Gaming on the Rise Across America: Smart Money Says CPAs Should Take Notice

By Craig Foltin

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OCTOBER 2005 - Not long ago, the only places in the United States where casino gaming was legal were Nevada and Atlantic City. Thirty-four states now allow casino gambling, and only Hawaii, Tennessee, and Utah allow no form of gambling (e.g., casinos, race tracks, or a lottery). The Figure lists types of gaming operations by state. These numbers continue to climb as casinos open in and around many major cities.

In 2003, after years of resident dollars going to New Jersey gaming, and more recently to Connecticut (the Foxwood and Mohegan Sun casinos produce an estimated $2 billion annually), New York Governor George Pataki and the state legislature approved legislation authorizing the largest expansion of gambling in the history of New York State. Three gaming tribes and nine casinos have been approved by the state. In addition, video lottery machines have been permitted at four racetracks, and a proposal has been made to build four casinos in Manhattan. Gaming is on the rise in New York and is beginning to take the state by storm.

Changing Attitudes and Their Economic Impact

Many state and local governments in financial trouble support legalized gaming because they see it as a way to raise revenue without raising taxes. The average 2,000–slot machine casino brings about 10,000 people a day into a community. Such a casino will have about 2,000 employees and produce more than $500 million in gambling revenue annually. It will also bring hotels, restaurants, and other forms of entertainment to the area.

The Seneca Nation casino in Salamanca, N.Y., is expected to bring New York State nearly $80 million in taxes and fees annually. After a casino opened in nearby Niagara Falls, Canada, annual spending there rose from $169 million to $1.2 billion. The two Connecticut casinos produce more than $400 million of revenue in taxes and fees for that state annually. In the United States overall, 2003 gross gaming revenues amounted to $73 billion. Exhibit 1 provides additional gaming data.

Gambling is increasingly looked upon as a legitimate entertainment option akin to sporting events, the theater, and amusement parks. All types of resort areas are clamoring to add casinos. Casino resorts have become family destinations that incorporate water and theme parks, theaters, shows, shopping, golfing, and other recreation into the mix. Exhibit 2 compares casino gaming to other forms of entertainment.

Industry Guidance

The AICPA is the primary source of casino accounting information, with its Casinos—AICPA Audit and Accounting Guide ($43.30). The Accounting Standards Executive Committee (AcSEC) appointed a special task force in the second quarter of 2003 to revise this guide, although AcSEC last discussed the matter in December 2004, at which time there was no plan to issue an exposure draft. Exhibit 3 summarizes major topics covered and tentative conclusions reached at that meeting. The complete discussion draft is available at

The AICPA guide notes that internal control risks are heightened because recording all individual table game transactions is not practical; cash receipts or equivalents are not recorded until they are removed from the drop boxes and counted; and the revenues produced are not from the sale of products or services that are readily measurable. Therefore, 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. 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 point out fraud or system errors. Additionally, there are unique aspects to physical safeguards, including table drop boxes, safes, vaults, count-room equipment, control over access to gaming equipment and supplies, keys, slot meters, and, particularly, the extensive electronic surveillance network. The auditor must review this monitoring system and the people responsible for it.

Internal control testing for casinos involves knowledge unique to gaming. Flowcharts, questionnaires, decision tables, and personal observation are required beyond the ordinary inspection of documents, reports, and electronic devices. Analytical procedures become even more critical. For example, 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 raise a red flag.

Financial reporting closely approximates that of the private sector. The accrual basis is used, and revenue is considered as net winnings (money gambled less payouts). Financial statements are fairly straightforward due to the use of only the basic accounts. Accounts receivable may depart from the norm due to a casino’s credit 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

The audit requires special planning and supervision due to the industry’s distinctive aspects. The auditor must be familiar with the general operations of a casino before starting fieldwork; additional background in hotel and food service is a plus. Essential documentation unique to the gaming environment includes copies of casino policies and manuals, configurations (both physical layout and computer programs), schedules, statistics, personnel policies, and interviews.

SAS 99, Consideration of Fraud in a Financial Statement Audit, acquires 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 in many different forms are everywhere in a casino, including in casino cages, drop boxes, gaming devices, and safes. Cash and equivalents take the form of currency, coins, house chips, personal checks, traveler’s checks, customer deposits, chips from other casinos, table chips, and credits. Because casinos operate 24 hours a day and recording every gambling transaction is unfeasible, cut-off procedures must be well documented. Customer wagers should be recorded when the win for each table or machine is counted and determined. This may vary, and the official count might be made hours after the table or machine closes. Fiscal years on the end of the calendar year pose additional headaches because New Year’s Eve is one of the busiest gaming days of the year.

Supplemental Resources

The American Gaming Association ( represents the commercial casino industry, addressing federal and state legislative, regulatory, and tax issues affecting organizations and customers. It performs considerable research, and serves as the nation’s first gaming-information clearinghouse. Available data and statistics include accounting issues, legal issues, economic impact, revenue by state, and gaming demographics. Several publications are also available.

The IRS requires 18 different forms. Required reporting ranges from simple issuances to 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 if a customer’s 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, which deals with suspicious transactions, illegal activity, money laundering, and tax evasion. All require specialized expertise and a detailed written plan of considerable complexity. Tribal gaming has additional specialized reporting requirements.

The Government Accountability Office (GAO; formerly the General Accounting Office) has tackled gaming issues. Its April 2000 study Impact of Gambling: Economic Effects More Measurable Than Social Effects found gambling was on the rise, and cited that 86% of Americans have gambled at least once in their lifetime, up nearly 20% since 1976. The study reviewed the effects of gambling on economic items, including job trends, welfare caseload, unemployment, tax revenue, and community investment. It also examined social items, such as domestic violence, child abuse, divorce, homelessness, and crime. Although the study found significant evidence of positive economic impacts of gambling, and no support of negative social impact of gambling, the GAO qualified the lack of social-impact findings by noting that the quality of relevant research in that area is extremely limited and that data on causes of the aforementioned social actions is lacking. This report incorporated and reviewed a June 1999 study by the National Gambling Impact Commission.

Other pertinent gaming research from 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.

Craig Foltin, PhD, CPA, is mayor of the City of Lorain, Ohio, and a part-time lecturer at Cleveland State University.




















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