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CA Lottery Payroll Process and Transactions -
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CALIFORNIA STATE LOTTERY
Audit Report
Payroll Process and Transactions
July 1, 2016, through April 30, 2019
BETTY T. YEE
California State Controller
March 2021
BETTY T. YEE
California State Controller
March 1, 2021
Alva Vernon Johnson, Director
California State Lottery
700 North Tenth Street
Sacramento, CA 95811
Dear Mr. Johnson:
The State Controller’s Office audited the California State Lottery’s (Lottery) payroll process and
transactions for the period of July 1, 2016, through April 30, 2019. The purpose of the audit was
to determine if the Lottery maintains an adequate system of internal controls over its payroll
process and processed payroll and payroll-related disbursements and leave balances accurately
and in accordance with collective bargaining agreements and state laws, regulations, policies,
and procedures.
Our audit found that the Lottery lacked adequate segregation of duties and compensating
controls over the payroll process, resulting in improper and questioned payments; granted
inappropriate keying access to the State’s payroll system; did not implement adequate controls to
limit excessive leave balances; and did not properly administer salary advances.
If you have any questions, please contact Mr. Finlayson by telephone at (916) 324-6310 or by
email at afinlayson@sco.ca.gov.
Sincerely,
Original signed by
MICHAEL REEVES, CPA
Acting Chief, Division of Audits
JLS/as
Alva Vernon Johnson, Director -2- March 1, 2021
cc: Gregory Ahern, Chair
California State Lottery Commission
Nathaniel Kirtman III, Commissioner
California State Lottery Commission
Keetha Mills, Commissioner
California State Lottery Commission
Peter Stern, Commissioner
California State Lottery Commission
Harjinder Chima, Chief Deputy Director
California State Lottery
Christopher Fernandez, Deputy Director, Human Resources Division
California State Lottery
James Shannon, Audit Manager, Internal Audits
California State Lottery
Brenden Murphy, Chief, Administrative Services Division
California Department of Human Resources
Jil Barraza, Chief, Personnel and Payroll Services Division
State Controller’s Office
California State Lottery Payroll Process and Transactions Audit
Contents
Audit Report
Summary ............................................................................................................................. 1
Background ......................................................................................................................... 1
Objectives, Scope, and Methodology ................................................................................ 2
Conclusion ........................................................................................................................... 3
Follow-Up on Prior Audit Findings .................................................................................. 5
Views of Responsible Officials .......................................................................................... 5
Restricted Use ..................................................................................................................... 5
Schedule—Summary of Audit Findings ................................................................................ 6
Findings and Recommendations ............................................................................................. 7
Appendix—Statistical Sampling Methodology
Attachment—California State Lottery’s Response to Draft Audit Report
California State Lottery Payroll Process and Transactions Audit
Audit Report
Summary The State Controller’s Office (SCO) audited the California State Lottery’s
(Lottery) payroll process and transactions for the period of July 1, 2016,
through April 30, 2019. The purpose of the audit was to determine if the
Lottery maintains an adequate system of internal controls over its payroll
process and processed payroll and payroll-related disbursements and leave
balances accurately and in accordance with collective bargaining
agreements and state laws, regulations, policies, and procedures.
Our audit found that the Lottery lacked adequate segregation of duties and
compensating controls over the payroll process, resulting in improper and
questioned payments; granted inappropriate keying access to the State’s
payroll system; did not implement adequate controls to limit excessive
leave balances; and did not properly administer salary advances. Further
details of these findings are described in the Conclusion, and Findings and
Recommendations sections of this report.
Background On November 6, 1984, California voters passed Proposition 37, the
California State Lottery Act of 1984 (Lottery Act), which authorized the
creation of a state-operated lottery. The Lottery Act is found in
Chapter 12.5, section 8880 et seq., of the Government Code. The Lottery
Act created the California State Lottery Commission (Commission) and
gave it broad powers to oversee the Lottery’s operations. The purpose of
the Lottery Act is to provide supplemental money to benefit public
education without the imposition of additional or increased taxes.
The Lottery has eight divisions: Executive, Finance, Human Resources,
Operations, Public Affairs and Communications, Security and Law
Enforcement, Information Technology Services, and Sales and Marketing.
As of October 1, 2020, the Lottery has 909 budgeted positions; staff are
located at Lottery Headquarters, two distribution centers, and nine district
offices.
In 1979, the State of California adopted collective bargaining for state
employees. This created a significant workload increase for the SCO’s
Personnel and Payroll Services Division (PPSD), as PPSD was the State’s
centralized payroll processing center for all payroll-related transactions.
PPSD decentralized the processing of payroll, allowing state agencies and
departments to process their own payroll-related transactions. The
Lottery’s Transactions and Payroll Unit in the Human Resources Division
has the responsibility of processing personnel transactions, payroll, leave
balances, and benefits.
Pursuant to Government Code (GC) section 8880.46.6, the SCO may
conduct special post-audits of the Lottery, as the State Controller deems
necessary. The Controller or his/her agents conducting an audit under this
chapter shall have access and authority to examine any and all records of
the Commission.
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California State Lottery Payroll Process and Transactions Audit
GC section 12410 states, in part:
The Controller shall superintend the fiscal concerns of the state. The
Controller shall audit all claims against the state, and may audit the
disbursement of any state money, for correctness, legality, and for
sufficient provision of law for payment.
In addition, GC section 12411 stipulates that “ . . . the Controller shall
suggest plans for the improvement and management of revenues.”
Furthermore, GC section 12476 states, “The Controller may audit the
uniform state pay roll system, the State Pay Roll Revolving Fund, and
related records of state agencies within the uniform State’s payroll system,
in such manner as the Controller may determine.”
Objectives, Scope, The objectives of the audit to were to determine whether the Lottery:
and Methodology
Maintained adequate and effective internal controls over its payroll
process;
Processed payroll and payroll-related disbursements and leave
balances accurately and in accordance with collective bargaining
agreements and state laws, regulations, policies, and procedures; and
Administered salary advances in accordance with collective
bargaining agreements and state laws, regulations, policies, and
procedures.
The audit period was July 1, 2016, through April 30, 2019.
To achieve our audit objectives, we:
Reviewed State and the Lottery’s policies and procedures related to
the payroll process to understand the Lottery’s methodology for
processing various payroll and payroll-related transactions;
Interviewed the Lottery’s payroll personnel to gain an understanding
of the Lottery’s internal controls and methodology for processing
payroll and payroll-related transactions;
Selected the following transactions recorded in the State’s payroll
database using statistical sampling (see the Appendix), judgmental
selection, and targeted selection based on risk factors and other
relevant criteria:
o 11 employees with keying access to the State’s payroll system;
o 45 out of 25,977 ($226,378 out of $131,774,771) regular pay
transactions;
o 129 out of 1,639 ($251,601 out of $1,072,513) overtime
transactions;
o 66 out of 133 ($948,295 out of $1,532,296) lump sum
transactions;
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California State Lottery Payroll Process and Transactions Audit
o 115 out of 3,615 ($230,165 out of $6,886,700) 9G bonus pay
transactions;
o 34 out of 1,216 ($16,704 out of $331,789) holiday credit accrual
transactions;
o 31 out of 69 ($480,624 out of $903,755) excess vacation and
annual leave balances;
o Five out of 237 ($38,628 out of $1,500,000) G1 payment
transactions;
Analyzed and tested the selected transactions, and reviewed relevant
files and records to determine the accuracy of payroll and payroll-
related payments, accuracy of leave transactions, adequacy and
effectiveness of internal control over the payroll process, and
compliance with collective bargaining agreements and state laws,
regulations, policies, and procedures; and
Reviewed all eight ($10,935) salary advance transactions to determine
whether the Lottery administered and recorded them in accordance
with collective bargaining agreements and state laws, regulations,
policies, and procedures.
We conducted this performance audit in accordance with generally
accepted government auditing standards. Those standards require that we
plan and perform the audit to obtain sufficient, appropriate evidence to
provide a reasonable basis for our findings and conclusions based on our
audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives. We limited our review of internal control to gain an
understanding of the Lottery’s payroll processes. We did not audit the
Lottery’s financial statements.
Conclusion Our audit determined that the Lottery:
Did not maintain adequate and effective internal controls over its
payroll process. We found the following deficiencies in internal
control over the payroll process that we consider to be material
weaknesses:1
o Inadequate segregation of duties and compensating controls over
payroll transactions (see Finding 1);
1
A deficiency in internal control over compliance exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to prevent, or detect and
correct, noncompliance with provisions of laws, regulations, or contracts on a timely basis. Control deficiencies,
either individually or in combination with other control deficiencies, may be evaluated as significant deficiencies
or material weaknesses. A material weakness in internal control over compliance is a deficiency, or combination
of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material
noncompliance with provisions of laws, regulations, or contracts will not be prevented, or detected and corrected,
on a timely basis. A significant deficiency over compliance is a deficiency, or a combination of deficiencies, in
internal control over compliance with provisions of laws, regulations, or contracts that is less severe than a
material weakness, yet important enough to merit attention from those charged with governance.
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California State Lottery Payroll Process and Transactions Audit
o Inappropriate keying access to the State’s payroll system (see
Finding 2);
o Failure to implement controls to limit the accumulation of
vacation and annual leave balances, resulting in liability for
excessive balances (see Finding 3);
o Inadequate controls to ensure that separation lump-sum payments
were calculated correctly and paid in a timely manner, resulting in
improper and late payments (see Finding 4);
o Inadequate controls to ensure that overtime payments were
calculated correctly, supported, and granted to eligible employees,
resulting in improper and questioned payments (see Finding 5);
o Inadequate controls to ensure that bonus payments were
calculated correctly and granted to eligible employees, resulting
in improper payments (see Finding 6);
o Inadequate controls to ensure that holiday credits were granted to
eligible employees and supported with documentation, resulting
in improper and questioned credits (see Finding 7); and
o Inadequate controls to ensure collection of salary advances in a
timely manner, resulting in failure to recover outstanding amounts
(see Finding 8).
Did not process payroll and payroll-related disbursements and leave
balances accurately and in accordance with collective bargaining
agreements and state laws, regulations, policies, and procedures. We
found the following instances of noncompliance:
o Excessive vacation and annual leave balances with a value of at
least $903,755 as of March 31, 2019 (see Finding 3).
Although an October 20, 2020 directive from the California
Department of Human Resources (CalHR) does not affect the
dollar value of this finding, we are disclosing this directive
because it affects our recommendation. CalHR has directed
departments to immediately suspend policies that require leave
balances to be reduced below the limit, and that require employees
to implement leave-reduction plans. This suspension will be in
effect until the 2020 Personal Leave Program (2020 PLP) ends or
July 1, 2022, whichever is sooner;
o Improper and late payments made for employee separation lump-
sum pay (see Finding 4), improper and questioned payments made
for overtime pay (see Finding 5), improper payments made for
bonus pay (see Finding 6); and improper and questioned holiday
credits (see Finding 7), costing an estimated net total of $127,477
(see Findings 4, 5, 6, and 7); and
Did not administer salary advances in accordance with collective
bargaining agreements and state laws, regulations, policies, and
procedures for three salary advances, totaling $2,500 that remained
outstanding as of April 30, 2019 (see Finding 8).
See the Schedule for a summary of the audit findings.
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California State Lottery Payroll Process and Transactions Audit
Follow-Up on Prior The SCO previously performed an audit of the Lottery’s payroll process
for the period from July 1, 2012, through June 30, 2015, and issued a report
Audit Findings
on February 24, 2017. The audit report included findings regarding keying
access, lump-sum payments, and overtime. Based on the work performed
during our current audit, we noted similar findings (see Findings 2, 4,
and 5).
Views of
We issued a draft audit report on November 3, 2020. Alva Vernon
Responsible Johnson, Director, responded by letter dated November 16, 2020
(Attachment), agreeing with the audit results. This final audit report
Officials
includes the Lottery’s response.
Restricted Use This report is intended for the information and use of the Lottery, the
Commission, CalHR, and the SCO; it is not intended to be and should not
be used by anyone other than these specified parties. This restriction is not
intended to limit distribution of this report, which is a matter of public
record, and is available on the SCO website at www.sco.ca.gov.
Original signed by
MICHAEL REEVES, CPA
Acting Chief, Division of Audits
March 1, 2021
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California State Lottery Payroll Process and Transactions Audit
Schedule—
Summary of Audit Findings
Total Dollar
Number of Number of Dollar Amount Amount of
Units of Dollar Amount Selections Selection of Selections Known and Finding
Audit Area Tested Method of Selection Population of Population Examined Unit Examined Likely Issues Number
Segregation of duties N/A N/A N/A N/A N/A - - 1
System access Targeted 11 - 11 Employee - - 2
Excess vacation and annual leave Statistical 69 $ 903,755 31 Employee $ 480,624 $ 903,755 3
Separation lump-sum pay Statistical and targeted 133 1,532,296 66 Employee 948,295 6 91 4
Overtime pay Statistical and targeted 1,639 1,072,513 129 Transaction 251,601 3 3,395 5
9G bonus pay Statistical and targeted 3,615 6,886,700 115 Transaction 230,165 8 0,222 6
Holiday credit Targeted 1,216 3 31,789 34 Transaction 16,704 1 3,169 7
Salary advances Targeted 8 10,935 8 Transaction 10,935 2,500 8
Total $ 10,737,988 $ 1 ,938,324 $ 1 ,033,732
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California State Lottery Payroll Process and Transactions Audit
Findings and Recommendations
FINDING 1— The Lottery lacked segregation of duties within its Transactions and
Inadequate Payroll Unit to ensure that only valid and authorized payroll transactions
segregation of were processed. The Lottery also failed to implement other controls to
compensate for this risk.
duties and
compensating
GC sections 13400 through 13407 require state agencies to establish and
controls over
maintain internal controls, including proper segregation of duties and an
payroll
effective system of internal review. Adequate segregation of duties
transactions
reduces the likelihood that fraud or error will remain undetected by
providing for separate processing by different individuals at various stages
of a transaction and for independent reviews of the work performed.
Our audit found that Transactions and Payroll Unit staff performed
conflicting duties. Staff members performed multiple steps in processing
payroll transactions, including entering data into the State’s payroll
system; auditing employee timesheets; reconciling payroll, including
reconciling system output to source documentation; reporting payroll
exceptions; and processing adjustments. For example, staff members
keyed in regular and overtime pay and reconciled the master payroll,
overtime, and other supplemental warrants. The Lottery did not have
compensating controls, such as a periodic supervisory review, to mitigate
the risks associated with such a deficiency.
The lack of adequate segregation of duties and compensating controls has
a pervasive effect on the Lottery payroll process, and impairs the
effectiveness of other controls by rendering their design ineffective or by
keeping them from operating effectively. These control deficiencies, in
combination with other deficiencies discussed in Findings 2 through 8,
represent a material weakness in internal control over the payroll process
such that there is a reasonable possibility that noncompliance with
provisions of laws, regulations, or contracts will not be prevented, or
detected and corrected, on a timely basis.
Good internal control practices require that the following functional duties
be performed by different work units, or at minimum, by different
employees within the same unit:
Recording transactions – This duty refers to the record-keeping
function, which is accomplished by entering data into a computer
system.
Authorization to execute – This duty belongs to individuals with
authority and responsibility to initiate and execute transactions.
Periodic review and reconciliation of actual payments to recorded
amounts – This duty refers to making comparisons of information at
regular intervals and taking action to resolve differences.
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California State Lottery Payroll Process and Transactions Audit
Recommendation
We recommend that the Lottery:
Separate conflicting payroll function duties to the greatest extent
possible. Adequate segregation of duties will provide a stronger
system of internal control whereby the functions of each employee are
subject to the review of another.
If it is not possible to segregate payroll functions fully and
appropriately, the Lottery should implement compensating controls.
For example, if the Transactions and Payroll Unit staff member
responsible for recordkeeping also performs a reconciliation process,
then the supervisor should perform and document a detailed review of
the reconciliation to provide additional control over the assignment of
conflicting functions. Compensating controls may also include dual
authorization requirements and documented reviews of payroll system
input and output; and
Develop formal procedures for performing and documenting
compensating controls.
The Lottery lacked adequate controls to ensure that only appropriate staff
FINDING 2—
had keying access to the State’s payroll system. If not mitigated, this
Inappropriate
control deficiency leaves payroll data at risk of misuse, abuse, and
keying access to
unauthorized use.
the State’s payroll
system
We audited the records of 11 Lottery employees who had keying access to
the State’s payroll system at various times between July 2016 and
April 2019. Of the 11 employees, five had inappropriate keying access to
the State’s payroll system. The five individuals did not have their keying
access immediately removed after their separation from state service,
transfer to another agency, change in classification, or temporary access
expired. For example, a Staff Services Manager I was allowed temporary
keying access to the payroll system from August 25, 2016, through
February 24, 2017. However, the Lottery did not remove or modify the
employee’s access until April 24, 2019, 789 days later.
The SCO maintains the State’s payroll system. The system is
decentralized, thereby allowing employees of state agencies to access it.
PPSD has established a Decentralized Security Program Manual that all
state agencies are required to follow in order to access the payroll system.
The program’s objectives are to secure and protect the confidentiality and
integrity of payroll data against misuse, abuse, and unauthorized use.
The Decentralized Security Program Manual states, in part:
The PPSD system contains sensitive and confidential information.
Access is restricted to persons with an authorized, legal, and legitimate
business requirement to complete their duties. . . .
Currently, PIMS, HIST, KEYM, PIP, LAS, MPC and/or ACAS
applications are restricted to Personnel Specialists or Personnel
Technician classifications because their need is by definition a function
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California State Lottery Payroll Process and Transactions Audit
of their specific job duties and any change in those duties requires a
reevaluation of the need for access.
If the employee’s duties change, such that the need for access no longer
exists, the access privilege MUST be removed or deleted immediately
by a request submitted by the department/campus. . . .
To prevent unauthorized use by a transferred, terminated or resigned
employee's user ID, the Security Monitor must IMMEDIATELY submit
all pages of the PSD125A to delete the user’s system access. Using an
old user ID increases the chances of a security breach which is a serious
security violation. Sharing a user ID is strictly prohibited and a serious
violation.
Recommendation
We recommend that the Lottery:
Update keying access to the State’s payroll system immediately after
employees leave the Lottery, transfer to another unit, change
classifications, or when temporary access period expires; and
Periodically review access to the system to verify that access complies
with the Decentralized Security Program Manual.
FINDING 3— The Lottery did not implement controls to ensure that it adhered to the
requirements of collective bargaining agreements and state regulations to
Inadequate
limit the accumulation of vacation and annual leave credits. This
controls over
deficiency resulted in a known and likely liability for excessive leave
vacation and
balances with a value of at least $903,755 as of March 31, 2019. We expect
annual leave
the liability to increase if the Lottery does not take action to address the
balances, resulting
excessive vacation and annual leave balances.
in liability for
excessive balances Collective bargaining agreements and state regulations limit the amount
of vacation and annual leave that most state employees may accumulate to
no more than 640 hours. The limit on leave balances helps state agencies
to manage leave balances and control the State’s liability for accrued leave
credits. State agencies may allow employees to carry a higher leave
balance only under limited circumstances. For example, an employee may
not be able to reduce accrued vacation or annual leave hours below the
limit due to business needs. When an employee’s leave accumulation
exceeds or is projected to exceed the limit, state agencies should work with
the employee to develop a written plan to reduce leave balances below the
applicable limit.
Our examination of the Lottery’s leave accounting records determined that
the Lottery had 774 employees with unused vacation or annual leave
credits at March 31, 2019. Of those employees, 69 (9%) exceeded the limit
set by collective bargaining agreements and state regulations. For
example, one employee had an accumulated balance of 2,218 hours in
annual leave, or 1,578 hours beyond the 640-hour limit. Collectively, the
69 employees accumulated more than 24,660 hours in excess vacation and
annual leave, costing at least $903,755 as of March 31, 2019.
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California State Lottery Payroll Process and Transactions Audit
We used a statistical sampling method to randomly select 31 of the
69 employees (as described in the Appendix) over the 640-hour limit to
determine whether the Lottery complied with collective bargaining
agreements and state regulations. The Lottery provided leave reduction
plans for 25 of the 31 employees; however, the Lottery could not
demonstrate that it had allowed the employees to carry vacation or annual
leave balances beyond the limit based on exceptions specified in the
bargaining agreements and state regulations.
The known liability for the 31 employees is approximately $480,624.
Because the statistical sample of 31 employees was representative of the
population, we projected our finding upon the remaining population. This
resulted in total known and likely liability due to noncompliance with
bargaining agreements and state regulations to the state of approximately
$903,755. The following table summarizes the results of our statistical
sampling:
Known excess vacation and annual leave balance liability $ 480,624
Divide by: Sample 480,624
Error rate for projection (differences due to rounding) 100.00%
Population that was statistically sampled $ 903,755
Multiply by: Error rate for projection 100.00%
Known and likely excess vacation and annual leave balance liability 903,755
Less: Known excess vacation and annual leave balance liability 480,624
Likely excess vacation and annual leave balance liability $ 423,131
_____________
* Amounts in this table are rounded to the nearest dollar.
This estimated liability does not adjust for salary rate increases and
additional leave credits.2 For example, a Lottery employee separated from
state service with 1,687 hours in leave credits, including 1,597 hours in
annual leave. After adjusting for additional leave credits, the employee
was paid for 1,943 hours, or approximately 15% more. If the Lottery does
not take action to reduce the excessive leave balances, the liability for
accrued vacation and annual leave will likely increase. This is because
most employees will receive salary increases or use other non-
compensable leave credits instead of vacation or annual leave, increasing
their vacation or annual leave balances.
Although an October 20, 2020 directive from CalHR does not affect the
dollar value of this finding, we are disclosing this directive because it
affects our recommendation. CalHR has directed departments to
immediately suspend policies that require leave balances to be reduced
below the limit, and that require employees to implement leave-reduction
plans. This suspension will be in effect until the 2020 PLP ends, or July 1,
2022, whichever is sooner.
2
Most state employees receive pay rate increases every year pursuant to state laws and/or collective bargaining
agreements until they reach the top of their pay scale, or promote into a higher-paying position. In addition, when
an employee’s accumulated leave balances upon separation are calculated for lump-sum pay, the employee is
credited with additional leave credits equal to the amount that the employee would have earned had the employee
taken time off and not separated from state service.
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California State Lottery Payroll Process and Transactions Audit
Recommendation
We recommend that, after the 2020 PLP ends, or July 1, 2022, whichever
is sooner, the Lottery:
Implement controls to ensure that its employees’ vacation and annual
leave balances are maintained within levels allowed by collective
bargaining agreements and state regulations;
Conduct ongoing monitoring of controls to ensure that they are
implemented and operating effectively; and
Participate in leave buy-back programs if the State offers such
programs and funds are available.
FINDING 4— The Lottery lacked adequate controls over the processing of employee
Inadequate separation lump-sum pay. We identified a net total of $691 of known and
controls over likely improper payments consisting of $13,449 in known and likely
overpayments and $12,758 in known and likely underpayments. The
separation lump-
Lottery also did not make separation lump-sum payments to 13 employees
sum pay, resulting
in a timely manner. If not mitigated, these control deficiencies leave the
in improper and
Lottery at risk of making additional improper and untimely separation
late payments
lump-sum payments, noncompliance with agreements and laws, and
liability for late payments.
GC section 19839 allows lump-sum payment for accrued eligible leave
credits when an employee separates from state employment. Collective
bargaining agreements include similar provisions regarding separation
lump-sum pay.
The Lottery processed payments for separation lump-sum pay, totaling
$1,532,296, for 133 employees between July 2016 and April 2019. We
examined the separation lump-sum pay for the 12 employees with the
highest payments, totaling $548,771. Of the 12 employees, the Lottery
overpaid three of them by $2,386, and underpaid three of them by
approximately $2,561 because Transactions and Payroll Unit staff
miscalculated the number of hours that would be paid in the lump sum
payment.
Of the remaining 121 payments to employees, totaling $983,525, we
randomly selected a statistical sample (as described in the Appendix) of
54 employees who were paid separation lump-sum pay, totaling $399,523.
We found that the Lottery overpaid six of them by approximately $4,494
and underpaid seven of them by approximately $4,142. The overpayments
and underpayments were made because Transactions and Payroll Unit
staff miscalculated leave balances paid. The Lottery also lacked adequate
supervisory review to ensure accurate processing of separation lump-sum
pay.
As we used a statistical sampling method to select the employees whose
payments for separation lump-sum pay were examined, we projected the
amount of likely overpayments to be $6,569 and likely underpayments to
be $6,055.
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California State Lottery Payroll Process and Transactions Audit
The following table summarizes the results of our statistical sampling:
Known improper payments, net $ 352
Divide by: Sample 399,523
Error rate for projection (differences due to rounding) 0.09%
Population that was statistically sampled 983,525
Multiply by: Error rate for projection 0.09%
Known and likely improper payments, net (differences due to rounding) 866
Less: Known improper payments, net 352
Likely improper payments, net $ 514
_____________
* Amounts in this table are rounded to the nearest dollar.
In addition, of the 66 separation lump-sum payments that we examined,
13 were not paid in a timely manner, in violation of collective bargaining
agreements and state laws, as summarized in the CalHR Human Resources
Manual, section 1703.
GC sections 13400 through 13407 require state agencies to establish and
maintain internal controls, including an effective system of internal
review.
Recommendation
We recommend that the Lottery:
Establish adequate controls to ensure accurate calculation and timely
payment of separation lump-sum pay;
Conduct a review of payments for separation lump-sum pay made
during the past three years to ensure that the payments were accurate
and in compliance with collective bargaining agreements and state
law; and
Recover overpayments made to separated employees in accordance
with GC section 19838 and State Administrative Manual (SAM)
section 8776.6, and properly compensate those employees who were
underpaid.
FINDING 5— The Lottery lacked adequate controls over the processing of overtime pay.
We identified a net total of $33,395 of known and likely improper and
Inadequate
questioned overtime payments. This consists of $24,071 in known and
controls over
likely overpayments, $4,380 known and likely underpayments, and
overtime pay,
$13,704 in known and likely questioned payments. If not mitigated, the
resulting in
control deficiencies leave the Lottery at risk of making additional
improper and
improper payments for overtime pay.
questioned
payments The Lottery processed 1,639 overtime pay transactions, totaling
$1,072,513, between July 2016 and April 2019. We examined all four
overtime pay transactions, totaling $1,764, for Work Week Group
(WWG) E employees who are not eligible to receive overtime pay under
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California State Lottery Payroll Process and Transactions Audit
normal circumstances. Of the four transactions, the Lottery overpaid two
payments to one employee, totaling $85. The employee was not eligible
for overtime compensation.
CalHR’s California State Civil Service Pay Scales, section 10, states, in
part:
Work Week Group “E” includes classes that are exempted from
coverage under the Fair Labor Standards Act because of the “white-
collar” (administrative, executive, professional) exemptions. To be
eligible for this exemption a position must meet both the “salary basis”
and the “duties” test.
Exempt (WWG E) employees are paid on a “salaried” basis and the
regular rate of pay is full compensation for all hours worked to perform
assigned duties. However, these employees shall receive up to 8 hours
holiday credit when authorized to work on a holiday. WWG E employees
shall not receive any form of additional compensation, whether formal
or informal, unless otherwise provided by the provisions of this work
week group.
We also examined 20 overtime pay transactions, totaling $188,828, for
WWG 2 employees who were paid for at least 60 hours. We found that of
the 20, two were overpayments, totaling $293.
Of the remaining 1,615 overtime pay transactions, totaling $881,921, for
WWG 2 employees who were paid for less than 60 hours of overtime
between July 2016 and April 2019, we randomly selected a statistical
sample (as described in the Appendix) of 105 transactions, totaling
$61,009. Of the 105 transactions, the Lottery overpaid 20 of them by
$1,639, and underpaid one by $303. We also questioned two transactions,
totaling $948, because the Lottery could not provide timesheets to support
that the payments were valid and authorized.
As we used a statistical sampling method to select the overtime pay
transactions examined, we projected the amount of likely overpayments to
be $22,054, likely underpayments to be $4,077, and likely questioned
payments to be $12,756.
The following table summarizes the results of our statistical sampling:
Known improper and questioned payments, net $ 2,284
Divide by: Sample 61,009
Error rate for projection (difference due to rounding) 3.7437%
Population that was statistically sampled 881,921
Multiply by: Error rate for projection 3.74371%
Known and likely improper and questioned payments, net
(difference due to rounding) 33,017
Less: Known improper and questioned payments, net 2,284
Likely improper and questioned payments, net $ 30,733
_____________
* Amounts in this table are rounded to the nearest dollar.
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California State Lottery Payroll Process and Transactions Audit
The known overpayments and underpayment occurred because
Transactions and Payroll Unit staff made keying and calculation errors.
The Lottery also lacked adequate supervisory review to ensure accurate
processing of overtime pay.
GC sections 13402 through 13407 require state agencies to establish and
maintain internal controls, including a system of policies and procedures
adequate to ensure compliance with applicable laws and other
requirements, and an effective system of internal review.
Recommendation
We recommend that the Lottery:
Conduct a review of payments for overtime pay made during the past
three years to ensure that the payments complied with collective
bargaining agreements and state laws and policies; and
Recover overpayments made to employees through an agreed-upon
collection method in accordance with GC section 19838, and properly
compensate those employees who were underpaid.
We further recommend that, to prevent improper overtime payments from
recurring, the Lottery:
Establish adequate internal controls to ensure that payments are
accurate and comply with collective bargaining agreements and state
laws and policies; and
Provide adequate oversight to ensure that the Transactions and Payroll
Unit staff process only valid and authorized payments that comply
with collective bargaining agreements and state laws and policies.
FINDING 6— The Lottery lacked adequate controls over the processing of payment type
Inadequate 9G bonus pay. We identified $80,222 in known and likely overpayments
controls over for bonus pay. If not mitigated, the control deficiencies leave the Lottery
at risk of additional improper payments for bonus pay.
bonus payments,
resulting in
The Lottery processed 3,615 bonus pay transactions, totaling $6,886,700,
improper
between July 2016 and April 2019.
payments
We examined six employees’ bonus pay transactions, totaling $25,000,
because they did not appear to adhere to the SEIU Local 1000 $2,500
signing bonus criteria. The Lottery overpaid five of the six employees,
totaling $12,500. Four employees were paid $2,500 twice, and one
employee was not eligible for the bonus.
Section 11.2 A., Signing Bonus, of the collective bargaining agreements
between the State and Bargaining Units 1, 3, 4, 11, 14, 15, 17, 20, and 21,
effective for the period of July 2, 2016, through January 1, 2020, states:
Upon ratification of the MOU, SEIU Local 1000 represented employees
shall receive a one-time bonus of two thousand five hundred dollars
($2,500)…
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California State Lottery Payroll Process and Transactions Audit
We also examined the four highest bonus pay transactions (excluding the
SEIU $2,500 bonus transactions), totaling $16,530. Our examination of
the transactions found no exceptions. Of the remaining 3,078 9G bonus
pay transactions, totaling $5,530,170, we randomly selected a statistical
sample (as described in the Appendix) of 105 transactions, totaling
$188,635. Of the 105 transactions, the Lottery overpaid four of them,
totaling $2,310. As we used a statistical sampling method to select the
bonus pay transactions examined, we projected the amount of likely
overpayments to be $65,412. The overpayments occurred because
Transactions and Payroll Unit staff made keying errors, and because sales
bonus reports did not match system information. The Lottery also lacked
adequate supervisory review to ensure accurate processing of bonus pay.
The following table summarizes the results of our statistical sampling:
Known improper payments, net $ 2,310
Divide by: Sample 188,635
Error rate for projection (difference due to rounding) 1.2246%
Population that was statistically sampled 5,530,170
Multiply by: Error rate for projection 1.22459%
Known and likely improper payments, net (difference due to
rounding) 67,722
Less: Known improper payments, net 2,310
Likely improper payments, net $ 65,412
_____________
* Amounts in this table are rounded to the nearest dollar.
GC sections 13402 through 13407 require state agencies to establish and
maintain internal controls, including a system of policies and procedures
adequate to ensure compliance with applicable laws and other
requirements, and an effective system of internal review.
Recommendation
We recommend that the Lottery:
Conduct a review of bonus payments made during the past three years
to ensure that the payments complied with collective bargaining
agreements and state laws and policies; and
Recover overpayments made to employees through an agreed-upon
collection method in accordance with GC section 19838.
We further recommend that, to prevent improper bonus payments from
recurring, the Lottery:
Establish adequate internal controls to ensure that payments are
accurate and comply with collective bargaining agreements and state
laws and policies; and
Provide adequate oversight to ensure that Transactions and Payroll
Unit staff process only valid and authorized payments that comply
with collective bargaining agreements and state laws and policies.
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California State Lottery Payroll Process and Transactions Audit
FINDING 7— The Lottery lacked adequate controls over the processing of holiday credit
Inadequate transactions. We identified approximately $12,331 in improper holiday
controls over credits. In addition, we questioned one transaction, valued at $838,
because the timesheet could not be provided. If not mitigated, this control
holiday credit
deficiency leaves the Lottery at risk of granting additional improper
transactions,
holiday credits.
resulting in
improper credits
The Lottery processed 1,216 accrual transactions of holiday credit
between July 2016 and April 2019. We examined 34 of these transactions,
with an estimated value of $16,704, because they contained irregular credit
amounts. Of the 34 transactions, 30 were improper credits, with an
estimated value of $12,331. In addition, the Lottery could not provide
supporting documentation for one transaction; therefore we questioned an
accrual of 24 hours with an estimated value of $838.
The improper holiday credit transactions were made because Transactions
and Payroll Unit staff improperly calculated holiday credit hours. The
Lottery also lacked adequate supervisory review to ensure accurate
processing of holiday credits.
GC section 19853 specifies the compensation that an eligible employee is
entitled to receive when required to work on a qualifying holiday.
Collective bargaining agreements between the State and Bargaining
Units 1 and 7 include similar provisions regarding holiday compensation
for represented employees.
GC sections 13400 through 13407 require state agencies to establish and
maintain internal controls, including an effective system of internal
review.
Recommendation
We recommend that the Lottery:
Conduct a review of holiday credits granted during the past three years
to ensure that credits complied with collective bargaining agreements
and state law;
Correct any improper holiday credits in the State’s leave accounting
system; and
Establish adequate controls to ensure that holiday credits granted are
valid and comply with collective bargaining agreements and state law.
FINDING 8— The Lottery lacked adequate controls over salary advances to ensure that
Inadequate they were recovered in accordance with state law and policies. We
determined that three salary advances, totaling $2,500, were not properly
controls over
collected and remained outstanding as of April 30, 2019. The oldest
salary advances,
unrecovered salary advance was outstanding for over two years. If not
resulting in
mitigated, this control deficiency leaves the Lottery at risk of failing to
outstanding
collect further salary advances.
amounts
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California State Lottery Payroll Process and Transactions Audit
At April 30, 2019, the Lottery’s accounting records showed eight
outstanding salary advances, totaling $10,935, including two balances
totaling $2,300 that had been outstanding for more than one year.
Generally, the prospect of collection diminishes as an account ages. When
an agency is unable to collect after three years, the possibility of collection
is remote.
The Lottery also did not adequately retain supporting documentation for
salary advances. In addition to the two salary advances noted above, the
Lottery could not provide adequate supporting documentation for another
salary advance, totaling $200. Only the Salary Advance Request form
could be provided. The Lottery did not have documentation to show
collection efforts or calculation of salary advance amounts.
The lack of adequate controls over salary advances reduces the likelihood
of collection, increases the amount of resources expended on collection
efforts, and negatively impacts cash flow.
GC section 19838 and SAM sections 8776 and 8776.7 describe the State’s
collection policies and procedures, which require the Lottery to collect
salary advances in a timely manner and maintain proper records of
collection efforts and payments.
Recommendation
We recommend that the Lottery:
Ensure that it recovers salary advances in a timely manner pursuant to
GC section 19838 and SAM sections 8776 and 8776.7; and
Maintain documentation of its collection efforts and payment of salary
advances.
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California State Lottery Payroll Process and Transactions Audit
Appendix—
Statistical Sampling Methodology
Results
Expected Projected to
Audit Type of Population Population Sampling Sample Selection Confidence Tolerable Error Sample Intended Finding
Area Testa (Unit) (Dollar) Unit Method Level Error Rate (Rate)b Size Population Number
Computer-generated
Regular Pay Compliance 25,977 $ 1 31,774,771 Transaction 90% 5% 0 (0.0%) 45 Yes N/A
simple random
Excess vacation and
Computer-generated
annual leave Compliance 69 9 03,755 Employee 90% 10% 2 (1.0%) 31 Yes 3
simple random
balances
Separation Computer-generated
Compliance 121 9 83,525 Employee 90% 5% 2 (1.0%) 54 Yes 4
lump-sum pay simple random
Computer-generated
Overtime pay Compliance 1,615 8 81,921 Transaction 90% 5% 2 (1.5%) 105 Yes 5
simple random
Computer-generated
Bonus pay Compliance 3,078 5 ,530,170 Transaction 90% 5% 2 (1.5%) 105 Yes 6
simple random
__________________
a We used attribute sampling for tests of compliance. It allowed us to achieve our objectives in an efficient and effective manner. The sample was designed in accordance with the
American Institute of Certified Public Accountants guidelines.
b Pursuant to the American Institute of Certified Public Accountant’s Audit Guide: Audit Sampling (May 1, 2017 edition), pages 131-133, the expected error is the expected
number of errors planned for in the sample. It is derived by multiplying the expected error rate by the sample size. The expected number of errors in the sampling tables on pages
135-136 was rounded upward, e.g., 0.2 errors becomes 1.0 error.
California State Lottery Payroll Process and Transactions Audit
Attachment—
California State Lottery’s
Response to Draft Report
State Controller’s Office
Division of Audits
Post Office Box 942850
Sacramento, CA 94250
http://www.sco.ca.gov
S19-LOT-0002