Office of Inspector General

Final Report

CAO IMPLEMENTS STRONGER MANAGEMENT CONTROLS OVER SKENTERIS’ OPERATIONS, ADDITIONAL IMPROVEMENTS WOULD BE BENEFICIAL

MEMORANDUM

TO: James M. Eagen III

Chief Administrative Officer

FROM: Steven A. McNamara

Inspector General

DATE: December 20, 2004

SUBJECT: Audit Report - CAO Implements Stronger Management Controls Over Skenteris’ Operations, Additional Improvements Would Be Beneficial

(Report No. 04-CAO-09)

This is our final report on the review of food services in the Ford House Office Building. The objectives of this audit were to determine whether the contractor, Skenteris, complied with the financial terms of the contract and to assess the adequacy of the financial controls over the food service operation. In this report, we identified where improvements can be made to internal controls to assure that the House receives its full share of revenues due and made a specific recommendation for corrective actions.

In response to our October 18, 2004 draft report, your office concurred with our finding and recommendation. The November 12, 2004 management response is incorporated in this final report and included in its entirety as an appendix. The corrective actions taken by your office are appropriate and should adequately respond to the recommendation. This issue is considered closed.

We appreciate the courtesy and cooperation extended to us by your staff. If you have any questions or require additional information regarding this report, please call me or Jim Cornell at (202) 226-1250.

cc: Speaker of the House

Majority Leader of the House

Minority Leader of the House

Chairman, Committee on House Administration

Ranking Minority Member, Committee on House Administration

Members, Committee on House Administration

CAO IMPLEMENTS STRONGER MANAGEMENT
CONTROLS OVER SKENTERIS’ OPERATIONS, ADDITIONAL IMPROVEMENTS WOULD BE BENEFICIAL

I. INTRODUCTION

Summary of Results

The food service concessionaire for the Ford House Office Building is in substantial compliance with the financial terms of its contract with the House.  For example, our audit results demonstrated that concession payments have supporting documentation and are submitted in the proper amount and are generally made in a timely manner.  To improve the concession payment process, the CAO has, since we last reported in 1998, implemented initiatives such as (1) requiring concession payments to be sent directly to the Office of Finance (Finance),

(2) requiring Finance to record and deposit all checks received within 24 business hours of receipt, (3) having the concessionaire maintain a scheduling log and maintain documentation on catering events, and (4) requiring the concessionaire to record its catering sales separately from food sales.  However, the House and Skenteris Family, Incorporated (Skenteris) could benefit from additional improvements to controls over catering operations.

During the audit we found that in some instances receipts from catering had been delayed in posting or not posted at all. Without effective controls over catering sales the House is at risk that concessionaires may not comply with the full requirements, terms, and conditions of their contracts.

Background

The House restaurant system is composed of various food services operated in the Capitol and the House Office Buildings (HOBs). Skenteris has been under contract to provide food services to the Ford HOB since September 1994. It was awarded a new 5-year contract in July 1999, which included 3 two-year option periods that, if fully exercised, would extend the contract through September 2010. The facilities covered by the contract include the cafeteria, carry-out, and in-house catering operations located in the Ford HOB. The current contract calls for Skenteris to pay the House 3˝ percent of its gross sales. For CY 2003, gross sales totaled $1,240,724.30, resulting in a fee of $43,425.35.

To monitor the contract, the Chief Administrative Officer (CAO) appointed a Contracting Officer Representative (COR) to ensure that Skenteris complies with the terms of their contract. The COR performs periodic checks of the concession, and receives and files monthly sales records from the concession operator. In addition, the COR is to ensure that the concession is operated in a professional manner, maintains cleanliness, records all sales, makes timely reporting of its sales, forwards its rental fee for concession space to the House on a monthly basis, and provides a yearly audited Schedule of Gross Receipts.

Objective, Scope, And Methodology

The objectives of this review were to determine whether the contractor, Skenteris, complied with the financial terms of the contract and to assess the adequacy of the financial controls over the food service operation. Specifically, our efforts were focused on whether the House had received the proper concession fee from Skenteris in a timely manner, and to assess whether Skenteris’ procedures ensured an accurate tabulation of monthly gross sales.

We examined the records of the Skenteris operation from October 2001 through March 2004. Furthermore, we interviewed CAO officials from the Office of Procurement (OP) and the Office of Contractor Management in addition to officers of Skenteris, and observed the Skenteris’ operations in order to gain an understanding of the operations of the restaurants within the Ford HOB. Our work was conducted during the period April 22, 2004 through June 10, 2004. This audit was conducted in accordance with Government Auditing Standards as implemented in the House Office of Inspector General policies.

Prior Audit Coverage

There have been two prior audit reports issued by the House Office of Inspector General that pertain to financial aspects of the House restaurant concessions.

Audit Report More Effective Contract Administration Needed In House Food Services (Report No. 98-CAO-07, July 20, 1998) found that the food service contractors were not in compliance with critical contract requirements. It further noted that Skenteris only remitted its fees when the COR requested payment. On average these payments from Skenteris were 17.7 business days late. The OIG recommended that the CAO reassign duties within what was then the Office of Food Services (OFS) to ensure that all fee checks were received by the House as stipulated in the contracts.

Audit Report Stronger Management Controls Needed Over House Food Service Contractor Operations (Report No. 98-CAO-08, July 20, 1998), found the food service contractors did not establish proper controls to provide reasonable assurance that revenues reported to the House were accurate. The OIG recommended the CAO establish appropriate management controls over their food service financial operations prior to awarding the contract, separately track and report revenues generated from catered events, and make available all books, records, and other supporting documentation for periodic, unannounced reviews by OFS and other House or contractor personnel supporting OFS.

II. RESULTS OF REVIEW

We found that the CAO has taken actions to improve the contract oversight of financial controls and contract compliance within the Skenteris operation since our first report in July 1998. Improvements include the development of a contract administration plan, a requirement for Finance to deposit concession checks within 24 hours, and maintenance by the contractor of complete and accurate accounting records. However, we identified where improvements can be made to internal controls. Without adequate controls, the House can not be assured that it received its full share of revenues due.

Concession Payments

Contractually, Skenteris is required to remit 3˝ percent of its monthly gross income to the House as its concession payment for operating the restaurant and carryout entities in the Ford HOB. Our objective was to verify whether Skenteris was paying the full amount of monthly concession payments to the House and doing so on a timely basis as stipulated in the contract. We reviewed a sample of monthly gross sales and concession payments reported during the period January 2002 through March 2004 and determined that Skenteris paid the full amount of concession fees due to the House, but was not always timely in making the required payment.

In 12 of these 27 months reviewed, Skenteris remitted its monthly payment early, on-time, or just one day late. CAO policy is to hold any payment received after 2:00 P.M. for deposit during the next business day. Because the records were not time stamped, we were unable to determine whether any of the 1-day late payments were received before or after 2:00 P.M. Therefore, we considered them to have been made in a timely manner. We determined the payments averaged four days late over this 27 month period. However, we found two occasions in which the delay in recorded payment by Skenteris was the result of House inaction, and one occurrence in which the payment had been misclassified.

Following the House’s Anthrax incident in the Fall 2001, House mail delivery to the Ford HOB was suspended. When it was resumed, a new process of irradiating all outside mail was established. This process resulted in mail delays. In addition to the mail delays, the CAO also failed to notify Skenteris that Finance had moved its offices from the Cannon HOB to the Ford HOB. Unaware of this move, Skenteris sent its payments to the Cannon HOB location, where the payment remained until it was realized that the payment had not been received by Finance. Removing these delays from our average delay calculation resulted in Skenteris’ monthly payment delay dropping to approximately two days late. This is a considerable improvement upon the 17.7 business days we reported in our 1998 audit report.

Catering Operations

In 1998 we reported that “House breakfast and luncheon meetings catered by Skenteris were not separately recorded or distinguishable from other food sales. Skenteris management did not maintain a scheduling log to track reservations or retain other documentation in support of sales revenues from catered events. Revenues from these activities were merely entered into the cash register as "food sales" and were not distinguishable as revenues generated from catering engagements. In addition, voided food sale transactions were not supported by voided sales receipts.” During our current review, we found that Skenteris now maintains a pre-numbered invoice tablet which it uses to record catering sales and maintain documentation related to catering events. Skenteris now enters each catering sale into the cash register as a catering sale, rather than a food sale, and voided food sale transactions are being reconciled at the end of each day. While improvements have been made, further improvement is necessary.

Skenteris only records catering events into the cash register when the event is paid in full. For some events, Skenteris must wait a few weeks before they receive payment. Payment comes in various forms: check, credit card, or electronic funds transfer. We found that in some instances Skenteris posted the catering event payment into the cash register days after payment had been received. Furthermore, in one instance we were not able to determine whether a catering payment received had been entered into the cash register or had been entered improperly as a food sale.

We selected a sample of four catering payments from the nine total events recorded by Skenteris between January 2003 and March 2004. In our sample, one event for $255 could not be traced to a cash register receipt or a daily sales report. The three other events were recorded into the cash register either two or nine days after payment was received. One of the nine day delayed payments was received by electronic funds transfer, so Skenteris may not have been aware that they had received payment. Skenteris is unsure of what happened with the transaction that we could not trace. They believe that either they became involved with doing another task running the restaurant facility and never entered it into the cash register or they may have made a cash register keyboard entry mistake and entered the sale as an open item which is used to record sales of daily specials offered to their patrons.

Recommendation

We recommend that the Chief Administrative Officer develop a contract management procedure that would have Skenteris notify the COR of scheduled catering events soon after they are scheduled; require Skenteris to record catering receipts into the cash register as ‘catering sales’ the same day payment is received; and require the COR to follow up to ensure payment on catering events has been recorded properly and timely.

Management Response

On November 12, 2004, the Chief Administrative Officer concurred with the finding and recommendation contained in this report. On July 12, 2004, the Office of Procurement issued contract modification #006 which requires: (1) Skenteris to notify the Contracting Officer Representative (COR) of scheduled catering events soon after they are scheduled; (2) catering sales to be recorded on a same day basis; and (3) the COR follow up to ensure that payment on catering events has been recorded properly and timely.

Office of Inspector General Comments

The action taken by the Chief Administrative Officer is responsive to the issue identified. The action taken is adequate and this issue is considered closed.

EXHIBIT