Performance audit, Department of Liquor Licenses and Control

              PERFORMANCE AUDIT
DEPARTMENT OF LIQUOR LICENSES AND CONTROL
Report to the Arizona Legislature
By the Auditor General
November 1988
88- 9
DOUGLAS R NORTON. CPA
AUDITOR GENERAL
STATE OFARIZONA
OFFICE OF1 H t
ALII) I'I'OR GENEKAI,
ILINDAJ BLESSING, CPA
L i t iilJTYAUUITOR GENERAL
November 14, 1988
Members of the Arizona L e g i s l a t u r e
The Honorabie Rose Mofford, Governor
Mr. Hugh Ennis, Superintendent
Department of Liquor Licenses and Control
Transmitted herewith i s a report of the Auditor General, A Performance
Audit of the Department of Liquor Licenses and Control. This report i s
i n response to a June 2, 1987, r e s o l u t i o n of the J o i n t L e g i s l a t i v e
Oversight Committee.
We found the Department of Liquor Licenses and C o n t r o l ' s compliance
process, which c o n s t i t u t e s 85 percent of the Department's d i s c i p l i n a r y
a c t i o n s , needs greater c o n t r o l s t o reduce the r i s k of abuse. I n
a d d i t i o n , the Department has not adequately c o n t r o l l e d the l i c e n s i n g
process, resu l t i ng i n spec i a l hand l i ng of some app l i cat i ons and
improper license issuance o f others. The report also i d e n t i f i e s
problems i n e n f o r c i n g l i c e n s e renewals and addresses weak cash- handling
procedures which c o n t r i b u t e d to two t h e f t s of State monies.
My s t a f f and I w i l I be pleased to discuss or c l a r i f y items i n the
report .
S i n c e r e l y ,
~ o u ~ Ru. sN or ton
Aud i t o r General
DRN: lmn
STAFF: William Thomson
Mark Fleming
Jerome E . Mi l l e r
Kimberly Hildebrand
Shan D. Hays
Kevin Smith
David J. Vidoni
2700 NORTH CENTRAL AVE. SUITE 700 0 PHOENIX, ARIZONA 85004 ( 602) 255- 4385
The O f f i c e o f the Auditor General has conducted a performance a u d i t of
the Department of Liquor Licenses and Control ( DLLC), i n response to a
June 2, 1987, r e s o l u t i o n of the J o i n t L e g i s l a t i v e Oversight Committee.
The performance audit was conducted as p a r t o f the Sunset Review set
f o r t h i n Arizona Revised S t a t u t e s § § 41- 2351 through 41- 2379.
Greater Controls Are Needed Over The Compliance
Process To Reduce The Risk O f Abuse And To Ensure
Equitable Treatment O f Licensees ( see pages 11 through 17)
DLLC's compliance process, which c o n s t i t u t e s more than 85 percent of the
Department's d i s c i p l i n a r y a c t i o n s , lacks adequate c o n t r o l s . The process
places much a u t h o r i t y and r e s p o n s i b i l i t y i n the hands of e s s e n t i a l l y one
person, w i t h no g u i d e l i n e s and l i t t l e supervisory review.
Compliance actions occur a f t e r a p r i v a t e meeting between the licensee and
the Department's compliance o f f i c e r . The p e n a l t i e s imposed as a r e s u l t
of these meetings range w i d e l y , w i t h l i t t l e or no documentation to
support v a r i a t i o n s i n p e n a l t i e s . For example, a licensee was c i t e d for
serving to a minor and f i n e d $ 500. A second v i o l a t i o n r e s u l t e d i n a
warning, and a t h i r d v i o l a t i o n resulted i n a $ 250 f i n e . I n c o n t r a s t ,
another licensee who had 9 p r i o r v i o l a t i o n s received a $ 1,000 f i n e f o r
the same offense.
The lack of documentation regarding p e n a l t i e s , coupled w i t h a lack of
w r i t t e n g u i d e l i n e s and no e f f e c t i v e supervisory review, creates an
o p p o r t u n i t y for c o l l u s i o n between the compliance o f f i c e r and the
licensee. Requiring documentation of f a c t o r s t h a t j u s t i f i e d the penalty
imposed, such as p r i o r v i o l a t i o n s and any m i t i g a t i n g or aggravating
circumstances, as well as e s t a b l i s h i n g w r i t t e n p e n a l t y g u i d e l i n e s , would
f a c i l i t a t e adequate reviews of p e n a l t i e s and reduce the r i s k of abuse.
DLLC Has Not Adequately C o n t r o l l e d
The Licensing Process, R e s u l t i n g I n Special Handling
Of Some A p p l i c a t i o n s And Improper License Issuance
( see pages 19 though 27)
DLLC needs to strengthen c o n t r o l s over the l i c e n s i n g process. Although
most applicants are handled according t o Department p o l i c y , we i d e n t i f i e d
several cases where i t appears that some a p p l i c a n t s were afforded special
treatment which allowed them to b e g i n o p e r a t i n g sooner than normal.
Also, DLLC has t r a n s f e r r e d l i q u o r licenses to several a p p l i c a n t s who d i d
not meet s t a t u t o r y and Departmental requirenents. I n f a c t , several of
the t r a n s f e r s were made to i n d i v i d u a l s who were judged to be unqual i f ied
on the basis o f background i n v e s t i g a t i o n s that revealed c r i m i n a l
information. Recent l e g i s l a t i v e changes governing license t r a n s f e r s
should prevent such problems i n the f u t u r e .
DLLC I n t e r n a l Controls Do Not Adequately Safeguard
State Revenue And Impounded Evidence ( See pages 29 through 34)
DLLC needs to improve c o n t r o l s over cash and evidence to reduce the r i s k
of t h e f t and loss. DLLC's f a i l u r e t o p r o p e r l y secure cash c o n t r i b u t e d t o
the t h e f t of more than $ 2,400 i n s t a t e monies. In a d d i t i o n , numerous
other c o n t r o l weaknesses o f f e r s i g n i f i c a n t o p p o r t u n i t y f o r a d d i t i o n a l
t h e f t or misuse of funds. For example, no supervisory approval was
requi red when almost $ 13,000 was subtracted from cash r e g i s t e r tape
t o t a l s from March through August of 1987. The $ 13,000 s u b t r a c t i o n was
apparently made so the tape t o t a l s would match the actual cash on hand
for deposit.
Board Duties And R e s p o n s i b i l i t i e s
Need C l a r i f i c a t i o n To Improve DLLC Operat ions ( see pages 35 through 39)
Current s t a t u t e s do not delineate d u t i e s o f the DLLC Board and the
Superintendent. Overlapping d u t i e s and r e s p o n s i b i l i t i e s have led to
disputes over a u t h o r i t y . U n t i l 1983, the r o l e s of the Superintendent and
the Liquor Board were c l e a r l y defined. However, s t a t u t o r y changes made
i n 1983 and i n 1985 suggest that the Board and Super intendent share
r e s p o n s i b i l i t i e s i n some areas. As a r e s u l t , several 1987 decisions
concerning l i q u o r licenses were made over Board o b j e c t i o n s .
The State Should Strengthen Laws And Procedures
Governing L i q u o r License Renewal ( see pages 41 through 44)
Control over the renewal process f o r l i q u o r licenses i s very weak.
Current s t a t u t e s are more l e n i e n t than those i n some other s t a t e s i n
allowing the sale of l i q u o r f o r 60 days a f t e r the license renewal date.
However, some licensees s e l l l i q u o r even beyond 60 days. This occurs
because DLLC does l i t t l e follow- up on expired licenses. In f a c t , DLLC
did not even inform i t s own i n v e s t i g a t o r s of expired licenses p r i o r to
August 1988.
Low s t a t u t o r y p e n a l t i e s also do l i t t l e to encourage prompt renewal of
licenses. The L e g i s l a t u r e should strengthen c o n t r o l s over the renewal
process by p r o h i b i t i n g l i q u o r sales by licensees who do not renew by
t h e i r renewal date and by automatically revoking the licenses 60 days
a f t e r the renewal date.
Records Section Needs B e t t e r Control
Over Licensing Fi les ( see pages 45 through 48)
DLLC needs to improve records management to ensure that e s s e n t i a l records
are protected against loss. Lacking a m i c r o f i l m i n g program, DLLC s t a f f
and the p u b l i c r e g u l a r l y use o r i g i n a l copies of irreplaceable records.
In a d d i t i o n , DLLC f a i l s to adequately r e s t r i c t and supervise access to
the records.
Statutes And Regulations Governing
Special Event Licenses Are Not Clear ( see pages 49 through 51)
Arizona law and DLLC r e g u l a t i o n s are unclear on special event licenses.
Liquor statutes do not c l e a r l y define what groups are e l i g i b l e for
special event licenses nor what c r i t e r i a organizations must meet to be
considered l e g i t i m a t e . Also, neither local governments nor DLLC appear
to c a r e f u l l y evaluate the q u a l i f i c a t i o n s of these organizations.
DLLC should also consider increasing the number of days for which
q u a l i f i e d organizations may obtain special event licenses. The current
two- day l i m i t i s too short to cover many of the special events for which
permits are sought.
TABLE OF CONTENTS
INTRODUCTION AND BACKGROUND. . . . . . . . . . . . . . . . . . . . . 1
SUNSETFACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
FINDING I: GREATER CONTROLS ARE NEEDED OVER THE COMPLIANCE
PROCESS TO REDUCE THE RISK OF ABUSE AND TO ENSURE EQUITABLE
TREATMENTOFLICENSEES. . . . . . . . . . . . . . . . . . . . . . 11
Compliance O f f i c e r Determines Most Enforcement Actions. . . . . . 11
Penalties Appear Inconsistent . . . . . . . . . . . . . . . . . . 12
Lack O f Compliance Guidelines
l n c r e a s e s P o s s i b i l i t y O f Abuse. . . . . . . . . . . . . . . . . . 16
Recomnendations . . . . . . . . . . . . . . . . . . . . . . . . . 17
FINDING II: DLLC HAS NOT ADEQUATELY CONTROLLED
THE LICENSING PROCESS, RESULTING IN SPECIAL
HANDLING OF SOME APPLICATIONS AND IMPROPER
LICENSE ISSUANCE. . . . . . . . . . . . . . . . . . . . . . . . . 19
DLLC Appears To Handle Some Applications
In A Special Manner. . . . . . . . . . . . . . . . . . . . . . . . 19
Licenses Have Been Transferred
To P o t e n t i a l l y Unqualified Applicants. . . . . . . . . . . . . . . 22
Interim Permits Allow Unqualified
Applicants To S e l l Spirituous Liquors. . . . . . . . . . . . . . . 25
Recommendations. . . . . . . . . . . . . . . . . . . . . . . . . . 27
FINDING Ill: DLLC INTERNAL CONTROLS DO NOT ADEQUATELY
SAFEGUARD STATE REVENUE AND IMPOUNDED EVIDENCE . . . . . . . . . . 29
Cash Routinely Handled Inappropriately . . . . . . . . . . . . . . 29
Evidence I s Not Adequately Controlled. . . . . . . . . . . . . . . 32
Recomnendations. . . . . . . . . . . . . . . . . . . . . . . . . . 33
FINDING I V : BOARD DUTIES AND RESPONSIBILITIES NEED
CLARIFICATION TO IMPROVE DLLC OPERATIONS . . . . . . . . . . . . . 35
The Board And Superintendent Have
Overlapping Responsibilities . . . . . . . . . . . . . . . . . . . 35
Changes In Statutory Provisions Could
Improve Working Relationship . . . . . . . . . . . . . . . . . . . 38
Recomnendations . . . . . . . . . . . . . . . . . . . . . . . . . . 38
FINDING V: THE STATE SHOULD STRENGTHEN LAWS AND
PROCEDURES GOVERNING LIQUOR LICENSE RENEWAL . . . . . . . . . . . . 41
DLLC Allows Licensees To Sell Liquor After
Their LicensesExpire . . . . . . . . . . . . . . . . . . . . . . . 41
Neither Statutes Nor Department Policies
Encourage Prompt Renewal . . . . . . . . . . . . . . . . . . . . . 42
Legislature Should Strengthen Penalties . . . . . . . . . . . . . . 43
Recomnendations . . . . . . . . . . . . . . . . . . . . . . . . . . 44
FINDING V I : RECORDS SECTION NEEDS BETTER CONTROL
. OVER L ICENSI NG FlL ES . . . . . . . . . . . . . . . . . . . . . . . 45
Control Over License Files I s Inadequate . . . . . . . . . . . . . 45
DLLC Could Improve Records Security In Several Ways . . . . . . . . 46
Recomnendations . . . . . . . . . . . . . . . . . . . . . . . . . . 47
FINDING V l l : STATUTES AND REGULATIONS GOVERNING
SPECIAL EVENT LICENSES ARE NOT CLEAR . . . . . . . . . . . . . . . 49
Statutes And Rules Are Ambiguous . . . . . . . . . . . . . . . . . 49
Recomnendations . . . . . . . . . . . . . . . . . . . . . . . . . 51
DLLC Lacks Information
To Evaluate Investigator A c t i v i t i e s . . . . . . . . . . . . . . . 53
Employees I d e n t i f i e d Upper Management Problems . . . . . . . . . . 54
DEPARTMENT RESPONSE . . . . . . . . . . . . . . . . . . . . . . . .
APPENDICES
I . Survey Of DLLC Employees . . . . . . . . . . . . . . . . . . . . . A- 1
1 1 . Legislative Council Opinions . . . . . . . . . . . . . . . . . . . A- 7
LIST OF TABLES
TABLE 1 - Active Liquor Licenses
Issued As Of 7- 1- 88 . . . . . . . . . . . . . . . . . . . . 2
TABLE 2 - DLLC Revenues, Expenditures And FTE Positions
Fiscal Years 1986- 87 Through 1988- 89
( unaud i ted 1 . . . . . . . . . . . . . . . . . . . . . . . . 4
TABLE 3 - Range Of Penalties Imposed For
Most Frequent Violations. . . . . . . . . . . . . . . . . . 13
INTRODUCTION AND BACKGROUND
The O f f i c e of the Auditor General has conducted a performance a u d i t of
the Department of Liquor Licenses and Control ( DLLC) i n response to a
June 2, 1987, r e s o l u t i o n of the J o i n t L e g i s l a t i v e Oversight Committee.
The performance a u d i t was conducted as p a r t o f the Sunset Review set
f o r t h i n Arizona Revised Statutes 5541- 2351 through 41- 2379.
H i s t o r y
Liquor has been taxed or otherwise regulated i n Arizona since the l a t e
19th century. The 1864 Howell Code, Arizona's f i r s t law c o m p i l a t i o n ,
provided f o r l i q u o r taxes for vendors of wines and d i s t i l l e d s p i r i t s . In
1919 the 18th amendment to the United States C o n s t i t u t i o n created a
n a t i o n a l P r o h i b i t i o n , which eliminated the need f o r l i q u o r r e g u l a t i o n .
Upon the repeal of P r o h i b i t i o n i n 1933, the a u t h o r i t y t o license and
regulate the manufacture and sale o f l i q u o r was placed i n the Temperance
Enforcement Commission under the State Tax Commission. In 1939, the
Arizona L e g i s l a t u r e e s t a b l i s h e d the Department of Liquor Licenses and
C o n t r o l , and vested r e s p o n s i b i l i t y f o r the a d m i n i s t r a t i o n and enforcement
of l i q u o r laws i n the Superintendent. A three- member State Liquor Board
was added i n 1967, and the number of Board members was l a t e r increased to
f i v e and then to seven.
The Department i s responsible f o r : 1) l i c e n s i n g alcohol beverage
s u p p l i e r s , wholesalers and r e t a i l e r s ; 2) a s s i s t i n g State o f f i c i a l s and
p o l i t i c a l subdivisions i n c o l l e c t i n g l i q u o r related taxes; 3)
i n v e s t i g a t i n g compliance w i t h l i q u o r laws, and a s s i s t i n g State and local
law enforcement agencies i n l i q u o r law enforcement; and 4) conducting
hearings and imposing sanctions for v i o l a t i o n s of l i q u o r laws. The types
and numbers of licenses issued as of J u l y 1988 i s l i s t e d i n Table 1.
D u t i e s o f the Board i n c l u d e : 1) g r a n t i n g and denying a p p l i c a t i o n s f o r
licenses; 2) adopting r u l e s and r e g u l a t i o n s to c a r r y out the p r o v i s i o n s
o u t l i n e d i n T i t l e IV; and 3) holding hearings and hearing appeals. Recent
additions to the Board s t a t u t e s established a Liquor Panel. The Panel i s
appointed by the chairman of the Board and consists of not less than
three Board members. The Panel may take a c t i o n t h a t the Board authorizes
pursuant to T i t l e I V .
Dut i es
Both the Superintendent and the Board members are appointed by the
Governor. The Superintendent serves concurrently w i t h the Governor,
while Board members serve three- year terms.
TABLE 1
ACTIVE LIQUOR LICENSES ISSUED AS OF 7- 1- 88
License Type
Numbe r of
Licenses Issued
Beer and Wine Store
Bar - Quota
Liquor Store - Quota
Beer and Wine Bar - Quota
Restaurant
Special Events
Club
Out- of- State Producer
Out- of- State Importer/ Exporter
Hotel/ Motel
Arizona Wholesaler
Government - County, C i t y , or Town
Conveyance - A i r l i n e s , Boats, and Trains
Domestic Farm Winery/ Microbrewery
In- State Producer
TOTAL
( a) Special Event Licenses are issued t o i n d i v i d u a l qua1 i f y i ng organizations. The
c r i t e r i a f o r l i c e n s i n g i s established i n A. R. S. 04- 203.02. The l i c e n s e i s only v a l i d
f o r a s p e c i f i c event and i s ! i m i ted to two, two- day events per year.
Source: Department of Liquor Licenses and C o n t r o l .
Personnel and Budget
DLLC receives a General Fund a p p r o p r i a t i o n . Revenues are generated from
license fees, fines and other miscellaneous sources, and deposited i n t o
the General Fund. The Department's revenues and expenditures f o r f i s c a l
years 1986- 87 through 1988- 89 are shown i n Table 2.
DLLC i s divided i n t o four d i v i s i o n s : A d m i n i s t r a t i o n , L i c e n s i n g ,
Enforcement and J u d i c i a l . DLLC employs 59 people statewide to administer
and enforce l i q u o r laws.
A d m i n i s t r a t i o n D i v i s i o n - The A d m i n i s t r a t i o n D i v i s i o n consists of the
Superintendent and immediate s t a f f . This includes the Assistant
Superintendent, accounting personnel, Liquor Board s e c r e t a r i e s and other
c l e r i c a l s t a f f , for a t o t a l of nine employees.
Licensing D i v i s i o n - The Licensing D i v i s i o n i s comprised of three
s e c t i o n s : Licensing, Data Processing and Records. The D i v i s i o n ' s major
r e s p o n s i b i l i t y i s to process a p p l i c a t i o n s and t r a n s f e r s f o r l i q u o r
I i censes. The Data Process i ng and Records s e c t i o n s maintai n up- to- date
records f o r approximately 9,000 a c t i v e licensees. In a d d i t i o n , the
sections provide i n f o r m a t i o n f o r the p u b l i c and the Department regarding
licensee status and business h i s t o r y . This D i v i s i o n has 18 employees.
Enforcement D i v i s i o n - The Enforcement D i v i s i o n i s the
investigative/ enforcement arm of the Department, which i s a duly
authorized c r i m i n a l j u s t i c e agency. I n v e s t i g a t o r s are f u l l y c e r t i f i e d
peace o f f i c e r s i n accordance w i t h the Arizona Law Enforcement O f f i c e r s
Advi sory Counci l ( ALEOAC) requ i rements and standards. l nvest i gators
f u n c t i o n statewide from duty assignment s t a t i o n s i n Phoenix, Tucson and
F l a g s t a f f . The D i v i s i o n ' s p r i n c i p a l o b j e c t i v e i s to ensure that l i q u o r
licensees and t h e i r employees comply w i t h a l l l i q u o r laws and r u l e s .
Twenty- three i n v e s t i g a t o r s and c l e r i c a l s t a f f are employed to perform
t h i s f u n c t i o n .
J u d i c i a l D i v i s i o n - The J u d i c i a l D i v i s i o n consists of the Compliance
and Hearing Sections. The Compliance Section negotiates consent
agreements w i t h licensees who have been c i t e d f o r l i q u o r r e l a t e d
v i o l a t i o n s . The Compliance Section also reviews reports of v i o l e n c e o r
p o l i c e i n t e r v e n t i o n a t licensed establishments t o determine whether
Department a c t i o n i s warranted. The Hearing Section was established i n
1985 to provide the Department an independent process to review matters
that were too complex or d i f f i c u l t f o r t h e Liquor Board or Superintendent
to adjudicate. C u r r e n t l y , the section reviews matters assigned to i t by
the Board and Superintendent, i n a d d i t i o n to a d m i n i s t r a t i v e complaints,
tax complaints and license t r a n s f e r s . The J u d i c i a l D i v i s i o n has nine
employees.
FTEs
TABLE 2
DLLC REVENUES, EXPENDITURES AND FTE POSITIONS
FISCAL YEARS 1986- 87 THROUGH 1988- 89
( unaudited)
Actual Actual Estimated
1986- 87 1987- 88 1988- 89
Revenues $ 3,391.100 $ 3.146.714 $ 3,714.600
Expenditures:
Personal Services $ 1,160,500 $ 1,179,524 $ 1,194,700
Employee Related 251 ,200 249,184 255,100
Professional and
Outside Services 46,400 69,372 85,800
Travel :
In- State 85,300 81 ,607 113,200
Out- of- State 2,300 1 ,658 7,000
Other Operat i ng 300,200 391 ,797 383,200
56,500 20,005 10,800
$ 1 ,902,400 $ 1 ,993,151 $ 2.049.800
Source: I n t e r v i e w s w i t h DLLC and JLBC s t a f f , and Budget Documents
f i s c a l years 1986- 87 through 1988- 89.
4
Audit Scope and Purpose
This a u d i t was conducted to evaluate the adequacy of r e g u l a t i o n by the
DLLC, focusing on these s p e c i f i c areas.
r The adequacy of c o n t r o l s over the Compliance Section,
a Whether the Department has g i v e n s p e c i a l treatment to some p o t e n t i a l
licensees.
r Whether DLLC needs to strengthen c o n t r o l s over cash and seized
property.
r Whether s t a t u t e s governing the d u t i e s and r e s p o n s i b i l i t i e s of the
Board and Superintendent c o n f l i c t .
r The adequacy of DLLC's enforcement o f s t a t u t e s and r u l e s and
regulations governing license renewals.
r Whether c o n t r o l s over the Department's l i q u o r f i l e s are s u f f i c i e n t t o
p r o t e c t t h e i r contents.
r Whether the special events s t a t u t e s need to be modified.
I n a d d i t i o n , we addressed the 12 s t a t u t o r y Sunset F a c t o r s . T h i s report
also contains Other P e r t i n e n t Information regarding I n v e s t i g a t o r A c t i v i t y
and organizational climate at DLLC.
This a u d i t was conducted i n accordance w i t h generally accepted
governmental a u d i t i n g standards.
The Auditor General and s t a f f expresses a p p r e c i a t i o n t o the Liquor Board,
Superintendent and s t a f f of DLLC for t h e i r cooperation and assistance
during the course of our a u d i t .
SUNSET FACTORS
In accordance w i t h A. R. S. 341- 2354, the L e g i s l a t u r e should consider the
following 12 factors i n determining whether the Department of Liquor
Licenses and Control should be continued or terminated.
1. Objective and purpose in e s t a b l i s h i n g the agency
The courts and the L e g i s l a t u r e have s t a t e d t h a t the o b j e c t i v e and
purpose f o r e s t a b l i s h i n g the Department center on p r o t e c t i n g the
public health, safety and welfare. Before 1984 Arizona law d i d not
define l e g i s l a t i v e i n t e n t f o r the DLLC.
In 1984 Arizona's session laws defined the purpose of the DLLC as
follows: ". . . to regulate the l i q u o r industry through the license
control process, c o l l e c t fees and taxes for the maintenance of
government and enforce s t a t u t e s i n order to maintain the health, and
we1 fare of the community."
2. The effectiveness w i t h which the agency has met i t s o b j e c t i v e and
purpose and the e f f i c i e n c y w i t h which it has operated
The Department's effectiveness i n meeting i t s o b j e c t i v e and purpose
has been hampered because licenses and i n t e r i m permits were issued to
apparently u n q u a l i f i e d i n d i v i d u a l s ( see Finding I I , page 19). In
a d d i t i o n , the Department has exercised weak and poor controls over
i t s compliance process ( see Finding I , page 11).
3. The extent to which the agency has operated i n the p u b l i c i n t e r e s t
Besides problems that have negatively impacted the Department's
effectiveness i n meeting i t s o b j e c t i v e , the Department has not acted
i n the p u b l i c i n t e r e s t by f a i l i n g t o p r o p e r l y control cash, which has
resulted i n the t h e f t o f p u b l i c monies.
4. The extent t o which r u l e s and regulations promulgated by the agency
are consistent w i t h the l e g i s l a t i v e mandate
In 1986 DLLC attempted a major r e v i s i o n of i t s rules and
regulations. The Department submitted 19 rules to the Attorney
General's O f f i c e f o r c e r t i f i c a t i o n , b u t o n l y one was c e r t i f i e d . The
others were withdrawn due t o d e f i c i e n c i e s . In December 1987 DLLC
resubmitted 15 r u l e s . According to the Department's Attorney General
representative, a l l 15 w i l l be denied c e r t i f i c a t i o n because of the
long delay between p u b l i c p a r t i c i p a t i o n and i n p u t .
The Superintendent informed our O f f i c e that the Department w i l l
attempt to recodify i t s statutes i n the upcoming l e g i s l a t i v e
session. After t h i s process i s complete, the Department w i l l submit
whatever rule changes are necessary so the rules w i l l conform with
s t a t u t e s .
5 . The extent to which the agency has encouraged input from the p u b l i c
before promulgating i t s r u l e s and r e g u l a t i o n s and the extent t o which
i t has informed the p u b l i c as t o i t s actions and t h e i r expected
impact on the p u b l i c
The Department held p u b l i c meetings the last time i t promulgated
r u l e s , i n 1986. However, when the Department resubmitted the rules
a f t e r changes were made, no p u b l i c meetings were held. Because of
the long delay a f t e r p u b l i c input, the Attorney General's O f f i c e w i l l
not c e r t i f y rules the Department now has pending.
The extent t o which the agency has been able to i n v e s t i g a t e and
resolve complaints that are w i t h i n i t s j u r i s d i c t i o n
DLLC's enabling statutes e s t a b l i s h a formal complaint review
process. In a d d i t i o n , statutes mandate that c e r t a i n types of
v i o l a t i o n s must be investigated by the Department. Our review of
DLLC's complaint process found t h a t l o c a l law enforcement agencies
d i d not report v i o l a t i o n s i n a timely manner, the Department took no
a c t i o n on many of those v i o l a t i o n s , and when the Department d i d act
the d i s p o s i t i o n was questionable. DLLC i s c u r r e n t l y working with
local law enforcement agencies i n attempts to reduce the number of
unactionable complaints. In a d d i t i o n , the Department i s e s t a b l i s h i n g
a new process f o r i n t e r n a l review of outside complaints. The
Department expects that the new system w i l l b e t t e r resolve complaints
by ensuring that the necessary evidence i s i d e n t i f i e d and obtained.
7. The extent t o which the Attorney General or any o t h e r a p p l i c a b l e
agency o f S t a t e government has the a u t h o r i t y t o prosecute actions
under enabling l e g i s l a t i o n
A. R. S. T i t l e 4 sets f o r t h c i v i l penalties f o r l i q u o r r e l a t e d
v i o l a t i o n s . Statutes allow the Superintendent and the Liquor Board
to impose p e n a l t i e s . The penal t i e s range from $ 200 to $ 3,000, and
according to DLLC, any amount of suspension time that i s deemed
appropriate. During the hearing process the Attorney General's
Office represents the Department.
8. The extent t o which the agency has addressed d e f i c i e n c i e s i n i t s
enabling s t a t u t e s which prevent i t from f u l f i l l i n g i t s s t a t u t o r y
mandate
In recent years several b i l l s have been introduced and passed that
were designed to c l a r i f y A. R. S. T i t l e 4 and increase p e n a l t i e s f o r
liquor related v i o l a t i o n s . For example, DLLC successfully sought
l e g i s l a t i o n during the 1988 session g i v i n g the Department more
f l e x i b i l i t y i n evaluating requests for license t r a n s f e r s . Also, the
Department obtained l e g i s l a t i o n p r o h i b i t i n g the consumption of
alcohol at unlicensed commercial businesses where food or beverages
are sold and entertainment i s provided.
9. The extent t o which changes are necessary i n the laws o f the agency
to adequately comply w i t h f a c t o r s l i s t e d i n the Sunset law
Based on our audit work, we recommend that the L e g i s l a t u r e consider
the f o l l o w i n g changes to DLLC's s t a t u t e s .
a Amend A. R. S. $ 94- 112 and 4- 210 to c l e a r l y delineate a u t h o r i t y
between the Superintendent and the Liquor Board ( see Finding I V ,
page 35) .
a Amend A. R. S. 54- 209.01 to automatically revoke unrenewed l i q u o r
l i censees 60 days a f t e r the l i cense renewal date, and estab l i sh
s t i f f e r p e n a l t i e s ( i n c l u d i n g mandatory license revocation) for
persons who s e l l l i q u o r a f t e r t h e i r licenses expire ( see Finding
V , page 41 1.
0 Amend A. R. S. 94- 203.02 to c l e a r l y define the c r i t e r i a for
q u a l i f i c a t i o n as a c h a r i t a b l e organization under the
Department's special event procedures ( see Finding V I I , page 49).
10. The extent t o which the termination o f the agency would
s i g n i f i c a n t l y harm the p u b l i c health, s a f e t y , or welfare
Regulation of the l i q u o r industry i s necessary for the p r o t e c t i o n of
p u b l i c health, safety and welfare. The need for control over the
sale of l i q u o r i s well established. A l l 50 states regulate the
l i q u o r industry, although regulatory s t r u c t u r e s vary d r a m a t i c a l l y .
Terminating DLLC could impact the h e a l t h , safety and welfare of the
p u b l i c , and would probably require that local governments assume the
r e s p o n s i b i l i t y f o r r e g u l a t i o n .
11. The extent to which the level o f r e g u l a t i o n exercised by the agency
i s appropriate and whether less or more s t r i n g e n t l e v e l s of
r e g u l a t i o n would be appropriate
Our audit work suggests that the level of r e g u l a t i o n i s appropriate.
12. The extent to which the agency has used p r i v a t e contractors i n the
performance o f i t s d u t i e s and how e f f e c t i v e use o f p r i v a t e
contractors could be accomplished
DLLC c u r r e n t l y contracts for court r e p o r t e r s . In the past, the
Department has contracted for hearing o f f i c e r s , c o u r t r e p o r t e r s and
i n t e r p r e t e r s .
Although the Department f e e l s that some of the past contracts were
not cost e f f e c t i v e , i t plans to continue c o n t r a c t i n g f o r court
r e p o r t i n g services. In a d d i t i o n , due to an a n t i c i p a t e d backlog i n
j u d i c i a l hearings, DLLC plans t o c o n t r a c t for hearing o f f i c e r s from
the p r i v a t e sector when necessary.
FINDING I
GREATER CONTROLS ARE NEEDED OVER THE COMPLIANCE PROCESS TO
REDUCE THE RISK OF ABUSE AND TO ENSURE EQUITABLE TREATMENT OF LICENSEES
Inadequate c o n t r o l may reduce the i n t e g r i t y o f the Department of Liquor
Licenses and Control ( DLLC) compl iance process. Most of the Department's
d i s c i p l i n e i s handled by one compliance o f f i c e r whose actions receive
l i t t l e review. Penalties imposed by the compliance o f f i c e r appear
. inconsistent and a r e n o t documented. More thorough documentat ion and
g u i d e l i n e s f o r imposing p e n a l t i e s would enable the Department to more
adequately guard against p o t e n t i a l abuse and ensure f a i r treatment of a l l
licensees.
Compliance O f f i c e r Determines
Most Enforcement Actions
Although the compliance section was established i n 1985 to help a l l e v i a t e
a backlog of cases awaiting hearings, i t has become the Department's main
d i s c i p l i n a r y process. The goal o f the compliance s e c t i o n ( which i s
e s s e n t i a l l y one person)(') i s to resolve a l l e g e d v i o l a t i o n s by l i q u o r
licensees w i t h o u t g o i n g through the formal hearing process. During 1987
more than 85 percent of the Department's a d m i n i s t r a t i v e d i s c i p l i n a r y
actions against l i q u o r licensees were generated by the compliance
s e c t i o n . This s e c t i o n issued 447 warning l e t t e r s to licensees and
entered i n t o 469 consent agreements i n 1987. I n c o n t r a s t , the
Department's hearing s e c t i o n issued only 132 a d m i n i s t r a t i v e reports and
recommendat i ons du r i ng the same per i od . (''
The compliance o f f i c e r has extensive a u t h o r i t y to make decisions i n cases
i n v o l v i n g l i q u o r law v i o l a t i o n s . P r i o r to June 1988 the compliance
o f f i c e r reviewed pol ice reports of a l leged I iquor v i o l a t i o n s and
determined whether d i s c i p l i n a r y a c t i o n against a licensee was warranted.
There i s one permanent compliance o f f i c e r p o s i t i o n and three c l e r i c a l s t a f f .
Recent1 y , an addi ti onal employee was temporari 1 y assigned t o work compl i ance cases.
(' 1 The State Liquor Board r a r e l y handles d i s c i p l i n a r y cases. The m a j o r i t y of i t s
cassload consi s t s o f o r i g i n a l appl i c a t i ons and nonuse of 1 i censes.
Now, DLLC i n v e s t i g a t o r s i n i t i a l l y review the reports and recommend
a c t i o n . However, the compliance o f f i c e r s t i l l determines whether action
should be taken. I n most cases that warrant a c t i o n , the compliance
o f f i c e r then meets w i t h the licensee for an informal, off- the- record
discussion. The compliance o f f i c e r i s the Department's only
representative i n t h i s meeting, and i n practice i s s o l e l y responsible for
judging the evidence i n the case and determining the penalty to be
imposed. Further, t h i s penalty can vary s u b s t a n t i a l l y - from $ 200 to
$ 3,000. ( 1)
In most cases on which the compliance o f f i c e r decides to take a c t i o n , a
consent agreement l i s t i n g the v i o l a t i o n , date o f v i o l a t i o n , and the
penalty agreed upon i s the only documentation of what t r a n s p i r e d d u r i n g
t h i s informal conference; no other record of discussion i s a v a i l a b l e .
The w r i t t e n agreement i s signed by both the licensee and the compliance
o f f i c e r . Although the consent agreement i s l a t e r reviewed and signed by
the Superintendent or Assistant Superintendent, no documentation of what
transpired during the conference i s provided to the reviewers, and the
terms of the agreement are r a r e l y changed as a r e s u l t of t h e i r review.
Thus, the compliance o f f i c e r ' s decisions serve as the Department's
response i n most d i sc i p l i nary act i ons .
I f a licensee refuses to meet i n f o r m a l l y o r i f an agreement cannot be
reached between the compliance o f f i c e r and the licensee, the matter i s
referred to a formal a d m i n i s t r a t i v e hearing. However, less than 15
percent of licensees are referred from the compliance section for a
hear i ng .
Penalties Appear
Inconsistent
D i s c i p l i n a r y actions by the compliance section do not appear to be
consistent. O v e r a l l , we found a wide range of penalties imposed.
Although the Department contends that the v a r i a t i o n i s j u s t i f i e d by the
facts i n each case, the compliance o f f i c e r provided l i t t l e documentation
to j u s t i f y the differences i n p e n a l t i e s f o r the cases observed i n our
samp l e .
( ' 1 This s e c t i o n c o l l e c t e d $ 181,775 i n f i n e s i n f i s c a l year 1987- 88.
12
Wide range of p e n a l t i e s imposed - Our sample of 193 consent agreements
showed that penalties vary g r e a t l y among licensees. ( ' ) Some I icensees
receive r e l a t i v e l y minor p e n a l t i e s w h i l e others are subject to much more
severe punishment. For example, I i censees c i ted for sel l i ng to underage
persons' 2' were assessed f i n e s ranging from $ 200 to $ 3,000. Table 3
f u r t h e r i l l u s t r a t e s the range of penal t i e s imposed for those v i o l a t i o n s
that occurred most o f t e n i n our sample.
TABLE 3
RANGE OF PENALT l ES l MPOSED FOR MOST FREQUENT V I OLAT I O N S ( ~ '
V i o l a t i o n s V i o l a t i o n Range o f Fine Most Range of
i n Sample Type Fine Often Imposed Suspension
93 S e l l o r p r o v i d e
liquor to a
minor $ 200-$ 3,000 $ 500 2- 5 days
13 S e l l or provide
l iquor to
i n t o x i c a t e d or
d i s o r d e r l y person $ 500-$ 2,000 ( b ) $ 1,000 3- 7 days
11 Employee consum i ng $ 200-$ 750 $ 200 2- 4 days
or buying l i q u o r
10 Minor on premises
without a
guardian $ 200-$ 1 ,000 ( c ) 3 days
( a ) This table includes only those v i o l a t i o n s t h a t appeared a t l e a s t ten times i n the
sampl e.
( b) Four licensees received a combination of three- day suspension and $ 1,000 f i n e .
( c ) Fine amounts of $ 200 and $ 500 were imposed e q u a l l y often.
Source: Auditor General sample of 193 consent agreements from the period
of A p r i l 1 , 1987 through March 31 1988.
A s t a t i s t i c a l l y v a l i d sample of 193 was randomly selected from t h e p o p u l a t i o n of 388
consent agreements f o r t h e p e r i o d A p r i l 1, 1987 through March 31, 1988. The sample
had a r e l i a b i l i t y of plus or m i nus 5 percent a t the 95 percent confidence l e v e l .
V i o l a t i o n s f o r s e l l i n g or p r o v i d i n g 1 iquor t o an underage person ( A. R. S 54- 244.9)
account f o r approximately h a l f o f the cases handled by the compliance section.
Although some consistency i n f i n e s was evident i n the cases we reviewed,
i t was not always apparent from the f i l e why one l icensee was f i n e d more
harshly than another f o r the same v i o l a t i o n . For example:
0 One licensee c i t e d for two counts of s e l l i n g t o a minor was fined
$ 1,000; whi Ie another, also c i t e d for two counts of s e l l i n g t o a
minor, was suspended for 10 days ( the equivalent of a $ 2,500 f i n e ,
according to the compliance o f f i c e r ) . Neither licensee had any
p r i o r l i q u o r v i o l a t i o n s .
0 One licensee was f i n e d $ 200 f o r f a i l i n g to n o t i f y the Department of
an act of violence on the premises. Another licensee c i t e d f o r the
same offense was f i n e d $ 500. Neither licensee had any p r i o r l i q u o r
v i o l a t i o n s .
The above cases i l l u s t r a t e the variance i n p e n a l t i e s imposed for s i m i l a r
v i o l a t i o n s . However, our review also indicated no consistent p a t t e r n
supporting increased p e n a l t i e s f o r licensees w i t h p r i o r l i q u o r
v i o l a t i o n s . "' We also i d e n t i f i e d cases where licensees w i t h p r i o r
l i q u o r v i o l a t i o n s were fined less than or the same as f i r s t time
offenders. Although p r i o r v i o l a t i o n information i s one of the few
f a c t o r s t h a t i s documented i n the licensee f i l e , i t s impact on p e n a l t i e s
imposed was not evident i n a l l cases.
0 In August 1986 a licensee was f i n e d $ 500 f o r a l l o w i n g a minor on the
premises without a guardian. Seven months l a t e r the licensee was
given a warning f o r the same v i o l a t i o n . A t h i r d v i o l a t i o n resulted
i n a $ 250 f i n e i n February 1988. I n c o n t r a s t , another licensee who
had no p r i o r v i o l a t i o n s was f i n e d $ 1,000 i n A p r i l for the same
of f e n i e .
0 In September 1986 the compliance o f f i c e r imposeda f i n e o f $ 1,00Oon
a licensee f o r s e r v i n g a l c o h o l to a minor. Eight months l a t e r a
second v i o l a t ion resu l ted i n a $ 500 f i ne. The same f i ne was imposed
on another licensee f o r s e r v i n g t o a minor, and t h i s licensee had no
previous v i o l a t i o n s .
0 On December 13, 1986, a licensee was c i t e d f o r serving to a m i n o r
and fined $ 500. Nine months l a t e r the licensee was again c i t e d f o r
the same v i o l a t i o n but fined only $ 200.
( ' 1 Our a n a l y s i s o n l y considered p r i o r v i o l a t i o n s t h a t occurred w i t h i n two years of the
current v i o l a t i o n . A s i m i l a r c r i t e r i o n i s used by DLLC's hearing o f f i c e r s .
The compliance o f f i c e r contends that p e n a l t i e s vary because the f a c t o r s
i n each case are d i f f e r e n t . However, the lack of documentation i n
licensee f i l e s l i m i t e d our a b i l i t y to determine whether the Department i s
dealing w i t h v i o l a t o r s s y s t e m a t i c a l l y and c o n s i s t e n t l y .
No documentation t o support penalty v a r i a t i o n s - Although p e n a l t i e s
varied widely, the consent agreements and licensee f i l e s d i d not document
why the d i f f e r e n t p e n a l t i e s were imposed. The Department does not
require supporting documentation f o r p e n a l t i e s imposed through the
compliance process. Lack of documentation l i m i t s the Department's
c o n t r o l over the compliance process.
The lack of supporting documentation prevents adequate review o f the
consent agreement. Although every consent agreement must be approved by
the Superintendent or Assistant Superintendent, i n most cases a l l t h i s
o f f i c i a l sees i s the actual consent agreement and the associated p o l i c e
report on the v i o l a t i o n . Neither the consent agreement nor any other
information provided to the reviewer i n d i c a t e s what f a c t o r s a f f e c t e d the
penalty imposed. Reviewers are not r e g u l a r l y informed of f a c t o r s such as
p r i o r v i o l a t i o n s or the strength of the evidence against the licensee.
The lack of documentation reduces c o n t r o l over the compliance process and
creates the opportunity f o r c o l l u s i o n between the compliance o f f i c e r and
licensees. The compliance process i s e s s e n t i a l l y handled by one person
from s t a r t t o f i n i s h , w i t h no w r i t t e n standards to guide decisions and no
e f f e c t i v e review of those decisions. Although we found no evidence of
c o l l u s i o n , the compliance o f f i c e r ' s a u t h o r i t y t o take a c t i o n without
documenting h i s decisions and the s i g n i f i c a n t f i n a n c i a l consequences
these decisions can have f o r licensees n e c e s s i t a t e s t r o n g c o n t r o l .
I n c o n t r a s t , the hearing process provides a more d e t a i l e d record of
deci sions and ensures greater c o n t r o l . When a l i censee goes to hear i ng,
the hearing o f f i c e r uses the information gathered during the hearing to
prepare a report of the f a c t s and circumstances and the reasons f o r the
d e c i s i o n , i n c l u d i n g any recent p r i o r v i o l a t i o n s , as support f o r the
recommendations f o r a c t i o n . Although t h i s much in- depth d e t a i l may be
too cumbersome f o r the compliance process, a b r i e f synopsis of the
f a c t o r s i n f l u e n c i n g the decision would show why c e r t a i n p e n a l t i e s are
imposed. For example, New Mexico has a compliance process s i m i l a r to
A r i z o n a ' s , b u t New Mexico's l i q u o r r e g u l a t i o n s r e q u i r e w r i t t e n f i n d i n g s
of f a c t and s p e c i f i c grounds for any d e c i s i o n made regarding a v i o l a t i o n .
Lack O f Compliance Guidelines
Increases P o s s i b i l i t y For Abuse
Discrepancies i n p e n a l t i e s may also r e s u l t from the lack of Departmental
p o l i c y for p e n a l i z i n g v i o l a t o r s . The lack of g u i d e l i n e s and l i m i t e d
documentation to support p e n a l t i e s may increase the r i s k of abuse i n
compliance decisions and a c t i o n s . Other s t a t e s have established penalty
guidelines to ensure consistent actions against v i o l a t o r s .
Lack of a c c o u n t a b i l i t y may increase p o s s i b i l i t y o f abuse - As noted
p r e v i o u s l y , most of the Department's d i s c i p l i n e i s handled by the
compliance o f f i c e r under c o n d i t i o n s t h a t increase the p o s s i b i l i t y for
abuse. Penalty g u i d e l i n e s would reduce the r i s k of abuse. However,
neither the s t a t u t e s nor r e g u l a t i o n s p r o v i d e s p e c i f i c p e n a l t i e s or ranges
for various types of v i o l a t i o n s . Also, n e i t h e r the Superintendent nor
the compliance o f f i c e r have adopted formal g u i d e l i n e s f o r determining
p e n a l t i e s . Therefore, the compliance o f f i c e r has extensive d i s c r e t i o n to
apply whatever penalty he f e e l s i s a p p r o p r i a t e , w i t h i n the broad
s t a t u t o r y l i m i t s .
Despite t h i s wide d i s c r e t i o n , the compliance o f f i c e r ' s c r i t e r i a are not
well defined. The compliance o f f i c e r o r i g i n a l l y s t a t e d t h a t he has a
standard " i n h i s head" to determine the proper p e n a l t y . Later he
indicated that h i s decisions may be based on such f a c t o r s as the age of
an i n d i v i d u a l or the person's p a r t i c i p a t i o n i n an i n d u s t r y sponsored
alcohol management course. A l l f a c t o r s used to consider the compliance
o f f i c e r ' s p e n a l t i e s were disclosed only a f t e r repeated attempts by audit
s t a f f to get the Department t o e x p l a i n the large d i f f e r e n c e s i n s i m i l a r
decisions and a c t i o n s .
Standard w r i t t e n p e n a l t y g u i d e l i n e s would e s t a b l i s h expectations, and
promote consistency and e q u i t y among p e n a l t i e s imposed against
licensees. Guidelines would also increase Departmental control over the
compl iance process by estab l i shi ng expected penal t ies for spec i f i ed
v i o l a t i o n s . Deviations from the guidel ines would be readi ly apparent.
DLLC does not see a need for s p e c i f i c penalty g u i d e l i n e s , arguing that
each case i s d i f f e r e n t and should be considered i n d i v i d u a l l y based on the
merits of that case. However, a lack of formal guidel ines fosters broad
d i s c r e t i o n a r y powers, which reduces the Department's control over the
comp I i ance process and may resu l t i n i ncons i s ten t and i nequ i tab I e
treatment of licensees.
Other s t a t e s have formal penalty guidelines - Several states have
established more s p e c i f i c guidelines - e i t h e r i n regulations or agency
p o l i c y - for taking d i s c i p l i n a r y a c t i o n against licensees. The Texas
Alcoholic Beverage Commission uses a " Standardized Penalty Chart" to
determine appropriate p e n a l t i e s . The chart l i s t s suspension ranges for
each of 61 d i f f e r e n t v i o l a t i o n s . These ranges escalate for subsequent
offenses. For example, the f i r s t offense of s e l l i n g to a minor w i l l
r e s u l t i n a 5 to 10 day suspension, and the second offense w i l l r e s u l t i n
an 11 to 15 day suspension. ' Tennessee, Cal i f o r n i a and New Mex i co
a l s o s p e c i f y ranges or s p e c i f i c f i n e s f o r various types o f v i o l a t i o n s .
C a l i f o r n i a ' s penalty schedule allows v a r i a t i o n s from the established f i n e
amounts, w i t h supporting w r i t t e n documentation.
RECOWENDATIONS
I. DLLC should e s t a b l i s h a schedule of expected p e n a l t i e s f o r v i o l a t i o n s
to promote consistency and equity among licensees penalized.
2. DLLC should require documentation of factors that impact p e n a l t i e s
imposed, to ensure that the reviewer has a l l the necessary
informat ion i n order to evaluate the appropriateness of the consent
agreement .
( ' ) For some v i o l a t i o n s a l i c e n s e e has the choice o f c o n v e r t i n g t h e suspension t o a f i n e
a t the minimum r a t e o f $ 150 t o $ 750 per day of suspension. Thus, a five- day minimum
suspension f o r the f i r s t o f f e n s e would convert t o a t l e a s t a $ 750 f i n e . This minimum
f i n e amounts t o more than DLLC f i n e s most licensees f o r t h i s same v i o l a t i o n .
FINDING II
DLLC HAS NOT ADEQUATELY CONTROLLED THE LICENSING PROCESS,
RESULTING IN SPECIAL HANDLING OF SOME APPLICATIONS
AND IMPROPER LICENSE ISSUANCE
The Department of Liquor Licenses and Control ( DLLC) needs to strengthen
c o n t r o l s over the l i c e n s i n g process. Although i t appears that most
a p p l i c a t i o n s are handled p r o p e r l y , the Department seems to process some
a p p l i c a t i o n s more e x p e d i t i o u s l y than o t h e r s . S t a t u t e s governing license
t r a n s f e r s have been applied i n a manner that has allowed apparently
u n q u a l i f i e d i n d i v i d u a l s to o b t a i n l i q u o r licenses. In a d d i t i o n , the
Department's Licensing D i v i s i o n has issued temporary permits to persons
whose a p p l i c a t i o n s f o r l i q u o r licenses are under p r o t e s t by the DLLC
enforcement d i v i s i o n .
DLLC Appears To Handle Some
A p p l i c a t i o n s I n A Special Manner
DLLC does not process a l l a p p l i c a t i o n s f o r l i q u o r licenses i n the same
manner. Although our review i n d i c a t e s t h a t most a p p l i c a t i o n s are handled
according to Department p o l i c y , several cases suggest that DLLC can be
pressured i n t o expediting some a p p l i c a t i o n s . T h i s s p e c i a l processing
tends t o favor selected a p p l i c a n t s by a l l o w i n g them t o b e g i n o p e r a t i n g
sooner than the norm.
Department procedures require t h a t persons seeking l i q u o r licenses submit
c e r t a i n i n f o r m a t i o n i n t h e i r a p p l i c a t i o n s . Required i n f o r m a t i o n includes
l e g i b l e f i n g e r p r i n t s , h i s t o r i e s o f a l l persons associated w i t h the
business seeking l i censure, adequate bonding for some I i censes, and a l l
sales tax i n f o r m a t i o n . The Department has established procedures to
ensure the o r d e r l y processing of l i q u o r a p p l i c a t i o n s . These include:
accepting only f u l l y completed a p p l i c a t i o n s , r e q u i r i n g f i n g e r p r i n t s f o r
some o r i g i n a l a p p l i c a n t s , r e q u i r i n g background approval b e f o r e l i c e n s e
issuance, and c o l l e c t i n g the proper bond.
During t h e course of our a u d i t numerous a l l e g a t i o n s were received by our
o f f i c e regarding DLLC's improper l i c e n s i n g p r a c t i c e s . As a r e s u l t , our
o f f i c e conducted a random sample of o r i g i n a l license a p p l i c a t i o n s to t e s t
c o n t r o l s of the l i c e n s i n g process. I n a d d i t i o n , we i n v e s t i g a t e d s p e c i f i c
a l l e g a t i o n s . A sample o f o r i g i n a l license f i l e s found t h a t a l l a p p l i c a n t s
met A. R. S. or DLLC requirements, and State background checks were
completed on a l l a p p l i c a n t s p r i o r to license issuance. However, the
sample i d e n t i f i e d one a p p l i c a t i o n that was processed even though i t was
incomplete.
Example 1
0 An a p p l i c a t i o n f o r a new license was received on October 27, 1987.
DLLC documentation i n d i c a t e s t h a t the l i c e n s i n g examiner was
concerned about accepting the a p p l i c a t i o n because i t was
incomplete. The l i c e n s i n g examiner was requested by her supervisor
to accept the a p p l i c a t i o n , and an i n t e r i m permit was issued October
27. The l i c e n s i n g supervisor could not e x p l a i n why t h i s
a p p l i c a t i o n was accepted.
I n f o l l o w i n g up on the s p e c i f i c a l l e g a t i o n s , we found that three licensees
d i d i n f a c t receive special treatment. The Department d i d not f o l l o w i t s
normal p r a c t i c e s i n i s s u i n g the licenses, and may have broken the law i n
one case.
Example 2
0 An o r i g i n a l license a p p l i c a t i o n was received on February 2, 1987.
Although an i n t e r o f f i c e memorandum i n d i c a t e s the a p p l i c a t i o n was
not c o r r e c t and was incomplete, i t was s t i l l processed. The
a p p l i c a t i o n lacked corporate o f f i c e r s ' f i n g e r p r i n t s , and complete
personal and business h i s t o r i e s . I n a d d i t i o n , the a p p l i c a n t d i d
not supply s u f f i c i e n t i n f o r m a t i o n r e g a r d i n g l i c e n s e ownership.
The Department received several requests from prominent p u b l i c
o f f i c i a l s to expedite t h i s a p p l i c a t i o n . An employee said phone
c a l l s were received supporting t h i s a p p l i c a t i o n . A DLLC supervisor
i n d i c a t e d t h a t the requests had an i n f l u e n c e on DLLC to process and
approve the a p p l i c a t i o n despite i t s incompleteness. ( A l l o f f i c i a l s
i nvo Ived i n i ssu i ng the I i cense are no longer employed by the
Department.) Eventually a l l the background information was
received. DLLC approved the l icense on February 20, 1987, 18 days
a f t e r r e c e i v i n g the appl i c a t i o n . The State background
i n v e s t i g a t i o n was not completed u n t i l February 25, f i v e days a f t e r
the a p p l i c a t i o n was approved.
Example 3
a An a p p l i c a t i o n was received by the DLLC on A p r i l 6, 1988. The
licensing examiner was requested to accept and process the
a p p l i c a t i o n on A p r i l 15, even though i t was incomplete.
F i n g e r p r i n t cards were provided on A p r i l 20. A l l the other
information was submitted by A p r i l 27. A Superintendent's Order
was issued on A p r i l 28 approving the a p p l i c a t i o n and the Iicense
was issued.
DLLC issued t h i s license 13 days a f t e r accepting the a p p l i c a t i o n on
A p r i l 15. This compares w i t h an average time of 100 days when
applicants are required to provide f i n g e r p r i n t s . According to the
Superintendent, the applicant thought that no license was required
since the establishment was located on Indian land. When informed
to the c o n t r a r y , the licensee submitted an a p p l i c a t i o n only two
weeks p r i o r to scheduled opening. Although DPS completed the
background check i n less than two weeks, the license was not
approved i n time for the scheduled opening. The applicant
s o l i c i t e d several q u a l i f y i n g o r g a n i z a t i o n s to o b t a i n special event
licenses so the establishment could open as scheduled and operate
u n t i l the new Iicense was approved. DLLC agreed to t h i s
arrangement on the assumption t h a t the proceeds would be given to
the a p p r o p r i a t e o r g a n i z a t i o n s .
DLLC's act ions i n these cases suggest t h a t some appl icants can obtain
special treatment. In several of these cases, applicants were represented
by attorneys who were knowledgeable about l i c e n s i n g requirements and were
thus able to reduce the time needed to provide complete information to the
Department. However, these cases also show that DLLC made except ions to
i t s stated requirement that a p p l i c a t i o n s be complete p r i o r to acceptance
for processing. These exceptions occurred despite c l e a r evidence that the
a p p l i c a t i o n s were not complete.
Special handling i s also evident i n one case i n which the Department
permitted a former licensee to renew a l i c e n s e t h a t had been cancelled for
nearly 11 months.
Example 4
a On November 21, 1986, a licensee surrendered a license to the
Department and f i l e d a " Surrender of License" form. The Iicense
was cancelled. On October 15, 1987, the former licensee requested
DLLC to " r e a c t i v a t e " the license. DLLC renewed the cancelled
license on October 19 without r e q u i r i n g a new a p p l i c a t i o n , thus
bypassing the l i c e n s i n g process. The request to r e a c t i v a t e the
license was submitted so an a p p l i c a n t , who was seeking a license
for the same l o c a t i o n , could o b t a i n a temporary Iicense ( i n t e r i m
permit) w h i l e w a i t i n g f o r license approval from the DLLC. DLLCfs
approval of t h i s request appears improper because there are no
s t a t u t o r y p r o v i s i o n s t h a t give the Department the a u t h o r i t y to
reissue the cancel led license.
DLLC's actions i n these cases suggest that some applicants receive
special treatment, p a r t i c u l a r l y i n accepting incomplete
a p p l i c a t i o n s and issuing licenses p r i o r to completing background
checks. Although these cases represent o n l y a small p o r t i o n of
l i q u o r Iicense a p p l i c a t i o n s , they raise questions about the
i n t e g r i t y o f the l i c e n s i n g process. I n d i v i d u a l s may be able to
prod the Department i n t o issuing licenses without reviewing a l l
relevant information to determine i f they are q u a l i f i e d . Even i f
these i n d i v i d u a l s are q u a l i f i e d t o h o l d l i q u o r licenses, the
special treatment described above i s u n f a i r to the many other
appl icants who comply w i t h the law and Department procedures.
Licenses Have Been Transferred
To P o t e n t i a l l y Unqualified Applicants
DLLC has approved a p p l i c a t i o n s f o r t r a n s f e r of l i q u o r licenses to
applicants who appear unable to meet s t a t u t o r y or Departmental
requirements. Although recent l e g i s l a t i o n may address the Department's
problem r e l a t i n g to Iicense t r a n s f e r s , DLLC may not be able to revoke
licenses transferred to these i n d i v i d u a l s .
Licenses issued t o i n d i v i d u a l s not meeting requirements - Based on
a l l e g a t i o n s and concerns by some DLLC personnel and other i n d i v i d u a l s
suggesting that the Department may be abusing i t s a u t h o r i t y in regards to
c e r t a i n license t r a n s f e r s , we reviewed recent Department a c t i v i t y i n t h i s
area. We found DLLC t r a n s f e r r e d l i q u o r licenses to several applicants who
did not meet A. R. S. and Departmental requirements. The Department
approved the transfers on the basis of a wr i t ten memo from i t s Attorney
General representative. However, background i n v e s t i g a t i o n s revealed that
the applicants had a h i s t o r y o f Iiquor law or c r i m i n a l v i o l a t i o n s that
i n v e s t i g a t o r s f e l t should d i s q u a l i f y them from obtaining a license.
Because of a legal i n t e r p r e t a t i o n from i t s Assistant Attorney General,
DLLC approved requests for license t r a n s f e r s i f the Department had held
the a p p l i c a t i o n for more than 90 days. A. R. S. 54- 267 states that
appl i c a t i o n s for a c q u i s i t i o n of control [ t r a n s f e r s ] are deemed approved
a f t e r 90 days i f not acted upon by the Superintendent. The Department's
Assistant Attorney General advised DLLC that f a i l u r e to act w i t h i n the
a l l o t t e d time period or to obtain a consensual extension of time would
r e s u l t i n automatic approval of the a p p l i c a t i o n . M e r i t s of the
a p p l i c a t i o n were not considered once the 90 days had passed.
However, other options may have been a v a i l a b l e to DLLC b o t h b e f o r e and
a f t e r the e x p i r a t i o n of the 90- day p e r i o d . For example, the Assistant
Attorney General t o l d us t h a t the Department could have set the
a p p l i c a t i o n request for hearing any time p r i o r to the 90th day. This would
allow the Department an o p p o r t u n i t y t o prepare documentation needed to
protest the license. Such a procedure would have allowed the Department
to deny the license even i f the applicant had not been to h e a r i n g b e f o r e
the 90- day s t a t u t o r y deadline. In a d d i t i o n , a f t e r the license was issued,
the Department could possibly revoke the license i f the applicant f a i l e d
to disclose past c r i m i n a l h i s t o r y . The Attorney General representative
d i d not discuss e i t h e r o p t i o n w i t h DLLC. He asserted that DLLC d i d not
request h i s opinion f o r any o p t i o n s , and he does not normally o f f e r advice
unless requested.
Our review i d e n t i f i e d seven cases i n which the Department approved license
t r a n s f e r s to i n d i v i d u a l s judged to be u n q u a l i f i e d on the basis of
background i n v e s t i g a t i o n s . Below are three examples i l l u s t r a t i n g
applicants who were p o t e n t i a l l y u n q u a l i f i e d to h o l d a l i q u o r l i c e n s e .
Example 5
a An a p p l i c a t i o n was received on November 10, 1987. The applicant was
granted an i n t e r i m permit, which allowed the business to operate up to
105 days. A second i n t e r i m permit was granted on February 22, 1988.
On March 3, 1988, a " Statement of Opposition" was f i l e d against the
a p p l i c a t i o n by the Enforcement Section of the DLLC, asserting t h a t :
1. The a p p l i c a n t p l e d gui l t y to t h e s a l e of alcohol to a minor on
March 31, 1987.
2. A c r i m i n a l case was pending against the applicant for sale of
alcohol to a minor.
3. The applicant f a i l e d to disclose a c i t a t i o n for sale of alcohol
to a minor.
4. The applicant f a i l e d to disclose an indictment by a Federal Grand
Jury for f o r c i b l e rescue of a seized automobile.
5. On June 11 , 1987, the app l i cant accepted a two- day suspension of
the l i q u o r license.
According to a DLLC s t a f f member, t h i s f i l e had been locked i n a
s u p e r v i s o r ' s f i le cabinet f o r an undetermined length of time, and was
not discovered u n t i l February 16, 1988. I t was l a t e r determined the
90- day period had lapsed on February 9. Thus, the Department f e l t i t
was requ i red to approve the app l i cat ion. The l i cense was issued on
March 24, 1988.
Example 6
0 An a p p l i c a t i o n was received by DLLC on September 28, 1987. A report
was submitted by a DLLC i n v e s t i g a t o r on December 11, 1987, p r o t e s t i n g
the a p p l i c a t i o n due to the past hidden ownership, numerous tax and
l i q u o r complaints, questions about the a p p l i c a n t s 1 r e l i a b i l i t y and
c a p a b i l i t y t o h o l d a l i q u o r license i n the past, and c r i m i n a l
h i s t o r i e s and d r i v i n g h i s t o r i e s of the two i n d i v i d u a l s applying for
the Iicense. The f i l e contains a handwritten note dated March 1,
1988, s t a t i n g : " since i t was over 90 days t h e Iicense had to be
i ssued . ' I
Example 7
a An a p p l i c a t i o n was received on January 5, 1988, and an i n t e r i m permit
issued. A report and p r o t e s t was f i l e d by a DLLC i n v e s t i g a t o r on
March 24, 1988, recommending that the a p p l i c a t i o n be denied " . . .
due to t h i s a p p l i c a n t ' s f a i l u r e t o d i s c l o s e a 1985 a r r e s t and 1986
c o n v i c t i o n f o r a s s a u l t . " The a p p l i c a t i o n was approved on May 19,
1988, because of the Department's f a i l u r e to act on the a p p l i c a t i o n
w i t h i n 90 days. The i n v e s t i g a t o r submitted the report questioning the
a p p l i c a n t ' s q u a l i f i c a t i o n s 79 days a f t e r the o r i g i n a l a p p l i c a t i o n was
made to the Department. However, the Department f a i l e d t o a c t on the
i n v e s t i g a t o r ' s report during the 11 days remaining i n the review
period.
One problem hindering the Department's approval of these t r a n s f e r s has
been i t s i n a b i l i t y to track the a p p l i c a t i o n s to ensure action w i t h i n the
legal time frame. In one case, the Department was well beyond the 90- day
l i m i t when i t received a background report questioning the a p p l i c a n t ' s
q u a l i f i c a t i o n s . However, i n the two other cases DLLC appears to have had
a l l necessary information to disapprove the a p p l i c a t i o n s , but f a i l e d to
act before t h e 90- day period ended
Recent l e g i s l a t i o n eliminates automatic approval - L e g i s l a t i o n enacted
by the 1988 L e g i s l a t u r e has changed the requirements governing Iicense
t r a n s f e r s . House B i l l 2417, which became e f f e c t i v e on July 8, 1988,
s t r i k e s the language that an a p p l i c a t i o n for license t r a n s f e r " i s deemed
approved by the Superintendent1' i f not acted upon w i t h i n a s p e c i f i e d time
frame. The " deemed approved" clause has been deleted from the law. In
a d d i t i o n , the new law provides 105 days f o r Departmental a c t i o n and gives
the Department the o p t i o n to extend the period f o r an a d d i t i o n a l 105
days. These p r o v i s i o n s place a p p l i c a t i o n s f o r license t r a n s f e r s under the
same requirements t h a t apply to a p p l i c a t i o n s f o r new licenses. Thus, the
problems that occurred i n the cases c i t e d above should be avoided i n the
f u t u r e .
However, the new law does not address the f a c t that l iquor l icenses have
been issued to u n q u a l i f i e d a p p l i c a n t s . Although DLLC issued licenses to
persons i t had deemed t o be u n q u a l i f i e d , the orders g r a n t i n g the licenses
were worded i n a manner t h a t may make i t d i f f i c u l t or impossible to revoke
the license. A Superintendent's order was issued i n each of these cases
s t a t i n g that the a p p l i c a n t had complied w i t h a l l or p a r t s of A. R. S.
554- 201, 4- 202 and 4- 203. Despite the Superintendent's language, these
a p p l i c a t i o n s and others were not approved based on the a p p l i c a n t s '
compliance w i t h s t a t u t e , b u t r a t h e r on the lack of timely review by the
Department. However, by f o r m a l l y s t a t i n g t h a t the requirements had been
met, the Department may have f o r f e i t e d i t s r i g h t to revoke licenses issued
to u n q u a l i f i e d i n d i v i d u a l s .
l n t e r i m Permits Allow U n q u a l i f i e d
Applicants To S e l l S p i r i t u o u s Liquors
DLLC's p o l i c y of i s s u i n g i n t e r i m permits w h i l e the Department reviews
a p p l i c a t i o n s f o r l i c e n s e s has allowed u n q u a l i f i e d i n d i v i d u a l s to s e l l
l i q u o r f o r periods up t o one year. The Department has r o u t i n e l y issued
i n t e r i m permits t o persons applying f o r license t r a n s f e r s and f o r some
categories of new I i c e n s e s . However, i n t e r i m permits have been issued
even when the Department had plans to oppose the a p p l i c a t i o n s .
A. R. S. $ 4- 203.01 authorizes the Superintendent to issue i n t e r i m permits
which allow an a p p l i c a n t to operate a business on a temporary basis f o r up
to 105 days while w a i t i n g f o r approval of an a p p l i c a t i o n . I n t e r i m permits
are a v a i l a b l e for same l o c a t i o n , same s e r i e s , license t r a n s f e r s , and a l l
hotel/ motel and r e s t a u r a n t s . An i n t e r i m permit i s a c o n d i t i o n a l p e r m i t ,
and authorizes the holder to a l l the p r i v i leges of the r e t a i l license for
which the a p p l i c a t i o n has been f i l e d w i t h the Department. An a p p l i c a n t
may be granted two consecutive i n t e r i m p e r m i t s .
However, as the f o l l o w i n g case shows, even when DLLC s t a f f have documented
evidence t o p r o t e s t the issuance of a l i q u o r license, an a p p l i c a n t may be
permitted to s e l l s p i r i t u o u s l i q u o r under an i n t e r i m p e r m i t .
a An a p p l i c a t i o n was submitted on June 3, 1987, and an i n t e r i m permit
issued. A second i n t e r i m permit was granted on October 7, 1987. An
i n v e s t i g a t i v e report was issued by a DLLC i n v e s t i g a t o r on October 23
p r o t e s t i n g the a p p l i c a t i o n ". . . due to the constant r e p e t i t i o n of
the nature of the l i q u o r v i o l a t i o n s and due to the amount of
v i o l a t i o n s and suspensions . . ." The report also noted that the
a p p l i c a n t " . . . only disclosed one l i q u o r suspension when indeed
there were nine . . . I ' The a p p l i c a t i o n was denied on January 25, 1988.
On February 2, 1988, the a p p l i c a n t was permitted t o reapply and was
issued another i n t e r i m p e r m i t . A second i n t e r i m permit was granted on
May 11, 1988. The second a p p l i c a t i o n was denied on May 26, 1988.
Through the use o f i n t e r i m p e r m i t s , the a p p l i c a n t was allowed to
operate and s e l l s p i r i t u o u s l i q u o r s f o r seven months while having two
a p p l i c a t i o n s denied.
Five of the s i x other states we contacted do n o t issue i n t e r i m permits.
When an i n d i v i d u a l seeks to t r a n s f e r a license i n those s t a t e s , the
a p p l i c a n t must e i t h e r wait f o r license approval or work as an employee
under the o l d license u n t i l the new one i s approved. According to the
DLLC Superintendent, Arizona's i n t e r i m permit p o l i c y allows the Department
to hold the a p p l i c a n t responsible f o r ensuring compliance w i t h the law
during the period before the new license i s approved. However, the
Department's p o l i c y of r o u t i n e l y approving i n t e r i m permits and i t s f a i l u r e
to withdraw the permits i f i t decides to protest the a p p l i c a t i o n reduces
i t s a b i l i t y to ensure that o n l y i n d i v i d u a l s meeting the q u a l i f i c a t i o n s
established by law s e l l alcohol i n Arizona.
DLLC r e c e n t l y adopted an informal p o l i c y of denying i n t e r i m permits to
a p p l i c a n t s when the Department has information that would lead the
Department to oppose the a p p l i c a t i o n f o r l i c e n s i n g . For example, four
a p p l i c a n t s were denied i n t e r i m permits a t the time of a p p l i c a t i o n because
the Department opposed the license a p p l i c a t i o n based on a v a i l a b l e
information. However, DLLC has not established a formal, w r i t t e n p o l i c y
that would ensure that i n t e r i m permits are not issued t o a p p l i c a n t s when
the Department questions t h e i r a p p l i c a t i o n s .
RECOWENDATIONS
1 . DLLC should e s t a b l i s h and adhere to c l e a r w r i t t e n p o l i c i e s and
procedures for a l l license a p p l i c a t i o n s . Incomplete a p p l i c a t i o n s
should not be accepted. A l l a p p l i c a t i o n s should include a l l
components necessary f o r processing, as described by DLLC p o l i c y .
2. The Department should e s t a b l i s h the f o l l o w i n g p o l i c i e s f o r issuing
i n t e r i m permits.
a Refuse to issue i n t e r i m permits i f the Department has reason to
question the a p p l i c a n t ' s q u a l i f i c a t i o n s or plans to p r o t e s t the
a p p l i c a t i o n .
a Under a u t h o r i t y granted i n A. R. S. 54- 203.01, DLLC should cancel
i n t e r i m permits when the Department plans t o p r o t e s t a license
because of unfavorable background i n v e s t i g a t i o n .
FINDING I l l
DLLC INTERNAL CONTROLS DO NOT ADEQUATELY SAFEGUARD
STATE REVENUE AND IMPOUNDED EVIDENCE
Poor i n t e r n a l c o n t r o l s have resulted i n improper handling of cash and
evidence. Weak cash- handling procedures, which increase the p o t e n t i a l for
abuse and decrease a c c o u n t a b i l i t y , contributed to the t h e f t o f s t a t e
monies. In a d d i t i o n , impounded evidence i s not adequately monitored.
The Department of Liquor Licenses and Control ( DLLC) handles large amounts
of cash. Payments for r e g i s t r a t i o n , renewals and other fees, and assessed
fines are received by mail and over- the- counter. In f i s c a l year 1988,
license fees and f i n e s t o t a l e d more than $ 3.1 mi l l i o n . One- third of the
license fees c o l l e c t e d are paid to the appropriate counties w i t h the
remaining balance deposited i n t o the state General Fund. In a d d i t i o n , the
Department refunds fees associated w i t h withdrawn or denied a p p l i c a t i o n s .
The Department also maintains a storage area to r e t a i n evidence of l i q u o r
v i o l a t i o n s . DLLC i n v e s t i g a t o r s confiscate items such as l i q u o r and cash
to use as evidence of v i o l a t i o n s . The Department auctions o r destroys
evidence when i t i s no longer needed. Recently, an auction of confiscated
evidence associated w i t h several licensees raised almost $ 900.
Cash Routinely
Handled Inappropriately
Control procedures are weak i n a l l areas of the Department where checks,
money orders and currency are received and handled. We found
d e f i c i e n c i e s throughout the process, from the time cash enters the system
u n t i l i t i s u l t i m a t e l y deposited. In a d d i t i o n , i t appears that p e t t y
cash funds have been used i n a p p r o p r i a t e l y .
Weak controls have resulted i n at least two t h e f t s i n the past 18 months.
( ' ) According t o DLLC, the two t h e f t s are s t i l l under a c t i v e i n v e s t i g a t i o n by the
Department.
a Clerks r o u t i n e l y leave cash i n an unlocked safe. In June 1987,
$ 2,414 i n cash disappeared from the DLLC l i c e n s i n g s e c t i o n , which
r o u t i n e l y takes i n large amounts of cash. A DLLC l i c e n s i n g c l e r k
rece ived $ 1,600 and $ 81 4 on two separate occas ions , p laced the money
i n envelopes, and l e f t i t i n a safe that i s kept unlocked during the
day. The safe i s i n an unsecured area and i s accessible to a t least
f i v e employees. The lack of s e c u r i t y and a c c e s s i b i l i t y o f the safe
along w i t h the poor cash r e c e i p t process p r o h i b i t e d the Attorney
General's O f f i c e from determining who was responsible for the missing
money.
a Employees r o u t i n e l y leave cash on or i n unlocked desks. I n March
1988, $ 40 was taken f rom an enve lope con t a i n i ng $ 7,581 that was to be
deposited. The envelope was l e f t unattended on an employee's desk.
An i n v e s t i g a t i o n of the incident revealed i t was not uncommon f o r the
c l e r k t o leave deposit monies unattended and unsecured. Other
employees also leave cash i n unlocked desks, sometimes for weeks or
months.
Further, other c o n t r o l weaknesses o f f e r s i g n i f i c a n t o p p o r t u n i t y f o r
a d d i t i o n a l t h e f t or misuse
a L i t t l e c o n t r o l i s maintained over the Department's cash r e g i s t e r . A t
one point 11 employees had authorized access to the cash r e g i s t e r ;
however, the actual number of employees w i t h access i s unknown since
personal i d e n t i f i c a t i o n numbers, which allow access to the r e g i s t e r ,
were not kept c o n f i d e n t i a l . ( ' ) In a d d i t i o n , there i s no approval
process for adjustments to cash r e g i s t e r transactions. Almost
$ 13,000 was subtracted from cash r e g i s t e r tapes from March through
August 1987. Apparently, the $ 13,000 was subtracted so t h a t the
r e g i s t e r tape t o t a l s would match the actual cash on hand for
deposit. No supervisor approved the adjustments and there i s no
documentation for why the adjustments were made. Therefore, the
v a l i d i t y of those adjustments i s questionable and suggests the
p o s s i b i l i t y of t h e f t .
a Improper segregation of duties f u r t h e r reduces c o n t r o l over cash.
One person closes out the cash r e g i s t e r , reconciles the cash r e g i s t e r
tape to the cash, posts the cash r e c e i p t s , prepares the deposit s l i p
and makes the d e p o s i t . This employee also had access to the
Department's safe. The same employee should n o t perform tasks that
provide o p p o r t u n i t i e s f o r s t e a l i n g cash r e c e i p t s and concealing the
t h e f t . Cash- handling and record- keeping d u t i e s should be separated.
a Various problems associated w i t h cash r e c e i p t s were i d e n t i f i e d . For
example, the l i c e n s i n g section accepts large d o l l a r amounts of cash
( 1 ) The Department says t h a t only s i x employees c u r r e n t l y have access t o the cash
r e g i s t e r .
over- the- counter. However, no r e c e i p t s were provided unless
requested.(') In a d d i t i o n , the Department's compliance d i v i s i o n
received payments for f i n e s and maintained r e c e i p t books on these
c o l l e c t i o n s . However, a review of r e c e i p t books revealed several
pages of missing r e c e i p t s . Also, i n some instances the Department's
copy of a r e c e i p t was blank, although the top copy of the r e c e i p t was
missing. Furthermore, one r e c e i p t book covering a five- month period
could n o t be located. The lack of r e c e i p t s and missing r e c e i p t s
increases the p o s s i b i l i t y of fraud and abuse.
a A Department secretary opens a l l the mail f o r the Department. Much
of the mail contains checks since most renewals ( approximately 800
per month) a r e p a i d by mai I . However, no l i s t i n g i s kept of mai l
cash r e c e i p t s and the checks are not r e s t r i c t i v e l y endorsed.
R e s t r i c t i v e l y endorsing checks prevents unauthorized persons from
cashing the checks. I n a d d i t i o n , l i s t i n g mail cash r e c e i p t s
f a c i l i t a t e s t r a c k i n g of r e c e i p t s and e s t a b l i s h e s a method to v e r i f y
receipt of payment.
Problems with petty cash - A recent f i n a n c i a l a u d i t of the Department
also revealed " a t o t a l breakdown of i n t e r n a l c o n t r o l s " over the p e t t y
cash fund, i n c l u d i n g f a i l u r e t o adequately monitor reimbursements,
employees u n f a m i l i a r w i t h authorized fund amounts, and improper bank
r e c o n c i l i a t i o n s . The f o l l o w i n g cases i l l u s t r a t e several questionable
payments from p e t t y cash, and i n d i c a t e the p o t e n t i a l f o r abuse.
a $ 66 f o r an employee's psychological counseling was p a i d f o r out of
p e t t y cash despite a l e t t e r from t h e Arizona Attorney General's
O f f i c e advising that t h i s was improper.
a In October 1987 the Department paid $ 261 from p e t t y cash f o r an
i n v e s t i g a t o r ' s eye exam and glasses. Since p e t t y cash fund
expenditures should be l i m i t e d t o normal business operation expenses,
i t would have been more appropriate to pay the claim d i r e c t l y through
the State Compensation Fund.
( 1 ) The Department now requires cash r e g i s t e r r e c e i p t s t o be given f o r every cash
t r a n s a c t i o n . Handwritten r e c e i p t s a r e issued on1 y i f the r e g i s t e r i s not
f u n c t i o n i n g .
Evidence Is Not
Adequately Controlled
Evidence i s not s u f f i c i e n t l y safeguarded or accounted f o r . A recent DLLC
inventory of i t s evidence room revealed impounded evidence w i t h no
property s l i p s , no Departmental report numbers, and no i n v e s t i g a t o r
i d e n t i f i e d . As a r e s u l t , some confiscated evidence cannot be traced to a
s p e c i f i c case. For example, 11 b o t t l e s of l i q u o r had no property s l i p ,
no report number, and no i n d i c a t i o n of the i n v e s t i g a t o r responsible.
Consequently, we could not determine where the b o t t l e s came from, when
they were taken, or why they were confiscated.
In a d d i t i o n , confiscated cash i s not adequately safeguarded or
r e c e i p t e d . " ' Confiscated money from i I legal gambling i n I iquor
establishments i s placed i n the DLLC property room. The money i s not
deposited or placed i n the safe. Since the money i s not a l l receipted,
i t i s impossible to t e l l whether i t i s a l l accounted f o r . However, a
recent DLLC memo addressed management's concern regarding the
a c c o u n t a b i l i t y of evidence, and established a procedure for handling cash
se i zed. ( 2
Furthermore, DLLC does not monitor t h e property room. Although we
i d e n t i f i e d no cases of missing evidence, there i s an obvious p o t e n t i a l
for items to disappear. The property room, which i s located i n the
basement of the I n d u s t r i a l Commission b u i l d i n g , i s accessible to a t least
14 DLLC employees. ( I n a d d i t i o n , the room i s located o f f a hallway which
i s accessible to the p u b l i c . ) Although a log i s used to i d e n t i f y who was
i n the evidence room and what evidence was brought i n or taken o u t , no
one monitors the log and employees frequently f a i I to sign i t . ( 3 )
( ' ) A recent inventory i d e n t i f i e d l e s s than $ 200 i n cash i n t h e property room. However
there i s no way t o v e r i f y whether any cash was taken p r i o r t o t h e i n v e n t o r y .
( 2) As o f July 25, 1988, a l l cash seized as evidence w i l l be impounded i n t h e s a f e .
( 3) A u d i t o r General s t a f f accompanied i n v e s t i g a t o r s t o the property room on several
occasions and never observed any of them s i g n i n g the l o g . I n a d d i t i o n , an
i n v e s t i g a t o r who recent1 y frequented the property room f o r inventory purposes never
signed the l o g .
In a d d i t i o n t o p o t e n t i a l t h e f t , f a i l u r e to control access to the property
room may a f f e c t the Department's a b i l i t y to prosecute cases. C u r r e n t l y ,
DLLC cannot ensure that evidence placed i n the room has not been tampered
with. This could r e s u l t i n evidence necessary to prosecute a case being
determined inadmissible.
RECOWENDATIONS
I . DLLC management should e s t a b l i s h and maintain the f o l l o w i n g i n t e r n a l
accounting and a d m i n i s t r a t i v e c o n t r o l systems.
a Written cash receipts procedures, such as immediately processing
cash receipts through the cash r e g i s t e r , l i s t i n g a l l mail cash
receipts immediately upon opening, and immediately r e s t r i c t i v e l y
endorsing checks.
a Written procedures for handling a l l cash r e g i s t e r overages,
shortages and voids, which address i n v e s t i g a t i o n of material
differences between cash receipts and the d a i l y cash r e g i s t e r
tapes, supervisor approval for any adjustments, and documentation
of the reasons for adjustments.
a Procedures that adequately safeguard cash to reduce the
temptation for t h e f t .
a Attempt to secure reimbursement for questionable disbursements
from p e t t y cash and implement procedures to guard against f u r t h e r
inappropriate disbursements.
a Segregation of cash- handling and record- keeping d u t i e s .
2. DLLC should formally adopt p o l i c i e s and procedures to ensure
a c c o u n t a b i l i t y f o r confiscated evidence.
a Specify mandatory information that must be captured on property
s l i p s and require supervisory sign- off to ensure that a l l
information i s i d e n t i f i e d .
a Designate one person accountable for the property room. This
person should log i n evidence, place i t i n the property room and
r e t r i e v e i t when necessary, and track the movement of evidence
when i t i s checked out of the property room.
r Establish a v e r i f i a b l e log of evidence i n the property room to
f a c i l i t a t e p e r i o d i c inventory checks and track evidence.
r Conduct p e r i o d i c reviews and inventory of evidence to maintain
a c c o u n t a b i l i t y .
FINDING I V
BOARD DUTIES AND RESPONSIBILITIES
NEED CLARIFICATION TO IMPROVE DLLC OPERATIONS
Overlapping d u t i e s and r e s p o n s i b i l i t i e s of the Department of Liquor
Licenses and Control ( DLLC) Board and the Superintendent have led to
disputes over author i t y to regulate l iquor i n Arizona. Current s t a t u t e s
appear to give s i m i l a r a u t h o r i t y to both the Superintendent and the
Board. Changes i n s t a t u t o r y p r o v i s i o n s would c l a r i f y d u t i e s and improve
the working r e l a t i o n s h i p between the Board and Superintendent.
The Board And Superintendent
Have Overlapping R e s p o n s i b i l i t i e s
Overlapping r e s p o n s i b i l i t i e s and disputes over a u t h o r i t y i n d i c a t e a need
f o r s t a t u t o r y changes. In the p a s t , the r o l e s of the Board and
Superintendent were c l e a r l y defined. However, recent changes i n law
suggest that the Board and Superintendent share r e s p o n s i b i l i t i e s i n some
areas. As a r e s u l t , decisions a r e b e i n g made i n s p i t e of Board
o b j e c t i o n s .
Roles were c l e a r l y defined - H i s t o r i c a l I y , the r o l e s of the
Superintendent and the Liquor Board were c l e a r l y defined. Before 1967
DLLC was directed by a Superintendent w i t h no Board. In response to
a l l e g a t i o n s of abuse of power by the Superintendent, a Liquor Board was
established and given the sole a u t h o r i t y t o issue, renew, t r a n s f e r and
revoke l i q u o r licenses. The Board's powers and a u t h o r i t y were f u r t h e r
c l a r i f i e d i n 1972 when t h e Attorney General's O f f i c e issued an opinion
s t a t i n g that the Superintendent's f u n c t i o n s r e l a t e d to a d m i n i s t r a t i v e and
enforcement procedures o n l y . The o p i n i o n f u r t h e r s t a t e d t h a t the Board
functions " are q u a s i - j u d i c i a l i n n a t u r e . " However, because of a backlog
i n cases set before the Board, s t a t u t e s were amended i n 1983, g i v i n g the
Superintendent equal a u t h o r i t y w i t h the Board to issue, revoke and renew
Iicenses. State laws were f u r t h e r amended to allow the Superintendent to
handle a l l license t r a n s f e r s . Both changes gave the Superintendent
a u t h o r i t y over areas t h a t were once s t r i c t l y Board r e s p o n s i b i l i t i e s .
Recent changes create dual r e s p o n s i b i l i t i e s - E x i s t i n g statutes r e s u l t
i n dual r e s p o n s i b i l i t y for many l i q u o r functions. Changes to A. R. S.
554- 112, 4- 201 and 4- 210 eliminated the Board's " sole" power to act i n
s p e c i f i c instances. Current laws give the Superintendent and the Board
shared r e s p o n s i b i l i t y for the r e g u l a t i o n of l i q u o r licenses. According
to the Superintendent, under the present system the Board acts as a check
and balance against a Super intendent who may want to usurp Board powers.
But the Superintendent, some Department o f f i c i a l s and Board members
i d e n t i f i e d serious problems that can a r i s e under the present system. For
example, the Superintendent can issue licenses and make decisions without
the Board's knowledge. In a d d i t i o n , disputes can develop between the
Board and Superintendent over which has the o v e r a l l r e s p o n s i b i l i t y for
p a r t i c u l a r l i c e n s i n g decisions. The Department's Attorney General
representative points out that under the present law the Board has the
ultimate a u t h o r i t y on l i c e n s u r e d e c i s i o n s , but the Superintendent can
manipulate or circumvent the Board by not communicating w i t h them. In
a d d i t i o n , Board members i n d i c a t e that without c l e a r d e l i n e a t i o n of
a u t h o r i t y the Board and the Superintendent r e l y on unwritten p o l i c i e s ,
communication and t r u s t . This may have put the Superintendent i n a
p o s i t i o n to abuse h i s a u t h o r i t y , whether i n t e n t i o n a l o r n o t .
Decisions made in s p i t e o f Board objections - The Liquor Board has
taken exception to the Superintendent's actions i n several cases for
which members feel the Board should have a u t h o r i t y . Under A. R. S. T i t l e
4, the State Liquor Board i s responsible for c e r t a i n a c t i v i t i e s . In
instances where the law has established shared r e s p o n s i b i l i t y , as i n the
case of I i cense i ssuance , suspens i on, revocat ion and renewal , a po l i cy
has been established through verbal agreement. For example, according to
Board Members, the Board and Superintendent agreed that a l l l i q u o r
I icenses p e r t a i n i n g t o swap meets were to be handled by the Board.
However, t h i s agreement was not followed, as shown i n the f o l l o w i n g
examp l e .
Case 1
The Superintendent granted a restaurant l i q u o r license to a swap meet
without informing the Board. The license area encompassed
approximately 13 acres of land. Liquor Board members say they would
have denied the license on the basis of a 1972 Attorney General's
Opinion s t a t i n g that a l i q u o r license must be bound by the immediate
premise of the restaurant i t s e l f .
36
Comnent: The Board was upset that the Superintendent d i d not adhere
to a verbal p o l i c y agreement that the Board would review a l l swap
meet l i q u o r license a p p l i c a t i o n s . Because the Board was not aware of
the swap meet license u n t i l a f t e r i t was issued, the Board could not
protest or revoke the license.
In another case, the Superintendent made a major decision without the
Boards' knowledge i n an area for which the Board feels responsible.
Case 2
On August 2, 1985, the Board revoked a I i quor I i cense. The I i censee
appealed the revocation to the Superior Court, which r e f e r r e d the
case back to the Board based on a legal t e c h n i c a l i t y . On July 10,
1987, the Board assigned the case to a hearing o f f i c e r . On November
13, 1987, the Superintendent removed the case from t h e hearing
o f f i c e r , combined the Board's case w i t h two o t h e r o u t s t a n d i n g
d i s c i p l i n a r y cases against the licensee, and entered i n t o a consent
agreement without t h e Board's knowledge. The three cases had a t o t a l
of 18 counts of alleged v i o l a t i o n s . The Superintendent's consent
agreement ordered the I icensee to pay a $ 1,000 f i n e and serve a
one- week suspension. The f i n e was paid on November 24. The
one- week suspension was completed on December 8.
The hearing o f f i c e r scheduled to handle the cases was n o t i f i e d of the
Superintendent's decision s h o r t l y before the hearing, and on December
8, 1987, received a memo from the Superintendent's O f f i c e informing
him that the case was no longer under h i s j u r i s d i c t i o n . This was the
same day the l i c e n s e e ' s suspension ended. The Board could not
reverse the decision of the Superintendent because the suspension had
already been completed.
Comnent: The Assistant Superintendent who entered i n t o the
agreement with t h e licensee said he thought the a c t i o n taken was
authorized by A. R. S. $ 4- 210. A, which gives the Superintendent as well
as the Board the power to act i n d i s c i p l i n a r y matters. However,
based on the Board's r e a c t i o n , he said the Department a c t i o n was a
mistake and the case should have been adjudicated through the Liquor
Board.
Interviews with the Board members revealed several other cases where they
feel the Superintendent took act ions t h a t usurped the Board's a u t h o r i t y .
However, the Board d i d not have the o p p o r t u n i t y to hear or respond to
these cases before the Superintendent took a c t i o n .
Changes I n Statutory Provisions Could
Improve Working Relationship
Changes i n s t a t u t o r y provisions could create b e t t e r working
relationships, reduce overlap and guard against p o t e n t i a l abuses. The
Legislature has several d i f f e r e n t a l t e r n a t i v e s to b e t t e r define
Superintendent and Board r o l e s .
The L e g i s l a t u r e c o u l d modify s t a t u t e s t o c l e a r l y i d e n t i f y the
r e s p o n s i b i l i t y of the Board and the Superintendent. According to the
Superintendent and members of the Board, c l a r i f i c a t i o n i s d e f i n i t e l y
needed. DLLC's Superintendent feels the Superintendent should have the
a u t h o r i t y to revoke, suspend and issue licenses, subject to an appeal
before the Liquor Board. The appeal process would allow the Board to
hear any cases where the licensee f e l t the Superintendent's a c t i o n was
u n j u s t i f i e d . A former Superintendent for DLLC f e e l s the Board should be
the f i n a l a u t h o r i t y f o r a l l Departmental a c t i o n .
In a d d i t i o n , to ensure against p o t e n t i a l abuse the s t a t u t e s could require
that the Superintendent inform the Board of a l l decisions w i t h i n a
reasonable time frame. The decisions should remain temporary u n t i l Board
r a t i f i c a t i o n . Such a law would reduce the l i k e l i h o o d that a
Superintendent would exceed h i s a u t h o r i t y . This process i s used i n some
other states we surveyed.
In areas where l e g i s l a t i v e c l a r i f i c a t i o n i s not p r a c t i c a l , such as
t r a i n i n g for Board members or updating members on new l e g i s l a t i o n , the
Legislature should require formal agreements to be promulgated i n DLLC's
rules and regulations. With the assistance of the Attorney General's
O f f i c e , the Board and Superintendent could c l a r i f y the necessary areas
and adopt the rules needed to administer them.
RECOWENDATIONS
1. The L e g i s l a t u r e should consider amending A. R. S. 394- 112 and 4- 210 to
c l e a r l y delineate a u t h o r i t y between the Liquor Board and
Superintendent. I t should eliminate overlapping r e s p o n s i b i l i t i e s by
i d e n t i f y i n g the s p e c i f i c duties and a u t h o r i t i e s of both the
Superintendent and the Board.
2. The Superintendent and Board should e s t a b l i s h agreements i n r u l e s and
regulations to c l a r i f y the remaining areas of u n c e r t a i n t y , w i t h the
assistance of the Attorney General's O f f i c e .
FINDING V
THE STATE SHOULD STRENGTHEN LAWS AND PROCEDURES
GOVERNING LIQUOR LICENSE RENEWAL
The Department of Liquor Licenses and Control ( DLLC) f a i I s to adequately
control l i q u o r license renewal. The Department does not enforce the law
that requires businesses to stop s e l l i n g l i q u o r a f t e r t h e i r licenses
e x p i r e . Neither State law nor Departmental p o l i c i e s provide i n c e n t i v e s
for prompt renewal. The L e g i s l a t u r e should strengthen p e n a l t i e s f o r l a t e
renewal and f a i l u r e to renew.
DLLC Allows Licensees To S e l l Liquor
A f t e r Their Licenses Expire
Many licensees s e l l l i q u o r i l l e g a l l y a f t e r t h e i r licenses e x p i r e .
Statutes mandate that the sale of l i q u o r i s i l l e g a l a f t e r license
e x p i r a t i o n , which occurs 60 days a f t e r the renewal date. According t o a
L e g i s l a t i v e Council memorandum, i f a licensee does not submit a l i c e n s e
fee to DLLC w i t h i n 60 days of the renewal date, the license e x p i r e s .
Our review of the Department's license renewals found that many licensees
d i d not renew u n t i l a f t e r t h e i r e x p i r a t i o n dates, and some licensees
continued to serve l i q u o r even though t h e i r licenses had expired. The
review showed that of 6,218 renewals due between J u l y 31, 1987 and March
31, 1988, 109 l icenses were renewed a f t e r they had e x p i r e d . A u d i t o r
General s t a f f i d e n t i f i e d 24 Phoenix area businesses operating on expired
I i censes . ( 1 )
Licensees can continue to s e l l l i q u o r because the Department does l i t t l e
fo l low- up when a I i cense exp i res . Accord i ng to l i cens i ng personne I , DLLC
( 1 The percentage of incidences we i d e n t i f i e d i s high enough t o cause concern about
i l l e g a l 1 iquor sales, but 1 ow enough to suggest t h a t Department i n v e s t i g a t o r s could
c a l l o r v i s i t each establishment. Checking on expi red 1 icenses appears f e a s i b l e .
Working from a p r i n t o u t of nonrenewed 1 icenses, a u d i t o r s telephoned and v i s i t e d 121
establishments i n about 18 hours and found 24 operating i l l e g a l l y . These r e s u l t s
demonstrate t h a t DLLC i n v e s t i g a t o r s could p r o f i tab1 y spend a few hours each month
making s i m i l a r i n q u i r i e s . Concentration on bars and restaurants would be most
productive, since they accounted f o r almost 80 percent o f renewals a f t e r expi r a t i o n .
mails l e t t e r s to licensees ordering them t o cease- and- desist, and sends
copies to a l l p a r t i e s w i t h a f i n a n c i a l i n t e r e s t i n the l i c e n s e . I t
cancels the license by releasing any bonds, issuing any refunds, a r c h i v i n g
the computer records, and moving the master f i l e f o l d e r t o a bottom
s h e l f . However, u n t i l r e c e n t l y the Department d i d nothing to ensure
compliance w i t h the cease- and- desist order. I t d i d not n o t i f y wholesalers
about e x p i r e d I i c e n s e s and s t i l l does not n o t i f y c i t y or county law
enforcement agencies or the Department of Pub l i c Safety- l nvest i gat ions and
Liquor Enforcement D i v i s i o n ( I L E D ) . " ) P r i o r to August 1988, DLLC d i d
not even inform i t s own i n v e s t i g a t o r s when l i c e n s e s e x p i r e d .
N e i t h e r S t a t u t e s Nor Department
P o l i c i e s Encourage Prompt Renewal
Arizona s t a t u t e s p r o v i d e low p e n a l t i e s and l i t t l e r i s k f o r licensees who
f a i l to renew i n a t i m e l y manner. DLLC f u r t h e r weakens the S t a t e ' s
p o s i t i o n by allowing licensees to renew long a f t e r licenses e x p i r e . Other
states have stronger c o n t r o l s over renewals.
Statutes provide l i t t l e i n c e n t i v e f o r licensees to renew on time.
C u r r e n t l y , licensees have a 60- day grace period during which they may s e l l
l i q u o r and renew t h e i r licenses. (') F u r t h e r , i f a licensee can
demonstrate " good cause" the Superintendent may renew a license a f t e r 60
days. Penal t i e s f o r l a t e l icense renewals are based on 20 percent of the
annual license renewal fee, and range from $ 10 to $ 100. T h i s p e n a l t y i s
r e l a t i v e l y minor f o r businesses worth thousands of d o l l a r s w i t h a
p o t e n t i a l l y high p r o f i t margin.
( 1 ) N o t i f i c a t i o n would a l l o w other agencies to a s s i s t DLLC i n i t s enforcement e f f o r t s .
Liaison personnel wi t h i n 1 ocal 1 aw enforcement agencies should be a1 erted t o the
p o s s i b i l i t y o f i l l e g a l 1 iquor sales i n t h e i r j u r i s d i c t i o n s . Wholesalers can also
a s s i s t i n preventing i l l e g a l sales because they are p r o h i b i t e d from s e l l i n g t o
customers whose l i c e n s e s are i n v a l i d . The Superintendent has r e c e n t l y emphasized
wholesalers' responsi b i l i t y to s e l l on1 y t o v a l i d 1 icenseholders and informs our
o f f i c e that he has a1 ready seen p o s i t i v e r e s u l t s . The Department plans to provide
computerized i n f o r m a t i o n on expi red 1 i censes t o a l l wholesalers so they can i d e n t i f y
customers whose 1 i censes are no longer v a l i d .
( 2 ) Renewal i s permitted a t any time d u r i n g t h e 60- day grace period. A1 though s t a t u t e s
say t h a t unrenewed l i c e n s e s a r e s u b j e c t to revocation, t h e law does n o t r e q u i r e
revocation and DLLC has never revoked a 1 i cense during t h i s period.
In a d d i t i o n , present DLLC p o l i c i e s do not encourage prompt renewal. For
example, DLLC r o u t i n e l y accepts weak documentation as " good causet1 f o r
l a t e license renewals. The Department r a r e l y refuses to renew expired
licenses. According to the l i c e n s i n g supervisor, no licensee was denied
renewal u n t i l 1988 when the Department refused to renew an expired license
of an i n d i v i d u a l w i t h an eight- year h i s t o r y of l i q u o r v i o l a t i o n s , and
pending charges f o r t r a f f i c k i n g i n s t o l e n p r o p e r t y , possession of
marijuana and d i s o r d e r l y conduct.
Because Arizona does not adequately c o n t r o l the license renewal process,
i t could have l o s t up to $ 1 mi l l ion l a s t year by renewing expi red quota
licenses i n Maricopa and Pima counties instead of r e s e l l i n g them. These
bar and l i q u o r s t o r e licenses are issued at market value. Last year, f i v e
licenses valued a t $ 34,250, 29 valued a t $ 25,450, one valued at $ 25,050,
three valued at $ 22,450, and 26 valued at $ 1,575 were renewed a f t e r
e x p i r a t i o n .
In c o n t r a s t , other states have stronger c o n t r o l over renewals. A survey
of other states found that C a l i f o r n i a , Colorado, Texas and Tennessee
automatically revoke Iicenses on the day renewal becomes overdue. In
a d d i t i o n , some s t a t e s send l i q u o r department agents to v i s i t premises and
make sure they are not o p e r a t i n g , C a l i f o r n i a n o t i f i e s local p o l i c e to
a s s i s t w i t h compliance, and Tennessee sends reminders before a license i s
due for renewal. ( 1 )
L e g i s l a t u r e Should
Strengthen Penalties
Licensees should not be allowed to s e l l l i q u o r f o r 60 days a f t e r t h e i r
renewal date. The present s t a t u t e a l l o w i n g licensees t o s e l l a f t e r t h e i r
renewal date i s outmoded and should be e l i m i n a t e d .
( 1) A r i z o n a ' s p r e v e n t i v e measures appear i n s u f f i c i e n t compared t o those o f other
s t a t e s . DLLC m a i l s o u t renewal a p p l i c a t i o n s 60 days i n advance, and has no f u r t h e r
contact wi th 1 i censees u n t i 1 mai 1 i ng cease- and- desi s t orders. Based on our review,
cease- and- desist orders have been mailed as e a r l y as 16 days and as l a t e as 98 days
a f t e r renewal dates.
Because the number of quota licenses i s c o n t r o l l e d by the State, once a
license expires a licensee may not be able to o b t a i n another. Therefore,
the L e g i s l a t u r e may want to continue to p r o v i d e a 60- day grace period,
but licensees should not be allowed to continue sales during t h i s
period. I f a 60- day grace period i s continued, then Iicenses should
automatically be revoked i f not renewed w i t h i n that time frame.
The present s t a t u t o r y p r o v i s i o n s a l l o w i n g licensees to s e l l l i q u o r for 60
days a f t e r t h e i r renewal date serves no purpose. According to Department
and industry spokespersons, the p r o v i s i o n was probably intended to allow
for the slow manual processing of renewals when a l l licenses were due at
the same time. However, the current automated system of staggered
renewals has eliminated much of the delay i n processing renewals. As a
r e s u l t , a r e p r e s e n t a t i v e from the l i q u o r industry and the Superintendent
agree that the p r o v i s i o n i s no longer needed.
RECOWENDAT I ONS
1. The L e g i s l a t u r e should consider amending A. R. S $ 4- 209.01 t o :
0 End permission to s e l l l i q u o r a f t e r t h e license renewal date.
0 Mandate license revocation 60 days a f t e r the renewal date and
place any revoked quota licenses back i n t o the license l o t t e r y .
2. DLLC should supply a l i s t of nonrenewed licenses to wholesalers,
local law enforcement agencies l i a i s o n s , and the DPS ILED u n i t at
least once a month.
3. Department i n v e s t i g a t o r s should v i s i t establishments w i t h expired
licenses to v e r i f y t h a t they are not s e l l i n g l i q u o r .
FINDING VI
RECORDS SECTION NEEDS BETTER CONTROL OVER LICENSING FILES
The Department of Liquor Licenses and Control ( DLLC) needs t o improve
records management t o ensure that e s s e n t i a l records are protected against
loss. The Department maintains many unique records that contain
important information for c o n t r o l l i n g l i q u o r sales i n the s t a t e .
However, current procedures for handling records do not provide adequate
p r o t e c t i o n . DLLC could improve records management i n several ways. ( 1
DLLC maintains more than 9,000 a c t i v e licensee master f i l e s that document
the chronological h i s t o r y of each establishment since i t s i n c e p t i o n . The
f i l e s a l s o c o n t a i n information on the licensee, the establishment,
f i n a n c i a l i n t e r e s t s and l i q u o r law v i o l a t i o n s . Complaints and p o l i c e
reports are kept i n an envelope i n s i d e the f i l e .
DLLCfs f i l e s are i r r e p l a c e a b l e , since they contain the only copy of most
documents. Although some current licensee information i s i n the
Department's computer database, the f i l e s are the Department's only
w r i t t e n record and the only source f o r I icensee background and
establishment h i s t o r y .
The Department's procedures do not p r o t e c t license f i l e s . During the
course of our a u d i t we learned t h a t some f i l e s were missing, documents had
apparently been removed from others, and f i l e s were casually l e f t l y i n g on
desks. ( 2 )
( 1 ) We requested a review o f f i l e r o o m procedures and s e c u r i t y by t h e S t a t e Department
o f L i b r a r y , Archives and Pub1 i c Records. Records Management s t a f f i d e n t i f i ed
several problems and recommended improvements.
( 2 ) We discussed some o f these problems w i t h DLLC personnel. As a r e s u l t , DLLC
i n s t i t u t e d some new p o l i c i e s t o improve c o n t r o l . Our recommendations are based on
the new policy, which s t i l l does not go f a r enough toward f i l e s e c u r i t y .
0 Restaurant a u d i t documents, which r e p o r t e d l y showed l i q u o r
revenues of approximately 81 percent of t h e gross ( l e g a l maximum
i s 60 percent), were missing from a licensee f i l e when we
attempted to v e r i f y the a l l e g a t i o n .
0 One licensee f i l e has been missing for weeks. Fileroom s t a f f have
new m a t e r i a l to add t o the f i l e , and have conducted repeated
unsuccessful searches f o r i t .
0 Envelopes containing complaints and other documents on each
licensee's l i q u o r law v i o l a t i o n s , which are used by the
compliance o f f i c e r i n determining p e n a l t i e s f o r repeat o f f e n d e r s ,
were incomplete i n many f i l e s .
These conditions e x i s t p a r t l y because employees have unsupervised access
to the f i l e s . Department s t a f f may enter the f i l e r o o m and p u l l f i l e s ,
take them t o t h e i r o f f i c e s , and hold them f o r up t o a week at a t i m e .
Employees are i n s t r u c t e d to leave " out" cards i n place of the f i les, but
do not always do so.
Problems also e x i s t w i t h p u b l i c access to the f i l e s . We saw many people
given f i l e s to view without showing the required p i c t u r e i d e n t i f i c a t i o n .
Although f i l e r o o m s t a f f i n s i s t that they can watch people as they use the
f i l e s , we observed groups of people s i t t i n g so the f o l d e r s were hidden
from view, and on one occasion saw a member of the p u b l i c leave the room
w i t h a f i l e .
F i n a l l y , according to the Department o f L i b r a r y and Archives, documents
w i t h i n the f i l e s should be numbered i n such a way t h a t missing documents
can be i d e n t i f i e d . Documents can be removed from f i l e s and no evidence of
the removal w i l l remain. An a l l e g a t i o n was made that some former s t a f f
members shredded documents t h a t would r e f l e c t poorly on the Department's
decisions. I t i s impossible to conf i rm or deny the charge because no
record of the documents i n the f i l e were kept.
DLLC Could Improve Records
Security In Several Ways
The Department could reduce the p o t e n t i a l f o r l o s t documents by
e s t a b l i s h i n g some simple, low- cost c o n t r o l s . For long- term s e c u r i t y ,
m i c r o f i l m copies would b o t h p r o v i d e backup and e l i m i n a t e the need for
s t a f f and the p u b l i c to handle o r i g i n a l documents.
Immediate improvements could be made i n three areas. F i r s t , f i l e
p r o t e c t i o n could be improved by placing the fileroom o f f - l i m i t s to most
s t a f f and enforcing the p i c t u r e i d e n t i f i c a t i o n requirement f o r p u b l i c
access. Second, the need for f i l e access could be l i m i t e d by adding more
information to the computer database so s t a f f can use t h e i r terminals
instead of the f i l e s . For example, i n v e s t i g a t i o n s i n progress, bonding
and other information could a l l be incorporated i n t o the database.
F i n a l l y , problem detection could be improved by numbering documents
w i t h i n f i l e s to i d e n t i f y missing pages, and by e s t a b l i s h i n g a manual or
computerized f i l e - t r a c k i n g system.
Because the documents are irreplaceable, DLLC should strongly consider a
m i c r o f i lm system. Employees and the p u b l i c could view the m i c r o f i Im
copies instead of the o r i g i n a l f i l e s , which would protect o r i g i n a l
documents against t h e f t or loss. According to Library and Archives
o f f i c i a l s , such a system costs approximately $ 30,000, and would enable
DLLC personnel to f i lm records. The i n i t i a l f i l m i n g of e x i s t i n g records
would probably have t o be contracted o u t , at a cost of about $ 40 per
1,000 pages for an approximate t o t a l cost of $ 10,000.
RECOWENDATIONS
1. DLLC should m i c r o f i l m records to protect the o r i g i n a l s against loss
or t h e f t .
2. The Department should adopt the f o l l o w i n g c o n t r o l s to prevent and
detect problems i n the o r i g i n a l f i l e s .
r Sequentially number a l l documents to a l e r t s t a f f to missing
pages and deter t h e f t or d e s t r u c t i o n of f i l e contents.
0 Place the f i leroom o f f l i m i t s to a l l personnel except f i leroom
s t a f f .
r Improve computer usage to reduce the need for p u l l i n g the
o r i g i n a l f i les. I n v e s t i g a t i o n s i n progress ( coded for
s e c u r i t y ) , bonding, tax l i e n s , and other items could a l l be
incorporated i n t o the database.
8 I n s t a l l a f i l e - t r a c k i n g system, e i t h e r manual ( f i l i n g a copy of
each out card by a suspense date) or computerized.
3. DLLC should work w i t h the L i b r a r y and Archives s t a f f to e s t a b l i s h
f i l e c o n t r o l s and set up the m i c r o f i l m system.
FINDING V I I
STATUTES AND REGULATIONS GOVERNING
SPECIAL EVENT LICENSES ARE NOT CLEAR
Arizona law and Department of Liquor Licenses and Control regulat ions on
special event licenses are unclear. Current p r o v i s i o n s d e f i n i n g groups
e l i g i b l e for these licenses are ambiguous. In a d d i t i o n , current l i m i t s
on the t o t a l number of special event days may be o v e r l y r e s t r i c t i v e .
Statutes And Rules
Are Ambiauous
Requirements d e f i n i n g who may obtain special event licenses a r e u n c l e a r .
I n a d d i t i o n , local a u t h o r i t i e s do not v e r i f y that o r g a n i z a t i o n s a r e
q u a l i f i e d for such l i c e n s e s .
Special event licenses are temporary permits t h a t a l l o w q u a l i f y i n g
organizations to s e l l l i q u o r for on- premises consumption. The law
s p e c i f i e s several types o f q u a l i f y i n g o r g a n i z a t i o n s such as c h a r i t a b l e ,
c i v i c , p o l i t i c a l and r e l i g i o u s groups; and f r a t e r n a l o r g a n i z a t i o n s i n
existence for more than f i v e years. DLLC's r u l e s l i m i t each o r g a n i z a t i o n
to two, two- day licenses per year. DLLC allows d i f f e r e n t chapters of the
same organizations to be counted as separate organizations, thereby
increasing the two license l i m i t .
License requirements are unclear - Statutes do not c l e a r l y d e f i n e what
groups are e l i g i b l e f o r special event l i c e n s e s . T h i s ambiguity i s
e s p e c i a l l y notable compared to other s t a t u t e s d e f i n i n g c h a r i t a b l e
organizations.
A. R. S. 94- 203.02 defines what e n t i t i e s may o b t a i n special event
licenses. Although the law generally describes e l i g i b l e groups, i t does
not s p e c i f i c a l l y i d e n t i f y c r i t e r i a a l l o r g a n i z a t i o n s must meet to be
considered l e g i t i m a t e . I n c o n t r a s t , A. R. S. 95- 401 ( State Amusements and
Sports Statutes) more c l e a r l y defines what c r i t e r i a must be met to
q u a l i f y for a bingo permit, and makes reference to A. R. S. 543- 201 which
states requirements to qua1 i f y for tax exemption. This law i s less
subject to a r b i t r a r y i n t e r p r e t a t i o n s than i s A. R. S. 54- 203.02. For
example, A. R. S. 55- 401.8 defines a c h a r i t a b l e organization as:
". . . any organization i n c l u d i n g not more than one a u x i l i a r y
of the organization, not for pecuniary p r o f i t , which i s
operated f o r c h a r i t a b l e purposes w i t h i n the state and which
has been so engaged for two years p r i o r to making a p p l i c a t i o n
for license . . ."
This law s p e c i f i c a l l y defines other e n t i t i e s such as f r a t e r n a l
organization, q u a l i f i e d organization, r e l i g i o u s organization and veterans'
organization. The law even addresses the length of time each
organization must e x i s t to q u a l i f y , what c o n s t i t u t e s a u x i l i a r y membership,
and lawful use and purpose of the e n t i t y .
Limited review o f organizational q u a l i f i c a t i o n s - Neither l o c a l
governments nor DLLC appear to c a r e f u l l y evaluate q u a l i f i c a t i o n s of
organizations a p p l y i n g f o r special event licenses. Although i n i t i a l
approval for a s p e c i a l event license must be provided by the l o c a l i t y
where the event w i l l occur, local governments depend on DLLC to ensure
t h a t i n d i v i d u a l s who apply for special event I icenses meet s t a t u t o r y
requirements. A survey of local government o f f i c i a l s responsible for
processing special event license a p p l i c a t i o n s found that the m a j o r i t y
depend on DLLC to ensure proper compliance w i t h the law. Consequently,
the c i t i e s o r counties rarely deny a license a p p l i c a t i o n unless local law
enforcement o f f i c i a l s o b j e c t , leaving the decision for license issuance to
the Liquor Department. However, DLLC maintains t h a t i t usually approves
a l l license requests c e r t i f i e d by c i t i e s and counties. Because neither
local governments nor DLLC s u f f i c i e n t l y ensure compliance w i t h the law,
l i censes may be i ssued to unqua l i f i ed organ i zat ions.
L i m i t s May Be
Too R e s t r i c t i v e
Current l i m i t a t i o n s for special event licenses may be too r e s t r i c t i v e .
A. R. S. 54- 203.02. D allows the Superintendent to implement rules l i m i t i n g
the number of times during the year t h a t a q u a l i f i e d organization may
apply for and be issued a l i q u o r l i c e n s e . DLLC rules l i m i t organizations
to two, two- day events per year. However, many times events sponsored by
c h a r i t a b l e organizations, such as g o l f tournaments and a r t f e s t i v a l s , l a s t
more than f i v e days or happen more than once a y e a r . Documents and
license requests reviewed by our O f f i c e i n d i c a t e that some o r g a n i z a t i o n s
want more than four days f o r t h e i r events. Therefore, these o r g a n i z a t i o n s
may seek licenses for themselves and a u x i l i a r y groups t o obtain the needed
permits for l i q u o r s a l e s . For example, one group obtained special event
permits allowing e i g h t days of l i q u o r sales by applying under four
d i f f e r e n t groups. According to a L e g i s l a t i v e Council memorandum, the
broad d e f i n i t i o n of o r g a n i z a t i o n s under the special event law makes t h i s
p r a c t i c e l e g a l .
In c o n t r a s t , other states surveyed a1 low more special licenses or provide
a l t e r n a t i v e methods when an a p p l i c a n t needs a l i q u o r license f o r special
events. For example, Colorado allows ten days per year and Tennessee
allows 12. C a l i f o r n i a has no l i m i t except on c e r t a i n organizations named
i n s t a t u t e . In a d d i t i o n , Texas and New Mexico have no l i m i t on the number
of times an o r g a n i z a t i o n may h i r e a r e g u l a r licensee t o o b t a i n a p e r m i t
and serve l i q u o r at i t s events. This p r a c t i c e i s i l l e g a l i n Arizona.
RECOMMENDATIONS
1. The L e g i s l a t u r e should consider amending A. R. S. 54- 203.02 t o c l e a r l y
define the c r i t e r i a f o r q u a l i f y i n g as a c h a r i t a b l e o r g a n i z a t i o n
e l i g i b l e f o r s p e c i a l event licenses.
2. Once the c r i t e r i a are c l a r i f i e d , DLLC should adopt r u l e s and
r e g u l a t i o n s to a s s i s t c i t i e s and counties i n reviewing a p p l i c a t i o n s
for special event l i c e n s e s . These r u l e s and r e g u l a t i o n s should
provide guidance as t o the circumstances that would warrant
disapproval.
3. DLLC should review the q u a l i f i c a t i o n s of a p p l i c a n t s approved by
l o c a l i t i e s to ensure t h a t approvals meet established c r i t e r i a .
4. DLLC should consider increasing the number of days q u a l i f i e d
organizations may o b t a i n special event licenses.
OTHER PERTINENT INFORMATION
During the a u d i t , other p e r t i n e n t information was developed on the
i n v e s t i g a t i o n s e c t i o n and the o r g a n i z a t i o n a l c l i m a t e at the Department.
DLLC Lacks Information
To Evaluate I n v e s t i g a t o r A c t i v i t i e s
DLLC i n v e s t i g a t i v e s t a f f has grown from seven i n v e s t i g a t o r s in 1983 to 21
in 1988. I n v e s t i g a t o r s ' primary a c t i v i t i e s are to conduct routine
inspections of l i q u o r establishments and i n v e s t i g a t e complaints against
licensees. However, the lack of useful management reports p r o h i b i t e d
auditors from evaluating the effectiveness and e f f i c i e n c y of the
i n v e s t i g a t o r ' s a c t i v i t i e s .
C u r r e n t l y , o v e r s i g h t of i n v e s t i g a t o r s i s l i m i t e d because there i s no
detailed and a n a l y t i c a l information about how i n v e s t i g a t o r s spend t h e i r
time. Although monthly a c t i v i t y reports and weekly time reports are
generated, no one analyzes the information by a c t i v i t y to show how
i n v e s t i g a t o r s ' time i s spent. For example, monthly reports i n d i c a t i n g
the number of inspections, complaints assigned and completed, and
c i t a t i o n s issued are produced autonomously by the Department's northern
and southern d i s t r i c t s ; however no cumulative t o t a l s are kept nor i s the
information compiled to form one report for the s e c t i o n . Also, no
analysis i s done to determine any trends or to compare a c t i v i t i e s between
the two d i s t r i c t s . In a d d i t i o n , no attempt i s made to determine the time
spent on each type of a c t i v i t y or to i d e n t i f y trends i n how
i n v e s t i g a t o r s ' use t h e i r time.
Although DLLC management has not analyzed or compiled any information to
determine how i n v e s t i g a t o r time i s spent, 21 a d d i t i o n a l i n v e s t i g a t o r
positions have been requested for f i s c a l year 1989- 90. However, there i s
no information compiled to document that s t a f f i s performing at optimal
e f f i c i e n c y or to support the need for a d d i t i o n a l s t a f f . In f a c t , a
cursory review of the southern d i s t r i c t ' s monthly a c t i v i t y reports for
the period January 1988 through June 1988 revealed dramatic p r o d u c t i v i t y
declines i n a l l a c t i v i t y areas. For example, the number of complaints
completed per month dropped 68 percent since January, while the number of
l i quor i nspect ions dropped 56 percent.
In a d d i t i o n , the Department i s not using a l l a l l o c a t e d i n v e s t i g a t i v e
p o s i t i o n s for enforcement functions. The section has three i n v e s t i g a t i v e
personnel assigned to noninvestigative d u t i e s . " ) Also, one p o s i t i o n
has gone u n f i l l e d f o r more than f i v e months. Furthermore, the section i s
top heavy, w i t h a r a t i o of almost one supervisory p o s i t i o n for every two
i n v e s t i g a t o r s .
Employees I d e n t i f i e d
Upper Management Problems
Due to a l l e g a t i o n s of i l l e g a l acts and employee d i s s a t i s f a c t i o n , our
o f f i c e conducted a s t a f f survey of DLLC i n May 1 9 8 8 . ' ~ ' As a r e s u l t ,
several incidents of p o t e n t i a l i l l e g a l acts were documented. A l l
information was evaluated by the audit s t a f f , and some of the r e s u l t s are
contained w i t h i n several of the e a r l i e r a u d i t f i n d i n g s .
The survey of DLLC employees and Board members a l s o d i s c l o s e d t h a t
personnel working i n the Liquor Department are d i s s a t i s f i e d w i t h several
aspects of the i r work env i ronment . Employees expressed the most concern
w i t h management i n s t a b i l i t y , personnel p o l i c i e s , cooperation w i t h i n the
Department, and i n s u f f i c i e n t resources to do t h e i r work.
As p a r t o f our a u d i t , we administered an o r g a n i z a t i o n a l climate survey to
s o l i c i t employee a t t i t u d e s and concerns that could impact DLLC's
e f f i c i e n c y and e f f e c t i v e n e s s . "' Employees were asked to express
agreement or disagreement w i t h 20 statements about the work environment
at DLLC. An opportunity f o r open- ended comments was also provided.
( 1 ) An a d d i t i o n a l i n v e s t i g a t o r has been on s i c k leave f o r more than two months and
recent1 y r e t i red.
( 2 ) A new Superintendent was confirmed the same month the survey was conducted. As a
resul t , some survey responses may i n d i cate a t t i tudes about the former
a d m i n i s t r a t i o n .
( 3 See Appendix I.
S i x t y DLLC employees and Board members were surveyed, including a l l
employees except the current and former Superintendents and the Assistant
Superintendent . Thi r t y - f o u r ( 57 percent) responded to the survey.
Responses to the questionnaire indicated employee d i s s a t i s f a c t i o n and
concern i n the f o l l o w i n g areas.
0 Cooperation and comnunication - Employees tended to f e e l t h a t
departments do not work well together, and there seemed to be a l o t
of f r i c t i o n between i n d i v i d u a l employees. This was p a r t i c u l a r l y true
i n the enforcement section.
Some members said communication between the Department and the Board
was u n s a t i s f a c t o r y . ( This comment r e f l e c t s Board members' feelings
before the new Superintendent joined the Department.)
0 I n s u f f i c i e n t resources - Many employees c i t e d the lack of needed
equipment as a hindrance i n t h e i r jobs. Again, enforcement employees
were the most discontented. They f e l t t h e i r needs for cameras, tape
recorders, t r a n s p o r t a t i o n and operating funds were not being met.
0 Management i n s t a b i l i t y - More than h a l f the employees responding
to the survey complained about chaotic working c o n d i t i o n s . They
referred to the environment as " c r i s i s management." However, they
expected improvement under the new Superintendent.
a Personnel practices and p o l i c i e s - Employee responses indicated
d i s s a t i s f a c t i o n w i t h Department personnel p o l i c i e s , and a l i m i t e d
knowledge of grievance procedures. Some described Departmental
p o l i c y as " good o l d boy" p o l i t i c s , and c r i t i c i z e d appointments of
exempt p o s i t i o n s under the former Superintendent.
Pkenix, Prizuna 85007
( 602) 542- 5141
November 7 , 1988
Douglas R. Norton
~' uditor General
Office of the Auditor General
2' 00 North Central Avenue
Phoenix, Arizona 85004
Dear M r . Norton:
I) Attached are responses from the Arizona State Department of Liquor Licenses and
Control to the audit conducted by your Department.
It is my belief that the audit was completed by a very good team of professional
state emp