LOTTERIES COMMISSION OF SOUTH AUSTRALIA

 

 

FUNCTIONAL RESPONSIBILITY AND STRUCTURE

 

Establishment

 

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.

 

Functions

 

The functions of the Commission are to administer and promote the following lottery games:

 

·                     Monday/Wednesday Lotto

·                     Oz Lotto

·                     Powerball

·                     Lotto

·                     Super 66

·                     The Pools

·                     Keno

·                     Instant Scratchies.

 

Structure

 

The structure of the Lotteries Commission of South Australia is illustrated in the following organisation chart.

 

 

 

AUDIT MANDATE AND COVERAGE

 

Audit Authority

 

Audit of the Financial Report

 

Subsection 31(1)(b) of the Public Finance and Audit Act 1987 and subsection 18A(2) of the State Lotteries Act 1966 provide for the Auditor-General to audit the accounts of the Lotteries Commission of South Australia for each financial year.

 

Assessment of Controls

 

Subsection 36(1)(a)(iii) of the Public Finance and Audit Act 1987 provides for the Auditor-General to assess 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.

This assessment also considers whether those controls are consistent with the prescribed elements of the Financial Management Framework as required by Treasurer’s Instruction 2 Financial Management Policies.

 

Scope of Audit

 

The audit program covered major financial systems and was directed primarily to obtaining sufficient evidence to enable an audit opinion to be formed with respect to the financial statements and internal controls.

 

During 2005-06, specific areas of audit attention included:

 

·                     expenditure

·                     payroll

·                     gaming

·                     fixed assets

·                     financial accounting

·                     computer environment.

 

The work done by the internal auditor was considered in planning the audit programs.  Reliance was placed on the work of internal audit in assessing the effectiveness of the Commission’s internal controls.  Specific areas in which reliance was placed on internal audit work included:

 

·                     fraud detection and prevention

·                     draw operations and dividend calculations.

 

 

AUDIT FINDINGS AND COMMENTS

 

Audit Opinions

 

Audit of the Financial Report

 

In my opinion, the financial report presents fairly, in accordance with the Treasurer’s Instructions promulgated under the provisions of the Public Finance and Audit Act 1987, applicable Accounting Standards and other mandatory professional reporting requirements in Australia, the financial position of the Lotteries Commission of South Australia as at 30 June 2006, the results of its operations and its cash flows for the year then ended.

 

Assessment of Controls

 

In my opinion, 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 are sufficient to provide reasonable assurance that the financial transactions of the Lotteries Commission of South Australia have been conducted properly and in accordance with law.

 

Audit Communications with Management

 

Matters arising during the course of the audit were detailed in management letters to the Chief Executive and, by arrangement, copies were forwarded to the Chair of the Commission’s Audit Committee.  Responses to the management letters were considered to be satisfactory.  Matters raised with the Commission and the related responses are considered herein.

 

The main issues related to timely reconciliation of various clearing accounts and various amounts between the general ledger and the on-line gaming system.

 

In response the Commission indicated that action would be taken to address the issues raised by Audit.

 

 

INTERPRETATION AND ANALYSIS OF FINANCIAL REPORT

 

The implementation of Australian equivalents to International Financial Reporting Standards (AIFRS) occurred in 2005-06.  Data for both 2005-06 and 2004-05 has been prepared using AIFRS.  Earlier data has not.  Note 4 to the financial statements sets out adjustments arising from the adoption of AIFRS.

 

Highlights of Financial Report

 

	2006	2005	Percentage
	$’million	$’million	Change
OPERATING REVENUE
Sales	348	349	-
Less cost of sales	(305)	(304)	-
Other revenue	7	7	-
Total Operating Revenue	50	52	(4)
OPERATING EXPENDITURE
Supplies and services	14	15	(7)
Employee benefit costs	6	7	(14)
Other expenses	3	4	(25)
Total Operating Expenses	23	26	(12)
Profit after Income Tax Equivalent	19	18	6
Net Cash Flows from Operations	90	90	-
ASSETS
Current assets	54	51	6
Non-current assets	13	15	(13)
Total Assets	67	66	2
LIABILITIES
Current liabilities	35	31	13
Non-current liabilities	6	9	(33)
Total Liabilities	41	40	2
EQUITY	26	26	-

 

 

Income Statement

 

Sales Revenue

 

A structural analysis of sales revenue generated by the lottery products provided by the Commission in the five years to 2006 is presented in the following chart.

 

Notably in 2005-06, Saturday Lotto sales were $132 million and Keno sales were $77 million, representing 38 percent and 22 percent of sales respectively.  These games remain the main individual revenue sources.

 

The analysis shows that total revenues remained static in 2005-06 following steady increases over the previous four years.  In 2005-06 sales of Saturday Lotto decreased by $3 million and Keno sales increased by $3 million.  Powerball sales increased by $5 million, reversing the decline in sales experienced in 2004 and 2005.

Operating Expenses

 

A structural analysis of the main operating expense items for the Commission for the five years to 2006 is shown in the following chart.

 

The operating expenses of the Commission decreased by $3 million in 2005-06 having been relatively constant over the previous two years.  In 2006 employee benefits costs decreased by $588 000 primarily as a result of changed accounting requirements relating to the net assets of the Commission’s superannuation scheme required upon adoption of AIFRS.  The superannuation scheme has a surplus of assets over liabilities and this surplus (which has increased by $498 000 in 2006) is brought to account as a reduction in the employee benefits costs (refer to Note 10).  This change in accounting requirements under AIFRS means in future, the employee benefits costs of the Commission will reflect the fluctuations in the net assets position of the superannuation fund.

 

Supplies and services costs reduced by $834 000 due mainly to decreased computer operations costs (down $331 000), other occupancy costs (down $127 000) and gambling tax on other games (down $296 000).  Depreciation and amortisation expense fell by $699 000 mainly as a result of a decrease in depreciation of the on-line lotteries system following revaluation adjustments.

 

 

Operating Result

 

For the five years to 2006 the Commission’s performance has been stable with profit after income tax equivalent for 2005-06 being $19 million following on from $18 million over the previous three years.

 

The following chart shows the total income, total expenses plus income tax equivalent and profit after income tax equivalent for the five years to 2006.

Distributions to Government

 

The Commission makes payments to the Government in accordance with the requirements of the State Lotteries Act 1966 and the Treasurer’s Instructions which are detailed in Notes 2(s) and 29 to the Financial Statements.  Essentially these payments comprise a gambling tax, an income tax equivalent payment, a dividend which equates to operating profit after income tax equivalent and a percentage of unclaimed prizes.

 

In 2006 the distribution provided for government amounted to $85 million, a decrease of $5.7 million over the previous year.  The decrease was due mainly to the provision of a special dividend payment of $6.5 million in 2004-05 being the proceeds of the sale of the Commission’s former Head Office premises in Rundle Mall.

 

Over the period under review a total of $417.1 million has been provided to the Government.

 

The following chart shows an analysis of the distributions provided to Government over the five years to 2006.

 

Balance Sheet

 

For the five years to 2006, a structural analysis of assets and liabilities is shown in the following chart.

 

The decrease in non-current liabilities over the five years is due mainly to the decrease in the unclaimed prize reserve, resulting from the payment of more promotional and additional prizes and the decrease in borrowings in line with the agreed repayment schedule.  Current assets increased in 2005-06 by $2.6 million primarily as a result of an increase in cash and cash equivalents.  Current liabilities increased as a result of an increase in payables of $1.7 million and an increase in other current liabilities of $1.7 million.  The increase in payables was due to increases in prizes payable (up $1.4 million) and undistributed funds (up $906 000) offset by a decrease in creditors and accrued expenses (down $484 000).  The increase in other current liabilities was a result of increases in the prize reserve fund (up $1 million) as explained in Note 24(i) and sales in advance (up $628 000).

 

Cash Flow Statement

 

The following table summarises the net cash flows for the five years to 2006.

 

	2006	2005	2004	2003	2002
	$’million	$’million	$’million	$’million	$’million
Net Cash Flows
Operations	91	91	86	84	79
Investing	(1)	3	(1)	(1)	(1)
Financing	(86)	(91)	(85)	(84)	(76)
Change in Cash	4	3	-	(1)	2
Cash at 30 June	52	48	45	45	46

 

The table highlights the significant cash generating capacity of the Commission’s operations.  A large portion of the cash balance at 30 June represents unpaid prizes ($10 million) and distributions owed to the Government ($9 million).  The financing cash flows in 2006 represent the amount being distributed to the Government, $84.4 million, and the repayment of borrowings, $1.6 million.

 

 

FURTHER COMMENTARY ON OPERATIONS

 

Unclaimed Prizes and Additional Prizes

 

In accordance with sections 16B and 16C of the State Lotteries Act 1966 a prize in a lottery that has not been collected or taken delivery of within 12 months is forfeited to the Commission and transferred to the unclaimed prizes reserve.  Of the monies transferred to the unclaimed prize reserve, 50 percent of forfeited prizes are distributed to the Government (for the credit of the Hospitals Fund), whilst the Commission may apply the remaining 50 percent for the purposes of providing additional or increased prizes in subsequent lotteries, providing prizes in promotional lotteries or making ex-gratia payments.

 

An analysis of the trend in the unclaimed prize reserve, promotional and additional prizes and payments to the Hospitals Fund over the past five years is shown in the following chart.

 

The analysis shows that the balance remaining in the unclaimed prize reserve has continued to fall over the period under review.  In 2006 the amount of monies paid out to players from the unclaimed prize reserve in promotional and additional prizes decreased by $1.8 million to $1.7 million.  Payments to the Hospitals Fund were $1.3 million, a decrease of $548 000 from the previous year and are at the lowest level over the period under review.