Report 2019-112 All Recommendation Responses

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

Recommendation for Legislative Action

To ensure that the Lottery provides the required amount of funding to education, the Legislature should require that the Lottery pay—from its administrative expense category—the $36 million to education it should have provided in fiscal year 2017-18.

Description of Legislative Action

As of February 25, 2023, the Legislature has not taken action to address this specific recommendation.

California State Auditor's Assessment of Annual Follow-Up Status: No Action Taken

Description of Legislative Action

As of February 25, 2021, the Legislature has not taken action to address this specific recommendation.

SB 891 (Chang, 2020) would have appropriated $36 million from the State Lottery Fund to the State Controller's Office for allocation to public education in order to cover the shortfall in allocations from the State Lottery Fund for this purpose for the 2017-18 fiscal year. This bill died in the Senate.

California State Auditor's Assessment of 1-Year Status: No Action Taken

Description of Legislative Action

SB 891 (Chang) would have appropriated $36 million from the State Lottery Fund to the State Controller's Office for allocation to public education in order to cover the shortfall in allocations from the State Lottery Fund for this purpose for the 2017-18 fiscal year. This bill died in the Senate.

California State Auditor's Assessment of 6-Month Status: Legislation Proposed But Not Enacted

Recommendation for Legislative Action

To ensure that the Lottery adheres to the meaning of the 2010 amendments to the Lottery Act, the Legislature should amend the act to specify that the relationship between increases in its net revenue and increases in its education funding should be directly proportional.

Description of Legislative Action

As of February 25, 2023, the Legislature has not taken action to address this specific recommendation.

California State Auditor's Assessment of Annual Follow-Up Status: No Action Taken

Description of Legislative Action

As of February 25, 2021, the Legislature has not taken action to address this specific recommendation.

AB 2963 (Quirk-Silva, 2020) would have, in part, amended the Lottery Act to specify that Lottery revenues are to be allocated so as to ensure that the relationship between increases in the net revenue of the Lottery and increases in funding allocated to public education is directly proportional. This bill died in the Assembly Education Committee.

SB 891 (Chang, 2020) would have amended the Lottery Act to specify that Lottery revenues are to be allocated so as to ensure that the relationship between increases in the net revenue of the Lottery and increases in funding allocated to public education is directly proportional. This bill died in the Senate.

California State Auditor's Assessment of 1-Year Status: No Action Taken

Description of Legislative Action

AB 2963 (Quirk-Silva) would have, in part, amended the Lottery Act to specify that Lottery revenues are to be allocated so as to ensure that the relationship between increases in the net revenue of the Lottery and increases in funding allocated to public education is directly proportional. This bill died in the Assembly Education Committee.

SB 891 (Chang) would have amended the Lottery Act to specify that Lottery revenues are to be allocated so as to ensure that the relationship between increases in the net revenue of the Lottery and increases in funding allocated to public education is directly proportional. This bill died in the Senate.

California State Auditor's Assessment of 6-Month Status: Legislation Proposed But Not Enacted

Recommendation #3 To: Lottery Commission, California State

To ensure that it provides the maximum amount of funding to education in future fiscal years, the Lottery should do the following:

-By August 2020, determine the optimal amount of prize payouts that maximizes the funding for education.

-By August 2020, establish a policy to annually reconsider the optimal amount of prize payouts that maximizes funding for education.

-Use this optimal prize amount when setting its budgets, beginning with the budget for fiscal year 2021-22.

Annual Follow-Up Agency Response From October 2021

Pursuant to Lottery policy, in building the Lottery's budget for fiscal year 2021-22, the Director made a determination that prize payout levels across all games were in accordance with the optimal prize payout range recommended in the Lottery's most recent commissioned prize rate study. Specifically, the 2021-22 budget estimated prize expense to total 66.7 percent of total projected sales. This is within the range of 65 percent to 67 percent that was recommended as being optimal in the most recent prize rate study analysis.

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

1-Year Agency Response

3a: Encina Advisors, as an objective third party, was engaged to conduct the recommended analysis and issued a report in December 2020. The report's author, Dr. Justin Adams, was a partner in the firm Chang & Adams that conducted the prior study in 2010.

The study concluded that an overall prize payout from 65% - 67% maximized the Lottery's contributions to public education. The report details several reasons for establishing an optimal range rather than a single point. Based on data from the past ten years across the U. S. lottery jurisdictions, this study found an optimal payout rate that was higher than what was found in the 2010 analysis.

Reviewing the Lottery's audited financials, the Lottery has never exceeded the optimal prize payout through FY 2018-19 - the last year where audited figures were available. Although the audit of the Lottery's FY 2019-20 financials is not complete, the prize payout rate appears to be 66.5%, which is within the optimal range recommended.

3b: The Lottery now requires the Director to annually determine that prize payout levels across all games have been optimized for the coming fiscal year to ensure that funding for education is maximized.

3c: Pursuant to the new policy, in building the Lottery's budget for fiscal year 2021-22, the Director will make a determination that prize payout levels across all games are in accordance with the optimal prize payout range recommended in the Lottery's most recent commissioned prize rate study. This process will be repeated each budget cycle.

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

Although the Lottery addressed the first two components of our recommendation to determine the optimal amount of prize payouts that maximizes funding for education and establish a policy to annually reconsider this amount, the Lottery has not yet adopted its 2021-22 budget. Therefore, we cannot determine whether the Lottery has used the optimal prize payout amount when setting its budget.

6-Month Agency Response

3a:

Status of Implementation:

Not fully implemented.

Reason for not fully implemented:

After brief delays due to the COVID-19 pandemic and locating prospective vendors to conduct this study, the Request for Proposal was sent to four firms on June 19th with responses provided by three of these companies by the due date of July 7th. A contract with Encina Advisors has been executed with a scope that will help the Lottery determine the optimal prize payout rate that will maximize funding for education. Based on the project plan provided in their proposal and the date of our kickoff meeting, the final report will be delivered around October 5, 2020.

3b:

Status of Implementation:

Fully implemented.

The Lottery now has an approved policy requiring the Director to make a determination that prize payout levels across all games have been optimized for the coming fiscal year to ensure that funding for education is maximized annually.

3c:

Status of Implementation:

Not fully implemented.

Reason for not fully implemented:

The approved policy in Recommendation 3b requires the Lottery to utilize optimal prize payout levels in its development of its annual fiscal year budget. As stated above, this will be first employed when the Lottery develops its Fiscal Year 2021-22 budget.

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

To address the portion of our recommendation that the Lottery establish a policy to annually reconsider the optimal amount of prize payouts that maximize funding for education, the Lottery provided us a copy of its new policy requiring its director to make such a determination annually.

60-Day Agency Response

3a: Determine the optimal amount of prize payouts that maximizes the funding for education.

The development of the procurement document for a consultant has begun, and the identification of potential bidders has also begun. Given the COVID-19 emergency and its impact on Lottery operations, it is anticipated that responses to the solicitation document for procuring the consultant will be due sometime during the month of May 2020.

3b: Establish a policy to annually reconsider the optimal amount of prize payouts that maximizes funding for education.

Given higher priorities arising from maintaining Lottery operations during the COVID-19 health crisis, this policy has not yet been developed. Development of policy is expected by the 3rd quarter of CY 2020.

3c: Use optimal prize amount when setting budgets.

The recommended process will be incorporated into the policy noted in 3b above and will be first employed when developing the Lottery's Fiscal Year 2021-22 budget.

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

Recommendation #4 To: Lottery Commission, California State

To adhere to the Lottery Act's education funding requirements, beginning with fiscal year 2020-21, the Lottery Commission should require its staff to demonstrate that they have planned for education funding to be maximized and aligned with the proportionality requirement of the Lottery Act, and approve only those budgets that plan for such funding. It should then monitor actual education funding and ensure that it complies with the requirement.

Annual Follow-Up Agency Response From October 2023

The Lottery continues to prioritize its statutory mission of maximizing contributions to education, rather than attempting to meet the conflicting proportionality requirement.

California State Auditor's Assessment of Annual Follow-Up Status: Will Not Implement

As we noted in our report, state law requires the Lottery to increase its funding to education in proportion to its increases in net revenues. If the Lottery believes that meeting this requirement is unrealistic and unworkable, it should inform the Legislature that it cannot meet this requirement and seek to amend the law. We stand by our conclusions and recommendations about what the Lottery Act currently requires and how the Legislature should clarify it to ensure that the Lottery meets the intent of the 2010 amendments to the Act.

Annual Follow-Up Agency Response From October 2022

As noted in previous responses, implementing the CSA's recommendation would require the Lottery to intentionally halt sales of higher-priced Scratchers games, which would result in less funding to education. Unlike the Lottery Act's proportionality requirement, for which elements of the language are open to interpretation, providing less funding for education by purposely reducing sales clearly runs contrary to the mission of the Lottery as codified in the Lottery Act.

California State Auditor's Assessment of Annual Follow-Up Status: Will Not Implement

As we noted in our report, state law requires the Lottery to increase its funding to education in proportion to its increases in net revenues. If the Lottery believes that meeting this requirement is unrealistic and unworkable, it should inform the Legislature that it cannot meet this requirement and seek to amend the law. We stand by our conclusions and recommendations about what the Lottery Act currently requires and how the Legislature should clarify it to ensure that the Lottery meets the intent of the 2010 amendments to the Act.

Annual Follow-Up Agency Response From October 2021

As noted in our August 2020 response, in order to implement the CSA's recommendation, the Lottery would have to intentionally reduce sales by withdrawing higher-priced Scratchers games, which would result in less funding to education - and runs counter to the mission of the Lottery as codified in the Lottery Act.

California State Auditor's Assessment of Annual Follow-Up Status: Will Not Implement

As we noted in our report, state law requires the Lottery to increase its funding to education in proportion to its increases in net revenues. If the Lottery believes that meeting this requirement is unrealistic and unworkable, it should inform the Legislature that it cannot meet this requirement and seek to amend the law. We stand by our conclusions and recommendations about what the Lottery Act currently requires and how the Legislature should clarify it to ensure the Lottery meets the intent of the 2010 amendments to the Act.

1-Year Agency Response

The Lottery Act's proportionality requirement can run counter to its requirement to maximize funding for education. Encina Advisors, LLC, with whom the Lottery contracted for its most recent optimal prize payout rate study, succinctly confirmed this conflict in not being able to achieve proportionality while prize payouts are below optimal levels. Specifically, they noted in their analysis that growing funding for education in proportion to net revenues (which as defined by the State Auditor) "cannot happen by definition as well as by design: increasing prize payout rates from 50 percent to the optimum necessarily means that prizes consume an increasing proportion of total sales growth and contributions to education consume a decreasing proportion of total sales growth, all while contributions to education still grow in absolute terms. Thus, instituting a proportionality requirement would prevent the Lottery from maximizing contributions to education by preventing it from increasing prize payout rates to the 65 to 67 percent range." Encina Advisors' analysis goes on to state that "While it is understandable that the California State Auditor would have concerns over maximizing contributions to education and desire a simple rule with which to evaluate these contributions, we strongly disagree with the Auditor's conclusions and recommendations for a codified proportionality requirement. Setting such a standard would be unrealistic and would be unworkable for the Lottery to meet." The Lottery will therefore continue to strive for proportionality in growth between net revenues and funding for education while prioritizing the maximization of absolute dollars it provides to education.

California State Auditor's Assessment of 1-Year Status: Will Not Implement

As we noted in our report, state law requires the Lottery to increase its funding to education in proportion to its increases in net revenues. If the Lottery believes that meeting this requirement is unrealistic and unworkable, it should inform the Legislature that it cannot meet this requirement and seek to amend the law. We stand by our conclusions and recommendations about what the Lottery Act currently requires and how the Legislature should clarify it to ensure the Lottery meets the intent of the 2010 amendments to the Act.

6-Month Agency Response

Although the Lottery strived for strict proportionality in the growth of sales revenues and profits to education in developing its 2020-21 fiscal year budget, the approved budget doesn't fully achieve this goal. The department's mission, as set forth in the Lottery Act, is to maximize supplemental funding for education. If the Lottery were to prioritize strict proportionality over maximizing funds to education, the Lottery would have to intentionally reduce the sales of instant games in the current fiscal year, and public education would consequently receive less funding from the Lottery. For the four consecutive fiscal years leading up to the 2010 Lottery Act changes that allowed for increased prize payout flexibility, total Lottery sales and profits to public education were declining. In response, over the last decade, the Lottery used the prize flexibility afforded by the 2010 changes to spend more money on prizes to generate more sales and more profits for education. The Lottery's experience has shown that, as higher-priced Scratchers games have been introduced, more sales have been generated, and, more importantly, more funding for education has also been generated. While the Lottery experiences higher profit margins on lower-priced Scratchers games, higher-priced Scratchers games have proven to be very popular with consumers, and generate much of the Lottery's profits for education. Lottery profits for education have grown by nearly 80% in the last 10 years in large part because of increased sales resulting from higher prize Scratchers games. As a result of offering these higher prizes which have increased sales, total Lottery sales revenues have grown over the last decade to be disproportionate to profits for education. To achieve strict proportionality in the growth of sales revenues and profits to education, the Lottery would have to intentionally reduce sales by withdrawing higher-priced Scratchers games, which would result in less funding to education.

California State Auditor's Assessment of 6-Month Status: No Action Taken

We recommended that the Lottery Commission should require its staff to demonstrate that they have planned for education funding to be maximized and aligned with the proportionality requirement of the Lottery Act, and approve only those budgets that plan for such funding. However, the Lottery's response indicated that it has not done so. In fact, our review of the budget Lottery staff submitted to the Lottery Commission for 2020-21 shows that it planned for its sales to increase by almost 7 percent while its planned contribution to education increased by only 3 percent.

60-Day Agency Response

The Lottery is currently in the process of developing its Fiscal Year 2020-21 budget to maximize funds to education, which has always been the Lottery's primary objective, as required by the Lottery Act. The Lottery will also strive for proportionality between projected revenues and contributions to education in building its 2020-21 budget.

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

Recommendation for Legislative Action

To ensure that the Lottery is subject to oversight of its procurement practices, the Legislature should amend the Lottery Act to direct the SCO to conduct audits of the Lottery's procurement process at least once every three years.

Description of Legislative Action

As of February 25, 2023, the Legislature has not taken action to address this specific recommendation.

California State Auditor's Assessment of Annual Follow-Up Status: No Action Taken

Description of Legislative Action

As of February 25, 2022, the Legislature has not taken action to address this specific recommendation.

California State Auditor's Assessment of Annual Follow-Up Status: No Action Taken

Description of Legislative Action

As of February 25, 2021, the Legislature has not taken action to address this specific recommendation.

California State Auditor's Assessment of 1-Year Status: No Action Taken

Description of Legislative Action

As of August 25, 2020, the Legislature has not taken action to address this specific recommendation.

California State Auditor's Assessment of 6-Month Status: No Action Taken

Recommendation #6 To: Lottery Commission, California State

To ensure that it conducts procurements in a way that preserves all possible funding for education, by August 2020, the Lottery should develop procurement procedures that, at a minimum, do the following:

-Provide examples of when products are truly available from only one source and examples of when the Lottery should consider whether alternative products can also fulfill its needs.

-Require its staff to collect and maintain documentation supporting any exception to competitive bidding and provide examples of adequate and inadequate documentation.

-Instruct its contracts unit to deny all procurement requests that do not demonstrate adherence to contracting requirements.

1-Year Agency Response

a) The Lottery implemented a framework for non-competitive bid agreements including standardized justification requirements. In addition, procurement policy and processes have been implemented that give procurement staff the final determination whether a good or service is only available from one source. All single source procurements classified as non-competitive bids are only approved with a corrective action plan to reduce similar purchases in the future. Procurement staff are conducting one-on-one focused training and assisting program staff through the procurement process including the identification of available competitive procurement options when non-competitive bids are submitted for review.

b) The Lottery conducted Lottery-wide training on the procurement process in August 2020. Since that time, additional procurement forms have been implemented that focus on documentation of decisions made during the solicitation process and throughout the life of the procurement. These forms include an Agreement Summary and a Purchase Order Summary. Part of the Lottery's effort to standardize and streamline the procurement program, it was also determined that a single Agreement form, the Standard Agreement, provides the Lottery with a cover page that identifies all required contract elements, clearly outlines the funding information required by the SCO, and organizes the information in a manner that is similar to the STD 213 utilized by most State Agencies in the contract process. The new Standard Agreement was implemented and is now the standard contract cover page utilized by the Lottery.

c) This was fully implemented in the previous corrective action report dated August 25, 2020.

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

The Lottery provided evidence that it has addressed the deficiencies that led to our audit findings. It has adopted new procurement policies around noncompetitively bid contracts and developed a new noncompetitive bid justification form that asks staff to explain how they determined that there was no other vendor with which they could contract. These policies and procedures do not align exactly with our recommendation. For example, they do not provide examples of adequate and inadequate documentation for noncompetitively bid contracts. However, the policies and forms, if followed and used by the Lottery, should be sufficient to ensure it adequately documents the need to enter into noncompetitively bid agreements.

6-Month Agency Response

Reason for not fully implemented:

a) The Lottery has created a framework for non-competitive bid agreements and is implementing various elements, including standardized justification requirements and training. In addition, procurement staff will have final determination whether a good or service is only available from one source. All single source procurements classified as non-competitive bids will only be approved with a corrective action plan to reduce similar purchases in the future. The Lottery will be implementing additional mandatory procurement training that is focused on how to conduct market research and how to define business requirements so that procurements are based on meeting the functional requirements and not brand specific features. Training is expected to be completed by December 2020.

b) The Lottery is conducting Lottery wide training on the procurement process. File documentation checklists are under development and will be maintained with the official procurement. To aide procurement staff in ensuring adequate documentation is included, checklists will detail specific documentation required for the type of purchase being made. Sample purchase files will be created and used as training tools for procurement staff. The Lottery will be implementing additional mandatory procurement training that is focused on documentation requirements which is expected to be completed by December 2020.

c) The Lottery has implemented an overarching procurement policy that directs the procurement office to conduct an analysis of all procurements to determine whether the requesting program has demonstrated a clear business need and how that need is in support of the Lottery's mission; and whether best value is clearly identified and supported prior to execution of the procurement. Any procurement that does not meet policy may be denied or returned to the program for additional clarification.

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

60-Day Agency Response

The Lottery is currently revising procurement policies and processes with regards to single source procurements. This will include a standardized process for documenting alternatives considered, detailed justification substantiating why alternatives could not meet business needs, and multi-level documentation review and approval. The policy is expected to be completed and submitted for approval by Lottery Management by end of April 2020. The revised procurement processes to implement the revised policy are expected to be completed by August 2020. Lottery-wide training on and full implementation of the revised policy and procedures are expected to be completed by December 2020.

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

Recommendation #7 To: Lottery Commission, California State

To ensure that it receives value for the funding it spends on its fairs program, by January 2021, the Lottery should determine whether the program has increased its brand strength, customer loyalty, customer satisfaction, ticket sales, and profits. If the analysis determines that the Lottery has not achieved these benefits, it should terminate the program.

Annual Follow-Up Agency Response From October 2023

In June 2023, the Lottery began a pilot of its post-pandemic Fairs & Festivals program. This program is an element of the Lottery's overall marketing plan and is designed to promote the Lottery brand and products and follows industry best practices. Following the final scheduled event of the season in November, the Lottery will conduct a holistic analysis of the pilot program that includes looking at CSA's recommendations to measure the intangible benefits for the Lottery in addition to consumer impressions, ticket sales, and profits. This analysis will be used to inform future participation in fairs & festivals.

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

Annual Follow-Up Agency Response From October 2022

As noted in previous responses, the COVID-19 pandemic significantly impacted the entire event industry. Almost all of the state's major fairs and festivals were cancelled in 2020 and 2021 and the Lottery redirected marketing resources during this period. While some events resumed in 2022, the Lottery has not yet restarted its fair and festival program. The Lottery has been evaluating the post-pandemic event landscape and is developing a plan to restart the program with the 2023 event season. This includes developing a methodology, per CSA's recommendation, to measure the intangible benefits for the Lottery in the form of brand strength, customer loyalty, and customer satisfaction at fairs and festivals in addition to ticket sales and profits, which will be used to help evaluate the efforts during the upcoming season.

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

Annual Follow-Up Agency Response From October 2021

While some events are beginning to return in generally smaller and reimagined formats to be COVID safe, the Lottery has not participated in any fairs and festivals to date. The Lottery continues to prioritize health and safety of its employees, retailers and vendor partners while looking at ways to evolve the program in the future.

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

1-Year Agency Response

The COVID-19 pandemic has devastated the event industry. Due to the uncertainties surrounding the coronavirus pandemic and vaccination timelines, most fairs and festivals and other live events have either canceled their 2021 events or are considering offering significantly smaller, re-imagined versions that would be safer to implement. The Lottery continues to monitor industry trends and will re-evaluate the program as necessary to adapt to the changes in consumer behavior and event industry.

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

6-Month Agency Response

Reason for not fully implemented:

All fairs and festivals, live events and major gatherings have been canceled and are not expected to fully resume at scale until sometime next year at the earliest. The Lottery will continue to monitor and evolve this program as necessary in the next 6-12 months.

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

We look forward to the Lottery's one-year response to see what actions it has taken to evaluate the effectiveness of its fairs and festivals program.

60-Day Agency Response

The Lottery is in process of developing its methodology to measure the intangible elements received at fairs and festivals, including awareness, engagement, brand strength, customer loyalty, and customer satisfaction in addition to ticket sales and profits. These metrics will be used to evaluate the efforts during the upcoming festival season. However, due to the impact of COVID-19, the program will most likely experience significant changes. All fairs and festivals have been canceled through June, and it is expected that more will be canceled during the summer months, including the largest fairs in the state. At this time, the Lottery is monitoring the current public heath guidance and prioritizing the health and safety of its staff, vendor and retail partners, and players before resuming fair and festival participation. Additionally, the impact of the crisis on consumer behavior and overall interest in attending events is also uncertain at this time. The Lottery will continue to monitor and evolve this program as necessary in the next 6-12 months.

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

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.