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Audit Report Number 2006-05City of RichmondVirginia Performing Arts FoundationSpecial Audit of Pre-construction Disbursements Requisition Submittals fromDecember 2003 through August 2005Prepared byCITY AUDITORRichmond, VirginiaSubmitted toThe Honorable Members of City CouncilSeptember 23, 2005CONTENTSPageCity Auditor’s Report......................................................................................................................................................................22EXECUTIVE SUMMARY..................................................................................................................................................................55FINDINGS AND RECOMMENDATIONS.............................................................................................................................771. Pre-construction Requisition Activity Between December 2003 and August 2005($12,000,000 limitation).............................................................................................................................................772. Financial Reporting Requirements under City Ordinance 2005-136-79.....................1212 The Honorable Members of City CouncilRichmond City Audit CommitteeCity of Richmond, Virginia 23219 City Auditor’s Report SCOPE At the request of the City Council, the Auditor’s Office audited the disbursementssupporting the Requisition for Grant requests from the Virginia Performing ...

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Audit Report Num ber 2006-05 City of Richmond Virginia Performing Arts Foundation Special Audit of Pre-construction Disbursements Requis ition Submittals from Decem ber 2003 through Augus t 2005
Prepared by CITY AUDITOR Richm ond, Virginia
Submitted to The Honorable Members of City Council September 23, 2005
CONTENTS
Page
City Auditor s Report ...................................................................................................................................................................... 22
EXECUTIVE SUMMARY .................................................................................................................................................................. 55
FINDINGS AND RECOMMENDATIONS ............................................................................................................................. 77
1.  Pre-construction Requisition Activity Between December 2003 and August 2005
($12,000,000 limitation) ............................................................................................................................................. 77
2. Financial Reporting Requirements under City Ordinance 2005-136-79 ..................... 1212
  
City Auditor s Report  
    The Honorable Members of City Council Richmond City Audit Committee City of Richmond, Virginia 23219   SCOPE At the request of the City Council, the Auditor’s Office audited the disbursements supporting the Requisition for Grant  requests from the Virginia Performing Arts Foundation (the “Foundation”) to the City for the period December 2003 through August 2005. We also analyzed whether the financial reports submitted by the Foundation complied with specific ordinance requirements.   OBJECTIVES  Our audit objectives were to:   determ ine whether the Foundation’s dis burs em ents s upporting the pre-construction requis ition reques ts were appropriate and in com pliance with ap-plicable agreem ents and ordinances , and  analyze whether the Foundation s ubmitted financial reports consis tent with the requirem ents outlined in Ordinance 2005-136-79 and with indus try s tandards .
METHODOLOGY We conducted our audit in accordance with Government Auditing Standards for Performance Audits issued by the Comptroller General of the United States. During the course of our work, we reviewed supporting documents including requisition requests, vendor receipts and existing contracts. We reviewed internal controls in place to the extent considered necessary. We believe that our audit provides a reasonable basis for our conclusions and our recommendations.
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Our audit was designed to answer specific questions from Council. Because of this, there are certain areas that our Office did not audit:
 We did not audit the Foundation.  We did not audit the construction project in its entirety.  We did not audit the Foundation’s pledges.  We did not audit construction estimates, time line or feasibility.
CONCLUSIONS
 The Ordinance governing the funding activity between the City and the Virginia Perform ing Arts Foundation is vague about what are allowable and unallowable cos ts . Consequently, the language in the ordinance is s ubject to varying interpretations . For ins tance, it includes funding for “other pre-cons truction activities ,” along with dem olition and planning and des ign. We found no evidence that the Virginia Perform ing Arts Foundation intentionally s ubmitted cos ts that the City would ultim ately deem to be unallowable.
 We reviewed the dis burs em ents and have des cribed what we believe are “s oft cos ts ” that could be included in “pre-cons truction activity,” but appear to be m ore adm inis trative in nature. Under Generally Accepted Accounting Principles (GAAP), s om e of these cos ts could be argued in either direction. However, for conservative purpos es , we have s egregated these cos ts . We included s ugges tions to City Council and City adm inis tration about exchanging these s oft cos ts for m ore certainly definite pre-cons truction cos ts already incurred by the Foundation but not paid for by the City. If s o, the City would allow the Foundation to res ubm it them for reimburs em ent.
 The Foundation om itted one of the financial reporting requirem ents of Ordinance 2005-136-79. Additionally, the Foundation’s interpretation of a binding pledge differs from that of the Auditor’s Office.   The m anagem ent of the City of Richm ond, Virginia, is res pons ible for m aintaining financial records . It is als o res pons ible for es tablis hing and m aintaining a s ys tem of internal accounting control and m anagem ent control. One s uch control is to ens ure adequate com munication of intentions and lim its with its bus ines s partners . In fulfilling this res pons ibility, m anagem ent is required to as s es s the expected benefits and related cos ts of control procedures .
We dis cus s ed the attached com ments and recom m endations with the Virginia Perform ing Arts Foundation m anagem ent throughout the audit and formally on Septem ber 21, 2005. Due to the nature of this audit report, we have not included m anagem ent res pons es to our recom m endations . We would like to thank the Virginia
Audit Report No. 2006-05 Virginia Performing Arts Foundation Special Audit of Pre-construction Disbursements        -  
Perform ing Arts Foundation m anagem ent and s taff for their cooperation and as s is tance during this audit.  This report is intended for the m em bers of the Richm ond City Council, the City Audit Com mittee, the City executives and m anagem ent, and the Virginia Perform ing Arts Foundation; it is a m atter of public record.
Res pectfully s ubmitted,
Lance Kronzer, CPA City Auditor
Randi L. Ricco-Clifford, CPA, CIA, CGAP Audit Manager
Als o contributing to the report: Shawnis e Newsom e, Auditor II
Septem ber 21, 2005
Audit Report No. 2006-05 Virginia Performing Arts Foundation Special Audit of Pre-construction Disbursements -         
Background
Conclusions
EXECUTIVE SUMMARY
In 2003, City Council adopted Ordinance 2003-268-239, providing $27.8M in funds to help pay for the construction of a new Perform ing Arts Center. The project included the dem olition of the Thalhim er’s building, renovation of the Carpenter Center and a new building to s upport additional theaters . Interim financing, from a 1% increas e in the m eals tax, of up to $12M was des igned to help pay for pre-construction cos ts . At the s tart of his term, the Richm ond City Mayor publicly s tated his dis satis faction with the progres s the Perform ing Arts Foundation (the “Foundation”) was m aking. The Foundation could not m eet the July 31, 2005 deadline for fund raising goals and as ked City Council for an extens ion.
After m uch publicity, Ordinance 2005-136-79 was pas sed by City Council, allowing the Foundation extra tim e to com e up with the additional pledges . Specifically identified in the Ordinance was the requirem ent that the Foundation provide m onthly financial reports .
During Augus t 2005, the Mayor’s office obtained s everal requis ition reques ts from the Foundation and questioned s om e of the expens es (travel, s alaries , food). The Mayor s us pended payments to the Foundation and indicated that he wanted to s eek ways to get a reimburs em ent from the Foundation. Furtherm ore, the Mayor advis ed City Council that the financial reports , as provided by the Foundation, did not m eet the ordinance requirem ents .
In late Augus t, following m ore publicity, City Council as ked the City Auditor’s office to perform an audit to ans wer the following questions : 1. Were the pre-construction requisitions appropriate and in compliance with the Ordinance?
2. Did the Foundation’s monthly financial reports comply with the Ordinance and were they consistent with industry stan-dards? 1. The language in the Ordinance relative to allowable cos ts was vague. Subsequently, we accum ulated s everal cos ts that could be considered adm inis trative in nature. However, the m ajority of the $12 m illion in disbursem ents were m ade for contractor in-voices, that we found to b e appropriate and to b e “pre-construction” in nature; we accum ulated $686,300 that was not  
Audit Report No. 2006-05 Virginia Performing Arts Foundation Special Audit of Pre-construction Disbursements        -  
Summary of Recommendations
Other Items to Consider
deemed appropriate. 2. The Foundation did not follow one of the reporting requirem ents of Ordinance 2005-136-179. The Foundation om itted the current construction cos t es tim ate. Additionally, the Foundation’s inter-pretation of a “binding” pledge differs from that of the Auditor’s Office.
1. Council s hould take whatever action is needed to allow the Foundation to replace the soft costs with pre-construction costs already incurred by the Foundation; better define the intended us e of rem aining $15,800,000 grant. 2. Revis e the Ordinance to s pecify m ore detailed m onthly financial data from the Foundation.
$27.8 m illion was obligated to the Foundation for their us e in the overall Project. The m eals tax increas ed by 1% for this very purpos e. Should the City revers e its elf on its promis e for the funding, the m eals tax will expire (unles s extended by City Council) upon the payment of any outstanding interim financing. We recognize that the Foundation, as a res ult of dis cus s ions with the City, has recently s hifted its s trategy and tim etable for com pleting the project. We encourage both the Foundation and City adm inis tration to continue dis cus s ions regarding s uch long-range plans for the property that will engender unified public and private s upport.
Audit Report No. 2006-05 Virginia Performing Arts Foundation Special Audit of Pre-construction Disbursements        -  
FINDINGS AND RECOMMENDATIONS
1. Pre-Construction Requisition Activity Between December 2003 and August 2005 ($12,000,000 limitation) It is im portant to note the following background items when determ ining whether the Virginia Perform ing Arts Foundation’s (the “Foundation”) requis ition reques ts were appropriate:  Ordinance 2003-268-239 provided $27,800,000 to the Foundation for:  acquiring and dem olis hing the former Thalhim er’s building,  planning, des igning, constructing and equipping a new perform ing arts center, and  renovating the existing Carpenter Center (the Project).
The City arranged for interim financing of $12,000,000 to cover the costs as s ociated with the dem olition, planning and des ign of the Project and other pre-construction activities .  This was the only stipulation relating to how the Foundation should use the funds. Note that th ud line-item lim its 1  or unallowable costs.  Nor weares  twhaesre  nao n bexpgleat ntahtiaot ns pofe ciwfiheadt cos ts s hould be included in “ other pre-construction activities.”  Supplem enting the Ordinance, City Adm inis tration created a “Grant Agreem ent” to es tablis h the interim financing procedures between the Foundation, the Richm ond Redevelopm ent and Housing Authority and the City. This grant did not include any other requirem ents for the financing to com mence and funds were originally s et up as advancem ents to the Foundation. It als o did not include s pecifics as to s upporting docum entation or other s tipulations relative to the expenditures . Additionally, there appeared to be no attention given by the City for s etting up a proces s to m onitor the Foundation’s s pending. Although the Ordinance es tablis hed a “requis ition and approval proces s ,” the form (a boilerplate certification s tatem ent by the Foundation) that was es tablis hed to us e before the payment was to be m ade falls far s hort of what “approval” m eans . The Director of Finance was res pons ible for determ ining the dis pos ition of the requis itions . “Dispos ition” was a determ ination of (a) whether the certification s tatem ent was attached to the requis ition, and (b) whether funds would be us ed from tax proceeds or from the line of credit facility. As a s upport agency, the Departm ent of Finance s tates that it generally does not “approve” dis burs em ents for appropriatenes s .                                                 1  Many of the City’s cooperation agreements specifically identify limits for administrative costs associated with individual projects.
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We reviewed the requis ition activity between the period Decem ber 2003 and Augus t 2005. The Foundation s ubmitted the following dis burs em ents in s upport of the $12,000,000 interim financing: Requis ition Date Am ount 4/28/04 $1,372,215 8/27/04 $1,753,140 2/16/05 $4,051,047 5/13/05 $3,789,625 8/3/05 $1,112,905 $12,078,932 2
Audit Methodology The Auditor’s Office reviewed the requis ition details to determ ine the appropriatenes s of the dis burs em ents . We s am pled docum ents for the purpos e of reviewing actual receipts (both from contractors, s ubcontractors and Foundation s taff) for reasonablenes s . In addition, we com pared invoices to contractual provis ions to ens ure the accuracy and propriety of the billings . Finally, we applied Generally Accepted Accounting Principles (GAAP) in order to conclude on the appropriatenes s of pre-cons truction activity. Conclusion We have s eparated our audit conclus ion into the three com ponents that have received m edia coverage over the las t s everal weeks : a) Contractor invoices , including reimburs ables b) Foundation activity (m ostly billed to the City as credit card dis burs em ents ) c) Allocated overhead applied by the Foundation
                                                2  A limit of $12,000,000 was established. The Foundation requested $12,000,000 but had provided support for the amount spent to date. Audit Report No. 2006-05 Virginia Performing Arts Foundation Special Audit of Pre-construction Disbursements -         
a) Contractor invoices The dem olition of the Thalhim er’s building, the renovation of the Carpenter Center and the creation of the new Perform ing Arts buildings require the collaboration of m any profes s ionals with differing s kills . Contractors and s ubcontractors were hired to help with the pre -des ign, s chem atic des ign, des ign developm ent, construction docum ents and the bidding proces s . After reviewing the contracts and invoices we conclude, as follows :  In its s ignificant contracts , the Foundation s howed due diligence by placing dollar lim its on reimburs ables and travel cos ts . Due to the nature of the project, profes s ionals were brought in from s everal different s tates ; travel was a known factor from the very beginning of the project. Generally, 10% of each contract value was us ed for an overall s pending lim it for reimburs ables and travel cos ts . We conclude that 10% is within indus try s tandards .  According to Generally Accepted Accounting Principles (GAAP) the contractors’ reimburs able activity and travel cos ts are considered as “direct increm ental cos ts ” of the project. It was reasonable for the Foundation to capitalize them as “cons truction-in-progress ” activity. Therefore, these contractual reimburs able cos 3 ts s hould qualify for the City’s reimburs em ent as a cos t of pre-cons truction.  Overall, we believe the expens es incurred were proper pre-cons truction activity. We did obs erve that s om e of the contractors’ expens e reports were vague relative to the purpos e and nature of m eetings . We dis cus s ed this with Foundation m anagem ent and advis ed them of this weaknes s s o that Foundation m anagem ent could reiterate proper docum entation to the contractors.  We accum ulated $1,838 of dis burs em ents (from 6 invoices ) that were not s upported by receipts . Amount to be deducted from Foundation’s requisition request: $1,838
                                                3  Over the past several weeks, both the media and City administration have zeroed in on individual items from the contractors’ invoices, such as a $3.53 lunch cost during travel periods, and has taken exception to the specific amount because it was not construction-related activity.
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b) Foundation activity (disburs em ents s pecifically billed to the City through s taff credit card charges and other m is cellaneous dis burs em ents )
Several of the Foundation’s s taff m em bers have been involved in the project and incurred expens es related to the project throughout the period. We have reviewed these expens es and note the following:
 The Foundation does not hacvee sas  apcotlicyy . 4 th aAtl l acpopsltise, sr eag acredlrteasins  tohf rtehseh aolmd ofuonrt , capitalizing construction-in-pro ivit were capitalized if they related to the project. Nevertheless , the Foundation’s external auditor has agreed with this practice, as all of the s taff activities charged to the Foundation’s credit card bills relating to the project were capitalized in the FY2004 audit. We point this out becaus e it s hows that the Foundation did not intend to s eek reimburs em ent for items they did not feel were project s pecific.
 Regardles s of the Foundation’s accounting practices , we reviewed their credit card dis burs em ents and requis ition reques ts and determ ined that m any of the charges were “s oft cos ts ” that, arguably, could be class ified as adm inis trative cos ts and not neces s ary/required to bring the as s et to form. As s uch, we have included these cos ts in our s um mary of am ounts to be deducted from the City requis ition. This includes all bus ines s lunch and dinner m eetings , a partnering works hop, s hipping, advertis em ents , bus ines s cards , m arketing and m is cellaneous purchas es and activity. On the other hand, s taff travel expenditures for construction m eetings (us ually held in Bos ton) were retained as allowable cos ts . We note the following items : o  Foundation s taff could not locate one credit card s tatem ent along with the related s upporting docum entation and s everal other travel receipts . For the purpos es of this audit, we have not allowed s taff travel reimburs em ent without proper receipts . o  There was a duplicate billing error in one of the Foundation’s requis itions for approxim ately $260 that is accounted for in our calculation below. o  In error, Foundation s taff included one am ount for $400,000 in a requis ition that was not a dis burs em ent, but rather a depos it for es crow purpos es . We als o rem oved this item for reimburs em ent. o  Many of the Foundation’s s taff receipts did not identify the purpos e and nature of the dis burs em ent. We have dis cus s ed this with Foundation m anagem ent. On the pos itive s ide, all of the Foundation’s check request forms had the proper internal approvals that Foundation m anagem ent had es tablis hed in their dis burs em ent proces s .
Amount to be deducted from the Foundation’s requisition request: $418,437                                                 4  Typically, thresholds can be set for disbursements that determine whether the amount should be capitalized as an asset. $5,000 is often used as a general guideline for certain assets. In a large construction project, the dollar amount may even be higher.
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