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California State Lottery California State Lottery: Information Technology Operations Need Correction and Because of Poor Scratcher Automation Decisions, It Unnecessarily Incurred Millions of Dollars in Contract Dispute Costs July 1997 California State Auditor California State 96107.2 Printed copies of this report can be obtained by contacting: California State Auditor Bureau of State Audits 660 J Street, Suite 300 Sacramento, California 95814 Permission is granted to reproduce reports. CALIFORNIA STATE AUDITOR KURT R. SJOBERG MARIANNE P. EVASHENK STATE AUDITOR CHIEF DEPUTY STATE AUDITOR July 31, 1997 96107.2 The Governor of California President pro Tempore of the Senate Speaker of the Assembly State Capitol Sacramento, California 95814 Dear Governor and Legislative Leaders: As requested by the Joint Legislative Audit Committee, the Bureau of State Audits presents its second audit report concerning the California State Lottery (lottery). This review completes our comprehensive performance audit of the lottery and focuses on the lottery’s information technol- ogy operations. We also reviewed the contract and lawsuit between the lottery and High Integrity Systems, Inc. (HISI). The lottery filed the lawsuit in 1993 after it terminated the contract with HISI for the Scratcher automation project. This report concludes that the lottery is not effectively man- aging its information technology operations. Specifically, the lottery’s Information Management and Services Division (IMS division) is not effectively managing its resources. In addition, the lottery’s primary database is not structured to allow lottery staff direct access to retailer sales infor- mation. Also, the IMS division’s service request process and Help Desk do not adequately meet the needs of lottery staff. Further, the lottery has not developed a long-term strategic plan for its IMS division. During the procurement of and litigation related to the Scratcher automation project, the lottery’s decisions strongly contributed to the failure of the project under the terms of the original contact. Further, the lottery was not aggressive in managing the lawsuit and may have been able to reach settlement much earlier. During the litigation and settlement process, the lottery incurred at least $7.5 million in contract dispute costs. Respectfully submitted, KURT R. SJOBERG State Auditor BUREAU OF STATE AUDITS 660 J Street, Suite 300, Sacramento, California 95814 Telephone: (916) 445-0255 Fax: (916) 327-0019 Table of Contents 6XPPDU\ 6 ,QWURGXFWLRQ &KDSWHU 7KH&DOLIRUQLD6WDWH/RWWHU\ª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ªV&RPPHQW RQWKH5HVSRQVH)URPWKH &DOLIRUQLD6WDWH/RWWHU\ 6XPPDU\ 5HVXOWVLQ%ULHI $XGLW+LJKOLJKWV KH &DOLIRUQLD 6WDWH /RWWHU\ ORWWHU\ RULJLQDWHG ZLWK WKH SDVVDJH RI 3URSRVLWLRQ LQ 1RYHPEHU 7KH ,QWKLVWKHVHFRQGSKDVHRIRXU 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