OFFICE OF THE AUDITOR

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1 OFFICE OF THE AUDITOR DEPARTMENT OF AVIATION AIR WISCONSIN AIRLINES CORPORATION REVENUE AND CONTRACT COMPLIANCE AUDIT OCTOBER 2007 Dennis J. Gallagher Auditor

2 Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado , FAX October 18, 2007 Mr. Turner West, Manager Mr. Vince Portaro, Vice President Department of Aviation Air Wisconsin Airlines Corporation City and County of Denver W6390 Challenger Drive, Suite 203 Appleton, WI Dear Mr. Turner West and Mr. Vince Portaro: Attached is the Auditor s Office Internal Audit Division s revenue and contract compliance audit report of Air Wisconsin Airlines Corporation for operations at Denver International Airport. The audit period was for the year ended December 31, The purpose of the audit was to determine whether Air Wisconsin properly reported and paid the City s compensation of revenue; and whether the City and County of Denver complied with the terms and conditions of the contracts; and whether internal controls were adequate. The Internal Audit Division found one reportable condition which is fully described in the accompanying report. If you have any questions, please call Kip Memmott, Director of Internal Audit, at Sincerely, DJG/kh Dennis J. Gallagher Auditor cc: Honorable John Hickenlooper, Mayor Honorable Members of City Council Members of Audit Committee Kelly Brough, Chief of Staff Claude Pumilia, Chief Financial Officer The prudent stewardship of Denver s finances, resources and financial records! We are also committed to improving accountability, efficiency, effectiveness and performance in city government. We will scrupulously protect the taxpayer s interests and work collaboratively with all concerned to improve our city and its government 1

3 Mr. West and Mr. Portaro October 18, 2007 Chris Henderson, Chief Operating Officer Arlene V. Dykstra, Acting City Attorney Lauri Dannemiller, Executive Staff Director, City Council Beth Machann, Controller Cheryl Cohen-Vader, Chief Deputy Manager of Aviation Stan Koniz, Deputy Manager of Aviation for Business and Technologies Pete Gingras, Assistant Deputy Manager of Aviation/Properties Laura Trujillo, Co-Assistant Deputy Manager of Aviation/Finance Amy Weston, Co-Assistant Deputy Manager of Aviation/Finance Sharon Shannon, Internal Audit Supervisor, Aviation/Finance 2

4 TABLE OF CONTENTS Transmittal Letter 1 Table of Contents 3 Internal Auditor s Report 4 Executive Summary 5 Background, Scope, Objective, and Methodology 6 Finding, Recommendation, and Responses 8 Schedule of Amounts Due and Paid and Related Notes 9 Exhibit A - Air Wisconsin response dated August 28, Exhibit B - Dept. of Aviation response dated September 10, Exhibit C - City Controller response dated September 26,

5 Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado , FAX INTERNAL AUDITOR S REPORT We have completed a revenue and contract compliance audit of the Airport Use and Facilities Lease Agreement dated May 17, 2005 between Air Wisconsin Airlines Corporation and the City and County of Denver at Denver International Airport for the year ended December 31, The purpose of the audit was to determine if Air Wisconsin properly reported and paid the City compensation of revenue as stipulated in their contract. We also determined whether the accompanying Schedules of Amounts Due and Paid for this audit period is fairly presented in accordance with the contract; and whether or not the City and Air Wisconsin complied with the terms and conditions of the contracts. Additionally, we assessed internal controls to ensure accounting and administrative internal controls in place were adequate and operating as intended. This audit was included in the Auditor s Office Internal Audit Division s 2006 Annual Audit Plan and is authorized pursuant to the City and County of Denver Charter, Article V, Part 2, Section 1, General Powers and Duties of Auditor. We conducted our audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Schedule of Amounts Due and Paid is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the revenue amounts and disclosures in the schedules. As a result of our audit, we found one compliance issue related to Air Wisconsin s concession revenues and a refund check. We did not identify any other significant reportable conditions. We extend our appreciation to Airport personnel who assisted and cooperated with us during the course of our examination. Internal Audit Division Date: October 18, 2007 Staff: Dick Wibbens, CPA, Audit Manager Marcus Richardson, Audit Supervisor Dr. Adeniyi Kelani, Lead Auditor Kip R. Memmott, CGAP Director of Audit Services The prudent stewardship of Denver s finances, resources and financial records! We are also committed to improving accountability, efficiency, effectiveness and performance in city government. We will scrupulously protect the taxpayer s interests and work collaboratively with all concerned to improve our city and its government. 4

6 AIR WISCONSIN AIRLINES CORPORATION EXECUTIVE SUMMARY FOR THE YEAR ENDED DECEMBER 31, 2006 This summary highlights the finding of the revenue and contract compliance audit, which is more fully described in the Finding, Recommendation, and Responses section beginning on page 8. The Finding, Recommendation, and Responses section includes responses from the Department of Aviation, Air Wisconsin Airlines Corporation, and Office of the Controller. Refund Check Not Issued in a Timely Manner We discovered that an $88,035 refund check for Air Wisconsin was not issued in a timely manner due to missing back-up documents. The Auditor s Office released a refund check to Air Wisconsin on May 18, 2007, 106 days after the request. 5

7 AIR WISCONSIN AIRLINES CORPORATION BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY FOR THE YEAR ENDED DECEMBER 31, 2006 Background Air Wisconsin Airlines Corporation, with its Regional Headquarters in Delaware, has a signatory Airport Use and Facilities Lease Agreement, dated May 17, 2005, for the use and lease of public airport facilities and passenger terminal premises at DIA. Air Wisconsin Airlines engages in the business of transporting passengers and materials by aircraft. The provisions of the contract structure timing of payments and extended the contract terms to terminate on December 31, However, Air Wisconsin Airlines closed their business operations at Denver International Airport on April 16, Scope Our audit of Air Wisconsin Airlines (Fund/org 73800/ ) was for the year ended December 31, The procedures performed included the determination of compliance with the contracts between City and Air Wisconsin; a review of documentation and data integrity; and a review and evaluation of internal controls as stipulated above. In addition, we reviewed Air Wisconsin s landing fees, interline bag transfer area fees, baggage claim fees, and AGTS and tunnel fees to determine if these fees were properly calculated and reported. The total amount audited for the year ended December 31, 2006 was $301,044. Objective The objective of this audit was to determine whether Air Wisconsin Airlines properly reported all landings at DIA and paid the City the proper compensation for landing fees, interline bag transfer area fees, baggage claim fees, and automatic guideway transit system (AGTS) fees in accordance with their contracts and airport rules and regulations. Also, the objective was to determine whether or not the Department of Aviation and Air Wisconsin complied with other terms and conditions of the contracts and applicable City rules and regulations. Methodology To meet the audit objectives, the following evidence gathering and analysis techniques were utilized, but were not limited to: Verified and recalculated rentals, fees, and charges Verified landing weights and rates charged Checked and determined timeliness of cash receipts Performed various tests of revenues Performed an analytical review of revenues Obtained physical, testimonial, and analytical evidence Reviewed the Year-End Adjustments for revenue component and rental fees Determined delinquent interest amount due Reviewed administrative and accounting internal controls 6

8 BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY AIR WISCONSIN AIRLINES CORP. Verified evidence of insurance and performance bonds requirements Conducted interviews with the staff of Air Wisconsin and DIA Reviewed contracts and City rules and regulations 7

9 AIR WISCONSIN AIRLINES CORPORATION FINDING, RECOMMENDATION, AND RESPONSES FOR THE YEAR ENDED DECEMBER 31, 2006 Refund Check Not Issued in a Timely Manner During our fieldwork, we found that the airport owed Air Wisconsin $88,035 for overpayments. The airport submitted a memo dated January 31, 2007 to the Auditor s Office so that a refund check could be issued to Air Wisconsin. According to an Auditor s Office dated February 21, 2007, supporting documentation was not attached to the refund request. Such documentation was needed in order to process and release the refund check to Air Wisconsin. According to Fiscal Rule 2.5, any disbursement made must include adequate supporting documentation which provides a clear picture to any individual reviewing the transaction. Unfortunately, the Auditor s Office requesting back-up information was sent to a DIA representative who was on extended leave and, therefore, no one from the airport responded to the Auditor s Office request. As a result, back-up information was not sent to the Auditor s Office until we discovered the issue during our fieldwork. We informed the appropriate airport personnel of the requesting back-up. Shortly thereafter the airport provided the necessary back-up. The refund check for $88,035 was released on May 18, 2007, 106 days after the request. Since the refund was not issued in a timely manner, it appears that the airport did not reconcile this payment request until it was brought to their attention. Recommendation In the future, to help prevent delays in processing refund checks, we recommend that the Department of Aviation attach sufficient supporting documentation for refund payment requests. The Department of Aviation should also reconcile payment requests to the Office of the Controller s (formerly known as Auditor s Office) records periodically and follow-up on all unprocessed refund payment requests. The Office of the Controller should establish a policy or system to verify that communications ( , voice mail, etc.) requiring feedback are properly routed to personnel with responsibility for addressing refunds in a timely manner. The Air Wisconsin Airlines Corporation Response Please see Exhibit A letter dated August 28, Department of Aviation Response Please see Exhibit B letter dated September 10, Office of the Controller Response Please see Exhibit C letter dated September 26,

10 AIR WISCONSIN AIRLINES CORPORATION SCHEDULE OF AMOUNTS DUE AND PAID FOR THE YEAR ENDED DECEMBER 31, 2006 Amounts Due Amounts Paid Balance Due (Note 1) (Note 2) City Landing Fees $262,825 $262,825 $ - Interline Baggage Transfer Area Fees 10,465 10,465 - Baggage Claim Fees 14,172 14,172 - AGTS and Tunnel Fees 13,582 13,582 - Total $301,044 $301,044 $ - - The accompanying notes are an integral part of this schedule. 9

11 NOTES TO SCHEDULE OF AMOUNTS DUE AND PAID AIR WISCONSIN AIRLINES CORP. Note 1. Amounts Due The rates used to calculate amounts due for this audit were obtained from Leigh Fisher Associates Final Report Rentals, Fees, and Charges for 2006 dated December 7, 2005 as authorized by the Airport. Landing Fees Air Wisconsin Airlines is required to pay an estimated landing rate of $3.225 per 1,000 pounds as a Signatory Air Carrier. There were 81,496,000 pounds of landing weight in 2006 for Air Wisconsin. The amount reported for landing fees is calculated as follows: 81,496,000 lbs/1000 lbs = 81,496 lbs x $3.225 = $262, Interline Baggage Transfer Area Fees All airlines occupying space in the Interline Baggage Transfer Area within the Landside Terminal are required to pay a charge for their respective linear feet of shelving area allocated based on their respective number of shelving units. Total linear feet of baggage shelving area is 20 units; and Air Wisconsin was allocated one (1) unit. The amount reported for interline baggage transfer area fees is calculated as follows: $717, (cost of interline baggage space)/20 (number of shelving area units) = $35, annual signatory rate per unit. Baggage Claim Fees All airlines occupying space in the concourses, exclusively for their own business purpose, is required to pay their pro-rata share of the joint use space costs associated with the conventional baggage systems. The allocated cost is based on their respective share of Airlines Leased square footage in the concourse. Airport allocated.3% of deplaned destination passengers (DDP) to Air Wisconsin. The amount reported for baggage claim fees is $4, per month and is calculated as follows: $16,197,000 (Total annual net baggage claim requirement)/12 = $1,349, x.3% = $4, Automatic Guideway Transit System Fees (AGTS) All airlines using the Terminal Complex at the airport is required to pay a fee based on all Originating and Destination Passengers (O & DP). Airport allocated.2% of O & DP to Air Wisconsin. The amount reported for AGTS fees is $3, per month and is calculated as follows: $23,284,000 (Total annual net AGTS and Tunnel requirement)/12 = $1,940, x.2% = $3, Note 2. Amount Paid All amounts paid in the schedule of amounts due and paid were determined from the Department of Aviation s accounting cash receipt records. Amounts paid incorporate those billed and due during the audit period and collected in the ordinary course of business whether or not within the audit period. 10

12 EXHIBIT A AIR WISCONSIN AIRLINES CORP. 11

13 EXHIBIT B AIR WISCONSIN AIRLINES CORP. 12

14 EXHIBIT C AIR WISCONSIN AIRLINES CORP. 13

15 EXHIBIT C AIR WISCONSIN AIRLINES CORP. 14

OFFICE OF THE AUDITOR

OFFICE OF THE AUDITOR DEPARTMENT OF AVIATION REVENUE AND CONTRACT COMPLIANCE AUDIT NOVEMBER 2007 Dennis J. Gallagher Auditor Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave.,