Audit of California Lottery finds over $305,000 in improper or dubious spending

California Lottery officials tallied more than $305,000 in improper or questionable spending over the last four years that included travel, food, gifts to employees and entertainment expenses, a state audit concluded Tuesday.

Among the improper expenses, the lottery agency spent $21,666 to give staff logo-branded swag such as T-shirts, backpacks, lip balm and iPad cases, labeling the purchases “learning aids” and “training tools,” according to the audit by state Controller Betty Yee.

The financial review was launched after rank-and-file employees of the lottery complained in an anonymous letter sent to Gov. Jerry Brown in August and during testimony at public hearings that managers had failed to control spending and had allowed inappropriate conduct at sales staff events.

“Lottery management’s lenient oversight and disregard for policies and procedures allowed for more than $300,000 in prohibited and questionable costs,” Yee said in a statement. “Clearly, Lottery management needs to overhaul their internal controls and enforce state policies.”

Yee’s review is just the first investigation completed after employees went public with complaints that included an alcohol-fueled party at which a manager allegedly put his head inside the blouse of a female employee. The state Department of Justice is also looking at allegations of mismanagement, nepotism, cronyism and favoritism by agency officials.

The California Lottery’s management reviewed the audit and “generally agrees with its findings and recommendations,” the agency said in a statement, adding that “Lottery Sales Division management could have done a better job tracking and documenting expenses and minimizing administrative errors.”

An internal review of the issues has already resulted in corrective action, the agency said in its statement, noting that its “staff is receiving updated training to ensure awareness of, and compliance with, all state regulations and rules.”

The state lottery was created when California voters approved Proposition 37 in 1984, with a portion of proceeds going to education. The audit comes at a time when the lottery is setting sales records: The agency provided $6.2 billion to public schools during the four-year period covered by the audit, officials said.

“Our audit found that the Lottery lacked adequate controls, including policies and procedures” for travel expenses, including those in an $8-million revolving fund for expenses, the audit concluded.

“In addition, policies and procedures were not followed as a result of the Sales Division’s directives and poor oversight,” the audit report said.

Auditors identified $240,934 in unallowable costs and $64,088 in questioned costs. The unallowed costs included $131,832 in inappropriate or unnecessary employee travel expenses for sales division staff events.

Improper expenses included $83,411 in hotel costs billed by employees despite a policy against such stays when a worker lives within 50 miles of an event.

“We identified one employee who lived only six miles from the conference but stayed at the hotel for three nights, costing $536,” the audit said. Lottery officials also overbooked rooms, resulting in cancellation and attrition fees of $12,731.

In addition, sales managers claimed excessive mileage reimbursement for commutes to the office by making brief stops at retail locations and claiming they were required by their job, the audit found. In one case, auditors said a manager had $13,280 in unallowable mileage costs.

The audit also said $16,738 was improperly spent on food and drinks at a non-mandatory after-hours meet-and-greet event with an agency contractor.

In an email to employees, Lottery Director Hugo López wrote that Yee’s office “did not discover any instances of fraud as had been alleged in the anonymous letter.”

The agency drew criticism from 27-year veteran lottery worker Tom Weber, a union steward who was one of five employees who complained about mismanagement in testimony to the Lottery Commission in September.

“The lottery, as usual, is downplaying a much more serious problem,” Weber said. “They are sweeping it under the carpet.”

Sign up for our Essential Politics newsletter »

patrick.mcgreevy@latimes.com

Twitter: @mcgreevy99