An Audit Report on Lotto Texas Activities at the Texas Lottery Commission
July 2006
Report Number 06-046
Overall Conclusion
The Texas Lottery Commission (Agency) has not always accurately advertised Lotto Texas jackpot amounts. The failure to accurately advertise Lotto Texas jackpot amounts may contribute to a lack of public confidence in the Lotto Texas game and the Texas Lottery Commission.
The State Auditor's Office identified seven instances in which the Agency advertised Lotto Texas jackpot amounts that exceeded estimated sales. In these instances, the advertised Lotto Texas jackpot amounts exceeded estimated sales by a total of approximately $4.4 million. In two other instances, the Agency did not have documentation enabling us to determine whether advertised Lotto Texas jackpot amounts exceeded estimated sales. Specifically:
- We verified Agency management's assertion that there were four instances between May 4, 2003, and June 11, 2005, in which advertised Lotto Texas jackpot amounts exceeded estimated sales.
- We cannot determine whether advertised Lotto Texas jackpot amounts exceeded estimated sales for two other Lotto Texas drawings between May 4, 2003, and June 11, 2005. We cannot make this determination because the Agency did not prepare an estimate for one drawing associated with a holiday, and its original approved jackpot estimation worksheet for the other drawing is missing.
The Texas Lottery Commission directed the Agency to increase estimated jackpot amounts by at least $1 million for each drawing to increase sales. This directive was made because, according to the Agency and members of the Texas Lottery Commission, ticket sales are partially driven by advertised jackpot amounts. In November 2005, the Commission also amended the Texas Administrative Code to require that, for all winning drawings, the jackpot prize amount actually paid to winners must be the higher of the advertised jackpot amount or a percentage of actual sales.
We identified three additional instances in which advertised Lotto Texas jackpot amounts exceeded estimated sales after the Commission adopted the above changes. In each instance, Agency management and the members of the Texas Lottery Commission were aware that advertised amounts had exceeded estimated sales.
Advertising Lotto Texas jackpot amounts that are within estimates of sales helps to ensure that jackpot amounts that must be paid are supported by actual sales. If the amount of a jackpot the Agency is required to pay exceeds actual sales, the Agency would be required to pay the jackpot using proceeds from other sources (including the General Revenue dedicated Lottery Account), and the amount transferred to the Foundation School Fund could be reduced.
Agency management does not adequately fulfill its role in addressing and/or complying with processes that are significant to promoting accountability.
Auditors identified several issues that indicate Agency management does not adequately fulfill its role. Specifically:
- Auditors identified a significant number of instances in which Agency management did not comply with policies and procedures to review or approve documentation related to jackpot estimations, jackpot prize payment calculations, and transfers to the Foundation School Fund. We did not identify any errors made by Agency staff performing these functions, and Agency management has made improvements in these areas. Consistent management reviews and approvals are critical to ensuring that Agency management enforces policies and procedures and that correct amounts are distributed to all required parties.
- The Agency could not substantiate the effective dates of policies and procedures in areas such as jackpot estimations, jackpot prize payment calculations, and Foundation School Fund transfers. Verifying the effective dates of policies and procedures helps ensure that staff (1) understand the processes it is responsible for and (2) comply with policies and procedures. Agency management recently adopted a policy related to the preparation and implementation of new policies and recognizes that further revision of this policy is necessary to clarify effective dates.
- The Agency does not appropriately oversee and monitor transactions that are created when a ticket does not print at a retailer (for example, because of a power outage), but the numbers selected for that ticket are still recorded in the contracted lottery operator's central computer system (these transactions are referred to as incomplete transactions). Although incomplete transactions are rarely created and none was associated with a high-tier ($600 or more) or jackpot prize during our test period, we identified issues with the Agency's oversight and monitoring of these transactions. Inadequate oversight and monitoring increases the risk that the Agency could erroneously conclude that there had been a game winner and transfer the associated prize to unclaimed prizes instead of putting the prize back into the jackpot for the next drawing. This could diminish the public's confidence in the integrity of online games. It could also affect sales because, according to the Agency and members of the Texas Lottery Commission, ticket sales are partially driven by jackpot amounts.
The Agency accurately calculates and pays Lotto Texas jackpot prizes and transfers funds to the Foundation School Fund.
After a Lotto Texas jackpot prize winner is identified, the Agency accurately calculates and pays Lotto Texas jackpot prizes in accordance with rules, policies, and procedures. In addition, the Agency accurately calculates and transfers proceeds from all games to the Foundation School Fund in accordance with Texas Government Code, Section 466.355.
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