OFFICE OF THE AUDITOR

Transcription

1 OFFICE OF THE AUDITOR DEPARTMENT OF AVIATION REVENUE AND CONTRACT COMPLIANCE AUDIT NOVEMBER 2007 Dennis J. Gallagher Auditor

2 Dennis J. Gallagher Auditor City and County of Denver 201 West Colfax Ave., Dept. 705 Denver, Colorado , FAX November 16, 2007 Mr. Turner West, Manager of Aviation Department of Aviation City and County of Denver Mr. Ron B. Reber, President and COO SkyWest Airlines, Inc. 444 South River Road St. George, Utah Dear Mr. West and Mr. Reber: Attached is the Auditor s Office Audit Services Division s revenue and contract compliance audit report of SkyWest Airlines, Inc. (SkyWest) 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 SkyWest properly reported and paid the City s compensation of revenue; whether SkyWest and the City and County of Denver complied with the terms and conditions of the contracts, Denver Municipal Airport System Rules and Regulations (DMASR&R); and whether internal controls were adequate. The Audit Services Division found two reportable conditions as detailed in the accompanying report. The second condition reported on regarding the annual year-end settlement determination is a recurring condition. If you have any questions, please call Kip Memmott, Director of Audit Services, at Sincerely, DJG/kh Dennis J. Gallagher Auditor cc: Honorable John W. Hickenlooper, Mayor Honorable Members of City Council Members of Audit Committee 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. Reber November 16, 2007 Page Two Kelly Brough, Chief of Staff David Fine, City Attorney Lauri Dannemiller, Executive Staff Director, City Council Chris Henderson, Chief Operating Officer Claude Pumilia, Chief Financial Officer Beth Machann, Controller Bryan Phillips, Manager Airport Affairs, SkyWest Airlines, Inc. Cheryl Cohen-Vader, Chief Deputy Manager of Aviation Stan Koniz, Deputy Manager of Aviation for Business and Technologies Patrick Heck, Deputy Manager of Aviation for Revenue Management and Business Development Pete Gingras, Assistant Deputy Manager of Aviation for Properties Laura Trujillo, Co-Assistant Deputy Manager of Finance Amy Weston, Co-Assistant Deputy Manager of Finance Sharon Shannon, Audit Supervisor, Department of Aviation 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 Findings, Recommendations, and Responses 8 Schedule of Amounts Due and Paid and Related Notes 10 3

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 November 8, 2005 between SkyWest Airlines, Inc. (SkyWest) and the City and County of Denver. The purpose of this audit was to determine whether the accompanying Schedule of Amounts Due and Paid for the year ended December 31, 2005, is fairly presented in accordance with the contracts. We also determined whether SkyWest and the City and County of Denver complied with other terms and conditions of the contracts, applicable City rules and regulations, and whether internal controls were adequate. This audit was included in the Auditor s Office Audit Services Division s 2007 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 made in the schedules. Our conclusion indicates that there were no material misstatements in the Schedule of Amounts Due and Paid. However, we found that SkyWest overpaid the City $1,315. We extend our appreciation to all personnel who assisted and cooperated with us during the course of our examination. Audit Services Division Date: November 16, 2007 Staff: Richard Wibbens, CPA, Audit Manager Marcus Richardson, Audit Supervisor Adeniyi Kelani, Ph.D., Lead Auditor Freddie Martin, Staff 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 EXECUTIVE SUMMARY FOR THE YEAR ENDED DECEMBER 31, 2005 This summary highlights the findings of the revenue and contract compliance audit, which is more fully described in the Findings, Recommendations, and Responses section beginning on page 8. The Findings, Recommendations, and Responses section includes responses from the Department of Aviation and SkyWest Airlines, Inc. 1. Balance Due the SkyWest The balance due the SkyWest is $1,315 as follows: Landing Fees $ (3,227) Interline Baggage Fee 1,572 Interest Charges 340 Balance Due the Auditee $ (1,315) At the request of DIA, SkyWest erroneously paid landing fees twice for 22 flights in the month of September Actual Amounts Paid are Not Used to Calculate Year-End Settlement The Department of Aviation provided Leigh Fisher Associates with the estimated amounts due by airline during the year, instead of the actual amounts paid. These amounts are used by Leigh Fisher to calculate the annual year-end adjustment. Therefore, Leigh Fisher used incorrect amounts to determine the annual year-end settlement. The year-end settlement is an ideal opportunity to determine the annual deficiency or overpayment. However, the proper deficiency or overpayment was not determinable at year-end in this case because the Department of Aviation did not use amounts actually paid by SkyWest. 5

7 BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY FOR THE YEAR ENDED DECEMBER 31, 2005 Background SkyWest Airlines, Inc., a subsidiary of SkyWest Inc., is a regional airline headquartered in the State of Utah. The airline, a signatory passenger air carrier, operates as United Express and Delta Connections under code-sharing agreements with United and Delta Airlines. SkyWest provides scheduled transportation for Denver International Airport (DIA) passengers and materials on a preferential basis. The airline fleet of aircrafts includes Bombardier Regional Jets 200 and 700 series, and Embraer EMB-120 Brasilia turboprop. The City and SkyWest had an expiring Airport Use and Facilities Lease Agreement from January 1, 2005 to October 1, The City and SkyWest subsequently executed Airport Use and Facilities Lease Agreement on November 8, The term of the agreement is October 1, 2005 to December 31, The Airline is required to pay landing fees, baggage claim, automatic guideway transit system, baggage operation and maintenance, inter-line baggage fees, and other fees and charges as applicable. Scope Our audit of SkyWest Airlines, Inc. at DIA (fund 73800/org ) was for the year ended December 31, The scope of our work included determining compliance with the contract conditions for a signatory passenger air carrier and compliance with the Denver Municipal Airport System Rules and Regulations (DMASR&R). Objective The objective of our audit was to determine whether SkyWest paid the City the proper amounts for landing fees, passenger based rentals, and other fees and charges in accordance with their contract and the DMASR&R. Additional objectives included determining whether SkyWest and the Department of Aviation complied with other terms and conditions of the contracts, whether the accounting and administrative internal controls were adequate and effective, and to determine if the entities complied with other City rules and regulations. 6

8 BACKGROUND, SCOPE, OBJECTIVE, AND METHODOLOGY Methodology To meet our audit objectives, the following evidence gathering and analysis techniques included but were not limited to: Reviewed the contract and Airport Rules and Regulations Conducted interviews and discussions with the Department of Aviation and SkyWest Tested revenue transactions of the Department of Aviation Reviewed and assessed the adequacy of accounting and administrative internal controls Recalculated fees and rental amounts Verified landing weights, rates, insurance, and bonding Reviewed and compared the amounts paid to calculate the year end adjustment Utilized analytical procedures 7

9 FINDINGS, RECOMMENDATIONS, AND RESPONSES FOR THE YEAR ENDED DECEMBER 31, Balance Due the City A. Overpaid Landing Fees Audit work revealed that SkyWest overpaid landing fees in the amount of $3,227. SkyWest erroneously paid landing fees twice for 22 flights in the month of September 2005, because the Department of Aviation (DIA) incorrectly notified the airline that their original landing fee payment excluded landing fee amounts for 22 flights. At the request of DIA, SkyWest subsequently issued a payment to compensate DIA for the 22 flights in the amount of $3,227. According to Section 5.05 of the Airport Use and Facilities Lease Agreement, if the rentals, fees and charges paid by Airline were greater than the respective amounts chargeable, Airline shall receive credits promptly in the amount of such overpayment. If the rentals, fees and charges paid by Airline were less than the respective amounts chargeable, Airline shall pay promptly the amount of any such deficiency. B. Underpaid Interline Baggage Fee Audit work determined SkyWest underpaid Interline Baggage fee for the month of September 2005, in the amount of $1,572. SkyWest officials claimed they were not notified of the rate change, but DIA s documentation dated August 26, 2005, indicates appropriate notice of rate change was provided. Section 5.05 of the contract indicates that if the rentals, fees and charges paid by Airline were less than the respective amounts chargeable, then the airline shall pay promptly the amount of any such deficiency. C. Interest Charges During the audit period, SkyWest did not make certain payments on the dates due for the months of July, October, November and December in accordance with the contract Section 9.10 of the Airport Use and Facilities Lease Agreement. This contract provision clearly states that any payment not made to the City when due shall accrue interest at the rate of 18% per annum commencing 5 days after such due date. As a result, SkyWest owes the City $340 for interest charges. Recommendations We recommend the Department of Aviation issue a net credit memo for $1,315 to SkyWest Airlines. We recommend that the Department of Aviation review and where necessary enhance billing controls to ensure billing accuracy. In addition, we recommend that SkyWest make proper payments based on DIA s updated invoice. Department of Aviation Response The Department of Aviation will issue a credit to SkyWest in the amount of $1,315 for the aggregate amount of various fees and charges that were overpaid and underpaid by SkyWest. SkyWest Airlines Response SkyWest Airlines chose not to respond. 8

10 FINDINGS, RECOMMENDATIONS, AND RESPONSES 2. Actual Amounts Paid are Not Used to Calculate Year-End Settlement Audit work determined that the amounts provided to Leigh Fisher Associates for the annual year-end settlement are not the actual amounts paid by the Airline during the year. These amounts are used to identify credits or deficiencies. The Department of Aviation provided Leigh Fisher Associates with the Estimated Amounts Due as the amount paid by SkyWest. The detail of actual vs. estimated amounts due is as follows: Actual Amounts Paid DIA Estimated Amounts Paid Variance Landing Fee 6,892, Landing Fee 6,889, , Baggage Claim 610, Baggage Claim 610, AGTS and Tunnel 807, AGTS and Tunnel 807, Interline Baggage Interline Baggage Area 28, Area 29, (1,572.00) 8,338, ,336, , Section 5.05 of the contract indicates that if the rentals, fees and charges paid by Airline were greater than the respective amounts chargeable, Airline shall receive credits promptly in the amount of such overpayment. If the rentals, fees and charges paid by Airline were less than the respective amounts chargeable, Airline shall pay promptly the amount of any such deficiency. Recommendations We recommend the Department of Aviation provide Leigh Fisher Associates with the actual amounts paid by the Airline to determine the proper credit or deficiency due to/from the Airline. Department of Aviation Response The Department of Aviation procedures in the year end adjustment calculation includes the following: Review aged receivables of airlines to determine if there are outstanding amounts due to the City. If amounts due exist, a recommendation is made to apply the airline s credit due (based on revenue receivable) to the amounts due in aged receivables; Or withhold airline s credit for year end settlement and/or revenue credit until the airline settles with the airport on the outstanding amounts due. This process by the Department of Aviation s Finance Department ensures outstanding amounts due at year end are reconciled and paid before a credit is issued to an airline. SkyWest Airlines Response SkyWest Airlines chose not to respond. 9

11 SCHEDULE OF AMOUNTS DUE AND PAID FOR THE YEAR ENDED DECEMBER 31, 2005 Amounts Due Amounts Paid Balance (Note 1) (Note 2) Due Landing Fees $6,741,255 $6,744,482 $(3,227) Conventional Baggage Claim 697, ,584 Automatic Guideway Transit System 959, ,110 Interline Baggage Area 29,942 28,370 1,572 Conventional Baggage System Operation and Maintenance 21,462 21,462 Interest Charges Balance Due the City $8,449,693 $8,451,008 $(1,315) The accompanying notes are an integral part of this schedule. 10

12 NOTES TO SCHEDULE OF AMOUNTS DUE AND PAID Note 1. Amounts Due Landing Fees, Conventional Baggage Claim, Automatic Guideway Transit System, Interline Baggage Area, Conventional Baggage System Operation and Maintenance, and Interest Charges are the revenue categories included in our schedule. We did not audit or review any other revenue item. A detail of each of these categories is noted below. All rates used to calculate the amounts due for this audit were obtained from the Leigh Fisher Associates Year-End Settlement of Rentals, Fees, and Charges for 2005 (Final Report) dated September 15, 2006, unless otherwise stated below. Landing Fees The actual annual landing fee rate, as listed in the 2005 Final Report, is *$3.138 per 1,000 pounds of landed weight for signatory carriers. SkyWest Airlines had 2,148,593 pounds of landed weight in 2005 (2,148,593 lbs x $ = $6,741,255). We verified the number of reported landings by SkyWest, on a test basis, through records maintained by SkyWest landing fee reports and with the Airport Mega Data System. Conventional Baggage Claim The actual rate, as listed in the 2005 Final Report, was $1.40 per domestic destination passenger. SkyWest had 498,165 deplaned domestic destination passengers in 2004 (498,165 passengers x $ = $697,584). Automatic Guideway Transit System The Automatic Guideway Transit System revenueproducing cost center of SkyWest is based on a percentage of origination and destination passengers. SkyWest had 994,434 origination and destination passengers. The rate was *$0.96 per originating and destination (O&D) passenger (994,434 passengers x $ = $959,110). Interline Baggage Area - The terminal linear feet of baggage shelving area available, 20 units. Interline Baggage Space 7,275 sq. ft. Cost of Interline Baggage Space $598,834 ($598,834 / 20 = $29,942) *1.0 unit of shelving space was allocated to SkyWest Airlines Conventional Baggage System Operation and Maintenance The cost for inbound and outbound baggage system is based on origination and destination passengers. The actual activity of SkyWest for 2005 Baggage System O&M were as follows: Total Origination Passengers 47,259 $ per passenger $14, Destination Passengers 52,744 $ per passenger 6, $21, Interest Charges According to Section 9.10 of the Airport Use and Facilities Lease Agreement, any payments not made to the City when due shall accrue interest at 18% per annum commencing five business days after such due date. * This rate has been rounded 11

13 NOTES TO SCHEDULE OF AMOUNTS DUE AND PAID Note 2. Amounts Paid The amounts paid were compiled from the Department of Aviation s cash receipt records. Amounts paid include billed and due during the audit period and collected in the ordinary course of business whether or not within the audit period. 12