Wednesday, November 24, 2010

Week In Review

State Capitol Week in Review

LITTLE ROCK – The new Arkansas lottery system needs to improve its financial practices to avoid a loss of integrity, to eliminate a lack of transparency and to prevent any violations of state law, legislative auditors have found.

The lack of financial controls is serious enough that legislators charged with oversight of the lottery have increased the frequency of reviews, stepping up meetings with auditors from once a year to six times a year until the problems are fixed.

The lottery was approved by voters in 2008 to provide greater scholarships for students at Arkansas colleges and universities. The initial year of the lottery was considered successful because more than 29,000 students received scholarships for the current school year. In September it was announced that lottery ticket sales were $485 million and that $106 million of that amount was allocated for college scholarships.

The constitutional amendment creating the lottery gave it a certain amount of independence from legislative control. However, lottery officials must comply with long-standing laws on procurement and accounting. As with all state agencies, its financial practices are inspected by legislative auditors.

The lottery contracts with private firms to operate many of its games. Under state law those contracts must be submitted for review by the Lottery Commission, a panel of private citizens with oversight authority, and by a legislative committee.

Last year employees of the lottery submitted for review a contract with a private company to operate an instant ticket game that called for the vendor to be paid 1.75 percent of net sales.

However, soon after the contract was reviewed by the Commission and legislators, lottery employees applied separate clauses in the contract that paid the private firm an additional $4.5 million. The Commission did not approve the change, nor did the appropriate legislative committee have the opportunity to review it.

Auditors pointed out that practices such as those used by lottery employees result in a lack of oversight and could lead to a lack of transparency. Lottery employees responded that the matter had been adequately reviewed and "no further review was required by law." Auditors specifically took issue with that statement, saying a review by legislators is "required under state law."

Auditors listed 11 areas where practices needed changing to protect the financial integrity of the lottery. For example, auditors found that lottery personnel could not explain how they calculated payments to private vendors under existing contracts. Their lack of knowledge "could cause vendor overpayments to occur, thus reducing funds available for scholarships."

The lottery's computer software "allows a valid financial transaction to be deleted in a manner that completely erases the transaction from the original financial records." This software prevents timely awareness of errors fraud, auditors said.

Auditors reported that travel reimbursements of $16,189 to lottery staff were paid "in conflict with state laws." For example, expenses were reimbursed without adequate documentation.

The lottery failed to perform background checks on people who applied for jobs, and thus the lottery hired two people with criminal records. They were later terminated. Also, the lottery paid too much into the retirement account of its director.

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