Auditors took inventory of carts in this Charlotte County, Fla., neighborhood. The full audit took several months because auditors had to pull together different types of data. Photo: SCS Engineers

Each year, solid waste haulers pay hundreds of millions of dollars in franchise fees or gross receipt fees to local governments. Based on gross revenues billed to the haulers' customers, these fees compensate cities for the use of their streets and rights of way.

Because the resulting revenues may be used for any lawful purpose, the fees have a significant impact on local services.

Unfortunately, the task of ensuring that these revenues accurately reflect contract specifications often falls to overworked or inexperienced staff. As a result, local governments often use a third party to implement or oversee franchisee contract audits—often uncovering thousands of dollars in underreported revenue in the process.

Not all audits result in such windfalls. But in addition to providing solid waste franchisees with performance benchmarks, regular audits help public agencies manage the mountain of financial reports they receive from contractors.

Depending on complexity of the franchise agreement and the number of franchisees, audits take three to six months to complete and cost $30,000 to $100,000.

Techniques And Tools

In August 2006, the city of Redondo Beach, Calif., employed a consultant to conduct a solid waste franchise audit. The audit, akin to an annual medical check-up, illustrates some of the techniques and tests often used to ensure the franchisee properly bills and remits franchise fees to the local government.

The consultant audited franchisee Consolidated Disposal Services. Under terms of its solid waste handling services agreement with the city, Consolidated collects the city's refuse, green waste, recyclables, and household hazardous waste. In return, the company sends a monthly bill for the various fees for the exclusive right to provide refuse collection service to the city.

These franchise fees provide revenue for the city to fund its integrated solid waste management programs and activities. The fees include a combination of an amount per dwelling unit, a percentage of gross revenues, reimbursement for operation of the household hazardous waste collection center, and a split in recycling revenues.

Upon request from the city, Consolidated gave the auditor financial and accounting records pertaining to cash, billing, disposal, and recovered materials sales transactions for the primary purposes of reviewing billing operations, accounts receivable, and disposal fee charges for the previous 12-month contract period.

Given the size of Consolidated's service area and number of accounts within the city, both the city and the franchisee agreed to a series of financial and billing tests. They included: