact payments based on misreported gross revenues. The settlement agreement should consider misreported gross revenues and neglecting to pay 2018 payments according to the “holding over” clause in the contract.

Auditee Response: Disagree
Auditee Narrative: The Department disagrees with this recommendation. The Department does not have adequate resources to perform revenue audits. The Department relies on the Concessionaire’s contractual obligation in each Concession License Agreement to annually submit a report of Gross Revenues prepared and certified by an independent certified public accountant to provide assurances that reporting and payments to the City is accurate and complete. Upon receipt of the annual audit, Department staff analyze the information contained in the audit compared to the periodic reports and payments submitted to the City by the Concessionaire. Adjustments to monies owed are made either by invoicing the Concessionaire, issuing a refund to the Concessionaire, or issuing a credit to the Concessionaire’s account. In addition, provisions are in each agreement that enables the Auditor’s Office to audit concessionaire records. The Department will, however, take two actions to address these audit findings. First, the Department will begin requiring the Concessionaire to provide POS reports and verify that percentage payments are based upon the Gross Sales amounts indicated on these reports. Second, the Department will require the Concessionaire to engage a new CPA to perform the annual audits.

Regarding the “holding over” clause, DPR was advised by the City Attorney’s Office that the Holding Over clause should be utilized as a legal remedy in the case of dispute. In this case, this concessionaire was selected again through a competitive process to operate the lodge for the new contract, and we agreed that they should remain on the premises until the new contract was executed. Unfortunately, DPR incurred some delays in timely completing the contract and we did not find it fair to require additional payments under the Holding Over provisions where we agreed that this concessionaire would remain at Pahaska.

 
Follow-up report

A follow-up report is forthcoming.

Other related reports

None at this time.

Audit Team: Katja E.V. Freeman, Sonia Montano, Dave Hancock, Marc Hoffman, Shannon Dale, Drew Woodward

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