Illinois Department of the Lottery 2001 Audit

REPORT DIGEST

DEPARTMENT OF THE LOTTERY

FINANCIAL AND COMPLIANCE AUDIT

For the Year Ended:

June 30, 2001

Summary of Findings:

Total this audit 2
Total last audit 4
Repeated from last audit 1

Release Date:
February 21, 2002

State of Illinois

Office of the Auditor General

WILLIAM G. HOLLAND

AUDITOR GENERAL

To obtain a copy of the Report contact
Office of the Auditor General
Attn: Records Manager
Iles Park Plaza
740 E. Ash Street
Springfield, IL 62703

(217)782-6046 or TDD (217) 524-4646

This Report Digest is also available on
the worldwide web at
http://www.state.il.us/auditor

SYNOPSIS

The Lottery used sole source procurements rather than competitive selection procedures to extend contracts for primary auditor services to conduct and observe lottery drawings. The contracts totaled $136,170.

{Expenditures and Activity Measures are summarized on the next page.}

DEPARTMENT OF THE LOTTERY
COMPLIANCE AUDIT
For The Year Ended June 30, 2001

EXPENDITURE STATISTICS	2001	2000
Total Expenditures (All Funds)	$936,551,107	$958,819,944
OPERATIONS TOTAL % of Total Expenditures	$61,510,656 6.6%	$62,931,714 6.6%
Personal Services % of Operations Expenditures Average No. of Employees Average Employee Salary Other Payroll Costs (FICA, Retirement) % of Operations Expenditures Contractual Services % of Operations Expenditures Telecommunication Expenditures % of Operations Expenditures New Lottery Game Expenditures % of Operations Expenditures Electronic Data Processing Expenditures % of Operations Expenditures Equipment Expenditures % of Operations Expenditures Operation of Automotive Expenditures % of Operations Expenditures Travel Expenditures % of Operations Expenditures Depreciation Expenditures % of Operations Expenditures All Other Operations Items % of Operations Expenditures	$9,296,929 15.1% 288 $32,281 $3,567,732 5.8% $24,911,115 40.5% $9,231,944 15.0% $9,727,571 15.8% $3,297,691 5.4% $27,957 0.1% $286,029 .5% $190,374 .3% $645,203 1.0% $328,111 .5%	$8,806,843 14.0% 287 $30,686 $3,239,813 5.1% $24,789,693 39.4% $9,282,098 14.7% $9,704,300 15.4% $2,940,412 4.7% $214,182 .3% $277,762 .5% $160,001 .3% $685,111 1.1% $2,831,499 4.5%
PRIZE TICKETS OR SHARES % of Total Expenses	$779,795,770 83.2%	$798,865,017 83.3%
COMMISSIONS AND FEES % of Total Expenses	$95,244,681 10.2%	$97,023,213 10.1%
Cost of Property and Equipment	$5,217,275	$4,957,935
SELECTED ACTIVITY MEASURES	2001		2000
Percentage of Sales paid out in prizes Percentage of sales transferred to the Common School Fund	54.8% 35.9%		54.5% 36.6%
Operating Transfers To Common School Fund	$511,254,208		$537,000,358

AGENCY DIRECTOR

During Audit Period: Lori Montana
Currently: Lori Montana

The Lottery used sole source procurements rather than competitive selection procedures for "primary auditor" services

The Department competitively selected two firms to perform "verifying auditor" services

The LAC requested assistance from the Governor and the Attorney General to resolve this matter

FINDINGS, CONCLUSIONS, AND

RECOMMENDATIONS

NONCOMPLIANCE WITH PROCUREMENT CODE

The Department of the Lottery (Department) did not comply with the Illinois Procurement Code’s competitive selection requirement provisions during fiscal year 2001. During fiscal year 2001 the Department contracted with three accounting firms to provide "primary auditor" and "verifying auditor" services to conduct and observe the midday and evening drawings. The contracts for all three public accounting firms utilized to conduct and observe the drawings expired on June 30, 2001. Two of the three public accounting firms had their contracts for primary auditor services renewed for another year, fiscal year 2002, through utilization of the sole source provision of the Illinois Procurement Code. The two contracts were valued at $136,170.

The firm that performed the "primary auditor" function for the evening drawing was again awarded a contract for these services. However, the firm that had been the "verifying auditor" for the midday drawing, was awarded the contract to be the "primary auditor" for the midday drawing. The third firm’s contracts to be the "primary auditor" for the midday drawing and "verifying auditor" for the evening drawing were not renewed.

For fiscal year 2002, two public accounting firms were competitively selected for "verifying auditor" services through an RFP process to replace public accounting firms previously declared by the Department to be sole source providers. Thus, only the "primary auditor" contracts for fiscal year 2002 were procured utilizing the sole source provision of the Illinois Procurement Code.

The Illinois Procurement Code (30 ILCS 500/20-25) states that "…contracts may be awarded without use of the specified method of selection when there is only one economically feasible source for the item." In addition, per Section 20-5 of the Code, " Unless otherwise authorized by law, all State contracts shall be awarded by competitive sealed bidding…"

The conducting/observing of lottery drawings by public accounting firms is not unique to the State of Illinois. Numerous other states use independent public accounting firms to conduct and observe their drawings.

In fiscal year 2000, a competitive selection process was not used to procure the services of either the "primary auditor" or the "verifying auditor". The fiscal year 2000 finding was discussed at the Legislative Audit Commission’s (LAC) hearing on June 26, 2001. Department management emphasized their belief that a sole source procurement was justified. The LAC has sent a letter to the Illinois Attorney General and the Governor requesting assistance to resolve this matter. A legal opinion from the Illinois Attorney General had not been received as of the close of the audit. A letter from the Governor was received stating that he believed the Department of Lottery acted within the scope of its delegated authority in making the determination that the procurements qualified as sole source exceptions.

The Department’s written justification for not procuring the "primary auditor" services through competitive selection stated that the firms’ "…experience in performing the highly procedural process provides the compatibility of service which the Lottery needs to operate." ( Finding 01-1, pages 12 & 15) This finding was first reported in 2000.

We recommended the Department comply with the Illinois Procurement Code and award contracts for both primary and verifying auditor services to conduct and observe the midday and evening Lottery drawings through a competitive selection process.

The Illinois Lottery disagreed with this finding and considers the Department to be in full compliance with the Illinois Procurement Code.

An auditors comment was added in regard to the Department’s response. The auditors continue to believe the use of the sole source exception to procure primary auditor services is not in conformity with the requirements of the Illinois Procurement Code. The auditors will continue to wait for the Attorney General’s opinion.

OTHER FINDING

The remaining finding dealt with the Department’s subscription sales renewal process. We will review the progress toward implementation of all recommendations in our next compliance audit.

Mr. Brett Finley, CPA, Chief Internal Auditor provided the responses to our recommendations on February 5, 2002.

AUDITORS’ OPINION

Our auditors stated the Department of Lottery’s financial statements as of June 30, 2001 and for the year then ended were fairly presented in all material respects.

____________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:RPU:pp

SPECIAL ASSISTANT AUDITORS

Our special assistant auditors for this audit were Martin & Shadid, CPAs.