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Audit of the D.C. Lottery and Charitable Games Control Board
Fiscal Years 1995 through 1997
E. Barrett Prettyman, Jr., Inspector General
September 30, 1998

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GOVERNMENT OF THE DISTRICT OF COLUMBIA
OFFICE OF THE INSPECTOR GENERAL
AUDIT OF THE D.C. LOTTERY AND CHARITABLE GAMES CONTROL BOARD
Fiscal Years 1995 Through 1997

TABLE OF CONTENTS

I. PURPOSE

II. BACKGROUND

III. SCOPE, OBJECTIVES AND METHODOLOGY

IV. SUMMARY

V. FINDINGS AND RECOMMENDATIONS

1. Inadequate Internal Controls at the Lottery Board

Inadequate Segregation of Duties

Recommendations

Insufficient Controls Over Repayment Agreements:

Recommendations

Inconsistency in Issuing Payment Receipts to Agents

Recommendations

2. Non-Compliance with Requirements

Non-Compliance with Agent Bank Account Regulations

Recommendations

Failure to Comply with Non-Sufficient Funds (NSF) Policy

Recommendations

Need to Enforce the Minimum Sales Requirement

Recommendations

Non-Compliance with Provisions of the On-Line Games Monitoring Contract

Recommendations

3. Improvements Needed in Finance, Licensing and Security Processes

Inadequate Reporting Capability of the Finance Computer Software

Recommendation

Deficiencies in the Agent Licensing Process and in the Maintenance of Agent Data Files.

A. Required Data Not Available for Processing Applications .

B. Licenses Issued Prior to Completion of Criminal Background Investigations

C. Deficiencies in the License/Renewal Application Forms, Files and Procedures

Recommendations

Accelerate the Process of Investigating Cancellation Reports

Recommendation

Employee Background Investigations Not Timely Completed

Recommendations

Lack of Inspection of Agents' Operating Records and Facilities

Recommendations

Exhibits

Exhibit A: Signet Bank Information Reporting System Return Statements

Exhibit B: List of Agents that Have Repayment Agreements

Exhibit C: Comments of Lottery Board

Attachment 1: Acknowledgment of Agent’s NSF Status

Attachment 2: Business Review

Attachment 3: Certificate of Bond

Attachment 4: Fingerprinting New Employees

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I. PURPOSE

The Office of the Inspector General conducted an audit of the D.C. Lottery and Charitable Games Control Board for Fiscal Years 1995 through 1997. The audit was conducted initially at the request of the former District of Columbia Auditor, and subsequently by the Executive Director of the District of Columbia Lottery and Charitable Games Control Board.

The District of Columbia Code (D.C. Code) requires that the Office of the D.C. Auditor conduct a regular post-audit of all accounts and transactions of the Lottery Board with respect to the operation of the lottery and daily numbers games. However, the Executive Director of the Lottery Board determined that it would be inappropriate for his office to perform an audit during Fiscal Years 1 995 and l 996 since he was Executive Director of the Lottery Board during part of that period.

The purpose of the audit was two-fold: 1) to evaluate the effectiveness of the Lottery Board's internal controls over ticket sales, agent licensing activities, collection of sales revenue from agents, monitoring of the on-line games contractor, and security operations; and 2) to determine, within the context of the internal control review, whether the Lottery Board's operations are in compliance with the applicable provisions of the D.C. Code, Sections 2-2501 through 2-2537, D. C. Municipal Regulations (DCMR) Title 30, and the Lottery Board's internal policies and procedures.

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II. BACKGROUND

The District of Columbia Lottery and Charitable Games Control Board was created in March 1981, to generate revenues for the District's General Fund, and to regulate gambling activities that support programs and services for the residents of the District of Columbia.

The Lottery Board makes sales via on-line terminals and instant tickets, and generates additional revenues by issuing licenses to conduct bingo games and raffles. The Lottery Board has approximately 530 terminals at various agent locations throughout the city.

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III. SCOPE. OBJECTIVES AND METHODOLOGY

Our review focused on the internal controls of the operational and financial processes of the Lottery Board.

The audit objectives were to:

  • Evaluate the effectiveness of the Lottery Board's internal controls over ticket sales, agent licensing activities, collection of sales revenue from agents, monitoring of the on-line games contractor, and security operations.
  • Determine whether the Lottery Board's operations were in compliance with the applicable provisions of the D. C. Code, Sections 2-2501 through 2-2537, DCMR Title 30, and the internal policies and procedures of the Board.

Our methodology for accomplishing the above objectives included the evaluation of the D. C. Lottery and Charitable Games Control Board for Fiscal Years 1995 through 1997. We reviewed the provisions of the D. C. Code, Sections 2-2501 to 2-2537, Lottery and Charitable Games Control Board; and DCMR Title 30, Lottery and Charitable Games. We also held discussions with Lottery Board personnel and reviewed financial statements of the Virginia State Lottery and the Maryland State Lottery Agency, for comparison purposes.

Our audit was performed in accordance with generally accepted government auditing standards, as promulgated by the Comptroller General of the United States.

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IV. SUMMARY

Our audit disclosed certain weaknesses and inefficiencies in the design and operation of the internal control structure of the Lottery Board. These weaknesses are summarized as follows:

  1. Inadequate internal controls with respect to the proper segregation of functions, management of repayment agreements, and issuance of payment receipts.
  2. Non-compliance with agent bank account regulations, non-sufficient funds (NSF) policy, provisions of the on-line games monitoring contract, and the need to enforce the minimum sales requirement.
  3. Need for improvements in the reporting capability of the finance computer software, agent licensing and maintenance of agent data files, investigation of cancellation reports, employee background investigations, and inspection of agents' operating records and facilities.

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V. FINDINGS AND RECOMMENDATIONS

1. Inadequate Internal Controls at the Lottery Board

Inadequate Segregation of Duties

During our audit, we noted that separate individuals were not performing the functions of collecting and recording receipts. The accounting supervisor, who maintained the receivable records, also kept ticket sale records, aged the receivable balances, and followed up on the collection and write-off of delinquent accounts. This condition failed to provide for adequate internal checks, supervisory reviews, and the proper documentation of activities within the division. Lottery officials stated that the inadequate separation of duties was due to inadequate staffing. The OIG also noted that currently there is no compliance unit. However, the Finance Division is handling some functions that in our opinion should be performed by a compliance unit.

Adequate internal controls require that certain duties and functions be segregated — performed by different individuals or functional areas. This minimizes the opportunity for irregularities to be committed and allows for the work of one employee to be checked by another employee. Generally speaking, no one employee should have physical control and recordkeeping responsibilities over any asset, or set of assets.

Recommendations:

We recommended that the Executive Director ensure that:

  1. Assessments of personnel assignments within the Finance Division are completed to determine the optimal allocation of personnel and the adequate segregation of duties.
  2. Consideration is given to establishing a compliance review unit to monitor compliance with Lottery Board policies and procedures.

Agency Response:

The Agency agreed with the finding and recommendations. (See Exhibit C.)

The Agency has added six experienced staff members to the Finance Department since January 1998. Proper checks and balances have been restored, and duties have been adequately segregated.

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Insufficient Controls Over Repayment Agreements

The OIG noted deficiencies in the Lottery Board's procedures for processing repayment agreements with agents whose accounts are in an NSF status. For instance, while only three of thirteen repayment agreements were written, the remainder were executed orally (see Exhibit B). Secondly, the parties did not execute one agreement, making it invalid and unenforceable.

We also noted that statements were not sent to the agents as payments were due. In other instances, the agents telephoned the Lottery Board's Finance Division to obtain information on amounts due. Due to these deficiencies, only two of the ten (10) agents that had oral repayment agreements were current on their payments at the time of this audit. Of the agents that were delinquent, some had not made any payments for at least four (4) months. (See Exhibit B.)

Oral agreements involving substantial amounts of money are generally not enforceable. Also, it is a common business practice for creditors to send reminders for amounts due.

Recommendations

We recommended that:

  1. The Executive Director of the Lottery Board ensure that repayment agreements are written and executed by all participating agents.;
  2. Repayment agreements be utilized only in instances where there is proof of burglary or break-in at the agent locations, by a police report or other uncontrollable circumstances; otherwise, full payment should be demanded.
  3. A process is established to generate monthly statements for agents with repayment agreements, to determine who is current or delinquent, and to develop an aging schedule. Of course, contact should be made with delinquent agents to request that their payments become current.

Agency Response:

The Agency agreed with the finding and recommendation. (See Exhibit C.)

The Agency agrees that all agreements should be written and has instructed staff not to enter into any verbal agreements. The Agency is in the initial stages of implementing a computerized receivable system and will consider segregating agents with agreements from the others so different procedures can be followed.

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Inconsistency in Issuing Payment Receipts to Agents

The OIG noted that the Lottery Board is not consistent in issuing receipts to agents who make payments on receivables. The Lottery Board recently introduced the procedure of issuing receipts to agents when payments are made on accounts; however, the receipts are not consistently issued. By not issuing receipts to agents in all cases for amounts paid, the Lottery Board created a void in the original source documentation for payments made. This made it difficult for the Lottery Board to perform subsequent reviews and reconciliations.

Proper internal controls require that accounts be reviewed and reconciled on a regular basis by a responsible official. For cash receipts and accounts receivable, examination of copies of receipts and comparison to other documents constitutes a fundamental element of a reconciliation process for these sensitive assets.

Recommendation

We recommended that the Lottery Board establish procedures to secure the complete and consistent issuance of receipts for all amounts collected and that the staff comply with this procedure.

Agency Response:

The Agency agrees with the finding and recommendation. (See Exhibit C.)

The Agency has instituted a procedure where all payments are accompanied by a receipt. (See Attachment 1 of Exhibit C.)

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2. Non-Compliance with Requirements

Non-Compliance with Agent Bank Account Regulations

We determined that the Lottery Board's procedures for the maintenance of agent bank accounts were not in compliance with the regulations. The procedures do not require agents to include certain terms that are required by DCMR Title 30 in regards to agreements with banks. By not enforcing these provisions, the Lottery Board weakens its control over funds belonging to the District, consequently allowing agents egregiously to violate the Lottery Board's non-sufficient funds regulations in a material manner.

Section 305.6 of DCMR, Title 30, states: "The agent's agreement with the bank shall provide that upon the change of principals, death, legal disability, incompetence, insolvency, or bankruptcy of the agent, all funds remaining in the account shall be paid over to the Agency as the lawful and true owner of the funds ". Furthermore, Section 305.4 states: "Funds deposited in this account shall constitute a trust fund for the Agency and withdrawals shall be made only in accordance with instructions issued by the Agency. No other funds shall be deposited in this account. "

The Lottery Board's procedures did not contain the provisions as stated above in the DCMR, Title 30.

Recommendations

We recommended that:

The Executive Director of the Lottery Board ensure that:

  1. Provisions of DCMR, Title 30, Sections 305.4 and 305.6, requiring agents' bank accounts to be designated as trust funds for the Lottery Board, be complied with and that the Lottery Board should be identified as the true owner of the funds.
  2. Agents' bank accounts for lottery sales revenue bear the notation "D.C. Lottery Board Trust Fund."

Agency Response:

The Agency agreed with the finding and recommendations. (See Exhibit C.)

The Agency will consider the impact of the designation the OIG recommends on the systems for the deposit of sales proceeds and make adjustments consistent with its business needs.

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Failure to Comply with Non-Sufficient Funds (NSF) Policy

We noted that the Lottery Board was not enforcing its policy to deactivate the agents' terminals in regards to agents with accounts in a non-sufficient fund (NSF) status. An account is classified as NSF when an agent does not deposit the total net weekly sales in the agent bank account. There are instances of agent accounts being in NSF status for several weeks before their terminals are deactivated. In one instance, an agent failed to deposit sales revenue of $30,534.77 for Week 1, $25,805.20 for Week 2, $23,978.13 for Week 3 and $27,890.49 for Week 4 (see Exhibit A).

DCMR 30, Section 212.1(a) provides that "the Executive Director may interrupt on-line lottery operations services to an agent without notice or prior hearing for failure to make prompt payment to the Lottery Board ". Also, the Lottery Board's accounts receivable procedures provide that "on-line terminals will be deactivated immediately on the notification of NSF and that a fourth NSF notification will result in a recommendation for revocation of license".

Failure to deactivate the agents' terminals upon the notification of NSF allowed the agents to continue defaulting on their payments.

Recommendations

We recommended that the Executive Director of the Lottery Board take action to:

  1. Ensure that agents' terminals are immediately deactivated upon the notification of NSF.
  2. Establish a liaison with the Department of Consumer and Regulatory Affairs in order to deny the renewal of business licenses to agents that owe the Lottery Board for past lottery sales.

Agency Response:

The Agency agreed with the finding and recommendations. (See Exhibit C.)

The Agency has reinforced and reiterated the NSF policy and has been able to reduce the number of NSF's by 50 percent and the overall balance by almost $100,000 since November 1997

The terminals were deactivated immediately, and agents' licenses have been revoked.

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Need to Enforce the Minimum Sales Requirement

The Lottery Board's policies and procedures manual requires that agents make minimum sales of $12,000 worth of on-line games and five packs of instant tickets per quarter. However, we noted that some agents' sales were not meeting this minimum requirement. Our analysis of the sales records for 14 agents, chosen randomly, for the period October 1996 through September 1997, revealed that only three agents were meeting the minimum sales requirements. In addition, the Lottery Board's Trade Development unit did not perform any reviews to monitor the agents' adherence to the minimum sales requirement. Since the Lottery Board is not reviewing agents' sales records for compliance with the requirements, the agents may not regard it seriously enough to comply with the procedure.

District of Columbia Municipal Regulations (DCMR) Title 30, Section 212.1 provides "the Executive Director may interrupt on-line lottery operations services to an agent without notice or prior hearing for failure to meet minimum sales standards established by the Executive Director".

Recommendations

We recommended that the Executive Director take action to:

  1. Ensure that the minimum sales policy is evaluated to consider its practicality; and
  2. Institute a variable minimum sales requirement and review sales on a regular basis to determine where sales levels can be improved; also, procedures should be established to aid agents not meeting the minimum sales requirement.

Agency Response:

The Agency agrees with the finding and recommendations. (See Exhibit C.)

The Agency will revise the policy to account for such circumstances in FY 1999. Currently, the Trade Development Mangers conduct quarterly business reviews for each agent to help the agent grow lottery sales. (See Attachment 2 in Exhibit C.)

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Non-Compliance With Provisions of the On-Line Games Monitoring Contract

We noted that the Lottery Board is not enforcing the terms of its contract with a CPA firm for auditing, inventory and reconciliation services. The contract provides, among other things, that "the Auditor must visit the Agency's computer control center at least thirty (30) times per year. Fifteen (15) of the visits shall be unannounced, the other fifteen fifteen (15) shall be announced only to the Agency 's Security Chief. " We noted that the auditor made only one unannounced and five announced visits to the computer control center during the February 7, 1997 to February 6, 1998 time period. Non-compliance with this provision could have a detrimental effect because operational deficiencies in the computer control center would not be detected or corrected in a timely manner.

Recommendations

We recommended that the Executive Director of the Lottery Board:

  1. Take the necessary steps to ensure that the auditing firm is closely monitored to secure compliance with the requirement for announced and unannounced visits — “the Auditor must visit the Agency's computer control center at least thirty (30) times per year....”
  2. Make adjustments in future compensation for visits not previously delivered as required by contract (Statement of Work).

Agency response:

The Agency agreed with the finding and recommendation. (See Exhibit C.)

The Lottery Board terminated its contract with the auditing firm for default in May 1998. The Security Director monitors the successor contract closely.

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3. Improvements Needed in Finance, Licensing and Security Processes

Inadequate Reporting Capability of the Finance Computer Software

The Lottery Board's computer software, which generates data on sales and delinquencies, does not produce reports that show the cumulative balances of ticket sales and delinquent amounts. As a result, the Finance Division uses spreadsheets and manual sub-ledgers to keep track of agents' receivable balances. The use of spreadsheets and manual subledgers to record such an enormous amount of data is time-consuming and unreliable, and could lead to significant errors and omissions in the account balances.

Lottery sales generate a large volume of transactions. Therefore, an accounting system that is completely automated should be in place to ensure complete, timely, accurate and efficient recording of all transactions. We were informed that the Finance Division is working on the implementation of a new automated agent ledger system; however, it is not currently in place.

Recommendation

We recommended that the Executive Director of the Lottery Board take actions to ensure that the installation of the new automated agent ledger system is completed as expeditiously as possible. These actions should include a list of action-items and a timetable for the augmentation of this automated system.
OIG No. 9812-08

Agency Response:

The Agency agreed with the finding and recommendations. (See Exhibit C.)

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Deficiencies in the Agent Licensing Process and in the Maintenance of Agent Data Files

We noted several deficiencies in the procedures for the issuance of agent licenses and the maintenance of agent data files. These deficiencies included the lack of required data for processing applications, incomplete criminal background checks, inadequate forms to capture needed information, and inadequate bonding requirements. The deficiencies are described in the following paragraphs.

A. Required Data Not Available for Processing Applications

The computer software used by the licensing unit for the maintenance of the agents' data files did not provide adequate information to evaluate applications in accordance with the relevant regulations. DCMR Title 30, section 203.7 provides: "The Agency shall not accept an application for a license from an applicant, or any of its owners, directors, or officers, within one (1) year of denial or revocation of a license, if the denial was based on the submission of false, misleading or fraudulent information, or if the revocation was for cause. " However, the Lottery Board's software could not generate a list of previously licensed applicants nor could it provide financial data on the applicant. As a result, the Lottery Board could not readily determine if an applicant had previously applied for and been denied a license, or whether the license had been revoked.

Additionally, the Licensing Unit had to obtain a report of agents' financial responsibility from the Finance Division in order to process license renewals. Further, the Lottery Board could not readily determine the business licensure status, nor tax status, of an applicant because the current software did not interface with the databases maintained by other regulatory agencies of the District Government. The absence of required information made it difficult to comply with some of the requirements for licensing, and created delays in processing applications. Finally, this condition could result in the licensing of applicants who otherwise would not qualify to be licensed to sell lottery tickets in the District.

B. Licenses Issued Prior to Completion of Criminal Background Investigations

We noted several instances where the Lottery Board either renewed expiring licenses, or issued new licenses, without receiving completed responses on the criminal history investigation form of the license applicants. District of Columbia Municipal Regulations (DCMR) Title 30, sections 203.4 and 203.5 provide that "the license applicant and the applicant's partners, directors, of officers, managers, supervisors and key employees shall consent to have their names referred to the Metropolitan Police Department and the police department of the jurisdiction of residence for a criminal history report, and to undergo any procedure which may be required for that purpose, including fingerprinting. " The licensing unit explained that the requests had been sent for the background investigations, and that the licenses were issued on a contingency basis.

The practice of issuing licenses before completion of the criminal history investigation process could result in lottery licenses being issued to individuals who have criminal records. Because agents handle District funds, it is imperative that an adequate background check be completed before a license is issued.

C. Deficiencies in the License/Renewal Application Forms, Files and Procedures

The OIG noted deficiencies in the forms, files and procedures used to issue licenses or renewals of licenses. DCMR Title 30 Section 302.1 states: "Before the license is issued and an on-line computer terminal is assigned, the Agency shall require each agent to be bonded in an amount determined by the Agency so as to avoid any monetary loss to the District resulting fr om the sale of lottery tickets. " Section 308.1(w) Agent Responsibilities states that the Lottery board should: "...Provide a certificate of insurance which indicates that the agent has and maintains casualty insurance, approved by the Agency, to cover the replacement cost of the on-line computer terminal and agency property assigned to the agent. The agent shall notify the Agency in writing of any change in insurance coverage fifteen fifteen (15) days in advance of the change. " The deficiencies are detailed below:

  • The forms did not always capture necessary information. For example, the license renewal applications did not always make a provision for the indication of business entity type, i.e., corporation, partnership or sole proprietorship. This made it difficult to determine the requirements that applied to specific agents. For example, specific requirements are applicable only to corporate applicants. Also, the form indicating requirements for licenses/renewal of licenses has not changed over the years despite the changes in requirements for licensing. This made it difficult during our review of the files to determine whether documentation was accurate and complete.
  • The OIG noted instances of agents' files and numbers being mixed up, and multiple numbers and files being assigned to and maintained for agents. The Licensing Unit informed us that this could be due to a change in agents' numbers, or agent ownership of multiple locations. This condition resulted in important documents not being deposited in the proper files.
  • There was inadequate follow-up made on deficient applications. When license applications are missing certain items, the Licensing Unit sends a "deficiency notice" to the agents requesting additional information. However, we noted that these requests were neither dated nor did they state deadlines for responses. This made it difficult to keep track of deficiency notices, and to enforce compliance with requirements.
  • The Lottery Board had inadequate bonding requirements for its agents. The agent licenses show a bond amount of $25,000, implying that the Lottery Board has bond insurance coverage to that amount on each of the agents. However, this was not the case. The Lottery Board annually collects the sum of $250 from each of the agents, which is maintained in a self-insurance fund and deposited on account. The representation of a $25,000 bonding amount on the face of the agent license is misleading. Also, the OIG does not believe that the current practice is sufficient to cover the potential losses that could occur in light of the amount of funds handled by the agents.

Recommendations

We recommended that the Executive Director of the Lottery Board take the following actions:

  • Upgrade the computer software to enable queries and the generation of information for past and current periods.
  • Establish an interface with other District government agencies' and their databases to facilitate the verification of information on license applications.
  • Provide read-only access of agents' financial data to the Licensing Unit to facilitate the license renewal process.
  • Consider allowing background checks to be performed by the Lottery Board's Security Division.
  • Issue unique identification numbers to agents (and unique location numbers for each site) from which sales will be made in the District, and clearly identify cases of multiple terminal and site ownership.
  • Develop a standardized renewal form, which requires the specification of business entity type.
  • Develop forms reflecting the requirements for a new, or renewal, license each year.
  • Establish a log, or other alternative process, for monitoring applicants' responses to deficiency notices.
  • Obtain a bonding contract with a surety company and require that the agents pay the premium on the contract in a timely manner.
  • Require that agents provide a proof of casualty insurance coverage to cover the cost of replacement of the on-line computer terminal and other Agency property assigned to the agents, as provided by DCMR 30, section 308.1.

Agency Response:

The Agency agreed with all the findings and recommendations except the agent bonding. The Chief Financial Officer informed us that a bond already exists in a sufficient amount and is self- insured by the District Government. We agree with this response. (See Exhibit C for Agency comments.)

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Accelerate the Process of Investigating Cancellation Reports

In October 1997, the Lottery Board introduced a process of reviewing daily reports of ticket cancellations to determine and investigate agents that had rates exceeding a certain percentage. Cancellation reports reflect tickets which have been voided due to errors in issuance. These reports are produced daily by the MIS unit and forwarded to the Security Division for review and investigation. However, during our review of the operations of the Lottery Board's Security Division, we noted that not even one investigative report had been finalized on review of the daily game cancellation reports.

A failure to complete the investigation of cancellation reports could result in instances of abuse and fraud by agents not being detected in a timely manner, or not being detected at all, due to the lack of review of the daily game cancellation reports. As a consequence, the District could lose lottery sales revenue. We were informed that the Security Division could not complete the investigations due to staff shortages.

Recommendation

We recommended that the Executive Director of the Lottery Board direct the Security Division to improve the investigation of cancellation reports. The Security Division should review reports on a daily basis, and develop the investigative reports appropriately.

Agency Response:

The Agency agrees with the finding and recommendation. (See Exhibit C.)

The Security Division currently maintains a daily cancellation report and conducts investigations accordingly.

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Employee Background Investigations Not Timely Completed

During a review of the Security Division's files, the OIG noted that new employees are allowed to assume office, and granted access to the building and facilities, prior to the completion of background investigations. District of Columbia Code, Section 2-2504 provides that: ".... All persons employed by the Board shall be fingerprinted before, and as a condition of, employment. " D .C. Code, section 2-2504 provides that: "The Board may, if it determines it necessary, require all or any of its employees to give a bond in such amount as the Board may determine. Every such bond shall be filed in the Office of the District of Columbia Treasurer. The cost of any such bond shall be part of the. necessary expenses of the Board.... " Failure to complete background checks before access is granted might result in losses to the District or compromise the integrity of lottery operations if, for example, an individual with past or current connections to illegal gaming is employed.

We noted that the Security Division was awaiting responses from the Metropolitan Police Department on some criminal background investigation requests. We also noted that the Lottery Board does not have a bonding process for employees. The nature of the Lottery Board's operations dictates that background investigations of employees be adequately and thoroughly completed before employees are allowed access to the facility. Also, bonding employees provides additional protection to the District in the event that an employee commits a criminal act.

Recommendations

We recommended that:

  • The Executive Director of the Lottery Board take action to monitor compliance with the regulations and policies regarding background checks of employees.
  • A bonding process be established for these Lottery Board employees in sensitive positions.

Agency Response:

The Agency agrees with the finding and recommendations. (See Exhibit C.)

Since June 1997 the Lottery Board no longer allows new employees to assume positions without a completed background check.

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Lack of Inspection of Agents' Operating Records and Facilities

During the audit, we noted that agents' facilities were not being inspected. District of Columbia Municipal Regulations (DCMR) Title 30. Section 306.3 provides, "Each agent's lottery operations records and each distribution center's records shall be subject to inspection by the Agency". There was a complete lack of inspections during Fiscal Year 1997. Also, the inspection reports for the previous years were not available for review. The failure to inspect agents' facilities caused a decline in the agents' morale and produced a nonchalant attitude towards the Lottery Board's regulations. In addition, consistent inspection acts as a deterrent to corruption. and abuse by agents, and would lead to a decrease in instances of non-sufficient funds. When we made inquiries to agency officials about this condition, we were informed that facilities were not inspected due to staff shortages.

In addition, the Lottery Board's procedures manual provides for annual inspections of the agent locations by the Security Division.

Recommendation

We recommended that the Executive Director of the Lottery Board take action to ensure the regular inspection of agents' records and facilities.

Agency Response:

The Agency agreed with the finding and recommendation. (See Exhibit C.)

The Lottery Board is looking into ways to achieve non-sales inspection.

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