CA Lottery Office Revolving Fund and Travel Expenses Follow-up -

CALIFORNIA STATE LOTTERY Review Report OFFICE REVOLVING FUND AND TRAVEL EXPENSES FOLLOW-UP May 1, 2019, through October 31, 2020 BETTY T. YEE California State Controller June 2021 BETTY T. YEE California State Controller June 10, 2021 Alva Vernon Johnson, Director California State Lottery 700 North Tenth Street Sacramento, CA 95811 Dear Mr. Johnson: The State Controller’s Office conducted a review of the California State Lottery’s (Lottery) Office Revolving Fund and travel expenses to determine the adequacy of the Lottery’s implementation of corrective actions related to the findings in our prior audit report, issued April 9, 2019. The period for this review was May 1, 2019, through October 31, 2020. Our review found that the Lottery fully implemented corrective actions for Findings 3, 5, 8, and 11; and that corrective actions to address the recommendations are still in progress for Findings 1, 2, 4, 6, 7, 9, and 10. The Lottery is recovering overpayments, addressing Lottery retailer training, and updating its procurement process. We will follow up on the in-progress corrective actions in a future engagement. If you have any questions, please contact Andrew Finlayson, Bureau Chief, Division of Audits, by telephone at (916) 324-6310 or by email at afinlayson@sco.ca.gov. Sincerely, Original signed by KIMBERLY TARVIN, CPA Chief, Division of Audits KT/as Nathaniel Kirtman III, Chair -2- June 10, 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 Nicholas Buchen, Deputy Director, Finance Division California State Lottery Sharon Allen, Deputy Director, Sales and Marketing Division California State Lottery Tiffany Donohue, Deputy Director, Operations Division California State Lottery Vincent Espinosa, Chief Enterprise Risk Officer, Executive Division California State Lottery Fernando Aceves, Chief Counsel, Legal Services, Executive Division California State Lottery Christopher Fernandez, Deputy Director, Human Resources Division California State Lottery Sara Sheikholislam, Deputy Director, Internal Audits, Executive Division California State Lottery James Shannon, Audit Manager, Internal Audits, Executive Division California State Lottery California State Lottery Office Revolving Fund and Travel Expenses Follow-up Contents Review Report Summary ............................................................................................................................. 1 Background ......................................................................................................................... 1 Objective, Scope, and Methodology ................................................................................. 2 Conclusion ........................................................................................................................... 3 Views of Responsible Officials .......................................................................................... 3 Restricted Use ..................................................................................................................... 3 Schedule—Summary of Corrective Action Plan Follow-Up ................................................ 4 California State Lottery Office Revolving Fund and Travel Expenses Follow-up Review Report Summary The State Controller’s Office (SCO) conducted a review of the California State Lottery’s (Lottery) Office Revolving Fund (ORF) and travel expenses to determine the adequacy of the Lottery’s implementation of corrective actions related to the findings in our prior audit report, issued April 9, 2019. The period for this review was May 1, 2019, through October 31, 2020. Our review found that the Lottery fully implemented corrective actions for Findings 3, 5, 8, and 11; and that corrective actions to address the recommendations are still in progress for Findings 1, 2, 4, 6, 7, 9, and 10. The Lottery is recovering overpayments, addressing Lottery retailer training, and updating its procurement process. See the Schedule for details on the status of each corrective action to address the 11 findings in the April 9, 2019 audit report. We will follow up on the in-progress corrective actions in a future engagement. 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 February 1, 2021, the Lottery has 917 budgeted positions; staff are located at Lottery Headquarters, two distribution centers, and nine district offices. On April 9, 2019, the SCO issued an audit report on the Lottery’s ORF and travel expenses for the period of July 1, 2014, through June 30, 2018. The audit identified 11 findings and recommended that the Lottery develop a detailed corrective action plan to address the findings. The SCO conducted this review to follow up on the Lottery’s corrective action plan. Lottery Office Revolving Fund The ORF is used to draw funds for payment of compensation earned, travel expenses, travel advances, or where immediate payment is otherwise necessary. The Lottery’s Finance Division is responsible for processing payments and ensuring that the ORF is replenished in a timely manner. Payments that do not meet the criteria for the ORF must go through the regular claim schedule process. -1- California State Lottery Office Revolving Fund and Travel Expenses Follow-up California Automated Travel Expense Reimbursement System The Lottery uses the California Automated Travel Expense Reimbursement System (CalATERS). CalATERS is a web-based application used by agencies to process travel advances and expense reimbursements. Travel advances are still paid through the Lottery’s ORF, while expense reimbursements are issued by the SCO. Pursuant to Government Code (GC) section 8880.46.6, the SCO may conduct special post-payment 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. 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 states that “. . . the Controller shall suggest plans for the improvement and management of revenues.” Objective, Scope, The objective of our review was to determine whether the Lottery implemented corrective actions to address the findings noted in the and Methodology April 9, 2019 audit report. The review period was May 1, 2019, through October 31, 2020. To achieve our objective, we performed the following:  Reviewed the Lottery’s corrective action plan for the ORF and travel expenses audit;  Reviewed the State Administrative Manual; the Lottery Act; the Lottery’s policies and procedures; California Department of Human Resources (CalHR) rules; collective bargaining agreements; and contracts; as they relate to ORF transactions and travel expenses;  Reviewed prior audits performed by the Lottery’s Internal Audits Office related to the ORF and travel expenses;  Interviewed the Lottery’s Finance Division, Human Resources Division, Operations Division, and Sales and Marketing Division staff members to verify whether corrective actions were implemented;  Judgmentally selected transactions for testing based on employee, date, and dollar amount to verify whether corrective actions were implemented. We tested: o ORF corporate credit card transactions–eight of 29 ($82,156 of $477,330); -2- California State Lottery Office Revolving Fund and Travel Expenses Follow-up o ORF individual/employee transactions–six of 65 ($43,169 of $85,083); o CalATERS transactions–50 of 1992 ($28,130 of $425,134); o International Game Technology PLC (IGT) reimbursement transactions–14 of 155 ($9,909 of $57,734); o Employee travel accounts receivables–10 of 78 ($963 of $15,713); This engagement is classified as a review and not an audit; therefore, we did not perform the engagement under generally accepted government auditing standards. Conclusion Our review found that the Lottery fully implemented corrective actions for Findings 3, 5, 8, and 11; and that corrective actions to address the recommendations are still in progress for Findings 1, 2, 4, 6, 7, 9, and 10. The Lottery is recovering overpayments, addressing Lottery retailer training, and updating its procurement process. We will follow up on the in-progress corrective actions in a future engagement. Views of We discussed our review results with Lottery representatives at an exit conference held on March 29, 2021. We agreed that the report could be Responsible issued as final. Officials Restricted Use This report is intended for the information and use of the Lottery, the California Lottery Commission, 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 KIMBRELY TARVIN, CPA Chief, Division of Audits June 10, 2021 -3- California State Lottery Office Revolving Fund and Travel Expenses Follow-up Schedule— Summary of Corrective Action Plan Follow-Up Finding No. Recommendation Status SCO Comments 1. Sales Division We recommend that: In The Sales and Marketing management did not progress Division is exploring ways • The Lottery’s Sales Division implement adequate to inform and educate management set the tone and lead controls over its Lottery retailers. Due to the by example; strong and effective operations COVID-19 pandemic, leadership is fundamental to an priority was shifted to effective internal control system; maintaining core and operations. We will follow • The Lottery regularly oversee and up on the status in a future monitor the activities of the Sales engagement. Division to ensure that all applicable policies, procedures, rules, and regulations are being followed. 2. Inappropriate and/or We recommend that the Lottery: In The Lottery recovered unnecessary progress overpayments due to error • Establish adequate controls to employee travel from hotels to the greatest ensure that travel charges are expenses for Sales extent possible, and sent appropriate and in accordance with Division staff events accounts receivable CalHR rules; collection letters to • Recover overpayments from the individuals who received hotels that made errors on billing inappropriate travel invoices; and reimbursements. As of February 2021, the Lottery • Consider recovering payment of has sent second collection unallowable lodging and per diem letters. Of the total accounts in accordance with GC receivable amount of section 19838. $15,724, the Lottery has collected $1,481, and written off $342. The Lottery intends to pursue the payroll deduction process with its Human Resources Division if the collection letter process is not successful. We will follow up on the status in a future engagement. -4- California State Lottery Office Revolving Fund and Travel Expenses Follow-up Schedule (continued) Finding No. Recommendation Status SCO Comments 3.Inadequate controls over We recommend that, to prevent Completed The Lottery implemented the processing of travel improper TEC payments from corrective actions to expense claims (TECs) recurring, the Lottery: address this finding. We verified that the Lottery • Establish adequate internal provided travel training controls to ensure that payments classes for supervisors and for TECs are accurate and comply managers. In addition, with collective bargaining clarification emails were agreements and CalHR rules; sent regarding personal • Provide training to the Travel Unit mileage claims and staff who process TECs to ensure documentation that they understand the requirements. requirements under collective bargaining agreements and CalHR rules; and • Maintain supporting documentation for mileage claims on TECs for future audits. 4. Improper food and We recommend that the Lottery: In The Lottery is updating its beverage purchases for progress procurement process. Sales • Establish adequate internal IGT-hosted events conferences and retailer controls to ensure that payments trade shows are currently for corporate card charges comply suspended. We will follow with state law to prevent improper up on the status in a future corporate card charges or engagement. payments; and • Provide adequate oversight to ensure that accounts payable staff processes only valid and authorized payments that comply with state law. 5. Improperly authorized For future long-term assignments, Completed The Lottery stated that it short-term rates for a we recommend that the Lottery will not apply short-term long-term out-of-class comply with the long-term travel lodging and per diem rates assignment provisions set forth in collective to long-term assignments. bargaining agreements and the The Lottery did not have CalHR Human Resources Manual. any employees on long- term assignments during the review period. 6. Inadequate controls over We recommend that the Lottery In The Sales and Marketing Sales Division vendor strengthen its internal controls over progress Division did not make any purchases the purchase order process and vendor purchases during ensure that procurement procedures the review period. The are followed by each division as well Lottery is updating its as by Contract Development procurement process. We Services. will follow up on the status in a future engagement. -5- California State Lottery Office Revolving Fund and Travel Expenses Follow-up Schedule (continued) Finding No. Recommendation Status SCO Comments 7. Unallowable items We recommend that the Lottery In The Sales and Marketing purchased for Lottery adhere to GC section 8880.64 to progress Division did not make any staff at sales conferences ensure that Sales Division purchases branded purchases during are necessary and appropriate. the review period. The Lottery is updating its procurement process. We will follow up on the status in a future engagement. 8. Misclassification of We recommend that the Lottery: Completed The Lottery implemented transportation costs corrective actions to • Provide training to staff and related to sales address this finding. No implement adequate oversight over conferences and retailer transportation costs were the allocation of transportation trade shows identified in the Lottery’s expenses; and sales conferences expense • Monitor expenses on a regular account during the review basis to identify any irregularities. period. All transportation costs reviewed were properly classified. 9. Improperly signed and We recommend that the Lottery In No hotel contracts were authorized hotel implement: progress executed during the review agreements and costs period. The Lottery is • Procedures to ensure that the updating its procurement appropriate individual signs process. New procedures contracts, including hotel will require a justification agreements; and memo, an estimated budget • A review and approval procedure for all anticipated costs, and for when actual costs exceed the the Director’s signature on delegated signatory's authority. all hotel contracts. We will follow up on the status in a future engagement. -6- California State Lottery Office Revolving Fund and Travel Expenses Follow-up Schedule (continued) Finding No. Recommendation Status SCO Comments 10. Lack of review over We recommend that the Lottery In The Lottery is finalizing IGT retailer trade show adequately review IGT invoices and progress procurement guidelines for expenses supporting documentation for any IGT purchases. No costs by expenses claimed by IGT. IGT were billed against the $200,000 reimbursement amount during the review period. The Lottery billed IGT for employee training and travel costs after the ORF and travel expenses audit was completed. During this review, we identified and communicated to the Lottery about additional training costs that could be reimbursed. We will follow up on the status in a future engagement. 11. Excess Lodging Rate We recommend that the Lottery: Completed The Lottery implemented Request forms (STD corrective actions to • Ensure that STD 255C forms are 2554C) were not address this finding. The adequately supported and properly completed and Lottery provided training to submitted in a timely manner; and submitted supervisors and managers • Ensure that excess lodging regarding excess lodging requests are approved before and the submittal process execution of agreement. for Form STD 255C. -7- State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250 http://www.sco.ca.gov S21-LOT-9001