Did Kentucky's lottery contractor political-contribution restriction apply to consultants hired by the state auditor?

Plain-English summary

The state auditor planned to hire consultants to help review how Kentucky's lottery corporation operated. The AG concluded that KRS 154A.160(2), which restricted certain entities selected to provide auditing services or major procurement items to the lottery, did not govern those consultants. The contemplated work evaluated management and performance rather than the accuracy of financial records, and the consultants' client was the auditor, not the lottery. The opinion did not decide whether their services could count as a major procurement item because it found they were not provided to the lottery.

Currency note

This opinion was issued in 1993. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Historical summary

State auditor and prospective consultants

The auditor would keep responsibility for directing the performance review and preparing its report. The proposed consultants were chosen for performance and management expertise, worked with the auditor's staff, and did not have to be accountants. On those facts, the AG said the lottery contractor restriction did not limit the auditor's selection of these consultants.

Lottery corporation

The lottery was the subject of the review but did not select the consultants, set their work, or contract with them. The AG treated the auditor as the recipient of their services. Sending the lottery an informational copy of the eventual report did not change that relationship.

Common questions

Did the lottery's political-contribution restriction bar consultants hired by the state auditor?

Not on the facts described. The AG said the proposed consultants did not provide auditing services to the lottery corporation and provided their work to the auditor instead.

Was the lottery performance review the same as its annual financial audit?

The opinion distinguished them. The annual audit checked financial records under accounting standards; the contemplated performance review examined the lottery's management and operations for the legislature.

Did the AG decide whether consulting services were a major procurement item?

No. The AG said that issue need not be reached after concluding that the services were supplied to the state auditor, not to the lottery corporation.

Background and statutory framework

KRS 154A.130(3) required an annual financial audit of the lottery and also authorized additional performance audits by the state auditor. KRS 154A.160(2) contained a political-contribution restriction for entities selected to provide specified services or major procurement items to the lottery. The AG read the terms "auditing services" and "to the corporation" against the proposed review's actual work and client. It cited KRS 446.010(15) for the accounting standards relevant to the financial audit.

Citations and references

• KRS 154A.130(3): annual financial audit and additional performance audit authority.
• KRS 154A.160(2): restriction on certain lottery service providers and procurement contractors.
• KRS 446.010(15): accounting standards definition cited in the opinion.

Source

• Landing page: https://www.ag.ky.gov/Resources/Opinions/Opinions/OAG93-023.htm

Original opinion text

OAG 93-23

March 10, 1993

David H. MacKnight

General Counsel

Office of the Auditor of Public Accounts

144 Capitol Annex

Frankfort, Kentucky 40601

Dear Mr. MacKnight:

You have asked whether the prohibitions contained in KRS 154A.160(2) (disqualifying certain accounting firms from auditing the lottery corporation) apply to consultants retained to assist the state auditor in conducting a performance review of the lottery corporation. We conclude that the statutory prohibitions do not apply in the circumstances that you have described.

Facts and applicable statutory provisions

On February 25, 1993, the interim joint committee on appropriations and revenue requested the state auditor to conduct a performance audit of the state lottery corporation. Because of the technical expertise required to perform such an audit, the state auditor intends to retain private contractors who will act as consultants in assisting the auditor with the performance review. The consultants will be chosen based on their expertise in performance and management evaluation rather than financial auditing procedures; in fact, it is not necessary that the consultants be accountants or that they be associated with an accounting firm.

The state auditor anticipates that the consultants will not be given general responsibility for completing the investigation and review; rather they will work in close coordination with the auditor's staff, with responsibility for directing the work and preparing the final report remaining solely with the auditor.

Results of the performance review will be sent to the Legislative Research Commission and to the legislative committee that requested the audit. While an informational copy of the report will be sent to the lottery corporation, it is clear that the review is intended to provide the legislature, rather than the lottery corporation, with information regarding the corporation's performance.

KRS 154A.130(3) requires the state auditor to arrange for an annual audit of the lottery corporation's records. This audit must be conducted in accordance with generally accepted accounting principles and must be performed by an independent certified public accountant. The same statute also provides authority for the state auditor to conduct performance audits of the lottery corporation. Subsection 3 states in part:

The Auditor of Public Accounts may, at any time, conduct such additional audits [that is, in addition to the required annual financial audit], including performance audits, of the corporation as he deems necessary or desirable. . . . . The corporation shall reimburse the Auditor of Public Accounts for the reasonable costs of any audits performed by him.

KRS 154A.160(2) provides certain prohibitions regarding the entities selected to provide auditing services or major procurement items to the lottery corporation. That subsection states in part:

No person, partnership, unincorporated association, corporation, or other business entity selected to provide auditing services or a major procurement item to the corporation, nor the officers thereof, or a political action committee thereof or to which the person or organization contributes, shall have contributed to any statewide candidate for political office in Kentucky or for any candidate for the General Assembly for a period of three (3) years prior to the award of the contract . . . .

The question we address here is whether the consulting services provided to the state auditor constitute “auditing services or a major procurement item [provided] to the [lottery] corporation” that would invoke the prohibitions contained in KRS 154A.160(2).

Analysis

We conclude that the anticipated consulting services do not constitute auditing services, and they are not provided to the lottery corporation. Therefore the state auditor need not be restricted by KRS 154A.160 in retaining consultants for the provision of these services.

Our conclusion that the proposed consulting services are not auditing services results from a comparison of the description of those services with the common definition of the word audit. Various dictionaries define audit in substantially this way:

a verification of accounts and records; a final statement of account, as for reporting the financial condition of a business at a given date; a rendering and settling of accounts.

See for example Webster's Third New International Dictionary. The performance review in question is not a statement regarding the accuracy of the lottery's records; that is the function of the annual financial audit. The performance review is directed toward the everyday management and operations of the lottery corporation; it is intended to determine whether the lottery is run effectively, not whether its books are kept accurately.

We also note that an audit, according to KRS 154A.130(3), must be conducted according to generally accepted accounting principles. The term “generally accepted accounting principles” is defined in KRS 446.010(15) to mean “uniform minimum standards of and guidelines to financial accounting and reporting as adopted by the National Council on Governmental Accounting . . . and by the Financial Accounting Standards Board . . . .” Those standards and guidelines, according to your letter, contemplate the issuance of an opinion letter to a client regarding its financial condition rather than a management or performance review directed at a third party — further evidence that “auditing services” does not include consulting services provided in connection with a performance review.

We next note that the consulting services in question are not provided “to the [lottery] corporation” and therefore cannot trigger the operation of KRS 154A.160(2). While the lottery is the object of the performance review, the services in question are provided not to the lottery but rather to the state auditor. The lottery has no control over the selection of the consultants, the scope of their work, or the manner in which their expertise will be utilized. There is no privity of contract between the lottery and the consultants, nor is the lottery the client of the consultants. Since the consultants will provide services to the state auditor rather than to the lottery, and since KRS 154A.160(2) applies only when services are provided to the lottery, the statute does not apply in the circumstances addressed here.

Since we have concluded that the consulting services are not provided to the lottery, it is not necessary for us to consider whether the services are a “major procurement item.”

Conclusion

We conclude that the prohibitions contained in KRS 154A.160(2) do not apply when the state auditor retains consultants to assist in performing a performance review of the lottery corporation.

Sincerely,

Chris Gorman

Attorney General

Ross T. Carter

Assistant Attorney General