To Outsource or Not to Outsource? A Gaming Compliance Question
By Pat Thorne
In today’s economic environment, now more than ever, it is incumbent upon businesses to find ways to become more efficient. Declining revenues and shrinking margins have left companies reeling. Obviously, one way to alleviate the concerns is to cut costs. By converting fixed costs into variable costs, capital can be invested in other areas of the business.
Nevada gaming regulators require that nonrestricted Group I licensees, as defined in Regulation 6.010(5), maintain a separate internal audit department, whose primary function is to perform internal audit work and who is independent with respect to the departments being audited. Regulators have also allowed casinos to elect to have an independent accounting firm perform the internal audit function.
For those smaller gaming companies that cannot afford to establish and maintain an in-house internal audit department, outsourcing can be a very cost-effective approach. Even larger companies can benefit. By diverting resources from an administrative function, management can focus its resources on its core business and on the customer.
By outsourcing gaming compliance to a qualified firm, the company can substantially reduce its labor costs. The company does not have to hire individuals or provide the ancillary support that comes with having full-time auditors on staff (such as office space, supplies, etc.). When you consider salary, payroll taxes, health insurance benefits, vacation, sick pay and training, outsourcing can provide compliance at as much as half the cost.
Cost is not the only consideration, however. Gaming compliance is ever changing. Keeping up with the latest regulations and their impact on the operation can be tedious, as well as risky, if the casino’s internal control systems are deemed noncompliant. Utilizing a qualified firm to perform these functions transfers this risk and can ensure compliance. If the firm that is engaged to perform these services provides similar services for a number of gaming entities, it can bring a “best practices” approach to the audits. The firm’s staff members have been exposed to a wide variety of other accounting and gaming systems and can assist the client in designing more effective controls.
Another consideration is independence. While all qualified internal audit departments subscribe to a code of ethics that incorporates independence and objectivity, smaller properties may find it more difficult to actually effect true independence. Let’s say, for example, a small property employs one individual for gaming compliance. That person interacts on a daily basis with individuals whose work he or she audits. It is only natural that over the course of time friendships or other relationships can develop. In some cases, it may be difficult for the internal auditor to submit an adverse report on an individual with whom a relationship has been established.
In other cases (which may be even more prevalent), an adversarial relationship develops between the internal auditor and the departments upon which he or she reports. In this case, critical information may be withheld from the auditor because of a perceived mistrust on the part of those being audited. With outsourced internal auditors, this is not a factor. Firms will rotate staff, thereby ensuring independence, as well as constantly providing a fresh look at the operations.
Another advantage of outsourcing is the ability to react quickly to unexpected situations. Should a small property lose its in-house internal auditor, a firm can quickly pick up the slack. Occasionally, management may determine it needs an audit of a specific area of the property that may fall outside the expertise of in-house staff or, because of time constraints, must be addressed immediately. An accounting firm can be a viable alternative.
Outsourcing is not for everyone. For those companies that have multiple properties, economies of scale can be realized by having a centralized internal audit department. But for some, outsourcing is the best opportunity to ensure effective gaming compliance in a cost-effective manner.
Pat Thorne, CPA, is a Shareholder of the CPA firm Kafoury, Armstrong & Co. He specializes in gaming compliance and consulting, taxation and assurance services. He is a member of the American Institute of Certified Public Accountants, past president of the Nevada State Board of Accountancy, and a member of the National Association of State Boards of Accountancy’s Strategic Initiative Committee and Board Enforcement Committee. He has also served on committees for the Nevada Resort Association responsible for the drafting of proposed gaming legislation and is currently a member of the International Association of Gaming Advisors.