Aramark Sports and Entertainment Services, Inc. … · audit of Aramark Sports and Entertainment...

Dennis J. Gallagher

Auditor

Office of the Auditor

Audit Services Division

City and County of Denver

Aramark Sports and Entertainment Services, Inc.

Red Rocks Amphitheatre Location Performance Audit

January 2010

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 Dennis Gallagher

Maurice Goodgaine Robert Haddock

Jeffrey Hart Bonney Lopez

Timothy O’Brien

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

http://www.denvergov.org/auditor

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 Denver, Colorado 80202 720-913-5000 FAX 720-913-5247 www.denvergov.org/auditor

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 Denver, Colorado 80202 720-913-5000 FAX 720-913-5247 www.denvergov.org/auditor

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


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

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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.

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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

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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;

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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.

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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.

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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;

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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.

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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.

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AGENCY RESPONSE

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