By Emmanuel T. Erediano
[email protected]
Variety News Staff
THE Commonwealth Ports Authority failed to properly record true-up adjustments from fiscal years 2017 to 2024, causing the timing of revenue recognition to depart from applicable accounting principles, according to an audit report completed by Ernst & Young.
The audit report noted that at year-end, CPA performs reconciliations, or “true-ups,” comparing actual audited results and external computations of terminal rental rates and landing fees against original budget inputs to determine whether customers were overbilled or underbilled.
True-up adjustments and any resulting changes in aviation fees, the report said, are included in customer contracts.
Although CPA conducts year-end true-up reconciliations for terminal rental and landing fees, the independent auditor found that “CPA did not record the required true-up adjustments in the fiscal years to which they relate.” Specifically, no true-up adjustments from fiscal years 2017 through 2024 were recorded in the general ledger during those periods.
Instead, the cumulative true-up amount of $8.2 million was recognized only in fiscal year 2024.
“Because these adjustments were not recorded in the proper fiscal period, the timing of revenue recognition is a departure from applicable generally accepted accounting principles, including Governmental Accounting Standards Board requirements for recognizing revenues when earned and measurable,” the report said.
Management also recorded a full allowance against the receivable due to uncertainty regarding collectability as of Sept. 30, 2024.
The audit further found that CPA failed to establish adequate internal controls or documented procedures to ensure that annual true-up calculations are reviewed, approved, and recorded in the proper accounting period, resulting in misstatements in operating revenues and receivables across multiple fiscal years (2017–2024).
According to the report, recording the cumulative adjustment in fiscal year 2024 materially misstated current-year financial results and did not accurately reflect revenues earned in the applicable periods.
The report added that if an airline operates for nearly a decade without knowing its finalized, audited operational costs per flight, “it is flying in a financial fog.” Airlines cannot retroactively charge passengers for miscalculated landing fees from 2018 or 2021, the report noted. As a result, airlines may price current and future tickets higher to hedge against the risk of retroactive multi-million-dollar billing adjustments.
The audit report made the following recommendations:
• Implement formal procedures requiring annual recognition of all rate-setting and true-up adjustments in compliance with applicable GASB requirements.
• Centralize documentation supporting consultant calculations, assumptions, and CPA reconciliations.
• Require documented management review of true-up calculations before closing the books each year.
• Strengthen internal controls to ensure adjustments required by rate-setting policies are consistently recorded in the proper fiscal year.
Action plan
CPA management agreed with the finding. In its corrective action plan, CPA acknowledged it failed to record the amounts due to questions about collectability and concerns about the impact on a fragile tourism industry following natural disasters and the Covid-19 pandemic. Management said the decision was ultimately made to record the transactions.
“CPA will record the true-up settlement amounts when they are determined moving forward in a timely manner,” management said.
Cross-subsidization fears and inflated fees
Federal aviation law requires that all revenues generated by an airport be expended for the capital or operating costs of the airport, the airport system, or other related facilities directly and substantially connected to air transportation.
However, the audit identified a material weakness regarding “revenue diversion,” noting that the Airport Division paid $615,140 to cover shared operating costs of the Seaport Division in fiscal year 2024 without approval from the Federal Aviation Administration.
As of Sept. 30, 2024, the Airport Division’s receivable from the Seaport Division totaled $120,582. CPA management said the use of airport revenues to cover seaport operating costs is acceptable because the seaport typically reimburses the airport within 90 days. As such, management believes this does not constitute a diversion of airport revenues.
However, the audit stated that CPA did not provide documentation from the grantor agency confirming approval for the use of airport revenues to fund seaport operations. As a result, the auditor found CPA to be in noncompliance with Special Tests and Provisions related to revenue diversion.
The report also raised concerns about pricing implications, stating that when airport funds are used to cover seaport deficits, airlines may lack clarity on whether landing and facility fees reflect actual airport costs or subsidize unrelated maritime operations. This uncertainty, the report suggested, may lead airlines to treat CPA’s fee structure as an unstable and potentially escalating liability.
The audit recommended that CPA seek approval from the grantor agency regarding the use of airport revenues to pay seaport operating costs.
Fully reimbursed
CPA management disagreed with the recommendation. It said all seaport costs initially paid by the Airport Division are reimbursed in a timely manner and that this method is used for operational efficiency to reduce vendor payments.
The Airport Division, management said, has been fully reimbursed. CPA also said it has received grantor acceptance of this method, despite the practice having been in place for more than 20 years.
Management further stated that the costs pertain to airport operational expenses, citing federal regulations that define airport operating costs as both direct and indirect expenses recognized under generally accepted accounting principles for government enterprise funds.
Emmanuel “Arnold” Erediano has a bachelor of science degree in Journalism. He started his career as police beat reporter. Loves to cook. Eats death threats for breakfast.
