REPORT DIGEST

DEPARTMENT OF THE LOTTERY
STATE LOTTERY FUND

FINANCIAL AUDIT
FOR THE YEAR ENDED JUNE 30, 2019

Release Date:  March 3, 2020

FINDINGS THIS AUDIT:  4

CATEGORY:  NEW -- REPEAT -- TOTAL
Category 1:  1 -- 2 -- 3
Category 2:  0 -- 1 -- 1
Category 3:  0 -- 0 -- 0
TOTAL:  1 -- 3 -- 4

FINDINGS LAST AUDIT: 5

Category 1: Findings that are material
weaknesses in internal control and/or a
qualification on compliance with State laws
and regulations (material noncompliance).
Category 2: Findings that are significant
deficiencies in internal control and
noncompliance with State laws and regulations.
Category 3: Findings that have no internal
control issues but are in noncompliance with
State laws and regulations.

State of Illinois, Office of the Auditor
General
FRANK J. MAUTINO, AUDITOR GENERAL

To obtain a copy of the Report contact:
Office of the Auditor General, Iles Park
Plaza, 740 E. Ash Street, Springfield, IL
62703
(217) 782-6046 or TTY (888) 261-2887

This Report Digest and Full Report are also
available on the worldwide web at
www.auditor.illinois.gov

INTRODUCTION

This digest covers the State Lottery Fund’s
financial audit as of and for the year ended
June 30, 2019.  A separate digest covers the
Department’s compliance examination for the
two years ended June 30, 2019.

SYNOPSIS

• (19-01) The Department did not ensure timely
compliance by its Private Manager with
obtaining a timely System Organization and
Control examination of the Central Gaming
System by an Independent Service Auditor, a
critical piece of audit evidence for both the
Department’s and State’s financial statements.
• (19-02) The Department has not resolved the
prior period excess cash transfers from the
State Lottery Fund to the Common School Fund,
totaling $64.124 million.
• (19-03) The Department has not performed all
the transfers to the Capital Projects Fund
from the State Lottery Fund required by the
Illinois Lottery Law, totaling $89.045 million
at June 30, 2019.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

FAILURE TO ENSURE TIMELY COMPLIANCE WITH THE
PRIVATE MANAGER AGREEMENT

The Department of the Lottery (Department) did
not ensure timely compliance by its Private
Manager with obtaining a timely System
Organization and Control (SOC) examination of
the Central Gaming System (CGS) by an
Independent Service Auditor, a critical piece
of audit evidence for both the Department’s
and State’s financial statements.

During the Department’s transition process
from the predecessor Private Manager to the
current Private Manager from the beginning of
Fiscal Year 2019, the Office of the Auditor
General (OAG) communicated the need for the
Department to ensure it received a SOC 1, Type
2 report from both entities covering the
period each entity ran the CGS during Fiscal
Year 2019. Department officials acknowledged
the importance of these SOC reports to both
the Department’s and State’s financial
statements, indicating the predecessor Private
Manager was aware of the need for a final SOC
report through the date when its CGS
transitioned to the new Private Manager.
Additionally, Department officials indicated
the new Private Manager would be contractually
required to obtain a SOC report covering its
CGS each fiscal year over the duration of the
contract.

Ultimately, § 11.7.2 of the Private Management
Agreement between the Department and the new
Private Manager required delivery of the SOC
report to the State covering the portion of
Fiscal Year 2019 when it operated the CGS no
later than September 28, 2019. When the CGS
transitioned to the new Private Manager on
February 18, 2019, the new Private Manager
assigned the functions to operate and maintain
the CGS to a subcontractor.

During this audit, we communicated the
importance of obtaining a timely SOC 1, Type 2
report to Department officials. After we
became aware the subcontractor was not going
to obtain the appropriate SOC report from an
Independent Service Auditor, we jointly worked
with Department officials to develop a
workable scope for the SOC examination and set
a mutually-agreeable deadline to receive the
SOC 1, Type 2 report of October 15, 2019,
which would still have enabled us to express
our opinion on the Department’s financial
statements to meet the deadline within the
State Comptroller Act to compile and publish
the State’s audited Comprehensive Annual
Financial Report (CAFR) no later than December
31, 2019. In a letter to the Private Manager
on August 6, 2019, Department officials
communicated (1) the need for a SOC 1, Type 2
report with the change in scope to get a
workable report and (2) their expectation the
subcontractor should have been aware of this
need.

As the audit progressed, we became concerned
the SOC 1, Type 2 report was not going to be
received timely. On October 16, 2019,
Department officials informed the OAG they had
interacted with the Private Manager and
determined the delays were due to the Private
Manager’s subcontractor contracting with a
firm to perform the examination that did not
have sufficient available resources to timely
complete both this SOC 1, Type 2 engagement
and the SOC 2, Type 2 engagement (see the
separately released compliance report).

In response, we requested the Department
provide us the engagement letter and/or terms
of the engagement between the Private Manager
and the Independent Service Auditor. We noted
the engagement letter between the Independent
Service Auditor and the Private Manager’s
subcontractor operating the CGS was not
written until October 7, 2019, and not
executed in writing by all parties until
October 8, 2019. Under this agreement, the
Independent Service Auditor was not going to
start performing its sole week of testing
until November 18, 2019. Further, the
Independent Service Auditor was not going to
deliver the final report until January 2,
2020. Along with this letter, Department
officials provided an undated and unsigned
“delivery schedule” showing the testing was to
be conducted from October 21 through November
1, 2019, with the final report delivered on
November 30, 2019.

The Private Manager’s subcontractor ultimately
delivered the SOC 1, Type 2 report signed by
the Independent Service Auditor on December
20, 2019, which significantly delayed our
completion of this audit. (Finding 1, pages
46-49)

We recommended the Department take immediate
action to ensure the Private Manager and its
subcontractor obtain a SOC 1, Type 2 report
for the CGS system covering the State’s fiscal
year no later than 45 days after the close of
the State’s fiscal year. In addition, we
recommended the Department monitor changes to
its environment to ensure it receives SOC 1,
Type 2 reports for all systems comprising the
State’s Lottery operated by service providers.

Department officials agreed with our
recommendation.

EXCESS TRANSFERS TO THE COMMON SCHOOL FUND

The Department has not resolved the prior
period excess cash transfers from the State
Lottery Fund (Fund 711) to the Common School
Fund (Fund 412), totaling $64.124 million.

During testing, we noted the following:
• Due to the overall profitability of the
Illinois Lottery during Fiscal Year 2019, the
Department was able to fully meet its Fiscal
Year 2019 obligations to Fund 412. As such,
while the net overpayment to Fund 412 from
Fund 711 did not increase this year, the
Department’s process still calls for, in years
where the Illinois Lottery does not have
sufficient profitability to fully satisfy its
obligations to Fund 412, the Department to
perform excess transfers into Fund 412 from
Fund 711 based upon the prescribed amount.

• The Department was unable to resolve excess
transfers that occurred during prior fiscal
years, totaling $64.124 million. (Finding 2,
pages 50-51)

Department officials indicated the Illinois
Lottery Law’s current language lacks clarity
and specificity on how to address the conflict
between the Department’s monthly obligation to
transfer the statutorily pre-determined amount
to Fund 412 with the transfer of actual final
sales proceeds that are both not fully
realized nor audited until, at least, three
months after the end of the fiscal year.
Therefore, the Department’s current process is
to make the monthly transfers based on the
availability of cumulative cash proceeds from
the ticket sales, as the Illinois Lottery Law
does not have a provision for adjusting the
deposits and transfers made during the fiscal
year after the actual final sales proceeds in
a given fiscal year have been realized and
audited in accordance with the priority order
established by the Illinois Lottery Law.
Further, the Department has been unable to
recoup the prior period overpayments as the
Illinois Lottery Law does not have a mechanism
for Fund 412 to reimburse overpayments from
Fund 711. Finally, Department officials
indicated they have not had ample time to
reach a legislative remedy.

We recommended the Department implement
controls to provide assurance it has the
resources available on an accrual basis to
properly allocate proceeds in accordance with
the Illinois Lottery Law or seek a legislative
remedy. Further, the Department should take
action to correct the overpayment of $64.124
million.

Department officials agreed with our
recommendation.

NONCOMPLIANCE WITH THE CAPITAL PROJECTS FUND
TRANSFER PROVISIONS WITHIN THE ILLINOIS
LOTTERY LAW

The Department has not performed all the
transfers to the
Capital Projects Fund (Fund 694) from the
State Lottery Fund (Fund 711) required by the
Illinois Lottery Law (Law), totaling $89.045
million at June 30, 2019.

During discussions with Department officials
concerning this balance, they indicated this
balance has accumulated due to the following
reasons:

1) Fund 711 annually transferred more cash
into the Common School Fund (Fund 412) than
required on an accrual basis during fiscal
years prior to June 30, 2009. In order to
account for this excess transfer, the
Department’s predecessor agency booked a due
from Fund 412 (accounts receivable) for the
amount of excess cash transferred in Fund 711
of $69.842 million at June 30, 2009. During
the Department’s Fiscal Year 2012 financial
audit, it was determined this due from did not
meet criteria established by the Governmental
Accounting Standards Board to be reported and
Department management posted an adjustment to
reclassify the $69.842 million as a transfer
out to Fund 412. This created a cash deficit
of $69.842 million within Fund 711, as Fund
412 now had the cash that otherwise should
have been deposited into Fund 694 in
accordance with the Law.

2) Prior to Public Act 100-0587, the
Department was required to annually transfer
cash from Fund 711 into Fund 694 on June 30.
Due to difficulties determining the exact
amount to transfer and timing issues arising
from the conversion of accounts receivable
into cash, the Department was not able to
timely transfer the remaining $19.203 million
from Fund 711 into Fund 694. (Finding 3, pages
52-53)

We recommended the Department work with the
General Assembly to address the permanent cash
deficit of $69.842 million within Fund 711
arising from the excess transfers which
occurred before June 30, 2009. Further, we
recommended the Department transfer the other
$19.203 million due to Fund 694 from Fund 711.

Department officials agreed with our
recommendation.

OTHER FINDING

The remaining findings pertain to the
Department’s controls over specialty tickets.
We will review the Department’s progress
towards the implementation of our
recommendations in our next financial audit.

AUDITOR’S OPINION

The auditors stated the financial statements
of the State Lottery Fund of the Department as
of and for the year ended June 30, 2019, are
fairly stated in all material respects.

This financial audit was conducted by Sikich,
LLP.

JANE CLARK
Division Director

This report is transmitted in accordance with
Section 3-14 of the Illinois State Auditing
Act.

FRANK J. MAUTINO
Auditor General

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