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City auditor questions financials of convention center service provider

Wednesday, April 27, 2011 by Josh Rosenblatt

Once again, the city’s Convention Center is the focus of urgent questions from the City Auditor’s Office.


On Tuesday, members of the City Auditor’s Office told the Council Audit and Finance Committee that the Convention Center can’t assure the validity of the net profit statement they receive each year from Aramark, the company responsible for the Convention Center’s catering and concession services.


Members had numerous questions after hearing Tuesday’s report. Because neither Aramark nor the Convention Center Department have been complying with contractual and city requirements for internal controls of their contract, the city auditor’s office says they can’t confirm that the $1.7 million the city received last year from concession sales is an appropriate reimbursement.


Under the terms of a 1997 agreement, the city receives 100 percent of Aramark’s net profits from catering and concession services at the convention center. In return, Aramark receives a fixed fee and is eligible for an annual productivity reward. In FY2010, the fixed fee retained by Aramark was reported at $400,000 and the productivity reward as approximately $21,000.


In addition, the contract requires Aramark to submit an annual certified, independent audit of its operations to the Convention Center by April 30 of each year. The city auditor’s office reported yesterday that Aramark has not submitted any such audits since 2003.


City officials discovered this oversight after a city contract with independent financial auditor R. Mendoza & Co. fell apart. The city engaged Mendoza in 2008 to conduct an audit of Aramark starting from FY2006. After two years of fieldwork, however, Mendoza declared that they did not have enough information to issue a final report and withdrew from their contract with the city.


“One of the issues they had from the onset was there was no accounting system that was generating statements, so there was a lot of time spent generating an accounting system to try and re-create transactions at Aramark’s corporate level,” Deputy Chief Financial Officer Jeff Knodel told the committee yesterday. “They were, in essence, getting information from different systems and compiling the financial statements (themselves).”


The city has since contracted with MHM to conduct an audit of the company’s services for the city. That audit is ongoing.


According to the report presented yesterday, the Convention Center staff does “not perform reviews of Aramark’s submitted monthly bank statements, financial statements and accompanying support, and balance sheets” or verify “whether a third party conducted the customer satisfaction surveys on which” Aramark’s annual productivity reward is based.


In addition, the report states that “Aramark has not provided to (the Convention Center) all financial information required by the contract.” Because of that lack of information, the department “cannot ensure that contract requirements are adhered to and that the city is receiving the appropriate funds due per contract.”


Assistant City Manager Rudy Garza told the committee that there was more than enough blame to go around. “We dropped the ball. There’s no doubt about that. … It’s not excusable,” said Garza. “The fact that we don’t have audited statements at this point is also not excusable. And it’s not all Aramark’s fault. Our convention center management and myself are responsible for making sure that happens.”


As the city waits for the results of the MHM audit, city staff offered recommendations yesterday to help repair the broken system of accounting and oversight. In response to an audit recommendation that the department “adopt an organizational structure and assign job duties in such a manner as to ensure an appropriate segregation of duties and delegated authorities,” Convention Center Department Director Mark Tester told the committee that Knodel will now be in charge of contracting responsibilities. Convention Center Assistant Director Darin Upchurch, meanwhile, will be the key administrator of the Aramark contract.


Asked after the meeting why Aramark has been unable to provide financial records for the last five years, City Auditor Kenneth Mory told In Fact Daily, “Aramark hasn’t made any claims to us. And the concern is there aren’t any records. Mendoza was not willing to issue a report and was forced to withdraw from it. That’s usually a risk indicator, so that concerned us.”


Despite that concern, however, Knodel told the committee that Mendoza had detected “no evidence of fraud” during the course of their audit. “It was purely the mechanics of putting the financial statements, the accounting system reports together” that caused Aramark trouble, said Knodel.


The city is in the final year of its 1997 contract with Aramark and has the option of two more extensions, totaling five years.


However, said Garza, “the results of this audit will certainly play a major role in our decision on whether or not we renew that option.” Asked when the city might receive a report from the new audit firm, Garza said perhaps within the next month or two.


In 2007, then City Manager Toby Futrell fired Convention Center Director Bob Hodge after he admitted falsifying reports that helped determine whether Convention Center employees — including the director — would get a bonus. The District Attorney’s Office took over the investigation from the City Auditor’s Office.


Among the misdeeds discovered but never prosecuted in 2007 was the misuse of the Convention Center’s equipment acquisition, repair, and replacement fund. In 2006, Hodge approved spending more than $11,000 from that fund for a retirement party for then Deputy City Manager Joe Canales.  


Aramark was the Convention Center caterer at that time, too.

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