Request By:
Hon. A. B. Chandler, III
Auditor of Public Accounts
144 Capitol Annex
Frankfort, Kentucky 40601
Re: Issues Related to Audits of the Kentucky Lottery Corporation.
AGO Corr. No. 92-(O)-1081.
Opinion
Opinion By: Chris Gorman, Attorney General; Gerard R. Gerhard, Assistant Attorney General
By letter of July 13, 1992, and follow-up discussion by your staff, you have posed a number of questions affecting auditing of the Kentucky Lottery Corporation (hereinafter, "the Lottery" ). The questions posed (as modified based upon discussion with Dave McKnight), and the views of this office in response to them, are set forth below.
(1) Is the Coopers and Lybrand Accounting firm eligible under KRS 154A.130(3) to perform the Kentucky Lottery Corporation annual audit for the fiscal year ending June 30, 1994?
KRS 154A.130(3) provides in part:
The Auditor of Public Accounts shall be responsible for a financial postaudit of the books and records of the corporation. The postaudit shall be conducted in accordance with generally accepted accounting principles, shall be paid for by the corporation, and shall be completed within ninety (90) days of the close of the corporation's fiscal year. The Auditor of Public Accounts shall contract with an independent, certified public accountant who meets the qualifications existing to do business within the Commonwealth of Kentucky to perform the corporation postaudit. The Auditor of Public Accounts shall remain responsible for the annual postaudit and the corporation shall pay all audit costs. The Auditor of Public Accounts may, at any time, conduct such additional audits, including performance audits, of the corporation as he deems necessary or desirable. Contracts shall be entered into for audit services for a period not to exceed five (5) years and the same firm shall not receive two (2) consecutive audit contracts.
* * *
(Emphasis added.)
In our view, the language of KRS 154A.130(3), limiting contract(s) for postaudit of the Lottery to a period not exceeding five years, refers to fiscal years. Accordingly, an accounting firm cannot receive a contract which would provide for such firm to conduct a postaudit of the Lottery for a sixth fiscal year, if such fiscal year would involve a contract consecutive to the period during which the firm carried out previous postaudits.
The Lottery, at its inception, transacted business for only part of a fiscal year. The postaudit for the period from the initiation of the Lottery, to the end of the fiscal year succeeding the start-up of business, is, nonetheless, the postaudit for that fiscal year. (Emphasis added.)
Our view is based in part upon the language of KRS 154A.130(3), which provides that "The postaudit . . . shall be completed within ninety (90) days of the close of the corporation's fiscal year. "
Since the statute envisions a postaudit for a fiscal year, it follows that subsequent statutory language in the same subsection, limiting contracts for postaudit services to a period not exceeding "five years," means five fiscal year periods. Such view is consistent with the rule of "ejusdem generis" which provides that where particular words (e.g., as here, fiscal year) in a statute are followed by general words (e.g., "years"), the general words are restricted to that to which the particular words refer. See
Hill v. Baker, 309 Ky. 514, 218 S.W.2d 24 (1949). And see, Sutherland, Statutory Construction, 5th Ed. (1992 Revision) , § 47.17 and 47.18.
Under the particular facts involved here, the accounting firm Coopers and Lybrand received a contract for postaudit services for the Lottery for the fiscal year ended June 30, 1989, and has received three successive "renewals. " Should it receive a fourth renewal, Coopers and Lybrand will not be eligible for a fifth renewal, or a subsequent contract, for postaudit of the Lottery, that would be consecutive to its contracts for postaudits for the preceding five fiscal years.
Stated another way, to allow a contractor to have contracts for postaudit services for five fiscal years during each of which the Lottery transacted business for a full twelve months, and an additional contract for part of a fiscal year during which the Lottery transacted business for only part of such fiscal year, would result in a contract exceeding the five year limitation imposed by KRS 154A.130(3).
It might be noted as well, that, from the initial postaudit contract forward, it appears to have been recognized (by both the Lottery and its current postaudit contractor) that the contractor receiving the initial contract would be eligible for a maximum of four subsequent "renewals. " See, for example, the addendum to the postaudit contract (PS 930302) for the year ended June 30, 1992, "Statement of Work Third Renewal, " provision B, "Contract Renewal" (copy attached).
You also pose several questions regarding the application of KRS 154A.160(2) under specific circumstances recited in your letter.
KRS 154A.160(2) provides:
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, nor shall they do so during the period of the contract or for a period of three (3) years thereafter. The proscription relating to prior contributions shall not apply to contributions made before December 12, 1988.
(2) If an owner, partner, officer, etc. makes a contribution covered by KRS 154A.160(2) and then leaves his or her accounting firm, does the ineligibility follow the individual, stay with the former accounting firm, and/or apply to any latter accounting firms, and during what time periods?
In our view, both the firm of which one was an officer at the time of making a contribution within the purview of KRS 154A.160(2), and a firm of which one who has made such a contribution subsequently becomes an officer, are disqualified from providing auditing services to the Lottery.
KRS 154A.160(2) disqualifies any person or other business entity from providing auditing services to the Lottery if, among other circumstances set forth, "officers thereof" have contributed to a statewide candidate for political office or a candidate for the general assembly. The statute does not contain language that would limit the disqualification of a firm to the circumstance of a contribution by one who, at the time of making a disqualifying contribution, was an officer of the disqualified firm. The language of the statute, as related to contributions by officers as a disqualifying factor, simply refers to contributions by "officers thereof," without words of limitation.
Regarding "time periods," if a contribution within the purview of the statute was made (a) within three years prior to the date a contract is to be awarded or is awarded, or (b) during the period of a contract, or (c) for a period of three years subsequent to contract period, by an officer of a business entity which would supply auditing services to the Lottery corporation, a firm whose officer made a disqualifying contribution would be disqualified from providing such services. The language of the provision does not apply to a contribution made prior to December 12, 1988.
(3) Do the contribution prohibitions in KRS 154A.160(2) apply to the spouse and children of an owner, partner, officer, etc.?
First, the language of KRS 154A.160(2) does not address an "owner" or "partner" of an entity that might be selected to provide auditing services for the lottery. As related to those who might have a "spouse" or "child," the statute would address an "owner," only if the "owner" were a "person" selected to provide auditing services to the Lottery, or was an "officer" of an entity so selected, and would address a "partner" only if the partner was an "officer" of an entity so selected.
Second, KRS 154A.160(2) does not impose an express ban upon contributions of (1) a spouse or child of a "person" selected to provide auditing services to the Lottery, or (2) a spouse or child of an "officer" of an entity so selected.
We caution, however, that this view addresses a contribution which is a bona fide contribution by a spouse or child, and which is not, in actuality, a contribution made by a "person" or "officer" within the meaning of the statute, using the name of a spouse or child as a subterfuge or cover.
In our view the plain words of KRS 154A.160(2) are controlling. The legislature did not include contributions by spouses or children, of a person or officers of an entity selected to provide auditing services to the Lottery, within the contribution disqualifier of that subsection. The plain words of the statute pertinent here address only contributions by a person, partnership, unincorporated association, corporation or other business entity, or officers thereof, "selected" to perform auditing services for the Lottery.
Enforcement of the concern expressed here could be accomplished by the Lottery requesting an appropriate certification that a disqualifying contribution had not been made. If a question subsequently arises as to whether a contribution was in fact made by a spouse or child, the matter would be determined based upon a detailed investigation of the facts surrounding a given contribution.
(4) Do the contribution prohibitions in KRS 154A.160(2) apply to accounting firm employees other than owners, partners, officers, etc.?
In our view the answer is no. Since the legislature did not include an "employee" as one whose contribution might otherwise be a disqualifier, or be banned, the contribution prohibitions contained in KRS 154A.160(2) do not apply to a contribution made by an "employee" of a person selected to provide auditing services to the Lottery or to an employee of an entity so selected. This view would not apply to a contribution made by a person selected to provide auditing services to the Lottery, or to an officer of an entity so selected, using the name of a "non-officer" employee.
(5) If an accounting firm's Kentucky office is prohibited/ineligible under KRS 154A.160(2), are the accounting firm's other state and national offices also prohibited/ineligible?
The answer to this question depends upon both the legal and organizational structure of the accounting firm involved.
If the Kentucky office of the firm is not separately incorporated, so that it is a separate legal entity from other state and or national offices of the firm, the other offices of the firm would be disqualified if disqualifying contributions were made by the Kentucky office of a selected entity. At the same time, if the practical organization of the firm, even if it had separately incorporated offices, were such that, despite separate corporate entities, the firm was in practical terms one firm from the standpoint of its management, the likelihood is that such firm should be disqualified by contributions of it, or its subordinate units, which are of the type that would result in a disqualification.
(6) If an owner, partner, officer, etc., contributes to a political action committee that contributes to candidates for statewide and legislative political offices, is that person and his or her firm ineligible under KRS 154A.160(2)?
KRS 154A.160(2) establishes a disqualification for contributions to a political action committee, only (1) where a disqualifying contribution is made directly by the political action committee of a person or other business entity selected to provide auditing services to the Lottery, or (2) where a disqualifying contribution is made by a political action committee to which a person, or other business entity selected to provide auditing services to the Lottery contributes.
Contributions of a partner or officer, etc., of an entity selected to provide auditing services to the Lottery to a political action committee, which in turn makes a contribution of the type addressed by the statute, will not disqualify a firm from being selected to provide auditing services to the Lottery.
STATEMENT OF WORK
Third Renewal
A. Statutory Audit Requirements
KRS Chapter 154A provides ". . . for a financial post-audit of the books and records of the (Kentucky Lottery) corporation." In addition, the section states: "The auditor of public accounts may, at any time, conduct such additional audits, including performance audits, of the corporation as he deems necessary or desirable."
B. Contract Renewal
On May 1, 1989, the Auditor of Public Accounts (APA) entered into a contract with Coopers and Lybrand to audit the Kentucky Lottery Corporation. Incorporated within that agreement was a provision for renewal of the contract on a year-by-year basis for a maximum of four years after the initial contract year. This provision was solely at the option of the APA and approval of the firm.
Audits performed thus far under this contract were for the years ended June 30, 1989 (initial), June 30, 1990 (first renewal) , and June 30, 1991 (second renewal) . The current contract for an audit of the year ended June 30, 1992, represents the third renewal.
C. Scope of Work
1. Financial/Compliance Audit for the Year Ended June 30, 1992
a. Nature of Audit
(1) The work will include a financial/compliance audit of the Corporation covering the year ended June 30, 1992. This work will be performed in accordance with generally accepted government auditing standards as promulgated by the Comptroller General of the United States in the U.S. General Accounting Office publication, Government Auditing Standards (1988 revision) .
(2) Accounting records and supporting documentation are maintained by the Corporation at its offices.
b. Deliverables
(1) The firm will submit bi-weekly progress reports beginning two weeks after the contract date. The reports will contain a synopsis of audit progress and a record of budgeted to actual time by major audit category.