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CDC - Item 4A - Glendon Hotel - Independent Accountant's Report on Applying Agreed-Upon Procedures Between the Rosemead Inn Hotel Partners, LLC and The Rosemead Community Development CommissionROSEMEAD COMMUNITY DEVELOPMENT COMMISSION STAFF REPORT TO: HONORABLE CHAIRMAN AND COMMISSIONERS FROM: JEFF ALLRED, EXECUTIVE DIRECTOR NE ' DATE: MAY 25, 2010 SUBJECT: GLENDON HOTEL-- INDEPENDENT ACCOUNTANT'S REPORT ON APPLYING AGREED-UPON PROCEDURES BETWEEN THE ROSEMEAD INN HOTEL PARTNERS, LLC AND THE ROSEMEAD COMMUNITY DEVELOPMENT COMMISSSION SUMMARY On July 2, 2008, the Rosemead Community Development Commission (Commission) acquired the Rosemead Inn located at 8832 Glendon Way. On August 28, 2008 the Commission approved a contract with the Rosemead Inn Hotel Partners, LLC (Operator) as the operator of the hotel and also approved an Operating Agreement (Agreement) between the Operator and the Commission. Included in the terms of the Agreement is a provision that allows the Commission to examine the financial records of the hotel operation. On March 9, 2010 the Commission directed staff to engage the Commission's auditors, Mayer Hoffman McCann, P.C., to examine the financial records of the hotel operations and prepare an Independent Accountant's Report on Applying Agreed-Upon Procedures (Report). An Independent Accountant's Report on Applying Agreed-Upon Procedures is not an audit but is a review of compliance with requirements of the Agreement and the financial impact of any non-compliance that may be discovered. The Report can be found attached to this staff report. The Agreement with the hotel Operator will be terminated in June of 2010 by mutual consent of the parties. At this point in time, the Commission may pursue two options: 1) Receive and file the Report and take no further action against the Operator to recover the money found to be owed to the Commission; or, 2) receive and file the Report and direct staff to collect the money found to be owed to the Commission by any means used in the course of normal business practices. STAFF RECOMMENDATION It is recommended that the Commission receive and file the Independent Accountant's Report on Applying Agreed-Upon Procedures and direct staff as to any further actions to be taken. APPROVED FOR COMMUNITY DEVELOPMENT COMMISSION AGENDA: GM NO. Community Development Commission Meeting May 25, 2010 Paoe 2 of 2 ANALYSIS The Report has found that the Operators were non-compliant with several requirements of the Agreement resulting in non-payment to the Commission of $55,384. As of this date the Operator has not been given the final copy of the Report. Following the Commission's review of the Report, a copy of the document will be forwarded to the Operator. In an April meeting with the Operator the City's Finance Director informed them of the initial findings of the accountant, which showed that the Commission was owed $63,475. Following that meeting the Operator presented additional expense documentation to the accountant and the finding was reduced by $8,091. Collection of additional money found to be due the Commission is pending receipt of the final Report by the Operator. PUBLIC NOTICE PROCESS This item has been noticed through the regular agenda notification process. Submitted by: Steven Brisco Finance Director Attachment: Independent Accountant's Report on Applying Agreed-Upon Procedures Mayer Hoffman McCann P.C. An Independent CPA Firm 2301 Dupont Drive, Suite 200 Irvine. California 92612 949-474-2020 ph 949-263-5520 fz www.mhm-pc.com Rosemead Community Development Commission 8838 East Valley Boulevard Rosemead, California INDEPENDENT ACCOUNTANT'S REPORT ON APPLYING AGREED-UPON PROCEDURES We have performed the procedures enumerated below, which were agreed to by the management of the Rosemead Community Development Conmtission ("Commission"), solely to assist the Commission in reviewing the Rosemead Inn Partner's ("Hotel") compliance with the Rosemead Inn Hotel Operating Agreement as well as the Hotel's compliance with the Rosemead Community Development Commission's Municipal Code 3.16 for Transient Occupancy Tax ("Ordinance') for the period of January 1, 2009 through March 31, 2010. The Hotel's management is responsible for maintaining the Hotel's accounting records and other documentation. This agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the management of the Commission. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose. The procedures performed and the results of those procedures are as follows: 1) We obtained the agreement between the Commission and the Rosemead Inn Hotel's Partners, LLC, in effect for the period January 1, 2009 through March 31, 2010 for the purpose of obtaining an understanding of the terms of the agreement. -2) We obtained a schedule of invoices supporting the $100,000 advance payment from the Commission for the for the renovations to the hotel and tested for the following: a) The schedule was mathematically accurate b) The vendor invoices supporting the amounts were sufficiently detailed and were for renovation expenses c) The related checks cleared the bank statement Results: The hotel provided a schedule of claimed renovation expenses that totaled $109,993. We were not provided any documentation for $24,878 of expenses reported on the schedule. For an additional $22,037 of questioned expenses, we were provided invoice detail but were not able to verify that a check had been written to pay the invoice because the check number indicated on the invoice did not clear per the bank statement. There was an additional $1,478 of expenses that did not appear to be related to the renovation. In many cases, checks were not written to vendors directly, but instead written to "Cash". As a result, we were only able to verify that the Hotel spent $61,335 on the renovation, resulting in $38,665 payable back to the Commission of the original $100,000 advance. See additional details at EDIT A. Rosemead Community Development Commission Page 2 of 3 3) We obtained each of the monthly financial reports submitted to the Commission to ensure the reports included the bank reconciliation, income statement, and budget to actual comparison report, as required by the agreement. Results: The Hotel did not provide total revenues for January, April, or May of 2009 and did not provide a detail of expenditures for January through March of 2009. Additionally the Hotel did not provide any basil reconciliations or budget to actual comparisons for the entire period under review. 4) We traced gross receipts reported on each monthly report to deposits recorded in the Hotel's bank account. Results: Total deposits reflected in bank statements exceeded that which was reported to the Commission by $36,522. See EXHMIT B for variance by month. 5) We traced disbursements reported on each monthly report to disbursements recorded in the Hotel's basil account. Results: Total disbursements reflected in the bank statements exceeded that which was reported to the Commission by $1,858. See E_-XH03IT B for variances by month. - 6) We reviewed the type of expenses reported on the monthly report to see if they appeared to be allowable per the agreement. Results: We noted that the Hotel had included management fees as an expense in the monthly report. Management fees are only allowed per the agreement in months where the hotel has a profit. The management fees should not be included in the calculation of profit. As such, $4,500 has been removed from expenses in EXHBIT B. 7) We attempted to obtain supporting documentation for a sample of expenses reported on the monthly reports. Results: We were not provided any invoice detail for expenses reported on the monthly reports. The Hotel's management explained that Pmvroll Eipenses reported on the monthly reports are only an estimate based on an estimated hours worked. Actual amounts paid for payroll expenses could not be verified. Payroll Expenses reported on the monthly reports totaled $64,976. 8) We attempted to obtain federal or state tax returns for the calendar year to compare total revenues per the tax return(s) to the total revenue reported to the Commission. Results: Per hotel management, the 2009 Federal and State tax returns have not been filed. No support for tax filing extension was provided. 9) We reviewed the Rosemead Community Development Commission's Transient Occupancy Tax ("TOT") Ordinance and performed the following procedures: Rosemead Community Development Commission Page 3 of 3 a) We obtained the TOT Returns filed from January 1, 2009 through February 28, 2010, and tested for mathematical accuracy. b) We traced revenues reported on the TOT Returns to revenues reported on the monthly financial reports or other documentation to support revenue numbers. Results: The hotel did not file TOT returns for the first and third quarter of 2009. For the second and fourth quarters, the TOT returns were mathematically accurate. TOT returns did not agree with monthly revenue reports. Management informed the auditor that the system generated reports were incorrect and did not provide those reports to the auditors. Additionally, the Hotel did not provide any daily room revenue reports or room folios to substantiate room revenue. To determine room revenue, we calculated the amount using the deposits reflected in the bank statements. We were unable to determine if additional revenue had been collected but not deposited into the bank account. The Hotel under-reported $11,282 of revenues to the Commission, resulting in a payment due to the Commission of $1,382. Additionally, the payment for the fourth quarter of 2009 was not received until February 10, 2010, and therefore should have included a 10% penalty which was never paid. This results in an additional payment due to the Commission of $416.See EXHIBIT C for details. Summary of Amounts Owed Refund of renovation advance - due to Commission $ 38,665 Underpayment of Commission share of profits - due to Commission 14,650 Underpayment of Transient Occupancy Taxes - due to Commission 2,069 Total Due to Rosemead Community Development Commission 55 384 We were not engaged to, and did not, conduct an audit,.the objective of which would be the expression of an opinion on the accounting records. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of the management of the Rosemead Community Development Commission and the Rosemead Inn Partners and is not intended to be and should not be used by anyone other than those specified parties. Irvine, California May 6, 2010 EXHIBIT A Glendon Inn Hotel Schedule of Renmation Expenses January I, 2009 through March 31, 2010 (2)Nocheck (3)Support Reponedto (I)NO cleared did not contain Supported Cio' Documentation the bank sufficient detail Expenditures Exterior Jaime Silva - Landscape S 250 150 - - - Signime 1.412 372 - - 1,040 Evergreen Trash 400 - - - 400 Boom Lifi 745 - - - 745 Interior Benny Prince - Carpet 14.750 - - - 14.750 Philip Yu Carpet Install 4,350 - 2,350 - 2,000 Dunn Edwards Paint 4,706 - - - 4,706 Sand & paint 11.700 5 642 - - 6,058 Furniture 16.780 - - - 16780 International Trading - Linens 2,430 - 447 - 1983 Han Nine Plumbing & Repair 12,692 - 10,242 - 2.450 J-Boa Electrical 8 Repair 760 - - - 760 Master Sofa - Lobby Furniture 785 - 375 - 410 Lubbv Paint & Tile 350 350 CCTV & Sound 3,744 3,744 - - - Room TV's 380 - - - 380 West Coast Liq. - Beds/Room Sets 8,115 - 5,150 2,965 Pac. Lod__ing / Room Supplies 369 - - - 369 Furniture Trucking 95, - - 952 - Misc Materials 799 799 - - - Appliances 150 150 - - - Crvsml Promotion Room Kettles 456 - - - 456 Hotel Software 1,512 1.512 - - - RamonMartin - General Labor 6.752 6352 - - - Hiram Medrano - General Labor 5.277 5.277 - - - JacksonTile - Lobby 519 - - - 519 Bullet ProofRoofing-Jesus Cabo 275 - - - 275 Amech Building Supplies 117 - - - 117 Air Control AC Service 380 - - 112 268 Mehra Medrano-Accounting III - - 111 - West Coast Telephone 100 - - - 100 .AMCO Glass 300 300 - - - Hassan Knussaumi - Parts 25 25 - - - GoldenstmLinen 178 178 - - - Doling Home 1.728 - 704 - 1,024 Hicks PlumbineRooter 500 - - - 500 Dragon Fire Ent. 172 - - - 172 Martin Guzman - Framing 765 - 300 - 465 American Tex - Remote Control 149 149 - - - Cementum Const 2.264 - 2,264 - - Manress & Fum. Removal 1.795 1,795 Sub-oned 109.993 24.878 21832 1175 59.302 141 Additional expenses claimed -Ahmed Swrafi Reimbursement kl 1,707 - - 95 1,612 Ahmed Sairafi Reimbursement 630 - - 208 422 B & K Electric 182 - 182 - - B & K Electric 23 - 23 - - Sub-total 2.541 305 303 1033 Total S 112535 24.878 22,037 1,478 61.335 (1) The hotel could not produce anp support in the form of invoices. receipts, or timesh"is. (2) A. invoice was provided as support; however, there was no evidence that a check had been written because the check had not cleared the bank account. (3) ].,nice documentation was not detailed enough to determine ifthe expense was related to the renovation or the expense was for office supplies or other costs clearly not related to the renovation. (4) During the audit the hotel provided the auditors an updated schedule of renovaa[ion expenses: these costs represent items not included on the previoush' provided schedule. 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