The Montana Lottery's involvement in the state Board of Horse Racing's fantasy sports gambling doesn't comply with state law, a legislative performance audit has concluded.

It recommended further legislative action "to ensure that this new form of gambling is administered in an equitable and transparent way."

The Legislative Audit Committee on Tuesday accepted the audit done by its staff. It asked the Board of Horse Racing to return to its November meeting to update members on how the board intends to address the recommendations.

However, the Schweitzer administration, both through the Board of Horse Racing and Montana Lottery, strongly disputed some of the audit's conclusions and recommendations.

"The Board of Horse Racing and the Montana State Lottery have operated within their statutory authority and will continue to provide the fantasy sports games as agreed," wrote Sherry Meador, an attorney for the horse racing panel. "The fantasy sports game is well-regulated, well-received and has provided the necessary funding to meet its purpose, which is to help horse racing."

"The Lottery and Board of Horse Racing believe that we are on the right track with fantasy sports pari-mutuel wagering," wrote Montana Lottery Director George Parisot.

While there may be differences of opinion over legal authority, Parisot said the Lottery and Board of Horse Racing are receptive to recommendations from the Legislative Audit Committee to improve this program.

A law passed two years ago allowed the Board of Horse Racing to launch fantasy sports gambling to help breathe some financial life into horse racing in Montana. The popularity of horse racing here has waned. Falling attendance forced the cancellation of races and reduced betting, thus cutting the purses paid to owners of the winning horses.

In June 2008, the Horse Racing Board entered an inter-agency agreement to have the Lottery provide the fantasy sports gambling.

So far, Montana betting on pro football and NASCAR fantasy sports has generated more than $181,000, with $134,000 of that total going to the players' prize pool, nearly $11,000 to the Lottery and more than $7,000 to retailers. The Board of Horse Racing received about $29,000.

The audit said the 2007 law did not mention the Montana Lottery nor change the Lottery law.

"Although (the 2007 law) did not identify a specific means of implementing fantasy sports gambling, the involvement of the Lottery does not comply with statute," the audit said.

While the Horsing Racing Board, Montana Lottery and governor's office offered "an expedient and effective means of implementing the legislation," neither the board nor Lottery sought to resolve the issues by seeking an attorney general's opinion or asking the 2009 Legislature to address it.

The audit also concluded that the Horse Racing Board "lacks full legal authority for adopting fantasy-sports gambling rules under the Montana Administrative Procedures Act," the audit said.

While the rules that were ultimately adopted provide a good basis for implementing this program, the board's agreement with the Montana Lottery "essentially negated these efforts," the audit said.

The audit recommended legislation to provide the Horse Racing Board with authority to contract for services, rather than license provisions. This would bring about "greater transparency in the process and greater confidence in the results," it said.

It also recommended that the Board of Horse Racing and Montana Lottery terminate their inter-agency agreement immediately on fantasy sports gambling.

Meador, the attorney for the Horse Racing Board, disagreed with the audit statements that legislation is needed to give the board authority to contract for services and that the Montana Lottery is not in compliance with state law.

Parisot said the Montana Lottery "engaged in significant due diligence" before agreeing to help the Horse Racing Board. He said both the Lottery and its attorney agree the Lottery has the legal authority to conduct fantasy sports wagering for the board. This joint venture enabled a fantasy sports football game to be developed, implemented and marketed in less than four months.

"Abrupt termination of the existing program could end Montana's racing program by removing this revenue source without replacement, and retailers would lose on investments already made," Parisot said.