Background 14.1 In our 1996 Report we discussed a number of issues relating to the Lotteries Commission of New Brunswick and the Atlantic Lottery Corporation Inc. (ALC). The most significant of these issues were highlighted in Results in brief, paragraphs 12.7 through 12.12 of that Report and covered: • the joint audit of ALC carried out with our colleagues from the Office of the Auditor General of Nova Scotia; • a recommendation for segmented financial information showing separately the results of the Video Lottery Program (VLP) and ALC’s ticket games; • a recommendation that the Lotteries Commission prepare a comparative cost analysis of two models of operation for the VLP prior to expiry of the agreement with the New Brunswick Coin Machine Operators Association on 31 March 2002; • the need for the Lotteries Commission to improve reporting on regulatory functions; • a recommendation that the Lotteries Commission request ALC to provide sufficient financial reporting to demonstrate compliance with the regulated payout percentages for the VLP; and • a statement that Commissioners serving on the Lotteries Commission have a conflict of interest if they are also serving on the board of ALC. Scope 14.2 In this chapter we are following up on the issues previously highlighted in the 1996 Report of the Auditor General. The issue on conflict of interest has been dealt with in Chapter 12, Crown Corporation Governance. Results in brief 14.3 Together with the Office of the Auditor General of Nova Scotia, we completed the joint audit of ALC. The Auditor General of Nova Scotia released the 1996 Shareholder’s Audit Assignment Report in March 1997. Results are summarized in Exhibit 14.1. 14.4 ALC has improved its reporting by providing a schedule of Segmented Operations by Province in its annual report. 14.5 Neither the Lotteries Commission nor ALC have yet published information to demonstrate that the Video Lottery Program complies with the payout percentages established by regulation. Follow-up on issues discussed in 1996 ALC joint audit 14.6 In our 1996 Report, we discussed the ongoing audit of the ALC being carried out in conjunction with the Office of the Auditor General of Nova Scotia. We have completed the audit. The Auditor General of Nova Scotia issued the 1996 Shareholder’s Audit Assignment Report to the Nova Scotia Gaming Corporation in March 1997. We in turn delivered copies to the Lotteries Commission of New Brunswick. 14.7 We believe it is important that this joint audit receive some coverage in our 1997 Report. Consequently, we have prepared Exhibit 14.1. This exhibit reproduces the Results in Brief from the 1996 Shareholder’s Audit Assignment Report and therefore should serve in providing the Legislative Assembly and the general public with a synopsis of the findings. Segmented reporting by ALC 14.8 Last year we dealt with the need for ALC to show the results of operations segmented by ticket games and the Video Lottery Program. We were pleased to find this type of reporting in ALC’s 1996-1997 Annual Report. ALC presented the information in a supplemental schedule called Segmented Operations by Province. Comparative costs of operation for VLP 14.9 In last year’s Report we discussed the comparative costs of the Video Lottery Program in New Brunswick and Nova Scotia. We recommended the Lotteries Commission prepare an analysis of the comparative costs prior to expiry of the agreement with the New Brunswick Coin Machine Operators Association Inc. That agreement expires in 2002. 14.10 It has been widely reported that the government has entered into discussions with the Association. At a meeting of the Standing Committee on Crown Corporations on 26 September 1997 the Deputy Minister of Finance stated: The Minister and the government are on the public record, and have been for some time, saying that they will not wait until the year 2002 to look at the program and see if there is another model that will work. It will essentially begin and will be put in place well before the expiration of the contract. There will be a new revenue sharing formula to replace the one that is there now, and it will work to produce extra revenue for the province. 14.11 During the past year we asked the Lotteries Commission about two aspects of the existing agreement that had come to our attention. These are: • The agreement appears to be signed by only one member of the Lotteries Commission of NB. Our understanding of the Commission bylaws is that at least two signatures are required. • Clause 7 of the agreement states “The Commission warrants that it is authorized by the Lieutenant Governor in Council, pursuant to the requirements of the New Brunswick Lotteries Act, to enter into this agreement.” We were unable to identify an Order in Council authorizing the contract although one appeared to be necessary. 14.12 The Commission has informed us that our understanding is correct. Reporting on regulatory activity 14.13 Our 1996 Report discussed the importance of the Lotteries Commission providing sufficient and appropriate reporting of its regulatory activity in its annual report. Our understanding is that the Commission has accepted our 1996 recommendation in this regard. At the 26 September 1997 meeting of the Standing Committee on Crown Corporations the Deputy Minister of Finance indicated this type of reporting would be included in the Commission’s 1996-97 annual report. 14.14 Our 1996 Report also discussed the value in having ALC providing the Commission with an annual representation giving assurance that it has fulfilled its regulatory responsibilities under provincial regulation. We were informed that the Commission has placed this issue on the agenda of its November 1997 board meeting. Compliance with video lottery payout percentages 14.15 In our 1996 Report we discussed the importance of demonstrating compliance with section 6(h) of Regulation 90-142 under the Lotteries Act of New Brunswick. The section states that a video gaming device “shall be programmed to award as prizes not less than eighty per cent, and not more than ninety percent, of the money it accepts.” (Emphasis ours). We reviewed the ALC financial statements and annual report for the year ended 31 March 1997 and noted this information was not included. 14.16 As part of our report for the prior two years, we presented a schedule showing that prize expense/cash out is deducted from gross video lottery receipts/cash in to arrive at the ALC financial statement line item called net video lottery receipts. We would like to update this schedule for this year’s Report to include results for the year ended 31 March 1997. We have included it as Exhibit 14.2. 14.17 In examining this exhibit, it is evident that the cash out or prize expense does not fall in the range of 80%-90%. We recognize that the Commission and ALC maintain that in order to demonstrate compliance with the regulation, one has to look at additional information on credits won and credits played. Yet the regulation seems quite clear in referring to the money it accepts, not credits won plus the money it accepts. What Exhibit 14.2 may be showing then, is that the VLP program is not in compliance with the regulation. 14.18 We recommend that the Lotteries Commission review Regulation 90-142 and the results of the Video Lottery Program to determine if the program is in compliance. Exhibit 14.1 Results in brief from 1996 Shareholder’s Audit Assignment Report Exhibit 14.1 - cont. Results in brief from 1996 Shareholder’s Audit Assignment Report Exhibit 14.1 - cont. Results in brief from 1996 Shareholder’s Audit Assignment Report Exhibit 14.2 Atlantic Lottery Corporation Inc. Video Lottery Receipts (thousands of dollars) Source: ALC & ALC’s external auditor Figures for 92/93 to 94/95 provided by KPMG; figures for 95/96 and 96/97 provided by ALC