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# Top 10 control issues in Indian gaming: Part one of three

## TRIBAL NATIONS QUARTERLY  |  December 21, 2012

Ever wonder how you stack up in the industry? Do you know the areas that other properties struggle with or which areas you might be overlooking? Drawing on our collective McGladrey experience performing internal control testing across the country, we have compiled a list of the top-ten most common control issues identified over the last year.

10. Weighted average calculation for gaming machines

Gaming machines theoretical hold percentages are important for management to evaluate the actual performance of a gaming machine to its expected performance. The expected performance, or par percentage, can be complicated for multigame or multi-denomination machines in which each game or denomination on the machine has a different par percentage. When summarized on the standard statistical analysis reports, the machine has only one par percentage noted, making it difficult to understand whether the machine is performing as it should. For example, if the keno game has a 12 percent theoretical hold percentage and the poker game has a 2 percent hold percentage, what par value should be included in the statistical reports? While most properties use the average or median amount (i.e. 7percent), this average or median may not be the best number to truly analyze the machine. For example, if the customers all play keno games, we would expect the actual hold to be close to the 12 percent, but if the game performed at 6percent, the monthly 3 percent variance investigation would not identify this machine as a problem machine, even though the true variance is 6 percent. Therefore, weighted average calculations are required by the NIGC MICS to better understand what the true performance of the machine should be. This weighted average calculation should be performed annually for adjustments to the par percentage in your statistical reports.

There are several solutions for this problem. If your slot system has the ability to pull a report (or if you can create a special report) that shows each theoretical and actual hold within one game, you can confirm that each game or denomination is performing within the standards set by the manufacturer. If your system does not have this capability, the casino needs to record the coin-in for each pay table on a quarterly basis. At year-end the casino will perform a weighted average calculation to determine what the true theoretical performance of the game should be based upon actual play. The example below illustrates how the coin-in can effect what percent better resembles the type of player you have. In this example, more people play Keno so the theoretical hold percentage is closer to 10 percent rather than 2 percent.

Game King Coin-in Theoretical Hold % *Weighted theoretical hold %

Jacks or Better \$1

1,000,000

2%

0.33%

Keno \$.5

5,000,000

12%

10.00%

6,000,000

10.33%

*Weighted Average is calculated by: (Coin-in and Total Coin-in) X Theo Hold %

9. Key control

An electronic key system has been implemented across most properties, but has it been successful in improving access control? We have seen many issues throughout the implementation and upkeep of the electronic key system. Control reports summarizing the system changes and employee access levels are supposed to be reviewed daily, monthly and quarterly. We frequently see that this review step is either not documented or not performed. It is also important to note that this review of the system control reports should be performed by someone independent of the maintenance of the system.

The auditor or reviewer of the control reports should understand the meaning of the various reports and what each key is used for, as well as which controls need to be maintained (i.e. controls for contents keys differ from those for release keys). We have also seen a lack of control surrounding the manual override key to the system, which is the most important key, as it gives full access to all keys in the electronic box. This key is frequently maintained in a security drawer or in the accounting office, with no special security over it. However, it should have the same controls over your most sensitive key, the contents keys. It should require at least three people involved in the access of the key. An effective control option can be the use of a dual lock box in a secured area such as the Vault, Security, or Accounting. Finally, the NIGC MICS only cover controls for sensitive keys, but each casino should also decide what other keys are important to maintain and review for appropriate access levels.

8. Title 31: Bill-In Reports

Gaming has made significant strides in improving compliance with the Title 31 requirements, especially as most properties have gone through an IRS audit of Title 31, or an IRS audit is imminent. One of the more common issues we have found related to Title 31 is the generation of bill-in reports from the gaming systems. This report records the bills inserted into the gaming device by a patron who has their player card inserted. There is much debate about the value of these reports by casino operators, but the regulation specifically requires the generation of these reports if the system has the capability. Many systems have developed these capabilities since the regulation was modified in 2007 to include bills inserted into the gaming machine. Check to make sure that your property has appropriately implemented the generation of these reports for aggregation purposes. If you have questions about whether or not your system has these capabilities, please reach out to your service team or contact Rodrigo Macias at Rodrigo.Macias@McGladrey.com.

Bonus! Other common internal control items

As we crafted this article and researched common control items, we selected as our Top ten items that are common and somewhat complicated from a compliance perspective. But we also find some nagging findings that frequently come up that you can tackle.

Manual forms
We frequently find insufficient controls related to manual, two-part forms. All manual forms should be controlled in a manner that prevents them from being routed by a single person. If the forms are related to cash transactions, they should be at least two-part in nature, and the control copy should be routed to revenue audit function independent of the original (white) copy. The forms should be tracked in the system or on a separate log so the casino knows which serial numbers (forms) were bought and used, and which ones remain. These manual forms should be inventoried periodically by an independent department (or maintained by an independent department) like Revenue Audit.

Also, we frequently see properties using manual forms which are redundant (or duplicative) with the system documentation. Take a closer look to see if you even need to have these manual forms.

Unredeemed tickets
Any ticket that has not been redeemed in the system is still active and can be redeemed for money. All unredeemed tickets should remain in the cage or vault until they can be expunged by the system. These unredeemed tickets should not be sent to revenue audit; as this is the equivalent of sending currency to the revenue audit. The auditor should not have access to the assets that they are auditing; if the tickets are sent to revenue audit, the auditor can redeem these tickets for currency at the kiosks and no one would know, as they are auditing their own transactions.

Keep your eye out for our next quarterly article which will include the next top 10 controls issues.

Contact McGladrey director, Theresa Kain for more information.