The following story, “Auditors flag lottery execs’ travel claims,” was written by Michael Wickline and published in the Arkansas Democrat-Gazette: Front Section, Pages 1 on 11/13/2010

Arkansas’ lottery failed to follow state travel rules and regulations for reimbursements for several employees, including its director, and failed to seek a legislative committee’s review for certain contract matters, a state auditor told lawmakers Friday.

Supervising senior auditor Andy Babbit said auditors found about a dozen deficiencies at the lottery, ranging from being unable to provide year-end financial statements in accordance with generally accepted accounting principles for the audit in the fiscal year ended June 30 to not completing employee background checks before hiring as required by state law.

In response to a question from state Rep. Clark Hall, DMarvell, Babbit said auditors don’t have the documents to determine whether the lottery paid for plane tickets for Director Ernie Passailaigue to fly home to South Carolina and back to Little Rock on weekends.

But Passailaigue, the former director of the South Carolina lottery who is paid $324,000 as Arkansas lottery’s director, said Arkansas’ lottery hasn’t paid for any such plane tickets.

He told the Legislative Joint Auditing Committee that his sole focus was to start the sale of lottery tickets as quickly as possible when he was hired in June 2009, and said the lottery started selling tickets in a world-record time of under three months.

“This was a learning process, not so much the lottery process because we have some expertise in that,” said Passailaigue. “But the other part, in terms of what was required, what type of documents, what the rules and regulations and laws of the state of Arkansas [are].”

But Rep. Jane English, RNorth Little Rock, said she is bothered that the lottery has “hired a whole staff of folks who really don’t understand, supposedly, our state agency business and how to do it.

“And it is kind of scary,” she said. “If this happened in another state agency, the director would be gone, absolutely gone, because this is not the way that state government operates.”

Passailaigue said auditors didn’t find money missing at the lottery or inaccurate financial records.

He said he takes responsibility for the deficiencies cited by auditors. “I believe in the concept of the buck stops here,” he said.

State Sen. Larry Teague, DNashville, said he appreciates “the dollars that are flowing to the kids” in the form of college scholarships from the lottery’s net proceeds.

It seems like Passailaigue and his staff “don’t like to be questioned and their policy is, ‘Let’s do it and, and if we get caught or if we get in trouble, we’ll fix it,’” he said. “I find it unacceptable for the people of Arkansas.”

Teague said he plans to propose legislation to require the lottery to be reviewed by the Legislative Council. “The theory would be to provide more open information,” he said.

State Sen. Johnny Key, RMountain Home, said he is frustrated because the lottery oversight committee raised questions several months ago about certain matters cited in the audit, such as background checks and personnel policies, and was assured by lottery officials that these issues had been taken care of.

“In retrospect, I wish we could have taken a lot more time and done a lot of things a little bit differently,” Passailaigue said. “Whether that would have meant loss of scholarship funds, I don’t know.

“But I wish we had spent more time on the administrative side and less time getting the lottery up and running and we didn’t have some of these questions,” he said.

Commission Chairman Dianne Lamberth of Batesville told lawmakers that lottery officials “are working as diligently as we can to take care of any discrepancies that we found here.

“We are taking this as seriously as we did to earn scholarship money for our students,” she said.

“We have gone from zero dollars to somewhat under a half-billion dollars [a year in ticket sales] in a very short period of time and we know we are not perfect and we don’t pretend that we are going to be perfect,” Lamberth said.

According to the audit, the lottery made travel payments and reimbursements totaling $16,189 in conflict with state laws and travel regulations.

Babbit said there were 22 instances totaling $9,616 where lodging expenses exceeded the allowable rate without Passailaigue’s approval or justification, he said. These instances involved several employees, including Vice President of Gaming David Barden, Vice President of Administration Ernestine Middleton and Passailaigue, he said.

Five charges totaling $1,872 to a travel credit card were not supported by adequate documentation, the documentation didn’t match the amount charged and the documentation did not appear to be original, according to the audit.

The documentation used to support travel credit card statements/reimbursements for airline ticket purchases were screen shots from an airline/travel booking website that were printed before an actual flight confirmation, according to the audit. Seven instances totaling $2,814 are in violation of state law, the audit said. These instances involved several employees including Barden and Passailaigue, Babbit said.

The business purpose was not adequately documented for travel expenses paid on behalf of or reimbursed to Barden, and hotel costs and meals totaling $1,114 were incurred beyond the dates of a lottery conference, according to the audit.

Passailaigue said he and Barden attended lottery conferences in New York City and Washington, D.C., and it was more economical to spend a day in New York rather than fly back to Little Rock after the New York conference and then fly to Washington, D.C. He said they also met one day with scratch-off ticket vendor Scientific Games International in New York.

Babbit said he was unable to secure documents to justify travel expenses through the lottery’s chief financial officer, Philip Miley.

Legislative auditors prepared the lottery’s year-end financial statements in accordance with generally accepted accounting principles as required by state law after it appeared that the lottery staff did not have knowledge of those accounting principles as applied to governmental entities for the last fiscal year, Babbit said.

Passailaigue said Miley is trained in accounting and prepared the lottery’s October financial statements in accordance with the accounting principles. Miley was a certified public accountant who allowed that certification to lapse, he said, adding that he does not believe Miley’s job description requires him to be a certified public accountant.

Babbit also said auditors believe the lottery oversight committee should have reviewed certain contract matters involving the lottery.

The lottery oversight committee reviewed the lottery’s contract with Scientific Games, which has a stated cost of 1.75 percent of net sales, Babbit said. Lottery management later agreed to selected options to the contract with a cost of 1.92 percent of net sales plus an additional cost of 1.5 percent of the prize fund, he said. The estimated cost of these options compared with the original cost of the Scientific Games contract is about $3.9 million per year, Babbit said.

The lottery’s managers also entered into three licensing agreements with Scientific Games with a total estimated cost of $670,000, he said. These matters should have been reviewed by the lottery oversight committee, he said.

Passailaigue said he strongly disagreed with the auditors’ finding on this matter.

Two months ago, Passailaigue survived Commissioner Ben Pickard’s motion to fire him in a 6-2 vote.

Afterward, Lamberth, who voted to retain Passailaigue two months ago, said she doesn’t think Passailaigue “should be dismissed for any of this.

“These are startup woes and we are taking care of this,” she told reporters. “I think Ernie is doing an exemplary job. … He started the agency. He is getting wonderful scholarship money for our students.”

From Sept. 28, 2009, to Oct. 31, 2010, the lottery sold $525 million in tickets and raised $113.2 million for college scholarships, according to lottery spokesman Julie Baldridge.

Written by Michael Wickline and published in the Arkansas Democrat-Gazette: Front Section, Pages 1 on 11/13/2010