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California State Lottery
The Lottery Has Not Ensured That It Maximizes Funding for Education

Report Number: 2019-112


Scope and Methodology

The Audit Committee directed the California State Auditor to review the Lottery. Specifically, the Audit Committee requested that we review the Lottery’s expenses and its contracting practices, and whether the Lottery considers the effect on education funding when analyzing its business practices and expenses. The table below lists the objectives that the Audit Committee approved and the methods we used to address them.

Audit Objectives and the Methods Used to Address Them
1 Review and evaluate the laws, rules, and regulations significant to the audit objectives. Reviewed relevant laws, regulations, and other background materials applicable to the Lottery.

Evaluate Lottery revenues and expenditures for at least the past three fiscal years and determine the following:

a. Whether the Lottery’s overall operational and administrative expenditure levels are appropriate.

b. For a selection of operational and administrative expenditures, whether the Lottery properly spent the funds for necessary purposes.

c. Whether the Lottery’s staffing levels and expenditures are justifiable.

  • Compared the Lottery’s expenditure levels to five other states’ lotteries: Arizona, Florida, New York, North Carolina, and Texas.
  • Reviewed the Lottery’s operational and administrative costs since 2015 and found that for the past three fiscal years the Lottery complied with the 13 percent cap on these costs established in the Lottery Act.
  • Reviewed 30 Lottery expenditures for fiscal years 2016–17 through 2018–19 to determine whether these expenditures were justifiable and for necessary purposes.
  • For fiscal years 2016–17 through 2018–19, reviewed the Lottery’s overall staffing levels and, for three lottery divisions, reviewed justifications for adding new staff positions.
3 Review and assess the Lottery’s process for verifying that prize claimants are actual winners, and determine whether it has properly distributed unclaimed prize winnings to public education.
  • Reviewed the Lottery’s prize claim investigation procedures.
  • Assessed the completeness of the Lottery’s record information management system. We identified one error in our testing, but otherwise determined that the data were complete for the purpose of selecting investigated prize claims to test.
  • Reviewed 30 prize claims from fiscal years 2016–17 through 2018–19 that the Lottery investigated and paid out.
  • Documented the Lottery’s process for distributing unclaimed prize winnings, reviewed the controls for this funding, and determined the amount of unclaimed prize money that went to public education.
4 Determine whether Lottery functions are operating efficiently, and identify any potential cost‑saving measures.
  • For three of the Lottery’s divisions, reviewed whether the division’s activities aligned with the goals and objectives contained within the Lottery’s strategic and business plans. From discussions with the division directors and review of applicable documents, found general alignment of the divisions’ goals with the Lottery’s overall goals.
  • Considered the results of the work performed under objective 2.
  • Reviewed whether the Lottery could incorporate new technology into games to operate more efficiently and effectively. We identified federal and state restrictions for online gaming and found that state law limited the Lottery’s use of technology in its games.
  • Reviewed the Lottery’s fairs program to determine whether the Lottery could demonstrate that it has received the benefits from this program that it expects to gain.
5 Evaluate the Lottery’s contracting practices to determine whether its purchase of goods and services are in compliance with applicable state law and best practices.
  • Reviewed General Services’ requirements for procurements and compared these to the Lottery’s requirements.
  • For 15 total contracts from fiscal years 2016–17 through 2018–19, determined whether the Lottery awarded these contracts according to its regulations.
  • Reviewed hotel agreements and associated trade show expenses for Lottery trade shows held from fiscal years 2014–15 through 2017–18.
  • Assessed the reliability of a report from the Lottery’s e‑procurement system. We relied on this report to determine the total number, type, and dollar value of the Lottery’s new procurements from fiscal years 2016–17 through 2018–19 as well as to assist in our selection of Lottery procurements to test for objectives 2b and 5. We performed completeness and accuracy testing of the data in the report and found that the data were sufficiently reliable for our purposes.
6 Assess whether the Lottery considers the impact on education funding when analyzing its business practices and expenditures.
  • Reviewed the Lottery’s three most current budgets and identified the amount it budgeted for education.
  • Obtained documentation and interviewed staff to determine whether and how the Lottery set the budgeted amount of funding for education.
7 Review and assess any other issues that are significant to the audit.
  • Reviewed the work the SCO did to support its April 2019 audit of the Lottery and interviewed SCO staff.
  • Interviewed Lottery and SCO staff and reviewed documentation related to the report to the Legislature that contained an assessment of the Lottery’s performance under the 2010 amendments to the Lottery Act.
  • Reviewed the SCO’s audits of the Lottery and its risk assessment process.

Source: Analysis of Audit Committee’s audit request number 2019‑112, planning documents, and analysis of information and documentation identified in the table column titled Method.

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