(Frankfort - June 22, 2004)
State Auditor Crit Luallen released her findings and recommendations regarding the former Kentucky Racing Commission. While the report found no evidence of any intent to defraud government, the Auditor's Office did find that the Commission suffered from lax management and a disregard for standard business practices and the rules and regulations of state government.
Luallen, during a morning press conference in the Governor's press room, said, "Our Auditors found no evidence of any intent to defraud government and nothing was found that merits referral to any law enforcement agency. But that is not the standard to which government should aspire. The state agency representing Kentucky's signature industry should have been one of the most professional and best managed in state government - unfortunately it was not."
The report, requested by Governor Ernie Fletcher, was not actually a financial audit, but an "agreed upon procedure". An Agreed - Upon Procedure is a type of engagement defined under auditing standards that involves performing specific procedures and issuing a report of findings and recommendations. The procedures specified by the Environmental and Public Protection Cabinet consists of eight specific questions that are addressed within the report; each is accompanied by specific findings and recommendations.
The Auditor's report makes a number of recommendations to address the problems and to assure appropriate oversight in the future. They are:
- First, the report strongly recommends that the Kentucky Horse Racing Authority Executive Director report to the Environmental and Public Protection Cabinet for administrative purposes. With clear lines of authority, cabinet officials can ensure that the Racing Authority adopt strong financial controls and comply with appropriate statutes and regulations.
- Further, it is recommended that the cabinet not employ an individual to simultaneously hold the positions of Racing Authority Executive Director and Chief State Steward.
- The cabinet should seek clarification from the Executive Branch Ethics Commission regarding possible violations of KRS Chapter 11A involving dual employment and possible conflicts between existing statutes and the Executive Branch Code of Ethics.
- In addition, the cabinet and Racing Authority should seek legislation and promulgate regulations to clarify the establishment and modification of track assessment fees and the manner of prorating KHRA's Executive Director's salary among the various tracks.
- The Racing Authority should implement and adhere to controls in areas that include employee time and attendance reporting, consistent application of travel reimbursement regulations, the security and timely deposit of license fees and other receipts, and the timely reconciliation of license receipts to licensing system data and to bank deposits.
- The Racing Authority management should be adequately trained to ensure operations comply with applicable statutes and regulations.
- Board members should be given appropriate orientation related to state policies and procedures.
- As an ex-officio member of the Racing Authority Board, the Environmental and Public Protection Secretary or designee should attend and participate in Board meetings.
Luallen said, "One of the conclusions that can be drawn from our review is that having one individual fill the dual role of Executive Director and Chief State Steward resulted in the work clearly being geared more toward the Steward's job. It appears the former Commission management was so focused upon the horse racing industry and racetracks that they were unwilling or unable to keep their internal workings in order."
The review of the Racing Commission was completed by 16 audit staffers who put in over 1,100 audit hours on the project. They worked closely with the employees of the Environmental and Public Protection Cabinet and the Kentucky Horse Racing Authority.
"As you will see from the report, the Auditor's Office conducted numerous interviews with current Authority and former Commission employees. When questions were raised, answers were sought - both inside state government and in the private sector. We conducted a thorough review of the management and structure of the state agency charged with the duty of promoting and protecting Kentucky's most recognized industry," said Auditor Luallen.
The staff from the Auditor's Office who worked on the project were: Doug Allen, Kelly Glines, Ellen Hessen, Tony Hutchins, Brent King, Elizabeth Lowe, Jenny Luscher, Brian Lykins, Bob McBeath, Scott McKenzie, Bob Pinkston, John Stout, Karen Tucker, Scott Vogt, Tiffany Welch, and Alice Wilson.
The Agreed-Upon Procedures and Findings are summarized below: 1) Review work performed by EPPC regarding travel charges in calendar years 2003 and 2004. In particular, examine the specific potentially fraudulent travel reimbursements identified by EPPC. Determine whether expenses submitted are allowable under Kentucky travel regulations and offer recommendations to resolve any audit findings. Recommend to KHRA policies and procedures to ensure future compliance with travel regulations.
- Former Executive Director and Staff Assistant inconsistently applied travel regulations.
2) Evaluate the EPPC and KHRA time and attendance policies and procedures, including employee classification and the associated method of compensation (hourly vs. salary). Test compliance with applicable time and attendance policies, procedures, statutes, and regulations referenced above and offer recommendations as necessary.
- Lack of written policies and procedures resulted in inconsistent use of earned leave, overtime, and use of "inclement weather" paid leave code.
3) Examine fiscal year 2003 (FY03) procurement contracts, or the lack thereof, for the following vendors:
- Dr. Sams
- Attorney Bruce Miller
- University of Kentucky contract with Equine Drug Research Council. As part of this issue, examine statutes to determine compliance.
Determine whether these contracts complied with all appropriate procurement statutes, regulations, and policies. Determine that all parties complied with the terms of these FY03 contracts.
- As noted in a prior report, KRC did not follow policies for procuring the services of Dr. Sams.
- KRC followed policies for procuring FY03 attorney contract.
- Payments to the University of Kentucky Research Foundation were statutorily allowed and in compliance with procurement policy.
4) Determine whether new policies and procedures enacted by EPPC for KHRA as of mid-January 2004 are properly designed to achieve the desired objective and are operational and consistently applied.
- We concur that new policies and procedures implemented by EPPC and KHRA will strengthen internal controls and clarify procedural processes. Our office made additional recommendations to address issues identified in this report.
5) Determine whether dual employment of any existing KHRA employees is in compliance with existing statutory, regulatory, or policy requirements. Recommend policies and procedures to be followed by KHRA to ensure dual employment is properly administered.
- While not expressly prohibited by law, an individual employed both as KRC Executive Director and Chief Steward creates conflicts of interests.
6) Determine whether track assessment rates implemented by KRC comply with 811 KAR 1:115 and offer recommendations as needed. Further, determine if the authority cited by KRC to increase these track assessment rates is accurate.
- The law is ambiguous as to KRC's authority to assess track fees.
7) Determine the adequacy of the general and application controls governing the KHRA licensing system and offer recommendations as needed.
- Racing system developed in 2001 has segregation of duties control weaknesses for system access.
- Security Administration functions over the KRCsystem should be improved.
- System design modifications are needed to improve data integrity and security.
8) Perform reconciliation for license receipts for the period of January 2003 to present. As part of this, develop internal control procedures to ensure receipts are handled properly.
- KRC did not deposit license receipts in a timely manner.
- KRC did not perform a timely reconciliation of license receipts to the licensing system and to bank deposits.