Texas Lottery executives were warned in a draft audit last winter that their decision to gut the agency's security force and fire most of its officers threatened the lottery's security and integrity, but lottery officials never disclosed those findings publicly.
A copy of the December draft obtained by the Houston Chronicle said that a reorganization ordered by lottery executives actually heightened the lottery's vulnerability to ticket theft, ticket counterfeiting and undetected fraud.
But those findings were not included in the 2004 Biennial Security Review provided to lawmakers and the three commissioners who oversee the lottery. Instead, the report said auditors found no issues that would "materially" impact the lottery's security and integrity.
And when the lottery commission chairman expressed concerns in December about the reorganization's effect on security, he was reassured the process would be smooth and beneficial.
The discovery of the draft audit, conducted by Austin-based Jefferson Wells, disturbed the chairman of the House committee that oversees the lottery.
"I never knew that we would hire outside people to help us and only give us half the story," said Rep. Ismael "Kino" Flores, D-Palmview.
"If they don't tell you what you want to hear, you just don't make it public? Welcome to the Texas lottery," he said.
Flores, chairman of the House Licensing and Administrative Procedures Committee, said the agency lied by not making the draft audit available to him and other lawmakers.
News of the outside audit comes at a turbulent time for the $3.5 billion state agency, which is responsible for $1 billion in education funding every year.
The lottery has been subject to intense public scrutiny and ridicule since last month when then-Executive Director Reagan Greer admitted approving several inflated Texas Lotto jackpot estimates.
Greer resigned late Friday and was temporarily replaced by deputy director Gary Grief, who has worked for the agency since its inception in 1993.
Lottery commissioners plan to meet Monday to discuss the inflated jackpots and other issues.
Grief, who championed the November reorganization as a way to streamline, cut costs and improve coordination at the agency, refused to comment for this story. So did general counsel Kim Kiplin, who helped oversee the audit.
Lottery spokesman Bobby Heith could not answer specific questions about the security audit, which is required by law every two years.
Heith said only that executives stand by the official report, dated January 2005, and contend that it is an accurate representation of the auditor's findings.
The two, however, are profoundly different.
The draft audit specifically warned that the reduction in commissioned law officers — from 35 to four — would hinder the agency's ability to prevent and solve lottery crime.
"Investigators have been instructed to conduct investigations over the phone rather than traveling to the scene of the crime," the draft stated. "Using the phone is not an effective means of performing investigations."
The outside auditors found that eliminating the security division and discontinuing some of its functions appeared to violate the Lottery Act, which governs the agency.
But the official review says only that the reduction in force "may have impacted some security functions" and, later, "It is not possible to determine the full impact of the organizational changes at this time."
It recommended the lottery order another independent audit about 180 days after the reorganization to evaluate its impact.
Former lottery investigators and security employees say an audit at the agency was a tedious process in which executives pressured firms to portray the lottery positively. And the 2004 audit apparently wasn't the first time a draft was changed.
Concerns about the reorganization resurfaced recently while lawmakers were investigating the inflated jackpots.
Days before Greer resigned, he asked the state auditor to conduct an outside review of the reorganization, recent firings and personnel policies.
The security division, once consisting of more than 30 commissioned peace officers, including former investigators from police and state agencies, had been a source of pride for the agency.
It operated regional field offices in Houston, Dallas, Midland-Odessa and San Antonio. Its investigators were charged with investigating complaints, solving lottery crime and helping prevent it.
The executive director had boasted to commissioners about how lottery investigators were aggressively pursuing perpetrators of schemes such as Latin Lotto, which targeted Spanish speakers.
The reorganization dissolved the division and closed the field offices. Those who were left began reporting to Kiplin's legal division.
Investigators were ordered to stop investigating stolen ticket cases, which had been an invaluable service to local police departments who lack lottery technology and expertise, according to internal documents.
"Why would you want to get rid of your security division?" Flores said. "I would think that because of the nature of the business you're in, that security would be the division of your agency that would be the strongest."
Flores said executives never gave him a good answer to that question when he asked them about it late last year.
Lottery Commissioner C. Thomas Clowe expressed similar concerns to Kiplin and the others in a December meeting, according to an official transcript.
Clowe, one of three commissioners appointed by Gov. Rick Perry to oversee the lottery, asked if the agency still had enough officers to maintain the security standard set by the division.
"I believe we do," Kiplin responded. She assured the commissioner that executives shared the concern and if they'd missed the mark in the reorganization, they'd address it immediately.
"Well, OK," the commissioner replied. "I hope you haven't missed the mark, and I don't want to go around fixing problems as a result of this."
That same month, the draft audit described an agency unprepared for reorganization. Employees didn't know their job descriptions, and managers couldn't explain procedures or policies to their employees, the auditor wrote.
Draft's words concealed
By no longer investigating ticket thefts, the draft audit found, the lottery not only opened itself to theft, but made it easier to get away with cashing in stolen tickets.
"The lottery has heightened its vulnerability and exposure to perpetrators of ticket theft," the draft report said. "Increased theft will expose the Lottery to loss of revenue, resulting in a negative impact in the public's perception of Lottery integrity."
But again, that warning never made it into the final report.
Local authorities lack lottery technology to track specific stolen tickets, and without a lottery investigator to help, the audit found the best the lottery could do was deactivate entire packs of tickets. Those packs could contain legitimate tickets already sold.
"This would mean when a player presents a legitimate ticket they have purchased, they would be denied their winnings," auditors wrote.
Excerpt from the December draft of the lottery security audit and from the final version provided to lawmakers:
• Draft: "The lottery has heightened its vulnerability and exposure to perpetrators of ticket theft. Increased theft will expose the Lottery to loss of revenue, resulting in a negative impact in the public's perception of Lottery integrity."
• Final: "Jefferson Wells (the auditor) did not identify any issues that would materially impact the integrity and overall security of the lottery's operations, gaming services and instant and on-line ticket productions."