CPAs are the real pit bosses: accounting and auditing for gaming.

This article has been adapted from one that originally appeared in the October 2005 CPA Journal and is used with permission.

Gaming on the Rise Across America and Michigan

Just a little over a decade ago, casino gaming only existed in Nevada and Atlantic City. While Hawaii

Michigan is no exception. With three land-based casinos in Detroit and 17 tribal casinos spread across the state, Michiganders have a wide variety of gambling options to choose from.

This growth is not only providing entertainment for people, but creating jobs for accountants. Gaming creates unique accounting, auditing, and consulting opportunities ripe for the picking for an aggressive CPA firm. Just in Michigan, millions of dollars of gaming transactions occur daily, requiring complex accounting and auditing systems along with specialized financial reporting.

The role of CPAs in gaming organizations is paramount, as they guide and influence the entire gambling operation. Combine that with the growth of gaming across the state, CPAs can strike it rich at Michigan's casinos without wagering a dime.

Economic Impact on Michigan

Gaming is making a substantial impact throughout the United States (see exhibit 2). Now more than ever, state and local governments find themselves in financial trouble. Gaming is one way to raise revenue without raising taxes, which is why many state and local governments are supporting gaming.

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Michigan and particularly Detroit are perfect examples. Detroit is now the sixth largest casino market in the country. If Indian gaming were included, Michigan as a total market would be fourth. See the list of the top 10 markets in Exhibit 2. Three Detroit casinos boast 225,000 square feet of gaming space, 9,400 gaming positions. They employ 7,500 people and attract 30,000 people each day.

The three Detroit casinos generated nearly $1.2 billion in gaming revenue for calendar year 2004. Michigan, with one of the highest tax rates on gross gaming revenue in the country at 24 percent, snags 12.1 percent while the remaining 11.9 percent goes to the city. Gaming taxes paid in 2004 on just gambling revenue by these three casinos totaled approximately $280 million. Income taxes from workers (gross wages totaled $366 million in 2004) and other taxes are excluded from this figure.

The three Detroit casinos were originally deemed temporary because the original licenses stipulate nongaming amenities such as hotel rooms. However, because of court challenges, this has not yet occurred. However, in November of 2005, the Michigan Gaming Control Board approved plans for a permanent Greektown facility scheduled to open in 2008.

Michigan's extensive Native American gaming market includes 17 tribal casinos, which generated approximately $868 million in gaming revenue in 2004. Eleven are located in the Upper Peninsula. The largest and most influential of the Indian casinos is the Soaring Eagle in Mt. Pleasant with more than 500 hotel rooms, 4,700 slots and entertainment facilities.

Because of state tribal gaming compacts, the taxes paid to state and local governments is approximately $86 million, substantially less than the rates of the Detroit commercial casinos. Although tribal owned, Greektown in Detroit falls under the commercial gaming laws of Michigan.

Industry Guidance

The AICPA is the primary source of casino accounting information. Casinos--AICPA Audit and Accounting Guide is the principal source of casino accounting and auditing direction.

Internal Controls may be the most important area to consider because of the high risk associated with casino gaming. The AICPA says that risk is heightened because of the following reasons:

1. It is not practical to record all individual table game transactions.

2. Cash receipts or equivalents are not recorded until they are removed from the drop boxes and counted.

3. The revenues produced are not from the sale of products or services that are readily measurable.

This is why it is important for both management and the auditor to pay extra attention to internal controls.

The process involving all paper controls should be reviewed thoroughly. All chip and cash exchanges and chip inventories require fill slips or credit slips. Statistical benchmarks based on average win/loss percentages are also essential to evaluate and can indicate fraud or errors in a system.

Physical safeguards take on a new dimension with gaming. Unique aspects include table drop boxes, safes, vaults, count room equipment, control over access to gaming equipment and supplies, keys, slot meters, and particularly electronic surveillance. Sometimes thousands of cameras are in place. The auditor must review this monitoring system and the people who are responsible.

Internal control testing for casinos requires extraordinary emphasis and strong personal knowledge unique to gaming. Use of flowcharts, questionnaires, decision tables and much personal observation are required beyond the ordinary inspection of documents, reports and electronic devices.

Analytical Procedures become even more critical to an audit. Numerous statistics such as win percentages provide key information. Although this data may fluctuate in the short term, win/loss percentages for each game are fairly precise over the long run. Differences from the norm would be a big red flag, unless casino policy has changed.

Financial Reporting closely approximates that of the private sector. Accrual basis is used and revenue is considered as net win (money gambled less payouts). Actually financial statements are fairly straightforward, due to the use of only the basic accounts.

One balance sheet account that may depart a bit from the norm is accounts receivable due to a casino's credit or IOU policy. Other areas that may uniquely impact the financial statements and should be covered in the notes include: complimentary offers, promotions, jackpots and customer deposits.

The Audit requires extra special planning and supervision due to the distinctive aspects discussed above. The auditor should be familiar with the general operations of a casino before starting fieldwork; additional background in hotel and food service is a plus.

Planning becomes even more important for gaming. Documentation is always a key to every audit and this is especially true in this instance. Copies of casino policies and manuals, configurations (both physical layout and computer programs), schedules, statistics, personnel policies and interviews are all a must.

SAS No. 99, Consideration of Fraud in a Financial Statement Audit (AICPA, Professional Standards) takes on increased value to the auditor due to the higher potential for fraud. Special attention should be given to cash balances and revenue cutoff. Cash and cash equivalents are all about in a casino and in many different forms. They exist in casino cages, drop boxes, gaming devices, safes, etc. They take the form of currency, coins, house chips, personal checks, travelers checks, customer deposits, chips from other casinos, table chips and credits.

Since casinos operate 24 hours a day and it is infeasible to record every gambling transaction, cut-off procedures must be well documented. Customer wagers should be recorded when the win for each table, machine, etc. is counted and determined. This may vary for each table and machine and the official count could be hours after a particular table, slot, etc. is closed.

Fiscal year ends on calendar year poses additional headaches because New Year's Eve is one of the busiest gaming days of the year. In summation, the auditor should ensure that a sound and consistent plan is in place to count and recognize revenue.

It is important to note that this guide may receive a major overhaul, though a timeline is not yet determined. The AICPA Accounting Standards Executive Committee (ASEC) appointed a special task force in the second quarter of 2003 to revamp this authoritative manual. The last time ASEC met on this matter was December of 2004, with no plan to issue an exposure draft at that time. Tentative conclusions reached at the December meeting are reviewed in Exhibit 3.

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Clearly, there is tremendous work for accountants in the gaming area, as management, casino employee, consultant or auditor. The AICPA's audit guide should be the first place to go for those interested. Background information and illustrations are also included in the Casinos--AICPA Audit and Accounting Guide, which can be purchased through the AICPA for $43.30.

Supplementary Resources

A leader representing the commercial casino industry is the American Gaming Association. Their organization addresses federal and state legislative, regulatory and tax issues affecting organizations and customers. They perform a lot of research and serve as the nation's first gaming information clearinghouse, providing much data and many statistics. Just a few of the topics include accounting issues, legal issues, economic impact, revenue by state and gaming demographics. Several publications are also available through this organization. An overview study can be accessed at their web site for years 2004 and 2005 entitled State of the States: The AGA Survey of Casino Entertainment.

For tax services, the IRS provides an abundance of accounting opportunities by requiring 18 forms. Required reporting ranges from simple issuances to reporting gambling winners, monthly income and annual filings. In addition, casinos must separately report each transaction of currency in or out of more than $10,000. This covers everything from chip purchases to safekeeping deposits, even if multiple transactions add up to $10,000 in a single day.

Also, most casino and card clubs are subject to Title 31, the Bank Secrecy Act. This Act deals with suspicious transactions, illegal activity, money laundering and tax evasion. All require a great deal of specialized expertise and entail the implementation of a detailed written plan encompassing considerable amounts of complexity.

To add to the difficulty, the IRS requires some unique and specialized reporting for tribal gaming. The IRS is currently working with a volunteer group of tribal representatives to create an IRS/Tribal consultation policy. For additional information on Indian gaming, the National Indian Gaming Association operates as a clearinghouse and is an educational, legislative and public policy resource for tribal policymakers and the public on Indian gaming issues. In addition, when dealing with tribal gambling it is important to know that it is governed by the Indian Gaming Regulatory Act, enacted in 1988. Congress also created the National Indian Gaming Commission to help regulate tribal gaming.

Marketing, training, supervision, general procedures, surveillance, internal controls, management contracts, leasing, public relations and compliance offer even more possibilities for CPA know-how. One of the most experienced full-service accounting and consulting firms is McGhie Consulting. They have a vast array of experience and service top casinos all over Nevada and the world. McGhie group offers everything from start up plans to the final reporting and auditing services. They serve as an excellent model for CPA firms who might wish to enter this growing area.

The Government Accountability Office (GAO) has also tackled some gaming issues. What may be their most relevant gaming research is an April 2000 study entitled, Impact of Gambling, Economic Effects More Measurable Than Social Effects.

The GAO found gambling was on the rise, citing that 86 percent of Americans have gambled at least once in their lifetime, up nearly 20 percent since 1976. Their study reviewed the effect of gambling on economic items such as job trends, welfare caseload, unemployment, tax revenue and community investment. They also examined social issues such as domestic violence, child abuse, divorce, homelessness and crime. They found significant evidence of positive economic impacts of gambling, but no support of negative social impact on gambling. They did qualify their lack of social impact findings by saying the quality of relevant research in that area is extremely limited and there was a lack of data on causes of the above-mentioned social actions. This report incorporated and reviewed a June 1999 study by the National Gambling Impact Commission.

Other pertinent gaming research done by the GAO includes: Indian Issues, Improvements Needed in Tribal Recognition Process; Internet Gambling, An Overview of the Issues; Campaign Finance, Contributions From Gambling Interests have Increased; and Indian Gaming, Federal Controls Did Not Detect Compact Approval Violation.

Sources specific to Michigan include the Michigan Gaming Control Board, and The Michigan Gaming Law web site. This site offers the basics of the law, the history and updates on gaming in the state. The legal group also offers services on regulatory reporting, compliance management services, licensing, etc.

Without a doubt, gambling is emerging as a major industry in the U.S. The economic impact is growing and it represents a significant revenue and job source for state and local governments. Gaming has become an acceptable entertainment alternative and is on the rise. Gambling has also taken hold in Michigan. Growing amounts of accounting guidance are becoming available for those CPA firms aspiring to take advantage of the abundant accounting and tax opportunities. Now may be the right time for your firm to bet on gaming accounting as part of your service mix and become the pit boss of accounting.

Related Links

American Gaming Association

AICPA

MACPA

IRS

Governmental Accountability Office

McGhie Consulting, CPAs

National Indian Gaming Association

National Indian Gaming Commission

Michigan Gaming Law

Michigan Gaming Control Board

Harrah's Entertainment

Greektown Casino

MGM Grand Detroit

Motor City Casino

Soaring Eagle Casino, MI

Casino Windsor

Noble Savage Media

Gambling News Magazine

Dr. Craig Foltin, CPA, is Mayor of the City of Lorain, Ohio, and is a part-time lecturer at Cleveland State University. You can reach him at mayor_foltin@yahoo.com.