Updated Nov. 11, 2010, 5:58 pm:  Additional detail about audit and findings, with quotations from Passailaigue

LITTLE ROCK, Ark. — An Arkansas state audit has revealed a variety of deficiencies in how the Arkansas lottery is being run, and one legislator told the lottery director he "would be gone" if he led any other state agency.

Members of the Legislative Audit Committee on Friday told lottery chief Ernie Passailaigue that they're not satisfied with how he has addressed problems that have come up since the lottery's formation last year.

Passailaigue said repeatedly that he takes responsibility for all the mistakes and he admitted that not enough time was spent during the lottery's startup on administrative controls, but several legislators warned him that it's time for problems to end.

"I wish we would have spent more time on the administrative side and less time on getting the lottery up and running," he said.

Passailaigue asked the legislators to remember that the lottery was launched "less than three months after I hit the ground." He called the startup "a learning process."

The report covers the lottery's performance in the fiscal year that ended June 30. The lottery was not in operation the entire year, having launched Sept. 28, 2009.

One of the most significant findings is that the lottery did not prepare financial statements for the fiscal year in accordance with generally accepted accounting principles, as required by state law.

"It did not appear that the staff had knowledge of generally accepted accounting principles as they apply to governmental entities," legislative auditor Andy Babbit said.

Rep. Jane English, R-North Little Rock, said that was a serious concern.

"It really bothers me that we've set up an agency and we have hired ... a whole staff of folks who really don't understand, supposedly, our state agency business and how to do it, and it is kind of scary," she said. "If this happened in a regular or another state agency, the director would be gone."

Auditors also found that the lottery entered into a contract with an instant-win ticket vendor that cost $3.9 million more than the contract reviewed by the legislative oversight committee on the lottery.

The lottery also entered into three licensing agreements with the vendor that cost an additional $671,861 and were never reviewed by the oversight committee, auditors said.

The audit found that lottery personnel received $16,819 in travel reimbursements that were not properly documented or approved or that exceeded the maximum rate without prior approval. Also, marketing sales representatives received $198,983 in reimbursements for travel that was not properly documented.

Passailaigue acknowledged that not enough attention was given to documentation but said "it doesn't mean that the trips weren't proper."

The audit found that the lottery did not wait to hire people until criminal background checks were completed, which led to the hiring and subsequent firing of two people with criminal histories. Sen. Johnny Key, R-Mountain Home, who serves on the legislative oversight committee, said he was concerned by that finding.

"I asked specifically about the background checks, and I was assured that you were working with state police to get those expedited and that would all be handled. Never did anybody come back and say there was a problem," he said.

Passailaigue said the process was rushed because of efforts to get the lottery started quickly, but background checks will not be a problem in the future.

The audit report identifies 11 problem areas. Others include:

• Retirement contributions for Passailaigue were based on his salary with multipliers, which appears to conflict with state law. The Division of Legislative Audit recommended that the lottery seek legal guidance on this point.
• The lottery did not maintain a database of people, such as lottery employees, who are prohibited from playing the lottery.
• Controls over purchases were "minimal" and potentially could allow unauthorized purchases to occur.
• The lottery did not have a clear policy on compensatory time, leading to confusion and possible liability.

Sen. Bill Pritchard, R-Elkins, told Passailaigue that any issues still unresolved should be resolved "posthaste."

"We get very, very irritated and out of sorts in a hurry when people tell us they're going to fix things and then they come back the next time with the same findings," he said.

Arkansas students were awarded more than 30,000 lottery-funded college scholarships for the fall 2010 semester.

Some information sourced from Arkansas News.