RHODE ISLAND LOTTERY (AN ENTERPRISE FUND OF THE STATE OF RHODE ISLAND) FISCAL YEAR ENDED JUNE 30, 2020 Dennis E. Hoyle, CPA, Auditor General Office of the Auditor General General Assembly State of Rhode Island Office of the Auditor General State of Rhode Island - General Assembly Dennis E. Hoyle, CPA - Auditor General oag.ri.gov 33 Broad Street Suite 201 Providence, RI 02903-4177 tel: 401.222.2435 fax: 401.222.2111 October 30, 2020 JOINT COMMITTEE ON LEGISLATIVE SERVICES: SPEAKER Nicholas A. Mattiello, Chairman Senator Dominick J. Ruggerio Senator Dennis L. Algiere Representative K. Joseph Shekarchi Representative Blake A. Filippi We have completed our audit of the financial statements of the Rhode Island Lottery for the year ended June 30, 2020 and have issued our Independent Auditor’s Report thereon. Section III of this report includes our Independent Auditor’s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards. Section IV contains a finding and management comments which include recommendations intended to enhance internal control or result in other operational efficiencies. Sincerely, Dennis E. Hoyle, CPA Auditor General -i- RHODE ISLAND LOTTERY (AN ENTERPRISE FUND OF THE STATE OF RHODE ISLAND) FISCAL YEAR ENDED JUNE 30, 2020 TABLE OF CONTENTS PAGE SECTION I INDEPENDENT AUDITOR'S REPORT .................................................................................... 1 MANAGEMENT’S DISCUSSION AND ANALYSIS ............................................................... 4 BASIC FINANCIAL STATEMENTS Statement of Net Position .............................................................................................................. 17 Statement of Revenue, Expenses and Changes in Net Position .................................................... 18 Statement of Cash Flows ............................................................................................................. 19 Notes to Financial Statements ........................................................................................................ 21 REQUIRED SUPPLEMENTARY INFORMATION Schedule of the Lottery’s Proportionate Share of the Net Pension Liability - Employees’ Retirement System Plan ........................................................................................................... 50 Schedule of Lottery’s Contributions – Employees’ Retirement System Plan ............................... 51 Schedule of the Lottery’s Proportionate Share of the Net OPEB Liability – State Employees’ OPEB Plan ............................................................................................................................... 52 Schedule of Lottery’s Contributions – State Employees’ OPEB Plan ........................................... 53 Notes to Required Supplementary Information ............................................................................. 54 SECTION II SUPPLEMENTARY INFORMATION Schedule 1 – Operating Revenue and Cost of Gaming Operations ............................................... 57 SECTION III INDEPENDENT AUDITOR’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE .......................................................... 58 SECTION IV FINDINGS AND MANAGEMENT COMMENTS .................................................................. 60 -ii- Office of the Auditor General State of Rhode Island and Providence Plantations - General Assembly Dennis E. Hoyle, CPA - Auditor General oag.ri.gov tel: 401.222.2435 fax: 401.222.2111 RHODE ISLAND LOTTERY Section I Independent Auditor's Report Management’s Discussion and Analysis Basic Financial Statements Required Supplementary Information 0 Office of the Auditor General State of Rhode Island - General Assembly Dennis E. Hoyle, CPA - Auditor General oag.ri.gov 33 Broad Street Suite 201 Providence, RI 02903-4177 tel: 401.222.2435 fax: 401.222.2111 INDEPENDENT AUDITOR’S REPORT Joint Committee on Legislative Services, General Assembly, State of Rhode Island: Report on the Financial Statements We have audited the accompanying financial statements of the Rhode Island Lottery (Lottery), an enterprise fund of the State of Rhode Island, as of and for the year ended June 30, 2020, and the related notes to the financial statements, which collectively comprise the Lottery’s basic financial statements as listed in the table of contents. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1 Office of the Auditor General Joint Committee on Legislative Services, General Assembly, State of Rhode Island Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Lottery as of June 30, 2020, and the changes in financial position and its cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matters As discussed in Note 2(b), the financial statements present only the Lottery enterprise fund and do not purport to, and do not, present fairly the financial position of the State of Rhode Island, as of June 30, 2020, the changes in its financial position, or, where applicable, its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 13 – Contingencies - the Lottery’s fiscal year 2020 revenues were materially affected by the global COVID-19 pandemic with impacts expected to continue in fiscal 2021. Additionally, the Lottery’s ability to generate income for transfer to the State’s General Fund could be adversely affected by competitor gaming activities in neighboring states. Our opinion is not modified with respect to these matters. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management’s Discussion and Analysis on pages 4 through 16, Schedule of the Lottery’s Proportionate Share of the Net Pension Liability – Employees’ Retirement System Plan on page 50, the Schedule of the Lottery’s Contributions – Employees’ Retirement System Plan on page 51, the Schedule of the Lottery’s Proportionate Share of the Net OPEB Liability – State Employees’ OPEB Plan on page 52, and the Schedule of the Lottery’s Contributions – State Employees’ OPEB Plan on page 53 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for