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Office of the City AuditorAudit VenueTech Contract
September 2000
September 12, 2000

Stockton City Council

AUDIT SUMMARY: VENUETECH CONTRACT

In accordance with our 2000 - 2001 audit plan, we have completed an audit of VenueTech Management Group, LLC (VenueTech) contract charges related to operations of the Fox Theatre. We conducted our audit in accordance with Generally Accepted Government Auditing Standards.

Our primary objective was to determine whether the bills for services submitted by VenueTech to the Redevelopment Agency (Agency) were in compliance with the terms of the management services contract. In addition, we performed follow-up procedures concerning prior audit reports for the Fox Theatre.

Based on the results of the audit, it is our opinion that, in all material respects, monthly billings were in accordance with the terms of the contract between VenueTech and the Agency. We did identify billing errors that resulted in a net overcharge of $5,400.05, which VenueTech has agreed to reimburse. The primary cause of the difference was double billings related to employee garnishments.

Personnel services costs were a significant portion of the amounts billed to the Agency. We did note internal control weaknesses related to the completeness and accuracy of VenueTech employee time cards. In addition, our follow-up of prior audit issues identified some areas where VenueTech management’s corrective actions had not been fully implemented.

During the course of the audit, we offered suggestions to strengthen internal controls. These suggestions have been communicated to both VenueTech and Agency management.

Additional information about our audit can be found in the attached AUDIT REPORT.

cc: Dwane Milnes, City Manager
Richard K. Denhalter, City Attorney
Katherine Gong Meissner, City Clerk
Robert Sivell, Enterprise Zone Manager
John Hinson, Administrative Services Officer
John Lind, VenueTech Management Group, LLC
Delores Roach, Public Information Officer
Lynn Lankford, Deloitte & Touche, LLP
The Record

AUDIT REPORT
VENUETECH CONTRACT

In accordance with our 2000 - 2001 audit plan, we have completed an audit of VenueTech Management Group, LLC (VenueTech) contract charges related to operations of the Fox Theatre. We conducted our audit in accordance with Generally Accepted Government Auditing Standards.

VenueTech receives a flat monthly rate for Management and administrative fees. Both fees are subject to annual increases linked to a Consumer Price Index (CPI). The monthly fees are currently $13,457.88 and $328.24 respectively. In addition, VenueTech receives reimbursement for expenses related to operation of the theatre. Reimbursed expenses include the total cost of support, $500 per event day for required Production Management services (also subject to the annual CPI increase), and direct costs of vendors supplying products or services.

The largest components of the monthly invoices from VenueTech have been the Management Fees and the cost of personnel reimbursement. The Management fee compensates VenueTech for organizational management, including an on-site General Manager and Executive Assistant.

Personnel expenses reimbursed to VenueTech are for the total cost of house support staff assigned to the theatre, other than those covered by the Management and Production Management fees. To arrive at the personnel reimbursement amount invoiced to the Agency, the gross wages for all staff are increased by 25% to cover the cost of employee benefits. Employees are required to submit a time card to document the hours worked. VenueTech’s financial policy states that the employee’s immediate supervisor must approve the time cards before submission for payment.

The City Auditor conducted an audit of the Fox Theatre in March 1999. The objectives of that audit were to evaluate controls over cash receipts and disbursements, and to assess compliance with related terms of the contract. The audit disclosed a number of areas where control improvements could be made, and VenueTech management submitted a plan for corrective action.

In December 1998, David E. Vaughn, CPA, performed a financial audit focusing on the cash receipts, disbursement and cash balances of the Fox Theatre through June 30, 1998. One product of this process was a Management Advisory Comments letter, which identified areas where operational improvements were recommended.

The Fox Theatre is an important element in the City Council’s goal to revitalize downtown. As shown in the following table, the City has committed significant financial resources in this program:

In addition, we performed follow-up procedures concerning prior audit reports for the Fox Theatre.

We began by obtaining a copy of the management services contract and the monthly invoices submitted by VenueTech. We interviewed City and VenueTech employees, and reviewed the service contract, invoices and supporting documentation. Controls and transactions were tested to verify our understanding of the internal control system, and to determine compliance with the contract.

Based on the results of our audit, it is our opinion that, with the exception of conditions noted below, monthly billings are, in all material respects, in accordance with the terms of the contract between VenueTech and the Agency.

The results of our audit indicate that an adjustment of $5,400.05 is owed back to the Agency. This amount is composed of the following:

Double billings related to garnishments – The personnel services costs invoiced to the Agency are based on gross pay for each individual. From an employee’s gross pay are deducted various withholdings, including garnishments, to arrive at net pay. VenueTech has erroneously added the garnishment amounts back into the personnel costs invoiced to the Agency, which caused a duplicate counting of garnishment costs. The resulting total personnel cost is then increased by 25% to arrive at the total reimbursement requested. The double counting of garnishments has resulted in the Agency being overcharged for personnel services costs totaling $5,506.23.

During the initial audit period from July 1, 1999 to June 30, 2000, we observed overcharges totaling $2,848.85. Based on these results, we then expanded the scope of testing to include invoices for the duration of the contract. Our expanded testing identified additional garnishment charges dating back to May 11, 1998 totaling $5,506.23.

VenueTech response:We agree with the finding and recommendation made in your draft report. Jim Henthorn discovered an error in the calculation of garnishments from our payroll records, based on the payroll service method of reporting garnishments. We have already corrected the problem effective with the October 2000 invoice. We are also happy to reimburse the City the $5,506.23 in overcharges that resulted over the term of our agreement.

Double billing related to overtime adjustment – In June 1999, VenueTech made a payroll adjustment to correct an error regarding the payment of overtime wages to its employees. The correction required payments to employees for prior overtime worked. The adjustment plus the 25% mark-up totaling $13,003.70 was invoiced to the Agency. The amount billed to the Agency inappropriately included garnishments and other withholdings, which resulted in double billing. The total amount over billed was $727.96.

VenueTech response:This finding and recommendation are essentially based on the same misinterpretation of garnishments from the records of our payroll service as mentioned above, and our response is the same. We will reimburse the City $727.96 for the overcharge that resulted from this error.

Unsupported payroll charges – The primary source documents and control points for the payroll system are the time cards. Based on our testing of a sample of pay periods during the initial audit period of July 1, 1999 through May 15, 2000, we identified unsupported payroll charges of $229.50. Most of the discrepancies were related to minor math errors, some resulting in underpayments to employees and under charges to the Agency.

VenueTech response:We do not question any of the math or rounding errors identified in the audit, and are happy to reimburse the City the $229.50.

CPI increase not taken – In section 3.3 of the service contract between the agency and VenueTech, the Management, Administrative, and Production Management fees are eligible for an annual increase equal to the annual increase in a consumer price index. VenueTech did not apply the increase to the Production Management fee, resulting in undercharges to the Agency totaling $1,063.54 for the period January 1997 through May 15, 2000.

VenueTech response:We appreciate being informed of this oversight on our part, and have made the correction beginning with the October 2000 invoice.

Controls over Time Cards – The primary source documents and control points for the payroll system are the time cards. During our testing we noted that controls over time cards regarding completeness and accuracy were weak. Per VenueTech’s financial policies, time cards for each employee must be approved by the supervisor prior to submission for payment. The immediate supervisor of the individual employee is required to approve employee time cards.

Of the time cards reviewed, 6% did not have an employee signature, 69% did not have a supervisory signature in evidence of review, and 9% were missing or did not support the wages paid.

VenueTech response:We agree with your recommendations, and will implement them immediately. We would like to point out that there are typically two levels of supervisory review of all time cards, but that we have been lax in requiring supervisor signatures. The time cards are reviewed by the supervisor who scheduled the work, and to whom the employees report directly. In addition, the time cards are reviewed by the Operations Manager. We have been requiring separate time cards for separate venues since March of 1999. Any time cards which combined hours for multiple venues were errors or oversights, and we will continue to monitor this.

FOLLOW-UP OF PRIOR AUDIT WORK OF THE CITY AUDITOR

In response to the City Auditor’s report dated March 1999, VenueTech has implemented a number of improvements related to the audit findings as identified in the Noteworthy Accomplishments section of this report. There were management corrective actions that had not been implemented or fully implemented, most notably:

8Management now retains a record of daily ticket sales. This record is intended to provide an audit trail, and to explain discrepancies in cash receipts. Although a detailed daily sales record is now maintained, we observed very few instances of documented explanations for discrepancies. The daily sales record compares the method of payment per the BASS Ticket System with the payment actually tendered. The daily sales form also identifies cash overages and shortages. Rarely did the document identify the cause of the discrepancies, even when on-site personnel apparently had knowledge of the cause.

In addition, daily sales receipts were not deposited intact. We noted "cash advances" reportedly to pay performers, and payments for other expenses deducted from cash collections with little supporting documentation. One payment noted on the form was for $100 to pay parking attendants during an event. We question whether cash was an appropriate way to pay this business expense. We also noted a $10,000 deduction from cash receipts to pay an unanticipated contract charge.

VenueTech response: We agree with your recommendation concerning better documentation of discrepancies on these daily reports, and will implement this recommendation immediately. We will also make daily deposits intact, although we would like to maintain having the option of adjusting a daily deposit on a show day for exceptional situations where unanticipated cash is required for production purposes. This will be the exception, not the rule, and we will require adequate documentation of any such exceptions.

8Ticket sales receipts continue to be deposited on a weekly basis, in violation of VenueTech’s financial policy that requires daily deposits.

VenueTech response:We agree with your recommendation and have implemented stricter controls to assure this practice is improved.

8The aggregate balance of all bank accounts may at times exceed the $100,000 limit per depositor that is insured by the Federal Deposit Insurance Corporation (FDIC). Based on our review of the bank statements and signature card, the account has not been converted to a joint account with the Agency. Although City employees are listed as signatories, the account remains solely in the name of VenueTech. The account also lists VenueTech’s federal ID number. There are income tax implications associated with a for-profit entity’s ID number appearing on an interest bearing account that is the property of a local government.

VenueTech response: We have confirmed that Union Safe Deposit Bank continues to erroneously use the VenueTech federal tax ID number, in spite of the fact that they were provided with a letter from the City Finance Department instructing them to do otherwise in December of 1999, when we changed all of the signature cards to include City employees. We will provide them with a duplicate copy of the City letter and ask them to make the correction. We will follow up with documentation of this change as soon as it is provided to us by the bank.

PRIOR FINANCIAL STATEMENT AUDIT SUGGESTIONS

In the Management Advisory Comments letter provided by David E. Vaughn, CPA dated December 22, 1998, a number of suggestions were made for improving internal control weaknesses related to cash handling and accounting processes. Some of the suggestions were similar to those presented by the City Auditor. VenueTech has implemented some of the suggestions as identified in the Noteworthy Accomplishments.

David Vaughn was contracted to perform the financial statement audit for the fiscal year ended June 30, 1999, and has indicated that he will follow-up on control weaknesses noted in his prior reports to management.

Where our follow-up work found that minor adjustments were still needed, we have communicated those issues in a separate memo of suggestions to VenueTech. Our suggestion memo also contains other opportunities for improvements that are minor in nature.

8 Tasks were adjusted to insure segregation of duties in reconciling the bank accounts. VenueTech’s president is responsible for reconciling the bank accounts. He is no longer authorized to sign checks.

8 The restrictive endorsement for checks over $2,000 was consistently applied. Two signatures are required for these checks, and only one on-site VenueTech employee is an authorized check signer.

8 Physical access to petty cash was strengthened.

8 Check writers consistently provided Driver’s license and telephone numbers.

8 The memo line on checks was used when purchasing Cashier’s checks for final settlement payments providing a clearer audit trail.

VenueTech made other recommended operational improvement by training staff to more fully utilize their accounting software, and obtaining an updated version of the program.

Program objectives and measures:
When the Agency originally leased the Fox Theatre, there were objectives for doing so. They have been talked about in general terms, but there do not appear to be any formal, written, quantifiable goals and objectives for operating the Theatre.

We think there should be quantifiable goals and objectives for operation of the Fox Theatre. Progress toward meeting the goals should be measured and used to adjust theatre operations, where appropriate.

Contract considerations:
Part of our work included examining the contract in order to test compliance with contract terms. In reviewing the contract, we found areas where, in our opinion, terms could be improved. Here are some of those areas:

Financial Incentives for Efficient Operations – Currently, the contract provides for reimbursements of a variety of costs. There are neither requirements nor incentives for operating efficiency. With the amount of experience the Agency now has, combined with opportunities for benchmarking with other venues, the Agency could establish benchmarks for labor and overhead costs. The contract could provide profit/loss incentives for meeting targets.

Relating Program Objectives to Contractor Performance and Setting Financial Incentives – Once the Agency has established goals and objectives for Fox Theatre operations, there may be opportunities to encourage achieving certain objectives by offering financial incentives to the contractor. This would work best for objectives that could be clearly assigned to the contractor, not those which require the combined performance of City staff and the contractor.

Vending Commissions – In Section 1.3 and 1.3.12 the contract addresses concessionaires. "VTECH shall provide on-going management of the Fox Theatre including the following operational tasks…Select, negotiate contract(s) for and hire concessionaires for providing catering, food and drink, and any other items for sale for Agency and client sponsored events." The language is specific to concessions for events. It does not address ongoing sales of vending items. If there are to be vending machines in the Theatre for use of staff and/or patrons, the contract should specify who selects the vendor and who is entitled to proceeds.

Staffing Levels – When the contract was executed, the Agency had no experience in theatre operations. The contract requires named positions and assigns specific duties to those positions. Now that the Agency has experience in operating the Fox Theatre, there are now opportunities to refine staffing requirements. The Agency may find it better to specify the number of staff who must be on duty at certain times (e.g. normal daily operation, during season ticket sales, day of event) and the functions that on-site staff must perform.

Production Management:
The current contract allows the contractor to charge the Agency $500 for production management for each event day. Related labor charges paid by the contractor are not to be included in personnel reimbursements, since they are paid from the $500 production management fee.

For events with an outside promoter, the Agency charges the promoter $25 per hour for production management services. However, the Agency still pays the contractor a fixed fee of $500 regardless of how much revenue was received.

We suggest that in future contracts, charges for production management be handled in a manner consistent with other contractor services. The Agency would pay the contractor at the actual labor rate, plus a mark-up for employee benefits.

Secret shopper surveys:
The City has taken advantage of secret shoppers to evaluate how well City employees and departments interact with the public. Results of these surveys have helped to identify ways to improve our public contact. Similar surveys at the Fox Theatre could help the Agency be assured that public contact in an entertainment venue is positive, professional, and helpful.

Customer Service Training:
Since 1995, the City has provided customer service training to its employees, recognizing that good customer service is important. We think that anyone associated with the Fox Theatre that has public contact should be required to attend customer service training that is similar in quality to that provided City employees.

Location of box office:
During our work, we heard a suggestion that once the Agency takes title to the Fox Theatre, the box office should be moved out of the main lobby area and into another storefront. This would reduce the heating and air conditioning needs while the theatre is dark, and would also improve building security. We concur with this idea and suggest that it be implemented as quickly as possible.

Include Fox Theatre operations in the City’s financial statements:
The Fox Theatre checking account is Agency property and all of the transactions of the account are Agency transactions. As such, they should be reflected in the Agency’s and the City’s annual financial statements.

One of two things should be done to ensure that the City properly accounts for Fox Theatre transactions. Periodic financial reports for the Fox could be sent to Administrative Services - Finance Division who would then post journal entries to reflect Fox Theatre transactions in the City’s general ledger. Or, Fox Theatre revenues could be deposited directly into the City’s main checking account. The existing checking account would then be handled as an imprest account, requiring periodic reconciliation and replenishment. Implementation of our second suggestion should include use of a positive pay system, which requires notifying the bank of check numbers and amounts as checks are issued.