AUDITOR'S REPORT

FACILITIES AND PROPERTY MANAGEMENT FRESHBREW GROUP USA, L.P.

AGREEMENT FOR VENDING MACHINE SERVICES

October 19, 2018

Michael Post, C.P.A., M.B.A. Harris County Auditor

Gary Gray, C.P.A. First Assistant Counry Auditor

Leslie Wilks Garcia, C.P .A., C.F .E. Chief Assistant Counry Auditor Audit Division

MICHAEL POST, C.P.A., M.B.A.

HARRIS COUNTY AUDITOR

October 19, 2018

Mr. John Blount, County Engineer Office of County Engineer 1001 Preston, 5th Floor Houston, TX 77002

Mr. Gary Gray, First Assistant County Auditor Harris County Auditor's Office 1001 Preston, gth Floor Houston, Texas 77002

1001 Preston, Suite 800 Houston, Texas 77002-1817

(832) 927 -4600

Fax (713) 755-8932 Help Line (832) 927-4558

RE: FreshBrew Group, USA, L.P. Agreement for Vending Machine Services for Harris County

The Continuous Audit Department performed procedures relative to the FreshBrew Group, USA, L.P. (the Contractor) Agreement (the Agreement) for Vending Machine Services for Harris County for the 31 months ending December 31 , 2017. The objective of the engagement was to evaluate controls for collecting and recording monthly payments from the Contractor and to evaluate compliance with the requirements of the Agreement.

We successfully performed the following procedures:

• Obtained an understanding of the process the Contractor uses to : • Obtain collections data from each individual machine. • Ensure the accuracy of the data. • Aggregate the data to prepare the monthly reports.

• Evaluated the guaranteed minimum monthly payments made to the County in accordance with the terms of the Agreement.

• Ascertained whether selected vending machines under the Agreement were permitted for placement at the approved County locations.

• Selectively tested whether vending machines exist at the approved locations identified in the Agreement or at revised locations allowed by the agreement.

• Verified the Contractor' s compliance with the terms of the Agreement for insurance coverage.

Mr. John Blount County Engineer

Mr. Gary Gray First Assistant County Auditor

Due to the Contractor' s inability to provide certain requested information and records, we were unable to complete the following planned objectives:

• Test the Contractor' s Monthly Revenue Reports for verification of timely submission and accurate sales revenue reporting.

• Determine if annual commission payments resulting from vending machines yearly gross sales revenue were accurately assessed, invoiced, received and deposited.

The enclosed Auditor ' s Report presents the observations and recommendations identified during our procedures. We appreciate the time and attention provided by you and your staff during this engagement.

cc: District Judges County Judge Ed Emmett Commissioners:

R. Jack Cagle Rodney Ellis Jack Morman Steve Radack

Kim Ogg Vince Ryan William J. Jackson Josh Stuckey

Sincerely,

y'h-.L.~ Pd--Michael Post County Auditor

2

TABLE OF CONTENTS

OVERVIEW ................................................................................................................................... 4

RESULTS ....................................................................................................................................... 4

3

OVERVIEW

On August 26, 2014, the Harris County Commissioners Court approved an Agreement with FreshBrew Group USA, L.P. to provide vending machine services to Harris County for the period August 26, 2014 through August 25, 2015 with four ( 4) one-year renewal options.

For this agreement, the Facilities and Property Management department is responsible for the identification of the Contractor to service the vending machines through the County bidding process and for facilitating its execution through providing access and space for the Contractor to provide its services. The Accounting Division is responsible for receiving the reports and the ultimate collection of any revenue due to the County.

The Agreement authorizes the Contractor to establish vending machines at specified locations throughout the County. While 289 machines at 97 locations were authorized in the agreement, the number of machines varies based upon County needs.

In exchange for allowing their machines on County property, the Contractor pays the County $22,083 per month. This amount is due by the 15th of the month or an additional $100 per day late fee is charged. The flat fee assumes that gross sales do not exceed a certain amount. If gross sales exceed $750,000 for the contract year, then the Contractor pays the difference between what has been paid and 36.5% of the annual gross sales within 30 days of the end of the service period.

To ensure compliance with this provision, the Contractor is required to submit a certified report of gross sales by vending machine by the 1 oth of every month. The records supporting these reports must be maintained for a period of six years and the County is authorized to audit and inspect those records.

RESULTS

FreshBrew Group USA, L.P. is not in compliance with key provisions of the Agreement. The lack of compliance has resulted in the Audit Division being unable to successfully perform a complete review of the Contractor' s performance with respect to the contract.

Specifically, the contract provides the following provisions for which noncompliance was noted: • That monthly payments will be provided by the 15th of the month or the vendor pays a

$100 per day late fee , • The payment will be accompanied by a monthly report itemizing gross sales by vending

machine, • This report is to include a sworn certificate that the amounts are true and correct, • That all records substantiating these reports will be maintained for six years, and • Should gross sales exceed $750,000 in a contract year that the County will be paid 36.5%

of the total sales less monthly payments already made.

4

Data analysis performed during the audit identified the following items: 1) Audit observed an unusually large number of collections reported that were not

divisible by $0.05. This was not expected given that vending machines do not normally accept change smaller than a nickel. This changed significantly for the collections reported after the Contractor was notified of the audit. (See Figure 1)

2) Data analysis showed that year over year sales being reported by the vendor for year two increased by a fixed amount from the same month of the prior year. (See Figure 2)

a. This fixed increase pattern of 0.5% increase continued until January of the third year.

b. In February of year three, a new pattern emerged that showed a fixed 0.6% increase pattern.

c. This 0.6% pattern continued until the audit notification was sent in June of 2017.

d. No discernible pattern was detected in sales reported by the Contractor after audit notification.

The causes of the above conditions could not be definitively determined for accuracy or to eliminate the possibility of malfeasance due to the fact that the Contractor had 'purged' all historical detail records related to sales.

Additionally, for the first time in the life of the Contract and in the year the audit was started, the annual sales exceeded the $750,000 threshold. This triggered additional revenue for the County in the amount of $21,826.67 for 2017 and another $76,720.66 for 2018. The Contractor disputed the amounts by interpreting the contract differently resulting in a lower amount due to the County of $13,072.67 and $67,966.07, respectively. The County Attorney reviewed the contract language and agreed that the Auditor's Office interpretation is correct.

With this report, we recommend the following: • Auditor's Office Accounting Division:

o Work with County Attorney to provide a demand letter for any additional revenue owed to Harris County. Prior to report publication management responded:

"The Auditor's Office Accounts Receivable Section followed the recommendation to send a demand letter and payments were received on September 28, 2018 ($81,039.34) and October 11, 2018 ($17,508.00), essentially bringing the account into good standing. "

• Facilities and Property Management Department: o Perform a cost/benefit analysis of the County owning/operating its own machines

but have them serviced by an outside company as this is the only way to maintain control over the revenue reporting system(s) of the machines.

o Seek guidance from the County Attorney and/or Commissioners Court for a decision on the future of the FreshBrew contract.

5

..., ciij' p C p N w .i:,. lJ1 en -.J 00 \,() 8 ... 0 ~ 0 ~ ~ ~ ~ ~ 0 ~ ID

* * * * ... n

Jun-15 0 ::, - Jul-15 ... QI n

Aug-15 -0 ... ::a Sep-15 ID < Oct-15 -ID ::, C Nov-15 ID ::a Dec-15 ID 'll Jan-16 0 ... e. ::, Feb-16 "TI

(IQ ' "' Mar-16 - ro :::r Vl 0 Apr-16 :y :E OJ "' May-16 ' - • ro :::r ID

* Jun-16 ~ 'll 0 ID ;;=: · Jul-16 ::u ...

(1) n iii" ID 0) Aug-16 < 0\ ::, Q: (1) -QI (D ::J

(IQ 0- Sep-16 C ID -< 0 ·V,. Oct-16 (1) - 0

"' i:::, Nov-16

::u QI lJ1 ro ii> -0 "' Dec-16 0 -0 ' - Jan-17 rt QI -iii' Feb-17

::J Q. OQ

<' Mar-17 ~: C" Apr-17 ii> C" May-17 < "In- Jun-17 0 z !-" Jul-17 0

Aug-17 gt n a. DJ -·

Sep-17 ~- .... 0

Oct-17 ::,

Nov-17

Dec-17

$95,000.00

$90,000.00

$85,000.00

$80,000.00

$75,000.00

$70,000.00

565,000.00

$60,000.00

$55,000.00

$50,000.00

Gross Sales Reported

Year One Year Three

Audit

Notification

Figure 2 Gross Sales as reported by the Contractor for scope period, show a near identical sales pattern year

over year until the audit begins.

7