By John McElhenny, Associated Press, 08/28/02

State Treasurer Shannon O'Brien, whose department oversees the Lottery, says it has become better-managed under her care. (Globe File Photo / Jonathan Wiggs)  RELATED Read the Lottery audit    (Microsoft Word document)

BOSTON -- The state Lottery is plagued by a host of problems, including suspicious ticket cashing, lax oversight of lost and stolen tickets, and questionable controls over sales agents, according to a state audit released Wednesday.

State Treasurer Shannon O'Brien, whose department oversees the Lottery and who is seeking the Democratic nomination for governor, said the Lottery has become more efficient and better managed since she took over in 1999.

The report by state Auditor Joseph DeNucci found that many people are cashing thousands of winning tickets worth less than $5,000, which allows them to avoid state and federal taxes, despite a 1999 audit that recommended closing the tax loophole.

One person who was not identified, for example, claimed 679 prizes worth $1.2 million from 1999 to 2002, yet had less than 1 percent of the money withheld in state and federal taxes.

By taxing people on their individual prizes, rather than on their total winnings, the state is missing out on withholding taxes on prizes under $5,000 that would bring in an estimated $4.5 million per year, the audit said.

But O'Brien said it's state and federal tax codes, not her office, that dictate how the winnings are taxed.

The audit also found many "suspicious claims" by instant game winners, including people with the same last name and address winning large prizes repeatedly in a short time period, against high odds.

In one example, 26 prizes totaling $115,000 were claimed from 1999 and 2000 by seven persons at the same address, six of whom had the same last name. The Lottery sales agent who sold all 26 tickets also had the same name, the audit found.

"There are tremendous management weaknesses at the Lottery," DeNucci said.

O'Brien said people of the same last name often win prizes. Lists of recent Lottery lists include 2,500 winners named "Johnson," for example.

O'Brien said in 1999 her office started monthly reports to tax officials with the names of Lottery players who appeared to win more than the odds would allow.

The audit called on Lottery officials to strengthen controls in order to protect public confidence in the $4.2 billion-per-year Lottery. It questioned the status of the Raynham Greyhound Park, which is the only one of 7,600 sales agents that can cash ticket prizes of more than $600.

Any prize over $600 must be reported for tax purposes, and last year at Raynham, 11 people made 70 percent of the claims over $600 at the track. That raises suspicions that a small number of people who don't pay taxes are paying cash to buy winning tickets from legitimate players who want to avoid taxes.

Raynham has enjoyed its special Lottery status for two decades, long before she took over as treasurer in 1999, O'Brien said, though she admitted her office could change that status if it chose.

O'Brien said her office has taken steps to improve controls at Raynham, including tightening claims procedures and controls over inventory.

She said she had also cut the Lottery's uncollected debt and trimmed costs at the Lottery, to where it is now the nation's most efficient, with an operating budget of less than 2 percent of annual lottery sales.

"The Lottery is a dramatically different place than it was before I took office four years ago," O'Brien said.

O'Brien is running for governor against three other Democrats, Republican Mitt Romney, Libertarian Carla Howell, and Green Jill Stein.

Last month, another audit by DeNucci's office criticized the performance of the board that manages the state pension fund, which O'Brien also oversees. Since then, the issue has dominated the governor's race.

"If this is her management style, she ought to be at Enron, not in the treasurer or governor's office," said Democratic gubernatorial candidate Warren Tolman.

"It looks like the self-proclaimed fiscal watchdog was asleep at her post," said Paul Wingle, spokesman for Democrat Tom Birmingham, who also is running for governor.

DeNucci said the timing of the audit was unrelated to the Sept. 17 primary. "There's never a good time for an audit. It's like a root canal," he said.