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November 8 , 2012
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Texas Lottery
Where Is The Missing Money?
Was this the PERFECT Crime?
Was it embezzlement? Fraud? Theft?
Or sheer incompetence?
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brought to you by
The Lotto Report
Posted: July 31, 2013
Revised:
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----------------- This is the day the Commissioners were given the
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This testimony can be found on the Texas Lottery website. Should you wish to read it from there, Click here The testimony starts on page 55. |
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| For the second item, Kim Tucker was our
14 lead auditor on this recently issued Internal Audit 15 Report, and so I'm going to turn this over to Kim to 16 present that to you. 17 MS. TUCKER: Thanks. 18 Good afternoon, Commissioners. My name is 19 Kim Tucker, from the Internal Audit Division. 20 Internal Audit has completed and issued a 21 review of the prize payment account. You should have a 22 copy of the full report before you. 23 While we initiated this audit as a result 24 of a complaint, this was an audit focused on a critical 25 key process in our agency. We focused this audit on 1 three core objectives. We sought to determine whether 2 the prize payment account balance is accurate and fairly 3 presented, that assets are adequately safeguarded and 4 that appropriate controls are in place. 5 Internal Audit reviewed reconciliations 6 performed during the time period of September 1, 2006, 7 through December 31, 2010. In accomplishing our 8 objectives, we worked with the Office of the Controller, 9 we reviewed agency files and records that were 10 available, and we performed selected test work as deemed 11 necessary. 12 Based on the results of our review, 13 Internal Audit cannot determine whether the prize 14 payment account is accurate and fairly presented, 15 confirm the amount of the discrepancy noted in the 16 reconciliations, or determine the reasons for the 17 variance in the prize payment account. While management 18 has made improvements in controls, adequate and 19 effective internal controls were not in place during the 20 period audited to ensure the prize payment account was 21 adequately safeguarded against unauthorized activity. 22 Our report includes recommendations to 23 assist the agency to enhance and strengthen controls 24 over the prize payment account and related processes. 25 Responsible management has expressed agreement with 1 Internal Audit's conclusions and recommendations 2 detailed in the report and has included corrective 3 actions in its responses. 4 This concludes my presentations, and we're 5 available to answer any questions you may have. 6 CHAIRMAN WILLIAMSON: Thank you, Kim. 7 As always, being an accountant and CPA, 8 you know, bank reconciliation is a basic function. So I 9 think we're going to dig a little bit into this and see 10 what all has transpired, I would guess, from the 11 beginning. And since it's under the office with the 12 Controller, Kathy, kind of give us a history of this 13 prize payment. Just start whenever it was opened, in 14 ninety whatever, and bring us forward up through 2010 15 when Internal Audit got involved with looking at this 16 old account. 17 MS. PYKA: Certainly. For the record, my 18 name is Kathy Pyka. I'm the Controller for the 19 Commission. 20 So, Commissioners, the account was opened 21 back in the late 1990s. And so it is an account, a 22 local bank account. And what we use the account for is 23 the issuance of prize payment checks. It's a revolving 24 reimbursement account. And so the way that the process 25 works is, as prize checks are issued, either from our 1 claims centers or here in the Austin office, the value 2 of those prize checks are routed to the safekeeping 3 trust company, and we are reimbursed that prize payment 4 account for the value of any prize payment checks. 5 CHAIRMAN WILLIAMSON: For those of us that 6 are ignorant, can you tell us what the prizekeeping 7 trust -- what the trust company is -- 8 MS. PYKA: Certainly. 9 CHAIRMAN WILLIAMSON: --where is that 10 located, who oversees that, that sort of thing. 11 MS. PYKA: Certainly. The Texas 12 Safekeeping Trust Company is the treasury branch of the 13 State of Texas. That office is housed as part of the 14 Comptroller of Public Accounts. And so any investment 15 transactions, any banking transactions for the State of 16 Texas are housed in that office. 17 They house a lot of the proprietary 18 functions of the State of Texas, while the Comptroller's 19 office itself handles the accounts for our appropriation 20 accounts like the funds that get appropriated to us to 21 pay for agency expenditures. So it's kind of two 22 different branches in that office. But the safekeeping 23 trust company handles all of our prize payment activity. 24 So this account has been there for quite sometime. I 25 understand that prior to Bank of America, it was housed 1 with a different bank institution. 2 I arrived here at the Commission at the 3 end of September 2005. Upon my arrival, just going 4 through what you would expect to have as basic 5 accounting functions, one of the very first reports that 6 I was required to file was the itemized operating 7 budget. That was due to the Governor's Office and 8 Legislative Budget Board in December of 2005. And that 9 is basically when I became aware of the fact that that 10 account nor our appropriation reconciliations with the 11 State Comptroller had been reconciled or were in a 12 current reconciliation status. So, again, that was in 13 early November of 2005. I arrived at the Commission in 14 late September 2005. 15 What we did was, in February of 2006 is, I 16 looked at the reconciliation activities for this 17 account. Based on the volume of activity that goes 18 through this account -- and just to give you a 19 perspective, about 5,000 prize checks are issued each 20 month out of this account -- it was apparent to me that 21 the best way to handle this was to begin by reconciling 22 the nominal activity for the month -- look at revenue 23 inflow, look at revenue outflow, look at expenditure 24 inflow, look at expenditure outflow and try to get our 25 arms around reconciling that. So while I had one team 2 of 2006, we had another team trying to go backwards to 3 reconcile what hadn't been reconciled. 4 I think you can probably gather it was not 5 a situation that anybody that's over a financial 6 operation wants to encounter. So I'm going to walk you 7 through, I would say, key dates of this reconciliation 8 project, trying to just walk through what happened. 9 So I'm going to take you through, then, 10 our Fiscal Year 2007 financial audit. Now, this is the 11 financial audit on our audited financials performed by 12 an external financial auditor. When they arrived to do 13 the work on the Fiscal Year 2007 books, which would 14 include activities of September 2006 through August 15 2007, we certainly disclosed the issues that we were 16 going through with the bank account reconciliation. And 17 in that particular year's audited financial report, the 18 agency was cited with a significant deficiency for the 19 lack of current account reconciliation of the prize 20 payment account.21 COMMISSIONER KRAUSE: Say that again. 22 MS. PYKA: It was the Fiscal Year 2007 -- 23 COMMISSIONER KRAUSE: Okay. 24 MS. PYKA: -- audited financial. That 25 audited financial and that opinion was released in 1 December of 2007. 2 COMMISSIONER KRAUSE: May I interrupt you 3 here for a second? 4 MS. PYKA: Yes, you may. 5 COMMISSIONER KRAUSE: Okay. So were there 6 any notes or records that you went to when you first 7 arrived and first began looking at this that indicated 8 what the person in your job before you was doing with 9 this account because, obviously, the whole thing existed 10 when you arrived? Were there any records that you could 11 go to where they were trying or even giving it a go to 12 try and figure it out? 13 MS. PYKA: There were older electronic 14 files. But with regard to complete files or files that 15 showed that the account had been reconciled, there were 16 not. And so what I did when we became aware of this in 17 November, is certainly I had two managers who reported 18 to me. And they had been here for some time. And 19 certainly, you know, in visiting with them, they 20 affirmed that my observation was correct, that we were 21 not current on reconciliations of either the prize 22 payment account or the appropriation reconciliation for 23 the accounts held in the Comptroller of Public Accounts. 24 COMMISSIONER KRAUSE: Is there any way to 25 know how far back that the controllers before you were 1 aware or had concern about this? Or was it just not 2 material, and so -- 3 MS. PYKA: I think that's a difficult 4 question -- 5 COMMISSIONER KRAUSE: Yes. 6 MS. PYKA: -- because certainly we tried 7 to go back. But there's so many missing pieces to the 8 reconciliation that we found, and I'll give you an 9 example. When we finally got the account to a constant 10 reconciliation variance -- I'm not going to say it was 11 reconciled to zero; it was reconciled to a constant 12 variance of 622,000 -- that was in June of 2010. That 13 balance had been much higher than 622,000 over the 14 periods when we were trying to get it reconciled. 15 But what we identified was that the way we 16 were handling the accounting for administrative prize 17 claims was incorrect. We were able to obtain enough 18 data in June of 2010 to go back and correct all the way 19 back to July of 2006, but adequate records prior to July 20 of 2006 were not available to make a correcting entry. 21 So we made a correcting entry to the tune of just over 22 $200,000 to get the variance down to 622,000. So that 23 correcting entry and all that we went through to do that 24 was reviewed during our Fiscal Year 2010 financial audit 25 performed by our external financial auditor at the time. 1 COMMISSIONER KRAUSE: But surely when you 2 rolled in, there were some kind of a book somewhere that 3 says: These are the procedures that we've been 4 employing for the last five years, 10 years to do this, 5 because we're a big enough of an operation where we have 6 to have written procedures for things.7 MS. PYKA: Commissioner, there were 8 procedures on file. I think the cash-in bank procedure 9 went back to 1998. But procedure and following the 10 procedure were two different things. 11 COMMISSIONER KRAUSE: I got it. 12 MS. PYKA: There were a number of other 13 issues during that time period that we would consider to 14 be significant control deficiencies in our eyes as well. 15 I mean, we worked through some payroll issues, we had 16 worked through some jackpot estimation issues, we worked 17 through some transfer issues. There were a lot of 18 issues that we addressed early in that tenure as part of 19 our just routine business process review of what the 20 status of affairs were at that point in time. 21 We continued working through issues 22 related to prize payable reconciliations, accounts 23 receivable reconciliations. And, you know, those have 24 been ongoing over the year. But cash in bank, I can 25 assure you, we applied a lot of resources. I know when 1 the audit was being performed, Cat asked me the question 2 of, you know, "Could you just put" -- I think your 3 question, Catherine, was, "a lot of resources and get to 4 it?" Well, it didn't seem to matter if we put five 5 resources, two resources or 100 resources, getting to 6 the data was our problem. And if you don't have that 7 data -- it was the absence of that historic information 8 that was our challenge. 9 And so back to the correction we did for 10 administrative prize checks, we knew we could get back 11 to July of 2006, and responsible staff in our department 12 that had been here for many, many years confirmed that 13 that accounting treatment for administrative prize 14 checks had been handled the same way as what we 15 identified as being an error. So, you know, one could 16 assume that part of the variance, the constant variance 17 related to older administrative prize checks, but I 18 can't say that without having that data. 19 And I think you can kind of gather, that's 20 what got us to the point that we needed to close out 21 that account and start afresh with a new account in 22 order to continue addressing the old but know that we 23 had a new account set up with proper controls.24 COMMISSIONER KRAUSE: Are we trying to do 25 too much of this one account? Should it be broken up 1 into smaller accounts? 2 MS. PYKA: I don't know that -- 3 COMMISSIONER KRAUSE: The volume of 4 activity, it seems like that by itself along presents a 5 pretty significant challenge to understanding what's 6 going through there. 7 MS. PYKA: Well, I will say -- I mean, I'm 8 very confident with what we're doing today. Since June 9 of 2010, the account -- the new account has been -- 10 well, let me back up. Since June of 2010, 11 reconciliations have been current. The old account had 12 a constant variance that we were able to reconcile every 13 single month with the same variance. 14 We opened the new account in August of 15 2010, and we've not had an issue one reconciling that. 16 It's been reconciled every single month timely and to a 17 zero variance. I would like to say that, you know, 18 we're going to continue enhancing that, I believe, with 19 the new gaming system, and with some new opportunity of 20 automation, that we can continue working toward 21 improvements. That's what we're about. But I'm not, I 22 don't think, as concerned about one account in the 23 volume. I am more concerned about the lack of 24 reconciliations, you know, historically.
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25 COMMISSIONER KRAUSE: So that's why our 1 review period ends at 2010, because we finally fixed it? 2 MS. PYKA: I would allow the auditor to 3 address that. 4 CHAIRMAN WILLIAMSON: Well, yes, we'll get 5 to that. I was just kind of trying to get the 6 historical perspective on this. 7 So when you say the $600,000 balance, 8 basically what that probably is, since there has been no 9 changes over a period of time, are just uncashed checks 10 that have never cleared for the most part. Or we can't 11 even say that, we don't know? 12 COMMISSIONER KRAUSE: And whose favor is 13 that in? 14 MS. PYKA: Yes. I wouldn't say that it's 15 uncashed checks, because we feel like we finally got to 16 an outstanding check register. We got to that in 2009, 17 and that was when we made a clean-up entry to the 18 submission of unclaimed prizes that's outlined in the 19 report. I think that what that difference is, is a 20 beginning balance difference, that without having those 21 historical records and not knowing if it was part of the 22 administrative trek accounting treatment that was in 23 error, we just don't know. 24 CHAIRMAN WILLIAMSON: Okay. 25 MS. PYKA: If we could re-create old 1 records and get to those old records, that would be the 2 magic of -- you know, we would love to go back and see 3 if that's what it is. But the absence of that -- in 4 between all of that, we went through a gaming transition 5 from the previous system to Prosis. And, of course, now 6 we've even into, you know, a different gaming system. 7 But -- 8 CHAIRMAN WILLIAMSON: But basically you're 9 saying it just could be accounting entries as much as 10 anything -- 11 MS. PYKA: Right. 12 CHAIRMAN WILLIAMSON: -- may not have 13 anything to do with uncashed checks -- 14 MS. PYKA: Correct. 15 CHAIRMAN WILLIAMSON: -- a certain portion 16 of it. 17 MS. PYKA: We were able to reconcile, you 18 know, previous months prior to my arrival the nominal 19 activity. But still, if you can't get to that beginning 20 balance, you know, that's the challenge. 21 CHAIRMAN WILLIAMSON: Okay. Tell us why 22 we don't have access to that older historical 23 information. 24 MS. PYKA: Well, in many cases, you know, 25 those records, through our records retention schedule, 1 have been removed from the agency. The agency maintains 2 records for three years. And so at the point in time 3 that we were beginning this work, some of those older 4 records were already destroyed at that point. So just 5 availability of that data, due to our records retention 6 schedule, which is the State of Texas' records retention 7 schedule. That's not something internal to this agency; 8 it's the common schedule for all of the state. 9 CHAIRMAN WILLIAMSON: Okay. So then what 10 we hear is, up and to the point of time of this 2010 11 date, the agency was aware that this was going on and 12 steps were being taken to try and understand what it was 13 and to go forward with this and deal with it and go on. 14 Okay. 15 MS. PYKA: Correct. And certainly before 16 we got to June of 2010, we put measures in place, you 17 know, to ensure that we didn't have ACH fraudulent 18 activity, by putting blocks on our account, and we 19 implemented various -- we put in place a positive pay 20 feature, and we've moved forward with that and even 21 enhanced that to a total positive pay feature. But we 22 did what we could at that time to address as much of it 23 as we could. 24 CHAIRMAN WILLIAMSON: Okay. Now, this 25 complaint comes in -- I've never seen the complaint. 1 Does anybody have a copy of the complaint? Do you have 2 it? I mean -- 3 MS. MELVIN: Yes, I have. 4 CHAIRMAN WILLIAMSON: Can you read that 5 into the record for us so we know exactly what kind of 6 brought this into your house, so to speak. 7 MS. MELVIN: Sure. Commissioner, I will 8 have to access that, if you will give me a few moments. 9 I can pull that up and I can read that into the record. 10 CHAIRMAN WILLIAMSON: Okay. That will be 11 great. 12 COMMISSIONER KRAUSE: Well, Ms. Pyka, if 13 in 2007 you had two teams of people working on this 14 project, then, obviously, there was, you know, focus on 15 it. And I'm assuming at that time that the Internal 16 Audit staff was working with you also trying, you know, 17 to provide some resources to figure it out? 18 MS. PYKA: At that point in time when we 19 were working on the dedication of that project, it was 20 solely the Office of the Controller staff. Internal 21 Audit's activities on the account began in I guess 22 December of two thousand -- 23 MS. MELVIN: Ten. 24 MS. PYKA: 2010. 25 COMMISSIONER KRAUSE: I heard some mention 1 about the Controller, and I wanted to make sure that 2 that was you. Or is that, you know, like Ms. Combs' 3 office? She probably wasn't the Controller at the time 4 but -- maybe she was -- does her office have anything to 5 do with what we're doing over here on controls and that 6 kind of thing? 7 MS. PYKA: Well, certainly when we became 8 aware of the issues, we certainly met with the 9 safekeeping trust company, which is an arm of the 10 Comptroller of Public Accounts -- 11 COMMISSIONER KRAUSE: I gotcha. Okay. 12 MS. PYKA: -- as well as our Bank of 13 America account representative. And that's how we began 14 the discussion of putting positive pay in place, putting 15 the ACH blocks on the account as well as moving forward 16 to the new account. So certainly they were very well 17 aware of the challenges we were facing. 18 CHAIRMAN WILLIAMSON: I've only gone back 19 to 2008, because that's all I have on the external 20 financial audit. The one that I saw I know mentioned it 21 in the footnotes, but they made no comment as terms of 22 any deficiencies or concern. So I guess at that point 23 in time, they were not concerned about the sufficient 24 deficiencies or that whatever was going on was not 25 material enough to add any additional comments within 1 the audit report itself. At least that's what I saw. 2 MS. PYKA: Correct.3 CHAIRMAN WILLIAMSON: So I guess -- I 4 mean, I would have to surmise whatever had been put in 5 place up to that point in time addressed those comments 6 from that prior audit, which you said was 2007? 7 MS. PYKA: Fiscal Year 2007. And 8 certainly when we got to the Fiscal Year 2008 audit, 9 Commissioners, we were not reconciled at that point 10 either, but they knew the progress that had been made 11 and they knew what that difference was and they knew the 12 nominal account work we were doing. So it was not a 13 repeat significant deficiency at the end of the Fiscal 14 Year 2008 audit. 15 You know, there were a lot of issues 16 discussed in that significant deficiency, and they're 17 the same issues that we've included in our management 18 response to this audit and what caused us to be in that 19 significant deficiency status. 20 COMMISSIONER KRAUSE: Didn't the variance 21 get smaller as you worked on it? 22 MS. PYKA: It did. 23 COMMISSIONER KRAUSE: It started out at 24 what, 620,000, and you got it down to what? 25 MS. PYKA: Well, actually, the variance 1 was well over a million. 2 COMMISSIONER KRAUSE: Okay. 3 MS. PYKA: So we got it down to 800,000 4 and then, through the administrative check correction, 5 got it down to 622,000. When we closed out the account, 6 it was at $622,000. 7 COMMISSIONER KRAUSE: And is there any way 8 to know, you know, which way that was going? Were we 9 short or were we over or -- 10 MS. PYKA: Our general ledger account 11 balance was higher than the bank and treasury -- or 12 cash-in treasury account. 13 COMMISSIONER KRAUSE: Okay. 14 MS. PYKA: And so the administrative check 15 correction is an entry that would have reduced that 16 balance, the cash-in bank balance down, is how it went 17 from 800 to 622,000. 18 CHAIRMAN WILLIAMSON: But we're not 19 actually talking $622,000 in terms of, you know, green, 20 we're talking just a -- 21 MS. PYKA: General ledger balance. 22 COMMISSIONER DELGADO: -- general ledger 23 account balance entry? 24 MS. PYKA: Correct. 25 COMMISSIONER KRAUSE: So we might have 1 just had a mistake on our records? 2 MS. PYKA: Correct. 3 CHAIRMAN WILLIAMSON: Correct. So just 4 for clarification, we're not talking about dollars in 5 the amount of 622,000, that's just the general ledger 6 account balance? 7 MS. PYKA: Account balance. 8 CHAIRMAN WILLIAMSON: Okay. Did you find 9 it?10 MS. MELVIN: I did. 11 CHAIRMAN WILLIAMSON: Okay. Would you 12 read it into the record for us, please. 13 MS. MELVIN: I sure will. 14 CHAIRMAN WILLIAMSON: And the specifics, 15 when it came in -- 16 MS. MELVIN: Absolutely. 17 CHAIRMAN WILLIAMSON: -- everything, you 18 know, how you got it, all of that or whatever your email 19 says. 20 MS. MELVIN: Absolutely. 21 The complaint was forwarded to me from the 22 State Auditor's Office. I was first contacted in 23 November of 2010. 24 CHAIRMAN WILLIAMSON: Which day? Do you 25 remember? 1 MS. MELVIN: I don't have that date in 2 front of me. 3 CHAIRMAN WILLIAMSON: Okay; okay.4 MS. MELVIN: Mid to late November, I would 5 say. At that time, the agency's contact manager with 6 the State Auditor's Office was Sandra Vice. And so 7 initially she called me to say that they had received a 8 complaint and that they wanted to discuss that with me. 9 After some phone calls back and forth, we 10 finally talked about this. And she forwarded the 11 complaint in an email and then also a hard copy of the 12 complaint. And looking at the hard copy, it looked like 13 the complaint had arrived on their fraud, waste and 14 abuse hotline. The State Auditor's Office maintains a 15 toll-free and also an Internet submission kind of 16 hotline for anyone to submit concerns. 17 I will go ahead and read it. 18 CHAIRMAN WILLIAMSON: If you will read the 19 date and the time. You know, if it's an email, I'm sure 20 that's all on there. 21 MS. MELVIN: Okay. So the complaint 22 states, "I have been told by staff in the Office of the 23 Controller at the Lottery that they have lost $600,000 24 during their change of accounts. They had scheduled to 25 change accounts 09/01/2009. But due to whatever, as 1 they would not explain it to anyone, they did not do it 2 until 09/01/2010 - the amount of fraud being done by 3 outside people to the lottery was such that we needed to 4 change bank accounts - however, the OC took so long in 5 doing so that a great deal of fraud continued. 6 "And I am now being told that they are 7 missing $600,000. These are the people who get merits 8 every 8 months, 5% plus once a year get a one-time bonus 9 ($1500 to $2500) no one but the Directors (Kathy Pyka) 10 direct contacts. Her lower workers do not get merits at 11 all and they lost no money. 12 "No one else in the TLC get merits like 13 this and now the merits are being frozen (as of Jan. 1, 14 2011). You can bet OC Director Kathy Pyka will make 15 sure her direct contacts all get merits in the month of 16 December. Yet, they will still not answer the $600,000 17 or the waste of money due to their not changing accounts 18 in a timely manner. 19 "Also their second in command, Ben 20 Navarro, was recently disciplined for lying to his 21 employees, telling them the lottery does not get merits 22 ever (this was before the merit freeze) while meantime 23 all the top dogs in the OC were getting them more than 24 once a year (including Ben Navarro who was caught in 25 more than just that lie and is in charge of the Lottery 1 funds). 2 "This worries me in that the people in 3 charge of money for the school fund are not being very 4 fiscal responsible and may be embezzling money asks how 5 do you lose $600,000? Where do you find money to give 6 that many merits and bonus when no one else in the 7 agency has that kind of money? Do an open records 8 request on any of these things with the lottery OC 9 divisions and you will see." 10 CHAIRMAN WILLIAMSON: What was the date of 11 that? Is it on there? 12 MS. MELVIN: Well, this was sent to me 13 contained in an email. And the -- excuse me. Let me 14 open this up. The email was sent to me November 10th. 15 I believe the date of the actual complaint was 16 November 4th.
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17 CHAIRMAN WILLIAMSON: Okay. So at this 18 point in time, what happened after you received this 19 complaint? 20 MS. MELVIN: Well, after I received the 21 complaint, as I stated, I visited with the State 22 Auditor's Officer as to the proper handling of the 23 complaint. Their process is, is that after they receive 24 complaints into their office, they can choose to keep 25 them and do whatever they choose to do, or they turn 1 them over to Internal Audit functions within state 2 agencies. 3 And so I receive other complaints about 4 the agency through their fraud, waste and abuse hotline. 5 And typically these are more related to retailer 6 concerns or, you know, "I tried to cash a ticket here, 7 and this retailer wouldn't cash my ticket," or, you 8 know, that type of thing. But every now and then, we 9 might get a complaint actually about internal agency 10 business. 11 And so I don't know that I see all those, 12 but I see the ones that they forwarded to me. So in any 13 case, I visited with our contact manager, Sandra Vice. 14 And in reading the complaint, you know, I said, "If 15 Internal Audit handles it, what we'll do is, we'll do an 16 internal audit of the prize payment account." 17 And so they said go forward and provide 18 them the results when we were finished. And so we 19 launched the audit in December of 2010. I spoke with 21 believe, right before we launched that. 20 Gary, it might have been the beginning of December, I 21 believe, right before we launched that.22 CHAIRMAN WILLIAMSON: Prior to the 23 complaint, was Internal Audit -- I mean, I assume the 24 answer is yes -- aware that this was a problem already, 25 that this account was not being reconciled? I mean -- 1 MS. MELVIN: Other than the notice in the 2 Fiscal Year 2008 audits, I would say no. 3 CHAIRMAN WILLIAMSON: Okay. So you had no 4 knowledge of this at all? 5 MS. MELVIN: I don't think I was aware. 6 CHAIRMAN WILLIAMSON: Other than 7 through the -- so were you doing this in 2007 when they 8 came out with the first audit report? 9 MS. MELVIN: Yes. 10 CHAIRMAN WILLIAMSON: So in 2007, you saw 11 the significant deficiencies? 12 MS. MELVIN: Yes, yes. 13 CHAIRMAN WILLIAMSON: So you were at least 14 aware of that? 15 MS. MELVIN: Yes. 16 CHAIRMAN WILLIAMSON: Okay. So in 2007, 17 you were still aware of that at that point in time. So 18 as we proceeded -- let's go back and talk about this 19 account. When this was brought up and we were aware 20 there was outside activity that was unauthorized, what 21 did we do with that? I mean, did we try and recoup any 22 of our money that we realized -- I mean, kind of walk me 23 through. I don't know if this was during what you were 24 doing or prior to that. 25 MS. PYKA: This would have been prior to 1 the work of Internal Audit in our office. 2 CHAIRMAN WILLIAMSON: Okay. 3 MS. PYKA: And so when we became aware of 4 the fraudulent activity, the first thing that we did, of 5 course, was notify Bank of America in order to obtain 6 credit for the fraudulent activity. We filed an 7 affidavit stating it was fraud. And at the same time, 8 we also notified Enforcement, our internal Enforcement 9 Division, of the fraudulent activity, for them to begin 10 their investigation. So there was one grouping that we 11 had. And then followed by that, we became aware of some 12 ACH activity that was fraudulent in nature, and so we 13 went through the same process with that as well. 14 CHAIRMAN WILLIAMSON: So did we like -- 15 were there charges filed on any of these people? Did we 16 recover any of the money that they fraudulently -- 17 created false checks or whatever the heck they did? 18 MS. PYKA: Certainly. There was an 19 investigation, as I mentioned, by Enforcement. And so 20 through the work of our Enforcement team -- and I don't 21 have the exact account -- but certainly several of those 22 individuals were prosecuted. And I don't have the 23 disposition of their exact status right now, but 24 certainly a number of them were found guilty. 25 COMMISSIONER KRAUSE: Who were these 1 people? 2 CHAIRMAN WILLIAMSON: Do we have any idea? 3 COMMISSIONER KRAUSE: They don't work for 4 us? 5 MS. PYKA: No, they do not work for us. 6 COMMISSIONER KRAUSE: Okay. They just 7 comment on the outside? 8 MS. PYKA: Correct. 9 COMMISSIONER KRAUSE: Okay. 10 CHAIRMAN WILLIAMSON: Okay. So proceed 11 forth. And then your team came in and went through and 12 basically looked at what they had been trying to do for 13 the last -- since 2000 and -- whenever you started 14 doing -- so you went in and spent your time and looked 15 at all that? 16 MS. MELVIN: Yes, ma'am. 17 CHAIRMAN WILLIAMSON: Okay. And, of 18 course, your results speak for themselves. 19 Now, the other thing is, I'm worried 20 during this that we're -- there were already processes 21 in place to correct all of the deficiencies, as it were, 22 and the processes and whatever to make sure this didn't 23 happen. Did y'all look at any of those? 24 MS. MELVIN: We launched the audit in 25 December of 2010. So our review period was, or scope
1 under audit, was through December of 2010. So our focus 2 clearly was on what we're calling the legacy account, 3 the old account. As Kathy mentions, the agency opened 4 the new account on August 30, 2010. So we looked at 5 September, October, November, December, those months, 6 and verified that, as she stated, within the new 7 account, that account had reconciled to zero each of 8 those months. 9 But we didn't go into great detail about 10 the new process, seeing as the account was only open 11 four months. And, you know, obviously, given the nature 12 of the complaint, we wanted to ensure we had a pretty 13 thorough review of the legacy account. 14 CHAIRMAN WILLIAMSON: From a materiality 15 perspective, was it somebody who said -- I don't know. 16 Kathy, it was you -- that there were like 5,000 17 transactions a month? 18 MS. PYKA: That's correct. 19 CHAIRMAN WILLIAMSON: So somebody do the 20 math for me. Over this period of time -- no. How many 21 transactions were unauthorized compared to the total 22 number of transactions that occur, say, over a year's 23 period of time or maybe even this whole four-year period 24 of time we were looking at? 25 MS. PYKA: Okay. So just looking at the 1 data from the report, there were 136 unauthorized 2 transactions. Of those 136, 100 of them were credited 3 back to us by Bank of America, because we were able to 4 provide them timely notification of the fraudulent 5 activity. So it left 36 transactions which were the 6 responsibility of the state, just under $50,000, that 7 became a bad debt to the state for fraudulent activity. 8 I'm going to focus first on -- the fraud 9 period was about a 21-month period. And so with about 10 5,000 transactions per month, that would equate to a 11 little bit over 100,000 transactions for that fraudulent 12 period. And again, we had 136 which were unauthorized. 13 The audit period I believe would have been 14 52 months if it went from September of 2006 to December 15 of 2010. So that would have included about 260,000 16 transactions included in the audit period for -- 17 CHAIRMAN WILLIAMSON: Is that kind of 18 where you came up, the same numbers? 19 MS. MELVIN: Yes. 20 CHAIRMAN WILLIAMSON: And I can't do the 21 math, because -- 22 MS. MELVIN: I haven't done the math but 23 that sounds about right. 24 CHAIRMAN WILLIAMSON: I don't know what 25 the math is, but that's got to be a point zero zero 1 something something percent, unless anybody can do that 2 in their head. 3 So let's talk about the dollar side of the 4 same things. What are we talking about dollar 5 perspective? What's the material- -- you know, 6 transactions are one thing. Dollars, obviously, are 7 more important, because it does impact what we give back 8 to the state or we earn for the state for the school 9 fund. So what are we talking about there? 10 MS. PYKA: Certainly. We understand the 11 importance of every dollar again. The fraudulent 12 activity that was not recovered was right around 13 $50,000. If we look at the revenue that we transferred 14 to the Foundation School Fund during that same time 15 period, we transferred $1.692 billion. And so as a 16 percentage of the total, it would be .003 percent of the 17 total, in dollars. 18 CHAIRMAN WILLIAMSON: Okay. 19 Commissioners, do you have any questions 20 or comments? 21 COMMISSIONER KRAUSE: Well, other than the 22 fact that, you know, once you got here and started 23 trying to figure out this, I mean, there isn't anything 24 that indicates that people that work for us were doing 25 wrong as far as taking money? 1 MS. PYKA: I am not aware of anybody on my 2 staff or certainly I will assure you I have not done 3 anything wrong in taking money. 4 COMMISSIONER KRAUSE: Right. We got our 5 investigative team on it, not Internal Audit but -- 6 MS. PYKA: Our Enforcement Division. 7 COMMISSIONER KRAUSE: -- I guess, you 8 know, our PIs or whatever. And so if they had thought 9 that we had internal folks, they would have focused on 10 that. 11 MS. PYKA: I would believe so. 12 COMMISSIONER KRAUSE: Right. Okay. And 13 so, you know, I guess I'm satisfied that we're clean as 14 far as that concerns. And then basically we were 15 wrestling with how to deal with the accounting 16 discrepancy. And during that time, we did get a little 17 taken advantage of, you know, by come con men, which I'm 18 not surprised. I mean, we're a huge financial 19 organization. And I'm sure Bank of America gets hit all 20 over the world with people trying to steal from them. 21 So what was about the time that our 22 investigators, our Enforcement people, were working on 23 their end of it? 24 MS. PYKA: They began their work in 25 December of 2008, is when they began their work. 1 COMMISSIONER KRAUSE: Okay. 2 MS. PYKA: And it was a fairly lengthy 3 process. They interviewed a number of individuals 4 involved in the fraudulent scheme and certainly met with 5 Harris -- it was in Harris County. 6 COMMISSIONER KRAUSE: How did it come to 7 our attention that the con men were actually getting the 8 better of us on some of that? 9 MS. PYKA: Through our nominal account 10 reconciliations. 11 COMMISSIONER KRAUSE: Okay. So the 12 procedures that we had in place were finding that. It 13 was just kind a little bit of a timing thing? 14 MS. PYKA: Correct. 15 COMMISSIONER KRAUSE: Okay. 16 MS. PYKA: Because -- 17 COMMISSIONER KRAUSE: They got -- 18 (Simultaneous discussion) 19 MS. PYKA: Yes. 20 COMMISSIONER KRAUSE: I like that. 21 CHAIRMAN WILLIAMSON: And I understand 22 your audit. You did not find any evidence of 23 internal -- 24 MS. MELVIN: No. 25 CHAIRMAN WILLIAMSON: -- unauthorized 1 activity during that time. 2 MS. MELVIN: In the course of my audit, 3 yes. 4 CHAIRMAN WILLIAMSON: Okay. 5 Do you have any questions? 6 Thank you both. I felt it was very 7 important that, you know, when things like this occur, I 8 believe we certainly need to come to an understanding of 9 what all transpired. 10 What I am going to do, unless one of my 11 fellow commissioners objects, I am going to request that 12 the State Auditor come in and look at the processes that 13 you have in place now, just to double assure us and, you 14 know, affirm kind of where you report, that we are doing 15 everything properly to take care of it from this point 16 forward and to figure out what we are going to do in 17 terms of dealing with that old account that doesn't 18 exist -- that old balance. I don't even like to use 19 that word -- that old balance on the general ledger and 20 what we need to do with that. 21 MS. PYKA: And I might address that. We 22 did move forward with the account write-off of the old 23 balance on the general ledger, in August of 2012. And 24 so the financial audit team that is in now is certainly 25 looking at that. So once we get through this audit, 1 that will be addressed. 2 And I certainly welcome any input or 3 oversight by the State Auditor's Office in coming back 4 in to look at the follow-up. I feel like through the 5 total positive pay features that we've put in on this 6 new account, that we've got some great fraudulent 7 activity screens in place, and we certainly have been 8 better served by having that in place. 9 CHAIRMAN WILLIAMSON: All right. Thank 10 you. 11 Any other -- 12 COMMISSIONER KRAUSE: No. 13 CHAIRMAN WILLIAMSON: All right. Thank 14 you. 15 MS. MELVIN: Thank you. 16 AGENDA ITEM NO. XIII |
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This testimony can be found on the Texas Lottery website. -------------
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Texas Lotto Report
(All About the Texas Lottery)
Dawn Nettles
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