Report LA96-18

Result in Brief

Effective regulation of the gaming industry is vital to the economic well-being of Nevada. In recent years, Nevada gaming regulators have taken a number of steps to improve the regulatory process. Among these are steps to strengthen the internal control and financial reporting practices of gaming licensees. Furthermore, these improvements have been accomplished with existing personnel resources, despite tremendous growth and change in the gaming industry.

To ensure it maintains regulatory effectiveness, the Gaming Control Board has set a goal of auditing gaming licensees every 2.5 years. However, because of dramatic growth in the industry and other factors, the audit cycle has risen to more than 3 years. Furthermore, the Board estimated that without additional audit agents, the cycle will reach 4 years by 1999.

Although the Board has improved the audit process, the audit cycle continues to grow. With competing priorities for limited state resources and the projected growth in the gaming industry, the Board may not be able to obtain the personnel needed to achieve its desired audit cycle. Therefore, alternative strategies must be considered, such as placing more reliance on work done by the licensees' auditors and adopting a risk-based approach to the audit selection process. These steps would help the Board maintain a strong regulatory presence with limited resources.

Principal Findings

1. Strong internal control requirements and improved financial reporting practices have led to more effective regulation of Nevada's gaming industry. As a result, violations of gaming laws, regulations, and policies have declined in recent years. For instance, additional taxes owed by gaming licensees as a result of unreported gross gaming revenues dropped from $2.49 for every $1,000 collected in 1990, to about 66 in 1994. When unpaid taxes on gross gaming revenues are compared to other state taxes, they are significantly lower. Furthermore, the number of violations cited by auditors showed a 40% decline between 1992 and 1994 for the 30 licensees in our sample. (page 11)

2. The Board has a long-standing goal to audit each gaming licensee every 2.5 years. However, despite improvements in the regulatory process, the Board has not been able to achieve this goal since 1986. For the year ended June 30, 1995, the audit cycle reached 3.2 years. The two main factors affecting the length of the audit cycle are the number of gaming licensees subject to audit and the available audit hours. While the number of licensees has grown 30% since 1986, the number of professional auditors on the Board's staff remained the same. Although the Board recently received 9 additional auditor positions, it currently estimates another 16 will be needed to achieve its goal. With the number of licensees expected to grow, the Board will need to consider alternative strategies. (page 13)

3. According to the Board, the quality of compliance auditing work performed by licensees' independent accountants and internal auditors has increased significantly since the establishment of required internal control systems and minimum audit procedures. As a result of the increased quality, the Board indicated it has placed increased reliance on the other auditors' work. Although we found instances when the Board increased its audit procedures based on the results of other auditors' work, we saw only a few instances when the Board reduced its audit procedures by relying on other auditors' work. (page 20)

4. The Gaming Control Board has established policies requiring the assessment of risk in its audits. These policies are designed to ensure scarce audit resources are allocated to the areas needing the most scrutiny. However, the policy requiring interim audit procedures be scheduled based on the assessed level of risk for each licensee was not always followed. Furthermore, the Board has not developed a risk-based approach to selecting licensees for audit. Consequently, licensees with the highest risk of non-compliance are audited as often as licensees considered to be low risk. (page 23)

Gaming Control Board
Auditor's Comments on Agency Response

The Gaming Control Board, in its response, does not agree with one finding and recommendation. The following identifies that section of the report where the Board has taken exception to our position. We have provided our comments on the issues raised in the Board's response to assure the reader we believe our findings, conclusions, and recommendations, as stated in the report, are appropriate.

The Board disagrees with our recommendation that it develop a risk-based approach for determining the frequency of licensee audits. The Board believes lengthening the audit periods for low-risk licensees would likely result in expending additional resources, rather than conserving them. Furthermore, the Board lists 5 areas of concern when audit periods are lengthened. (See page 42)

Legislative Auditor's Comments

On page 14, we discuss similar concerns resulting from a lengthening audit cycle. For instance, early detection of noncompliance allows licensees to correct problems more timely. However, we believe the problems created by lengthening the audit cycle become even greater with high-risk licensees. A longer audit cycle for high-risk licensees can have more serious consequences because the Board has determined they present a higher risk of noncompliance than low-risk licensees.

As discussed on page 26, a risk-based audit selection process could allow the Board to redirect its audit resources from low-risk licensees to those that may need greater coverage because they present a higher risk potential. We believe this approach would help the Board ensure a strong audit process with available audit resources.