Report 2019-112 Recommendation 8 Responses

Report 2019-112: California State Lottery: The Lottery Has Not Ensured That It Maximizes Funding for Education (Release Date: February 2020)

Recommendation #8 To: Controller's Office, State

To ensure effective oversight of the Lottery, the SCO should immediately begin taking steps to improve its audits of the Lottery by doing the following:

-Develop and follow procedures that ensure that objections to audit findings are addressed by the audit team that worked on the audit. The procedures should provide the audit team sufficient time to interact directly with the Lottery about its objections and should direct the audit team to fully document its rationale for making any adjustments to the audit's findings before the audit report is published.

-Revise its risk assessment of the Lottery to include issues of efficiency and effectiveness of the Lottery's operations.

-Select high-risk areas of the Lottery's operations and conduct performance audits to assess the effectiveness and efficiency of those areas. In all audits of the Lottery, consider how the audit findings relate to the Lottery's purpose of providing education with the maximum possible funding.

Annual Follow-Up Agency Response From October 2021

The SCO takes the CSA's recommendations seriously. The revised policies and procedures, risk assessment, recent audits with economy and efficiency objectives, and additional resources dedicated to these audits have improved SCO's oversight of the Lottery.

The SCO finalized revisions to the Engagement Manual and Bureau Chief Checklist to align with the 2018 Government Auditing Standards and the Technical Update issued in April 2021 with additional procedures for documenting the rationale for making adjustments to audit findings before an audit report is published. Audit teams are provided sufficient time to interact directly with the Lottery to address any objections to findings before reports are published.

The SCO Division of Audits completed a risk assessment of the Lottery and issued the report on September 30, 2020. See https://sco.ca.gov/Files-AUD/09-2020_saa-lot_lotteryRiskAssessmentOpsandActivities.pdf. The risk assessment evaluated the exposure risks of Lottery operations, activities, and certain contracts and identified 38 high risk or medium-high risk areas. Audits now include economy and efficiency objectives, which focus on identifying potential waste and determining whether contributions to education were maximized.

The SCO issued a review report on The Ellen DeGeneres Show Scratchers Ticket Promotion on March 25, 2021, identified $100,000 in questioned costs, and recommended that the Lottery ensure that all purchase decisions related to Lottery promotions are made prudently to ensure that the amount of funding allocated to public education is maximized. See https://sco.ca.gov/Files-AUD/03-2021_saa-lot_ellen.pdf. In December 2020, an economy and efficiency audit of the Lottery's marketing contracts was initiated and the final report is scheduled to be issued in October 2021. The SCO is currently conducting two additional audits of the Lottery that include economy and efficiency objectives.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

1-Year Agency Response

The SCO Division of Audits established procedures to fully document the rationale for making adjustments to audit findings before an audit report is published. These procedures are documented in the Engagement Manual, Electronic Work Papers Protocol, and Bureau Chief Review Checklist. We will continue to ensure that staff members follow applicable policies and procedures for adjustments to audit findings. Audit teams are provided sufficient time to interact directly with the Lottery to address any objections to findings before reports are published.

We completed our risk assessment of the Lottery and issued a report on September 30, 2020, which is available at https://sco.ca.gov/Files-AUD/09-2020_saa-lot_lotteryRiskAssessmentOpsandActivities.pdf. For operations, activities, and contracts categorized as medium-high and high risk, future audits will include an economy and efficiency objective, focusing on identifying potential waste and determining whether contributions to education are maximized. On December 2, 2020, we initiated an audit of the Lottery's prize payment process, which includes this economy and efficiency objective. Future audits will also include economy and efficiency objectives whenever possible.

This new focus of our performance (compliance) audits will now include greater consideration to the efficiency and effectiveness of the Lottery's operations. As such, on December 2, 2020, the SCO Lottery audit unit initiated an audit of the Lottery's prize payment process, which includes this economy and efficiency objective.

California State Auditor's Assessment of 1-Year Status: Pending

SCO provided no new procedures to support its claim to have addressed our recommendation. We look forward to reviewing its application of an efficiency and economy objective at its next scheduled update.

6-Month Agency Response

The SCO Division of Audits established procedures to fully document the rationale for making adjustments to audit findings before an audit report is published. These procedures are documented in the Engagement Manual, Electronic Work Papers Protocol, and Bureau Chief Review Checklist. Confidential conversations involving legal counsel were not included in the audit work papers of the Lottery's Office Revolving Fund. We will continue to ensure staff members follow applicable policies and procedures for adjustments to audit findings. Audits teams are provided sufficient time to interact directly with Lottery to address objections to the findings before reports are published.

The SCO Division of Audits established audit objectives for the Lottery that focus on efficiency and effectiveness. We have begun our risk assessment of the Lottery, and we anticipate completing the assessment by September 30, 2020. This risk assessment devotes greater consideration to the efficiency and effectiveness of the Lottery's operations.

In addition to devoting greater consideration to the efficiency and effectiveness of the Lottery's operations, the risk assessment takes into consideration high-risk areas of the Lottery's operations, such as scratcher ticket production and district sales representative activity. The results of the risk assessment, scheduled for completion by September 30, 2020, will be used to plan the nature and scope of future audits. We will consider how the audit findings related to the Lottery's purpose of providing the maximum possible funding to public education.

The SCO Division of Audits takes the California State Auditor's audit recommendations seriously, and believes the modifications to the risk assessment and audit planning processes will improve SCO's oversight of the Lottery.

California State Auditor's Assessment of 6-Month Status: Pending

The SCO's response overstates the changes it made in response to our recommendation. The SCO provided us the same copies of its engagement manual, electronic workpaper protocols, and review checklist that it provided to support its 60-day response. However, these items are dated before our report's release in February 2020 and do not directly address our recommendation. We look forward to the SCO's 1-year response for an update on the changes it has made to implement our recommendation.

60-Day Agency Response

The SCO Division of Audits established procedures to fully document the rationale for making adjustments to audit findings before an audit report is published.These procedures are documented in the Engagement Manual,Electronic Work Papers Protocol, and Bureau Chief Review Checklist. Confidential conversations involving legal counsel were not included in the audit work papers of the Lottery's Office Revolving Fund. We will ensure staff members follow applicable policies and procedures for adjustments to audit findings. Audit teams are provided sufficient time to interact directly with Lottery to address objections to the findings before reports are published.

California State Auditor's Assessment of 60-Day Status: Pending

The SCO's response overstates the changes it made in response to our recommendation. The SCO provided us copies of its engagement manual, electronic workpaper protocols, and review checklist. However these items are dated before our report's release in February 2020 and do not directly address our recommendation. We look forward to the SCO's six-month response for an update on the changes it has made to implement our recommendation.

All Recommendations in 2019-112

Agency responses received are posted verbatim.