review of the management services ... - broward county cvb...the greater fort lauderdale / broward...

Exhibit 1.

Review of the Management Services Agreement for the Greater Fort Lauderdale/ Broward County Convention Center

November 26, 2012 Report No. 12- 15

Office of the County AuditorEvan A. Lukic, CPA

County Auditor

Table of Contents

Topic Page

Executive Summary...............................................................2

Purpose and Scope ...............................................................3

Methodology ..........................................................................3

Background............................................................................4

Findings................................................................................11

Recommendations...............................................................17

Appendix 1 ...........................................................................19

Office of the County Auditor 1

Compliance Review

Executive Summary

This report presents the results of our review of the management services agreement for the Greater Fort Lauderdale / Broward County Convention Center (Center). The purpose of the review was to evaluate contract administration and compliance with the management services agreement including analysis of reimbursable expenditures, reported revenue collections and related internal controls.

Our review disclosed:

The Convention Center and Visitors Bureau (CVB) relinquished custody and control of public funds to SMG resulting in unnecessary risk.

Procurement of certain capital improvements through SMG violated the County’s procurement policy and may have conflicted with State Statute.

Certain capital improvements made by SMG have not been properly accounted for within the County’s financial system.

Documents supporting Center operating costs are not adequately reviewed or retained by the County.

Financial reports for the Center are fragmented and do not clearly present the actual results of operations.

Center transactions are not accurately recorded in the County’s financial system.

These issues extend beyond the CVB to varying degrees and should be viewed from a County-wide perspective. Accordingly, we recommend the Board of County Commissioners (Board) direct the County Administrator to take all necessary steps to ensure the issues identified in this report are addressed, including:

Issues within the CVB

1. Establishing control over county funds by taking necessary steps to end advance payments to SMG and ensure that SMG submits all collected revenues to the County each month.

2. Establishing effective contract administration over the SMG contract to include review and approval of all expenditures paid for with County funds and retention of documentation supporting financial transactions.


Compliance Review

3. Identifying and properly recording amounts due to and from SMG at year end and reconciling recorded amounts within the County’s financial system to the SMG Audited Financial Statements.

4. Ensuring the annual adopted budget clearly reflects the full cost of Center operations.

5. Presenting to the Board, an annual report of Center financial operations to include the full costs of operations incurred by the County with expenditure detail.

Issues relative to County-wide internal controls

6. Ensuring the Accounting Division independently reviews all payment requests to ensure compliance with contractual provisions, county policies, procedures and state law.

7. Requiring supporting documentation for all expenditures of public funds be retained under County control.

8. Establishing effective procedures for the identification and proper accounting of County transactions including advances (receivables) and capital improvements.

Purpose and Scope

The purpose of the review was to evaluate contract administration of and compliance with the management services agreement including analysis of reimbursable expenditures, reported revenue collections and related internal controls.

The scope of the review was fiscal years 2010 and 2011, with additional limited financial analysis performed for fiscal years 2007 through 2009.

Methodology

To accomplish our objectives, we:

Interviewed staff of: Convention Center and Visitors Bureau (CVB), Broward County Accounting Division, SMG, SMG’s subcontractors, and SMG’s external audit firm


Compliance Review

Reviewed: Management Services Agreement between SMG and Broward County, Subcontracts between SMG’s subcontractors and SMG, Relevant sections of County Administrative Code and Internal Control

Handbook, County Operating Budget for the Convention Center (Fund 1100), County Advantage Financial Reporting System for the Convention Center

(Fund 1100), SMG Special Purpose Audited Financial Statements, SMG Operating Budget, Monthly SMG financial reports, SMG/SAVOR External Auditor Workpapers, County Reports of disbursements to and receipts from SMG, SMG and SAVOR underlying financial records including selected:

Bank statements, General ledger reports, Account reconciliations, Invoices and other payment support, Payroll registers, and Event documents including customer contracts, event estimate

summaries, banquet event orders, settlement statements, billing support, and other event related documentation

Prepared: Process documentation and walkthroughs of selected events, and Reconciliations between SMG Special Purpose Audited Financial

Statements, County Convention Center Fund 1100, and County Reports of Disbursements to and Receipts from SMG

Consulted with County Attorney’s Office Staff

Background

The Facility

The Greater Fort Lauderdale / Broward County Convention Center (Center), which commenced operations in 1991, is a County-owned 600,000 square foot facility consisting of four exhibit halls, two ballrooms and 31 meeting rooms. The Center is a part of the County’s efforts to attract visitors to Broward County and hosts approximately


Compliance Review

160 events per year with over 300,000 attendees. The County issued bonds supported by Tourist Development Taxes (TDT)1 to finance the $48 million construction cost of the Center.

Center Operations

Management

Broward County’s Greater Fort Lauderdale Convention Center and Visitor’s Bureau (CVB) oversees Center operations and administers the County’s Management Services Agreement (Agreement) with SMG (formerly known as Spectator Management Group, Inc.). Under the terms of the current 10-year Agreement, which commenced January 1, 2010,2 SMG manages all activities and operations of the Center, including, but not limited to, the rental of space, advertising, promotion, marketing/sales, events management, box office, public relations, procurement, maintenance, security, custodial and support services. SMG also arranges catering, concession and support services for conferences, conventions, exhibitions, performances, and special events taking place in the Center.

At the beginning of each month, the County advances monies to SMG to pay for their monthly operating expenses based on their approved budget. SMG in turn is required to remit revenues generated from the Center at the end of each month to the County. Any unexpended advances or unremitted revenues are to be reconciled at the end of the year and remitted to the County. For management of the Center, the County pays SMG an annual management fee of $350,000, adjusted each year based on the Consumer Price Index, plus an incentive fee of up to 25% of the management fee.3 The total management and incentive fees paid to SMG in fiscal years 2007 through 2011 totaled $2,270,168 and are shown in Table 1 on the next page.

1 Section 125.0104, Florida Statutes (“Local Option Tourist Development Act”) permits counties to levy taxes for tourism promotion. The tax is levied on every person who rents, leases or lets for consideration any living quarters or accommodations in any hotel, motel, apartment, rooming house, mobile home park, recreation vehicle park, tourist or trailer camp, or condominium for a term of six (6) months or less. 2 The CVB also contracted with SMG under two prior ten-year agreements for management services of the Convention Center commencing on December 12, 1989. 3 The incentive fee consists of two components as follows (1) 60% of the incentive fee is based on whether SMG has operated the Convention Center to ensure that there is no more than a $300,000 net annual loss and (2) 40% of the incentive fee is based on compliance with established operational criteria. SMG has received the full incentive fee in each of the five years reviewed.


Compliance Review

Table 1 – Total SMG Management and Incentive Fees, By Fiscal Year 2007 through 2011

Fiscal Year

Management Company

SMG

2007 2008 2009 2010 2011

448,544 $ 462,001 475,861 444,949 438,813

Total 2,270,168 $ Source: SMG Audited Financial Statements

Catering and Concessions

Catering and concession services at the Center are provided by SMG Food and Beverage, LLC (a.k.a. SAVOR), a wholly-owned subsidiary of SMG, under the terms of an exclusive 10-year Concession Agreement.4 SAVOR contracts directly with Center clients for catering (banquets, luncheons, and reception stations) and concession (ex. a cash bar) services as well as regular concession services offered during large events (such as exhibit hall concession stands and coffee shops operated independent of client contracts).

In accordance with their agreement, SAVOR retains a management fee equivalent to 5% of revenues and an incentive fee equivalent to 8.5% of profits.5 All remaining revenues in excess of expenditures are remitted to SMG which is included in the revenues that SMG remits to the County. The total management and incentive fees retained by the catering and concession companies in fiscal years 2007 through 2011 are shown in Table 2 on the next page.

4 The CVB previously contracted with Boston Culinary Group, Inc., the parent company of NFS of Broward, Inc. to provide catering and concession services at the Convention Center under the terms of a 10-year Concession Agreement which expired December 2009. 5 Under the previous Concession Agreement which expired December 2009, the concessionaire retained a management fee equivalent to 6.5% of revenues and an incentive fee equivalent to 10% of profits.


Compliance Review

Table 2 – Total Catering and Concession Management and Incentive Fees, By Fiscal Year 2007 through 2011

Fiscal Catering and Concession

Company Total

Year Boston Culinary SAVOR

2007 2008 2009 2010 2011

654,802 $ 906,412 655,433 41,787

-

-$ --

417,489 386,433

$ 654,802 906,412 655,433 459,276 386,433

Total 2,258,434 $ 803,922 $ $ 3,062,356

Source: SMG and SAVOR Audited Financial Statements

Other Event/Support Services

Other support services at the Center are provided through contractors selected by SMG. These contractors provide services such as electrical, audio visual, internet, and security, etc. The contractors contract directly with center clients for such services and pay a commission fee. In fiscal year 2011, contractors reported charges for support services of approximately $2.4 million and paid commissions of $749,000 to the Center through SMG.

Contract Process

Event Booking

The CVB and SMG coordinate booking events at the Convention Center. Generally, the CVB handles events scheduled more than 18 months in the future while SMG handles all the more immediate bookings (those scheduled within 18 months). Events which will result in the greatest number of hotel room bookings are a priority.

The CVB and SMG prepare an event estimate summary and negotiate a contract with the customer. Together, these documents specify the rental space, special requirements, and additional services to be provided, as well as the corresponding rental and service fees.

SMG also facilitates arrangements for the client to contract directly with its preferred subcontractors. The subcontractors in turn, negotiate directly with the customer, and then pay a commission through SMG to the County after services are rendered.

SAVOR negotiates with the customer requesting catering, concession and banquet services using separate sales staff. SAVOR sales staff negotiate a separate contract and “Banquet Event Order” (BEO) with the customer. The contract specifies standard


Compliance Review

payment and legal terms, guaranteed attendance requirements, applicable surcharges for orders within 72 hours of event, taxes, service charges, etc. The BEO lists the type of service required, menu items and quantities, and applicable fees.

Event Operations

Prior to the event date, a SMG event manager is assigned to work with the client and subcontractors to ensure the space is set up according to requirements and assist in planning the event details. Throughout an event, the event manager maintains documentation of services delivered to the client.

A SAVOR catering coordinator is also assigned to work with the client and plan the event. Seventy-two hours prior to an event, the catering coordinator verifies final counts with the customer and adjusts the BEOs to reflect the updated counts. During the event, catering staff prepare and provide services in accordance with the specifications in the BEOs. The catering coordinator also generates additional BEOs for any additional services requested by the customer during an event.

Event Settlement and Invoicing

Following the event, SMG prepares a settlement statement recapping the charges, deposits, and final amount due to or from the customer. SAVOR separately invoices the customer for catering event charges and applies outstanding customer deposits to the final invoices.

Concessions

Independent of event booking and contract development with customers, SAVOR also plans concession service levels based on expected attendance and sales for each event.

Concession Revenues are generated from the following sources:

1. Exhibit Hall Concession Stands – Operated any time an exhibit hall is booked. Staffing and inventory planned based on expected attendance and sales.

2. Coffee Shops on the 1st and 2nd Floors – Operated for a minimum of 4 hours any time expected Convention Center attendance exceeds 16.

3. Portable Carts and Stations – These consist of various options such meat carving, sandwich, pasta, pizza, and beverage (cash bar) stations as well as buffets added along the side exhibit halls, etc. Staffed and operated based on expected attendance and sales.


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SAVOR may also provide ‘cash only’ food and beverage service during the event (e.g. a cash bar) as planned and negotiated with the customer. The negotiations include certain minimum sales guarantees incorporated into the contract.

Center Financial Results of Operations

Accounts Maintained by SMG

Each year, SMG provides audited financial statements for Center operations to the CVB. The financial statements are inclusive of SMG and SAVOR operations as well as management and incentive fees paid to SAVOR. As shown in Table 3 below, SMG reported annual profits to the County6 in each of the fiscal years 2007 through 2011. Reported profits ranged from a low of $18,075 in 2011 to a high of $1,568,871 in 2008.

Table 3 – Accounts Maintained by SMG Accounts Maintained by SMG

Special-Purpose Statement of Revenues and Expenditures (Audited) Fiscal Years 2007 - 2011

2007 2008 2009 2010 2011

Operating Revenues $ 12,526,365 $ 15,076,996 $ 11,983,986 $ 10,607,257 $ 9,935,331 Operating Expenditures 11,489,790 12,652,019 10,806,436 9,731,712 9,534,799 Catering & Concession Mgt. & Incentive Fee 654,802 906,412 655,433 459,276 386,433 Excess of Operating Revenues Over Operating Expenditures 381,773 1,518,565 522,117 416,269 14,099

Other Revenue 131,585 50,306 10,494 3,977 3,976 Excess of Operating and Other Revenues Over

$ 513,358 $ 1,568,871 $ 532,611 $ 420,246 $ 18,075 Operating Expenditures

Source: SMG Audited Special-Purpose Statement of Revenues and Expenditures.

Broward County Convention Center Operating Fund

As described above, SMG remits net profits generated from Center operations to the County. The County also incurs costs for the Center which are in addition to the Accounts Maintained by SMG. Those costs for fiscal years 2007-2011 include:

SMG Management and Incentive Fees - The County issues a separate payment to SMG for management and incentive fees which averages $454,000 per year.

Salaries and Benefits of County Staff – Salaries and benefits of County staff tasked with the oversight and operation of the Center approximates $1.2 million per year.

6 As described in “Management” section above, these profits are submitted to the County via remittance of revenue from Convention Center operations as well remittance of any unexpended funds previously advanced to SMG by the County.

9 Office of the County Auditor

Compliance Review

Marketing and Event Support Services – The County provides incentives to attract customers to the Center. This includes paying a portion of Center fees to SMG on behalf of a customer or paying for other convention related services such as shuttle buses or event advertising. These expenditures range from $1.7 million to $3.2 million per year.

Purchased Insurance – The County pays property insurance for the Center ranging from $600,000 to $800,000 per year.

Other – Other expenditures include County-wide cost allocation charges, professional services, ground maintenance, and other miscellaneous costs ranging from $800,000 to $1.4 million per year.

As shown in Table 4 below, combining the costs incurred by Broward County with the net profits reported by SMG results in net Center losses for each of the fiscal years 2007 through 2011. The Center operating losses ranged from a low of $4.4 million in 2008 to a high of $5.9 million in 2007. The County also pays capital and debt service expenditures for the Center. Net Center Losses are funded by Tourist Development Taxes (TDT).

Table 4 – Broward County Convention Center Fund (Fund 1100)

2007 2008 2009 2010 2011

Net SMG Revenue (From Table 3) 513,358 $ 1,568,871 $ 532,611 $ 420,246 $ 18,075 $ Less SMG Compensation (Mgt & Incentive Fee) (448,544) (462,001) (475,861) (444,949) (438,813)

Net Revenue from SMG Operations 64,814 1,106,870 56,750 (24,703) (420,738) Other Non-SMG Revenue (interest income, etc.) 661,555 700,531 845,441 165,497 464,007

Net Operating Revenue 726,369 1,807,401 902,191 140,794 43,269

Salaries & Benefits 1,139,619 1,095,712 1,184,255 1,176,902 1,212,931 Marketing and Event Support Services 2,932,376 3,193,994 2,786,707 2,820,020 1,727,952 Security Services 435,025 438,244 355,646 280,496 281,472 Purchased Insurance 739,656 624,635 803,171 754,855 619,495 Cost Allocation Chargeback 95,570 137,520 192,410 229,880 139,050 Professional Services 139,856 114,696 118,736 107,211 82,600 Ground Maintenance 159,659 175,646 173,159 181,275 205,456 Payments To Other County Funds 220,272 231,833 228,902 237,608 201,183 Miscellaneous Expense 770,926 237,752 98,148 169,542 161,295

Operating Expenses 6,632,959 6,250,032 5,941,134 5,957,789 4,631,434

Net Center Loss (5,906,590) (4,442,631) (5,038,943) (5,816,995) (4,588,165) Tourist Development Tax Subsidy 5,906,590 4,442,631 5,038,943 5,816,995 4,588,165 Net Center Loss After Subsidy - - - - -

Broward County Convention Center (Fund 1100) Compiled Statement of Revenues and Expenditures (Adjusted)

Fiscal Years 2007 - 2011

Source: Broward County Financial Reporting System adjusted by the Office of the County Auditor


Compliance Review

Findings

Finding 1 – The CVB relinquished custody and control of public funds to SMG resulting in unnecessary risk.

SMG retained $3 million due to the County

Article 5.1 of the agreement with SMG states “Firm shall pay COUNTY the amount of Three Million ($3,000,000) (“Capital Investment”) no later than September 30, 2010 to be used by COUNTY toward the funding of projects designed to achieve LEED EB Silver certification.” Accordingly, the Broward County Office of Management and Budget included the $3 million as a budgeted revenue in the supplemental Fiscal Year 2010 Budget.

SMG did not pay $3 million to Broward County as required by the contract. Instead, SMG retained the money in an SMG bank account.

It is important to note the $3 million was not reflected as an asset (e.g. a receivable) in the County’s accounting system or financial statements. CVB management has stated that the money from the account was used to fund capital improvements to the Center or was returned to the County.

The CVB advanced $2.5 million to SMG outside of the contract and contrary to County policy.

The CVB advanced $2.5 million to SMG representing the balance of anticipated expenditures for capital improvements to the Center.

Per Section 7.2 of the agreement, the County provides monthly advances to SMG equal to a proportion of the annual operating budget of the Center. However, the contract does not provide for advances of capital improvements which are not included in the annual operating budget. Furthermore, the County’s Internal Control Handbook (ICH) states that “Payments in advance of the receipt of goods or services violate the pre-audit requirement of the Administrative Code and the constitutional sanction against the extension of credit.”7

Contrary to the County policy against advance payments and outside of the contract, the contract administrator processed payment requests through the County’s Accounting Division based on memoranda from SMG requesting payment (in lieu of actual invoices). Furthermore, to facilitate the payment, the contract administrator signed documents indicating that the goods and services were received prior to actual receipt.

7 Volume 6 “Accounting, Payroll and Tangible Property Procedures”, Chapter 3 “Payment Process”, Section C1 “Advance Payments”.


Compliance Review

As of September 30, 2011, $1.4 million of County funds held by SMG remained unspent.

At the CVB’s direction, SMG expended the monies among six groups of capital improvement projects at the Center. Table 5 below provides a summary of the County funds retained by and advanced to SMG for the capital improvements. As of September 30, 2011, $4.1 million had been expended leaving $1.4 million remaining unspent.

Table 5 – Summary of Capital Advances Held by SMG Expended

by SMG Balance

Date Amount

n/a* 3,000,000 $

11/12/2009 500,000 3,500,000 $ 2,399,729 $ 1,100,271 $

2 Chillers 8/16/2010 900,000 903,744 (3,744) Chiller replacements 3 Electronic Marquee 8/16/2010 200,000 4,257 195,743 Legal and engineering services for permitting of electronic marquee.

4 Curtain Wall Frame Enhancements

7/27/2011 470,000 336,295 133,705 Framework supporting the glass entranceway and windows.

5 Various Capital Improvements

10/12/2009 150,000 149,931 69

Storm drain improvement, fuel tank replacement, asphalt repair, engineering and consulting services (design of curtain wall improvements, land survey for hotel site, design of courtyard fountain improvements), meeting room and event signage system, other miscellaneous repairs and improvements.

6 Various Capital Improvements

2/14/2011 300,000 298,291 1,709

Engineering services (Fire connection relocation), Property Appraisal Services related to hotel site development, Sidewalk repair, Roofing repair, Web filter, dishware, damper replacement (component of climate control system), kitchen ceiling tile, ballroom upgrade, Epoxy flooring improvement, other miscellaneous repairs and improvements

Total 5,520,000 $ 4,092,247 $ 1,427,753 $

Retained / Advanced to SMG

As of Sept. 30, 2011 Description of Expenditures Detail

1 Various Greening Projects

Various greening projects consisting of landscaping, HVAC, electrical, and plumbing improvements as well as consulting and LEED certification services

Source: Prepared by the Office of the County Auditor based on County disbursement records and SMG expenditure details. *Capital contribution retained by SMG

According to CVB staff, the remaining balance of $1.4 million was returned to the County and/or spent in fiscal year 2012.

The County also advances operating funds to SMG and SMG collects and retains certain Center revenues.

Section 7.2 of the contract specifies that monthly operating expenses are paid in advance by the County to SMG. Accordingly, during fiscal year 2011, the CVB advanced $6.2 million in operating funds to SMG. In addition, SMG collects and retains certain Center revenues. During fiscal year 2011, SMG retained approximately $2 million in Center revenues collected from customers. As a result, SMG held public funds at the end of each month in fiscal year 2011.These balances ranged from approximately $1.4 million to $4.4 million not including capital advances described above and customer deposits. At the end of the year, SMG prepared a reconciliation and reported approximately $2.5 million due to the County which included unexpended advances, unremitted revenues, Center profits, and other transactions.


Compliance Review

These balances indicate that operating advances established by the contract may be unnecessary. Regardless, the cost of working capital should be borne by the management company as is consistent with other management agreements within the County. Establishing payment on a reimbursable rather than advance basis also fosters improved internal controls for the review and approval of expenditures as each payment request must include supporting documentation.

In addition, the current practice of SMG retaining certain center revenues violates section 7.3.1 of the Agreement which requires collected revenues to be deposited into a Broward County account no later than the first business day of each month immediately following receipt.

Relinquished custody and control of public funds creates unnecessary risk

The above sections cite violations of contract provisions and County policy relative to handling, custody and control of public funds. Most importantly, however, is the potential risk these practices create for the County.

Although management has represented the retained and advanced funds were ultimately used for County purposes or returned to the County and we found no indication of misappropriation, maintaining the funds in the name and under the control of SMG created unnecessary risk of loss to the County in the event of financial failure of SMG or the depository bank.

Chapter 280, Florida Statutes, establishes a public depository program design to protect public deposits above the Federal Deposit Insurance Corporation (FDIC) limits and requires public funds to be secured within a qualified public depository. The deposit of public funds in the name of SMG precludes the protection afforded by the public depository program.

Finding 2 – Procurement of certain capital improvements through SMG violated the County’s procurement policy and may have conflicted with State Statute.

In fiscal years 2010 and 2011 the County’s contract administrator directed SMG to perform the six capital improvement projects at the Center shown in Table 5 on page 12. The improvement projects were not in the scope of the management services agreement with SMG; therefore, the procurement of these improvement projects violated the County’s competitive procurement policy.8 In addition, the procurement of capital improvement projects by the County are governed by Section 255.20 Florida Statutes, which requires competitive award of each project estimated to cost more than $300,000. It is not clear if the method of award of these projects by SMG complied with statutory requirements.

8 Administrative Code of Broward County, Chapter 21, Operational Policy, Procurement Code Finance and Administrative Services


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Failure to follow County procurement policies subjects the County to potential risks including non-competitive pricing and potential legal challenges.

Finding 3 – Certain capital improvements made by SMG have not been properly accounted for within the County’s financial system.

In reviewing the capital improvement projects shown in Table 5 on page 12 we noted the following accounting errors and omissions:

$3 million of Greening projects paid for from monies held by SMG were not recorded as capital assets in the Fixed Asset Module of the County’s Financial Reporting System. Apparently the Accounting Division was not aware of the capital expenditure because the projects were paid from monies held by SMG.

$300,000 in capital improvements in fiscal year 2011 was coded in error as an operating expenditure rather than a capital expenditure.

$150,000 in capital improvements in fiscal year 2010 was recorded as a single line item labeled “roof repair” although it consists of several unrelated capital improvements.

Another $500,000 for various greening projects was entered as a single line item labeled “greening projects;” however, within a sample of six vendor invoices to SMG totaling $337,996, we identified a $10,484 purchase of two Dell Poweredge R510 Servers and $22,838 purchase of a 42-inch wall mounted touch screen monitor and software. These items were not appropriately identified, separately recorded or asset-tagged for accounting, depreciation and tracking.

Failure to record or properly identify recorded assets in the County’s financial management system precludes the County’s ability to track and physically verify the location and existence of the assets and undermines the accuracy and reliability of the financial system. In the example above, the various “greening projects” are collectively grouped as building improvements and depreciated over 20 years in the financial system; however, the individual components included computer servers and software which should be depreciated over a shorter period.

Finding 4 – Documents supporting Center operating costs are not adequately reviewed or retained by the County.

Our review disclosed that CVB staff do not adequately review and approve the documentation supporting the Center operating costs. Based on our review and discussion with CVB staff, it appears CVB staff rely on the annual reconciliation of


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revenues and expenditures by SMG and the annual audit report on the accounts maintained by SMG. This reliance is not sufficient to ensure that all expenditures by SMG are for an approved public purpose. The annual independent audit is not designed to provide assurances that all transactions are in accordance with the contract or legal requirements. Further, because an audit involves sampling and materiality considerations it is not a replacement for sound contract administration. We also found that SMG, rather than the County, maintains the records and supporting documentation for expenditures incurred in Center operations .

Finding 5 – Financial reports for the Center are fragmented and do not clearly present the actual results of operations.

Clear and complete presentation of the Center’s financial performance is necessary for adequate management review and decision making.

We found that financial reporting on Center operations was fragmented and key financial reports do not provide a clear picture of the results of operations:

SMG Audited Financial Statements The SMG Audited Financial Statements properly reflect the results of the Center accounts managed by SMG. These statements do not include additional expenditures incurred by the County in the operations of the Center, such as SMG management fees, salaries and benefits of County employees, marketing and event support services, security services, property insurance, ground maintenance, etc. For example, in fiscal year 2011, the SMG Audited Financial Statements reported a profit of $18,075 that was distributed to Broward County; however, as shown in Table 4 on page 10, the Center actually performed at a net loss, before capital and debt service of $4.6 million.

CVB Center Budget Although the “Section Summary” of the CVB Center Operations Budget does include all expenditures and account groupings for the Center, the summary presentation does not clearly present Convention Center operations.

The “Performance Measures” section of the CVB Center Operations Budget reflects the profitability reported by SMG but not the additional expenditures incurred by the County. For example, the performance measures in the 2011 Adopted Budget forecasted a net income of $16,281 which is comparable to actual results of $18,075 reported by SMG but not comparable to the $4.6 million net loss, before capital and debt service. Like the SMG Audited Financial Statements, the “Performance Measures” section of the CVB Budget provides only a partial view of the full costs of operating the Center.


Compliance Review

County Audited Financial Statements The Center’s financial performance is combined in the County’s General Fund in the County’s annual financial statements. However, because the Center’s activity is not separately presented, the County’s financial statements do not present the results of operations for the Center.

Fragmented and unclearly presented financial reporting restricts management’s ability to properly benchmark and analyze financial performance, reduces decision-making ability of policy-makers and limits the public’s ability to evaluate the use of public funds.

Finding 6 - Center transactions are not accurately recorded in the County’s financial system.

In accordance with Generally Accepted Accounting Principles (GAAP), revenues and expenditures should be accurately recorded within the appropriate account in the period the transaction occurs.

Center revenues and expenditures are not accurately recorded within the Convention Center Fund (Fund 1100) of Broward County Financial System and do not reconcile to the SMG Audited Financial Statements. During our review, we noted multiple instances of misstated revenue and expenditure accounts in each of the five years reviewed. Table 4 –“Broward County Convention Center Fund (Fund 1100)” on page 10 contains corrections and adjustments, shown in Appendix A on page 19, required for accurate presentation.

The following examples highlight a selection of typical corrections, we found:

Marketing expenditure and revenues were understated. In fiscal year 2010, the County directed SMG to perform $2,820,020 in Marketing and Event Support Services as shown in Table 4 on page 10. However, the County only paid $950,000 to SMG to perform these services and SMG deducted the remaining $1,870,020 from revenues remitted to the County in fiscal year 2011. Therefore, the Marketing and Event Support Services expenditure account for 2010 and Revenue account for 2011 were understated by $1,870,020.

Gate Security services expenditure and revenues were overstated. In fiscal year 2010, the County advanced $400,000 to SMG to perform gate security which cost $280,496 as shown in Table 4 on page 10. SMG remitted the difference of $119,504 to the County in fiscal year 2011. Therefore, the Gate Security Services expenditure account for 2010 and Revenue account for 2011 were overstated by $119,504.

Ground Maintenance expenditure and revenues were understated. In fiscal year 2010, the County directed SMG to perform ground maintenance which cost of $181,275 as shown in Table 4 on page 10. However, the County did not pay


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SMG to perform the services and SMG deducted the $181,275 from revenues remitted to the County in fiscal year 2011. Therefore, the Ground Maintenance expenditure account for 2010 and Revenue account for 2011 were understated by $181,275.

Each of the examples discussed above, as well as other instances, occurred in each of five fiscal years reviewed.

The corrections are primarily the result of unrecorded amounts receivable from and payable to SMG. Each year, SMG prepares a reconciliation identifying amounts due to and from the County; however, the County does not record these amounts. Instead, the County records revenues and expenditures based on actual amounts received and disbursed, but does not account for additional amounts receivable or payable.

This form of “cash-based” accounting is not in accordance with GAAP. Inaccurate accounting limits management’s ability to properly benchmark and analyze financial performance.

Recommendations

We recommend the Board of County Commissioners direct the County Administrator to take all necessary steps to ensure the issues identified in this report are addressed, to include:

Issues within the CVB

1. Establishing control over county funds by taking necessary steps to end advance payments to SMG and ensure that SMG submits all collected revenues to the County each month.

2. Establishing effective contract administration over the SMG contract to include review and approval of all expenditures paid for with County funds and retention of documentation supporting financial transactions.

3. Identifying and properly recording amounts due to and from SMG at year end and reconciling recorded amounts within the County’s financial system to the SMG Audited Financial Statements.

4. Ensuring the annual adopted budget clearly reflects the full cost of Center operations.


Compliance Review

5. Presenting to the Board, an annual report of Center financial operations to include the full costs of operations incurred by the County with expenditure detail.

Issues relative to County-wide internal controls

6. Ensuring the Accounting Division independently reviews all payment requests to ensure compliance with contractual provisions, county policies, procedures and state law.

7. Requiring supporting documentation for all expenditures of public funds be retained under County control.

8. Establishing effective procedures for the identification and proper accounting of County transactions including advances (receivables) and capital improvements.


Appendix 1

Original Adjustment Adjusted Original Adjustment Adjusted Original Adjustment Adjusted

Net SMG Revenue 861,534 $ (348,176) $ 513,358 $ 728,189 $ 840,682 $ 1,568,871 $ (1,611,442) $ 2,144,053 $ 532,611 $ Less SMG Compensation (Mgt & Incentive Fee) (448,544) - (448,544) (462,001) - (462,001) (475,861) - (475,861)

Net Revenue from SMG Operations 412,990 (348,176) 64,814 266,188 840,682 1,106,870 (2,087,303) 2,144,053 56,750 Other Non-SMG Revenue (interest income, other) 661,555 - 661,555 700,531 - 700,531 845,441 - 845,441

Net Operating Revenue 1,074,545 $ (348,176) $ 726,369 $ 966,719 $ 840,682 $ 1,807,401 $ (1,241,862) $ 2,144,053 $ 902,191 $

Salaries & Benefits 1,139,619 - 1,139,619 1,095,712 - 1,095,712 1,184,255 - 1,184,255 Marketing and Event Support Services 951,650 1,980,726 2,932,376 996,989 2,197,005 3,193,994 986,424 1,800,283 2,786,707 Security Services 463,650 (28,625) 435,025 472,700 (34,456) 438,244 468,175 (112,529) 355,646 Purchased Insurance 739,656 - 739,656 624,635 - 624,635 803,171 - 803,171

Cost Allocation Chargeback 95,570 - 95,570 137,520 - 137,520 192,410 - 192,410 Professional Services 139,856 - 139,856 114,696 - 114,696 118,736 - 118,736 Ground Maintenance 211,590 (51,931) 159,659 - 175,646 175,646 - 173,159 173,159 Payments To Other County Funds 220,272 220,272 231,833 231,833 228,902 228,902 Miscellaneous Expense 1,876,843 (1,105,917) 770,926 1,293,880 (1,056,128) 237,752 1,006,746 (908,598) 98,148

Operating Expenses 5,838,706 $ 794,253 $ 6,632,959 $ 4,967,965 $ 1,282,067 $ 6,250,032 $ 4,988,819 $ 952,315 $ 5,941,134 $

Net Convention Center Profit (Loss) (4,764,161) $ (1,142,429) $ (5,906,590) $ (4,001,246) $ (441,385) $ (4,442,631) $ (6,230,681) $ 1,191,738 $ (5,038,943) $

Brow ard County Convention Center (Fund 1100) Compiled Statement of Revenues and Expenditures (Adjusted)


2007 2008 2009

Source: Broward County Financial Reporting System adjusted by the Office of the County Auditor.


Appendix 1 Continued

Original Adjustment Adjusted Original Adjustment Adjusted

Net SMG Revenue (749,729) $ 1,169,975 $ 420,246 $ (636,339) $ 654,414 $ 18,075 $ Less SMG Compensation (Mgt & Incentive Fee) (444,949) - (444,949) (438,813) - (438,813)

Net Revenue from SMG Operations (1,194,678) 1,169,975 (24,703) (1,075,152) 654,414 (420,738) Other Non-SMG Revenue (interest income, other) 165,497 - 165,497 464,007 - 464,007

Net Operating Revenue (1,029,181) $ 1,169,975 $ 140,794 $ (611,145) $ 654,414 $ 43,269 $

Salaries & Benefits 1,176,902 - 1,176,902 1,212,931 - 1,212,931 Marketing and Event Support Services 950,000 1,870,020 2,820,020 493,965 1,233,987 1,727,952 Security Services 400,000 (119,504) 280,496 400,000 (118,528) 281,472 Purchased Insurance 754,855 - 754,855 619,495 - 619,495

Cost Allocation Chargeback 229,880 - 229,880 139,050 - 139,050 Professional Services 107,211 - 107,211 82,600 - 82,600 Ground Maintenance - 181,275 181,275 - 205,456 205,456 Payments To Other County Funds 237,608 237,608 201,183 201,183 Miscellaneous Expense 933,620 (764,078) 169,542 792,260 (630,965) 161,295

Operating Expenses 4,790,076 $ 1,167,713 $ 5,957,789 $ 3,941,484 $ 689,950 $ 4,631,434 $

Net Convention Center Loss (5,819,257)$ 2,262 $ (5,816,995) $ (4,552,629) $ (35,536) $ (4,588,165) $

Brow ard County Convention Center (Fund 1100) Compiled Statement of Revenues and Expenditures (Adjusted)


20112010

Source: Broward County Financial Reporting System adjusted by the Office of the County Auditor.
