The Lotteries Commission of South Australia (the Commission) is a statutory authority established pursuant to the State Lotteries Act 1966 (the Act) with its principal function being to promote and conduct lotteries for South Australia. The Commission, which is responsible for overseeing the affairs of the Lotteries Commission, comprises four members appointed by the Governor and is subject to the control and direction of the Minister for Government Enterprises. The Commission has established an Audit Committee to focus on matters of a financial and audit nature. The structure of the Commission during 2000-01 is detailed below.
The Commission is responsible for the administration of the following lottery games:
With the exception of SA Lotto, Keno and Instant Scratchies, the lottery games administered by the Commission are conducted in conjunction with other States and Territories of Australia pursuant to various ‘Bloc’ agreements. The aim of these ‘Blocs’ is to promote and operate games according to uniform rules and regulations. With the exception of the pooling of the prize money, in all respects each Bloc member is legally, economically and organisationally independent.
Section 18 of the Act gives the Commission power, with the approval of the Minister, to make rules providing for or regulating the practices, procedures and operations of the Commission.
While the Commission’s main business activities are controlled centrally through Head Office, the greatest proportion of its selling activity is decentralised via a large agency network across the State. These agencies are privately owned by individuals or companies and are paid a commission fee for the sale of lottery tickets.
Effective from 1 July 2000, subsection 16(3) of the Act was amended to provide for the payment of the Goods and Services Tax (GST) in respect of net gambling revenue and the payment of a gambling tax of 41percent of net gambling revenue. The gambling tax is paid to the Hospitals Fund except for sports lotteries and special lotteries, which are paid to the Recreation and Sport Fund.
Pursuant to subsection 16(3) of the Act, the Commission is required to pay surplus funds to the Hospitals Fund (as a contribution towards public hospitals). These funds are the balance of funds remaining after making an allowance for GST in respect of net gambling revenue; gambling tax; operating and capital expenses; applying net proceeds of The Pools to the Recreation and Sport Fund; and retaining funds for certain designated purposes.
Treasurer’s Instruction 22 applies a tax equivalent regime to the Commission. The regime requires the Commission to pay amounts deemed equivalent to that which would have been paid to the Commonwealth if it was not exempt from the taxation laws of the Commonwealth. The tax equivalent regime has been applied in a manner that is consistent with the requirement of the Commission, pursuant to subsection 16(3) of the Act, to pay surplus funds to the Hospitals Fund.
The total distribution of funds to government, including the Hospitals Fund and Recreation and Sport Fund is detailed in Note 17 to the financial statements.
In accordance with sections 16B and 16C of the Act a prize in a lottery that has not been collected or taken delivery of within 12months is forfeited to the Commission and transferred to the Unclaimed Prizes Reserve. The legislative requirements and the consequential accounting treatment regarding the retention and distribution of unclaimed prizes is explained in Note 1(o) to the financial statements.
In February 1998 the Government announced a number of initiatives to examine the possible sale of certain government assets, including the Lotteries Commission of South Australia. In February 2000 the Government announced its intention to offer for sale the operations of the Commission.
As a result of the proposed sale process, Ministerial directions were given to the Commission, whereby certain restrictions were placed on the conduct and affairs of the Commission.
In December 2000 the Commission was advised that the sale would not proceed and that the Ministerial directions that applied during the review process were revoked.
Subsection 18A(2) of the State Lotteries Act 1966 specifically provides for the Auditor-General to audit the accounts of the Commission in respect of each financial year.
The audit program covered all major financial systems and was directed primarily towards obtaining sufficient evidence to enable an audit opinion to be formed with respect to the financial statements and internal control.
During 2000-01 specific areas of audit attention included:
The On-Line Wagering System is the key business system for the Commission. Consequently significant audit focus was directed to that system, which included the verification of sales and winners for nominated draws using audit computer software.
Further commentary regarding the computer information systems environment is contained in ‘Audit Findings and Comments’ hereunder.
Audit submitted to the Chief Executive Officer a management letter conveying the scope of the audit and findings arising from the review of its operations. In addition, the Commission’s Internal Auditors undertook a number of reviews. The findings of both external and internal audit reviews were submitted to the Audit Committee and are further commented on in ‘Audit Findings and Comments’ hereunder.
Audit review focussed on the control framework governing the Commission’s operations and included consideration of the Commission’s policies, procedures and internal control mechanisms. Audit noted that the Commission’s operating environment was characterised by good internal control practices with independent checking over the preparation and processing of transactions to ensure that processes were being completely and accurately performed.
Consequently, the overall internal control structure of the Commission was assessed as satisfactory. This reflects the Commission’s awareness of the importance of establishing and maintaining a strong internal control infrastructure.
The Commission has an Audit Committee which comprises three Commission members. The Audit Committee meets on a quarterly basis and reports to the Commission.
The broad functions of the Audit Committee are to regularly review the adequacy of the accounting, internal auditing, reporting and other financial management systems and practices of the Commission. These responsibilities extend to liaising with the external auditors, approving and evaluating the internal audit program, monitoring risk management practices, and the review of the annual financial statements.
Internal Audit was involved in the review of a number of aspects of the information technology environment as well as other areas of the Commission. These included reviews of:
The Audit Committee directs and evaluates Internal Audit by reviewing and approving the audit plan, evaluating the effectiveness of Internal Audit and ensuring that the internal auditors are able to perform their duties free from restrictions.
The Commission operates a risk management program. The program is a structured, formalised process that includes:
Audit review revealed that the Commission has continued its risk management program, which included a detailed review of all risks during the year.
The On-Line Wagering System and other financial accounting systems are operated, in-house, by the Commission. The On-Line Wagering System is the major system operating at the Commission. This is the organisation’s lottery system which records details of sales and prize payouts.
Due to the significance of information technology to the Commission, the internal audit program included a number of projects that focussed on the information technology area. The verification work by Internal Audit is considered to be a critical component of the on-going program of internal review activity and provides a sound management control process to ensure the on-going integrity over the Commission’s gaming operations.
Audit’s review of the Commission’s control environment over information technology included an assessment of the recent and future planned Internal Audit coverage. Audit observed that the Commission has implemented a comprehensive Internal Audit review coverage of the new system that addressed system management, operation and security. In developing that coverage, the Commission considered the results of internal risk management assessments, actions proposed emanating from previous Internal Audit reports, and past matters raised by Audit.
The audit work performed during the year included the verification of sales and winners for nominated draws. To perform this work the Commission arranged for the supply of a Computer Assisted Audit Technique (CAAT). The CAAT provided to Audit was a copy of the On-Line Wagering System programs rather than a specific purpose CAAT. Consequently the verification approach required Audit to conduct extensive testing and validation of the operation of the CAAT. The CAAT was successfully tested and nominated draws verified. To maximise the benefit for Audit purposes the CAAT was also used to contribute to forming an opinion on the Commission’s financial statements.
As required by subsection 36(1)(a)(iii) of the Public Finance and Audit Act 1987,the audit of the Lotteries Commission of South Australia included an assessment of the controls exercised in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities. The assessment also considered whether those controls were consistent with the prescribed elements of the Financial Management Framework as required by Treasurer’s Instruction 2 ‘Financial Management Policies’.
Audit formed the opinion that the controls exercised by the Lotteries Commission of South Australia in relation to the receipt, expenditure and investment of money; the acquisition and disposal of property; and the incurring of liabilities, were sufficient to provide reasonable assurance that the financial transactions of the organisation were conducted properly and in accordance with the law.
The following graph illustrates the trend in sales and amount of distribution to the Government over the past five years and shows that sales for the year have increased by $14.6million to $309.6million representing a percentage increase of 4.9 percent.
The distributions available to the Government from the year’s operations were $78.8million, a decrease of $7.2million over the previous year. The decrease was due to the introduction of Goods and Services Tax (GST) on net gambling revenue, which is an expense to the Commission. Had this tax not been an expense to the Commission, distributions to the Government would have increased by $4.2million to $90.2million.
The following graph provides details of sales generated by the lottery products provided by the Commission. Notably, Lotto (Saturday) sales were $123million and Keno sales were $61.7million, representing 40percent and 20percent of sales respectively.
As illustrated above, the major contribution to the increase in sales is due to Powerball and Instant Scratchies. The graph also highlights the decline in Keno sales over the past five years, which decreased by $6.9million (10percent) from last year.
The following graph describes total operating expenses (excluding GST expense), together with those expenses expressed as percentage of sales revenue.
The above graph shows that whilst operating expenses, excluding GST, have increased, when those expenses are expressed as a percentage of sales the increase is not so prominent, particularly considering the increased depreciation expense and borrowing expenses associated with the implementation of the new On-Line Wagering System in June 1999.
The graph below compares cash and investments to interest income for the past five years.
