LITTLE ROCK — A suggestion by the lottery’s internal auditor that written policies should be established for the planning and design of scratch-off ticket games struck a nerve with lottery managers.
Led by chief executive Ernie Passailaigue, they wrote that the auditor’s “erroneous conclusions in this portion of the audit are possibly attributable to ... lack of lottery experience or rudimentary knowledge of gaming.”
“After a record startup ... [the lottery’s] first-quarter sales resulted in an astonishing #5 ranking for per capita instant ticket sales when compared to the sales of other U.S. lotteries, ... achieved through experience and careful planning,” they said.
“To suggest that additional written policies and procedures (on ‘how to design an instant ticket’) could replace or compensate for experience and industry knowledge (both of which are vital to this entrepreneurial activity) is specious,” said their 12-page memorandum.
“Internal audit’s failure to acknowledge existing resources, processes, and procedures raises some questions regarding the overall intent of the findings and the auditor’s objectivity,” they said.
The auditor is Michael Hyde. On Friday, he declined to reply to the managers’ remarks about his lack of lottery experience and “rudimentary knowledge of gaming,” and their questioning of his objectivity.
In his written response to the commission, he agreed that the lottery’s successful startup “is a noteworthy achievement.”
“However, it does not mitigate responsibility the internal auditor has to the Arkansas Lottery Commission and the citizens of the state of Arkansas to provide an objective, independent review of the lottery’s activities and make recommendations to enhance internal controls,” he wrote.
His reply dated June 16 to the Lottery Commission was obtained by the Arkansas Democrat-Gazette under the state Freedom of Information Act. The newspaper also obtained a copy of the audit and the managers’ response.
DIFFERENCE OF OPINION
Passailaigue and Hyde report directly to the nine member commission.
Though the exchanges sound like a behind the scenes snit, Passailaigue said, “We don’t have any battles. Our team that works for me is focused on trying to ... get financial aid [in lottery-financed scholarships] to as many people as possible.”
Asked whether Hyde is qualified to be auditor and should be in the job, Passailaigue said, “It doesn’t matter what I think because he’s not my employee. My opinion doesn’t matter.”
Hyde said he was disappointed in the managers’ response and didn’t understand it.
Last June, the commission hired Passailaigue, who had been South Carolina’s lottery director since 2001, to start Arkansas’ lottery at an salary of $324,000 a year. The commission hired Hyde as internal auditor on Sept. 9 at an annual salary of $118,500.
Hyde had been chief auditor for the state Highway and Transportation Department from 2003-09 and an auditor for the Legislative Audit Division from 1998-2003.
From Sept. 28 through June 20, the lottery had sold $362 million in tickets, including $315 million in scratch-off tickets, according to the commission. So far, it has raised $76.7 million for scholarships.
Commission members generally treated the exchanges between Passailaigue and the managers with Hyde as matters that could have been avoided with better communication.
Commission Chairman Dianne Lamberth of Batesville said the exchange reflects a difference of opinion among professionals who must improve their communication with one another.
“A new startup is going to have some rough edges, and we are going to have to get this communication better to take care of these rough edges and growing pains,” she said.
Hyde “is new, and he is learning lottery, and [lottery managers] are learning Mike Hyde’s way,” Lamberth said.
“Nobody is in trouble with us,” she said. “Hyde is a proven auditor from another state agency, and we have a proven management team and we have a proven partner with [lottery vendor] Scientific Games.”
Hyde acknowledged in an interview that he met with Passailaigue last month to make sure that the lottery completely documents several employees’ reimbursements of lottery vendor Scientific Games International’s payments for their meals in Alpharetta, Ga.
He said “somebody who wanted to remain anonymous had brought it to my attention.”
MEAL REIMBURSEMENTS
Passailaigue said Hyde wanted a paper trail for the transactions, and lottery officials provided him with the requested documents.
Vice President of Gaming David Barden, attorney Bishop Woosley, Product Development Director Carolyn Cabell, Security Director Lance Huey, Advertising and Marketing Director Joanna Bunten and Sales Director Robert Stebbins, along with Passailaigue, collectively reimbursed Scientific Games $344.83 for the March 11 meals at the Sage Woodfire Tavern in Alpharetta, according to lottery records. The records show that the seven checks to Scientific Games are dated either March 17 or March 18.
The lottery reimbursed several employees for the meals, state records show.
Woosley said Friday that Huey repaid $6 of the $62 reimbursement he received from the lottery after the Democrat-Gazette questioned whether the payment exceeded the maximum rate allowed. The employees paid for their own drinks, he said.
Passailaigue said several lottery employees who deal with scratch-off tickets went to Alpharetta for two days of meetings in March at Scientific Games’ headquarters to see the tickets in various stages from planning to manufacturing.
Employees of the lottery and Scientific Games went out for a meal and the restaurant wouldn’t split the ticket, so Scientific Games paid for the meal. The lottery employees agreed to send the company checks to reimburse it, and they did so, Passailaigue said.
Among other things, Arkansas’ lottery law bars a lottery vendor with a major procurement contract from providing gifts to Lottery Commission employees.
A gift “means any payment, entertainment, advance, services or anything of value unless consideration of equal or greater value has been given therefor” under Arkansas Code Annotated 25-115-103.
Woosley said he doesn’t believe that Scientific Games’ payment for the meals violated the law because the employees intended to reimburse the vendor and did so shortly thereafter.
A spokesman for Scientific Games said the company “complies with all lottery rules for our customers and potential customers.”
“When lottery customers reimburse us for expenses during site visits, it is done in compliance with local requirements as was the case with a recent visit by representatives of the Arkansas lottery,” said Aimee Remey of Scientific Games.
Graham Sloan, executive director for the Arkansas Ethics Commission, said Woosley called him last week and told him that a lottery vendor paid for meals, and commission employees reimbursed the company on their next business day.
Sloan said Woosley asked him whether there was anything else they needed to do. He told him there wasn’t.
“The bell had been rung, and they did everything they could to unring it,” Sloan said.
He said he doesn’t know whether Scientific Games’ payment violated the state law.
Whether the commission employees’ reimbursement of the lottery vendor their next business day “is good enough” would be a question for the Ethics Commission, not its staff, to resolve if an ethics complaint is filed, Sloan said.
Lamberth said commission employees need to be paying for their own meals.
“I wish our employees had thought about it before allowing it to happen and taken care of it at that time,” she said. “Some education has taken place, so it won’t happen again.”
THE BOTTOM LINE
Commissioner Mike Malone of Fayetteville, chairman of the lottery’s audit committee, said there will be tensions at times between the managers and auditors.
“Everyone has the best interests of the lottery at mind, and we have to make sure we are communicating toward that end,” he said. “I think some tension from time to time is fairly typical when you have a strong internal-audit function.”
Commissioner Joe White of Conway said the commission has a responsibility to operate the lottery with integrity and part of that is having an internal auditor.
“I am disappointed in the apparent lack of communication” between Passailaigue and Hyde, he said.
“This lottery is one of the best lotteries in the country, so somebody is doing something right,” White said. “The bottom line is it is raising a lot of money for scholarships.”
In March, state officials estimated that 29,200 students would receive scholarships at a cost of about $120 million in the 2010-11 academic year - 18,600 students at four year universities at $93 million and about 10,600 students at two-year colleges at $26.5 million.
The state Department of Higher Education has received 16,840 applications for the Academic Challenge Scholarships from students who were high school seniors, and so far 9,257 of the 11,472 applicants offered scholarships have accepted them, said department director Jim Purcell. Department officials are still working through 5,368 other applications to gather missing documents and make sure the transcript information they received is accurate, he said.
“We do expect to have enough in the 2010-2011 academic year to support the students that were awarded under the traditional category,” he said.
The department received 36,698 other applications from students already enrolled in college, who are called “current achievers,” and “nontraditional” students, such as those who wish to go to college after being out of school for some time, he said. He said department officials expect to have the transcripts processed by the end of July to determine how many applicants qualify under the current achiever and nontraditional categories and how many applicants the budget will support.
The law allocates $41.5 million to the current achiever category and at least $12 million to the nontraditional category, he said.
The Legislature set the scholarships at $5,000 per year for qualifying students at four-year colleges and at $2,500 per year for qualifying students at two-year colleges.
“While we do not have the final data on the number of students that qualify for the current achiever and nontraditional categories, we will award as many students as the budget allows,” Purcell said.
Front Section, Pages 1 on 06/27/2010