12121423 - Level II Training Book

Commissioner Certification Training Level II AGENDA December 12-14, 2023 NYNY Hotel Casino, Las Vegas, Nevada PST Time

Tues day, December 12

8:00 AM 9:00 AM

Breakfast to be provided

Licensing: Key Employees & Primary Officials Billy David, Bo-Co-Pa

9:00 AM 10:30 AM

10:30 AM 10:45 AM Break 10:45 AM 12:15 PM

Licensing: Vendors & Facilities Billy David, Bo-Co-Pa

12:15 PM 1:15 PM Lunch Break 1:15 PM 2:45 PM

Employment Issues for Regulators Charlene Jackson, JD

2:45 PM 3:00 PM Break 3:00 PM 4:30 PM

Journey of Submission Peter Nikiper, Director of Technical Compliance, BMM Test Labs Wednes day, December 13

8:00 AM 9:00 AM

Breakfast to be provided

Internal Auditing-What's Required & How it Should Be Approached Ryan Burns, CPA, Partner Blue Bird CPA's

9:00 AM 10:30 AM

10:30 AM 10:45 AM Break 10:45 AM 12:15 PM

Financial Controls & Accounting Standards Ryan Burns, CPA, Partner Blue Bird CPA's

12:15 PM 1:15 PM Lunch Break 1:15 PM 2:45 PM

Tribal Sovereign Immunity and The Gaming Regulator Liz Homer, Homer Law

2:45 PM 3:00 PM Break 3:00 PM 4:30 PM

Effective Regulatory Writing Liz Homer, Homer Law Thurs day, December 14

8:00 AM 9:00 AM

Breakfast to be provided

Creating a new Approach to Surveillance Abe Martin, CFE, CSP Casino Cryptology

9:00 AM 10:30 AM

10:30 AM 10:45 AM Break 10:45 AM 12:15 PM

Surveillance Cheats & Scams Abe Martin, CFE, CSP Casino Cryptology

Please plan to stay for the entire class on each day to get your certificate of completion. Please be on time for sessions

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Employment Issues and Gaming Regulation

IGA Level II Commissioner Training

Charlene D. Jackson

Learning Objectives

• Overview of Employment Law • Considerations • Jurisdiction • Applicable Law/Procedure and/or Regulation • Regulatory Authority • Companion Reading • Constitution • Case Law, including regulatory agency decisions • Policy • Gaming Compacts and Appendices

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• Generalized information for educational and discussion purposes only • Not to be taken as legal advice • Does not create an attorney-client relationship • Cases discussed may be overturned – please consult with legal counsel to determine relevancy and applicability

The Small Print

Law Interpretation 101 – Important Considerations

• Mandatory v Discretionary Terms • Qualifying language • And/or • Commas • Hereafter • Notwithstanding • Including but not limited to

• Legislative Intent • Definitions

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Examples:

• The power of a comma • Let’s eat Grandma! • Let’s eat, Grandma! • Qualifying Language • That’s not something I’m expecting. • That’s not something I’m expecting, right now. • Definitions

• Language

• The board shall consider the following: 1. Application, 2. Education; and 3. Experience • The board may consider the following:

1. Application, 2. Education; or 3. Experience

• Gaming Device • gaming device

Edward Employee – Where do you begin?

• Card dealer – required to stand for long periods of time • Long time employee, 50 years old • Union Rep – engaged in wage dispute • Picked up something heavy at work – hurt on the job • Medical release from work; returned with limitations and pain medication • Workmen’s compensation paperwork submitted but left on Secretary’s desk; Employer part of paperwork not completed

• Returned with reasonable accommodations request; granted by HR but not implemented by supervisor • Supervisor required employee to return to regular duties • Routine drug test – failed • Reaggravated injury at work; transported to hospital; hospitalized and missed work • NC/NS • Return to work – resign or be terminated

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I’m a Gaming Regulator – Employment Law is “HR” • Overlap • HR - Operational • Suitability – Skills/Knowledge/Experience • Job performance • Commission – Regulatory • Threat to public interest, regulation of gaming • Creation of unfair or illegal practices in the conduct of gaming • Awareness important

Federal Employment Law Generalized Review

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Wait …. Do federal employment laws apply to Tribes and Tribal Enterprises??

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The General Rule

• General statutes by their own terms “applying to all persons includes Indian tribes and their “property interests”. • Federal Power Commission v. Tuscarora Indian Nation, 362 US 99 (1960). • Exceptions: • Intramural matters – application would impose on exclusive rights of self-governance • Application of the law would abrogate treaty rights • Congressional intent that law does not apply • Donovan v. Coeur d’Alene Tribal Farms, 751 F.2d 1113, 1116 (9 th Cir. 1985)

• What does the statute say? • If it says it applies … it applies • If it says tribes are exempt, tribes are exempt • What if it’s silent? • Does the tribe/entity meet the criteria outlined in statute? • If yes, likely to apply • If no, argument that the statute doesn’t apply • What are the Facts? • Do one of the exceptions apply? • Intramural matter • Interfere in treaty rights • Congressional intent that it doesn’t apply

Ask ….

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Title VII of the Civil Rights Act of 1964

• Prohibits discrimination due to race, color, religion, gender or national origin • Applies to employers with 15+ employees for each working day in 20+ calendar weeks • Excludes US, US owned corporations and Indian Tribes • Exemption does not extend to enterprises with mixed ownership (Tribe and non-native owner) • Myrick v. Devils Lake Sioux Manufacturing Corp., 718 F. Supp. 753 (D.N.D.1989)

What about an entity of the Tribe?? • McCoy v. Salish Kootenai College , D.C. No. 9:17-cv-00088-DL (Nov. 20, 2019) (unpublished) • Plaintiff resigned his position and claimed he was forced to resign due to hostile work environment based on allegations of sex-based harassment • Defendant moved to dismiss arguing the they were an arm of the Tribe and excluded from the definition of employer under Title VII. • Lower court ruled the Defendant was immune under Sovereign Immunity as an arm of the Tribe and exempted from the definition of employer under Title VII • 9 th Circuit upheld lower court decision – Considered: • Method of creation of the economic entity • Purpose of the entity • Structure, ownership, and • Management, including the amount of tribal control • Tribal Intent re: Sovereign Immunity • Financial Relationship between the Tribe and entities

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Indian Preference Under Title V II

• Indian preference is permitted for employers meeting the applicability criteria on or near reservations

• Exceptions: • No preference for members of a particular tribe over other tribes if employer is not tribally owned • Dawavendewa v. Salt River Project Agricultural Improvement Power Dist., 154 Fed.3d 117 (9 th Cir., 1998) See also Dawavendewa v. Salt River Project, 276 F.3d 1150 (9 th Cir., 2001)

Tribal Specific Hiring Preference • EEOC v. Peabody (No. 12-17780 (9 th Cir, 2014) • Peabody entered lease agreements with Navajo Nation that included Navajo hiring preference. Leases approved by DOI • EEOC sued – tribal specific preference is violation of Title VII • Rounds of litigation – procedural issues • Sovereign Immunity – tribes cannot raise sovereign immunity as a defense against a lawsuit filed by the federal government • DOI cannot be joined without consent and only DOJ can bring an EEOC suit against a government agency • USSC – denied review in 2011 – allowed claim against Peabody to proceed on remand • Held: Tribal hiring preferences in Peabody leases are based upon tribal affiliation – a political classification - allowable • Despite Dawavendewa v. SRP , there are times when differential treatment serves to fulfill a trust obligation to tribes • Indian Mineral Leasing Act of 1938 purposes – advance tribal independence

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Does Title VII apply? • Answer: It depends … • Ownership • Tribe – probably not

• Tribal Entity – Depends – Structure/organization/purpose • Non-Tribal owned corporation operating on/near reservation - Depends • Factual considerations

• Generalized exceptions • Application of other law

• EEOC/Tribal MOU: Effort to address discrimination Case Processing • Jurisdictional Considerations • Training, Assistance and Reporting • Opportunity for tribes/Tribal TERO to resolve issues

Age Discrimination in Employment Act • Prohibits discrimination based on age • Applies to employees and applicants for employment over 40 years old • Liability may be avoided if employer can show a bona fide occupational qualification requiring an employee to be younger • Silent on applicability to Tribes

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Case Law • ADEA applies in “capacity as proprietor” of bingo facility, at least when claimant is not a tribal member. • EEOC v. Forest County Potawatomi Community , No. 2:2013mc00061 (E.D. Wis. 2014) • Tribe enjoys sovereign immunity from ADEA • Williams v. Poarch Band of Creek Indians, No. 15-13552 (11th Cir, October 18, 2016) • ADEA may not be applicable - generalized exceptions • Intramural matters • EEOC v. Cherokee Nation , 971 F.2d 937 (10th Cir. 1989) • Treaty rights • EEOC v. Karuk Tribe Housing Authority, 260 F.3d 1071 (9 th Cir. 2001)

Americans with Disabilities Act of 1990 • Elimination of discrimination against individuals with disabilities • National mandate with enforceable standards • Federal enforcement • Congressional authority – including 14 th amendment and to regulate commerce to address discrimination • Note: Disability is a specifically defined term

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Titles of ADA • Title I • Employment opportunities • Requires Reasonable Accommodations

• Title III

• Prohibits exclusion, segregation or unequal treatment in public accommodations and commercial facilities • Can apply to a public accommodation run by a tr ibe • Cannot be enforced by a private person against a tribe in non- Indian forum due to SI; compliance can be compelled by US AG

• Employers with 15+ employees • Excludes: US, US owned corporations and Indian Tribes • Equal opportunity to benefit from programs/services • No mention of applicability to tribes • Tribes may be exempted by sovereign immunity

• Title II

• Florida Paraplegic Assoc. v. Miccosukee Tribe of Indians of Florida , 166 F.3d 1126 (11 th Cir 1999)

Definitions • Disability

• Physical or mental impairment that limits one or major life activities; • History of an impairment that substantially limited on or more major life activities; or • Regarded as having such an impairment • Major Life Activities • Include but not limited to: walking, seeing, caring for oneself, learning, working, thinking, communication and operation of bodily functions – neurological/functions • Recovery

• In recovery; • Ceased use; • Participating in supervised rehabilitation program; or • Successfully rehabilitated

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Addiction and Substance Abuse • Addiction – current or past is • Substance Use

considered a disability • Factual considerations

• Protects a person in recovery who is no longer engaged in illegal use of drugs • Illegal: • Use of illegal drugs – heroine/cocaine • Use of Rx medications • No valid or a fraudulent prescription; or • Using more than prescribed • Legal use is protected by ADA but taking more than prescribed may not be covered

• Can require employee to meet same standards of other employees • Need not make accommodation to support/enable use but may need to make accommodation for rehabilitation

Fair Labor Standards Act

• Standards for minimum wages and terms of payment for overtime • Employers prohibited from • Payment of wages less than statutory minimum • Work week in excess of 40 hours unless employees are compensated at time-and-a-half their regular wage • Exploiting child labor • No specific mention of tribes

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Case Law

• FLSA applies to business operated on tribal land and owned by tribal member • Chao v. Matheson , 2007-WL-1830738, No. C-06-5361 (W.D. Wash., June 25, 2007) • FLSA applies to tribally owned retail store on tribal land • Solis v. Matheson , 563 F.3d 425 (9 th Cir 2009) • LEO not entitled to protections because tribal law enforcement is traditional governmental function • Snyder v. Navajo Nation , 371 F.3d 658 (9 th Cir. 2004)

National Labor Relations Act

• Authorizes unions to organize and engage in “protected concerted activity” • Prohibits employers from prohibiting exercise of rights or engaging in conduct that may have a “chilling effect” • Applies • Employers with $50,000 in annual business • Private employers operating on or near reservations • Does NOT apply to US • No express applicability or exemption for tribal governments

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Protected Concerted Activity

• 2+ acting together to improve working conditions/wages • 1 if he/she involves others before acting or acts on behalf of others • Union membership not required

• Excludes

• Reckless or malicious behavior • Sabotaging equipment • Lies about a product

• May exclude

• Revealing trade secrets • Hate speech

Examples

• Social media comments • Sharing own confidential information – wages/corrective action • Rules restricting criticism of management • Rules requiring employees to be respectful • Rules prohibiting resistance to proper work-related orders or discipline, even though not overt insubordination

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Case Law • Tribal law prohibiting union membership as a condition of employment did not violate NLRA. The tribe has sovereign authority to govern its own territory. • NLRB v. Pueblo of San Juan , 276 F.3d 1187 (10 th Cir. 2002) • NLRA applies to casino wholly owned and operated by a tribe on the tribal reservation because the operation of a casino is not an exercise of self-governance or a governmental function • San Manuel Indian Bingo and Casino v. NLRB , 475 F.3d 1306 (D.C. Cir. Feb 2007), reh’g enbanc denied (D.C. Cir., June 8, 2007)

Family Medical Leave Act

• Employers with 50+ employees must provide 12 weeks of unpaid leave in a year for family and medical reasons • Eligibility • Employed 12 months and 1,250 hours;

• Birth, adoption, placement of child in foster care; • Care of seriously ill child, spouse or parent; or • Own serious illness • Return to same or equivalent position upon return • Tribes not specifically mentioned • DOL position that FMLA applies to Tribes • 2020 – Extended Family Medical Leave Act

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Case Law

• Must exhaust tribal court remedies • Sharber v. Spirit Mountain Gaming, Inc., 343 F.2d, 724 (9 th Cir. 2003) • FMLA does not abrogate tribal sovereign immunity and without a waiver in gaming compacts or by policy, the court will not infer one • Muller v. Morongo Casino Resort & Spa , ED-CV-14-02308-VAP (C.D. Cal, July 17, 2015)

Other Federal Employment Laws

• Employee Retirement Income Security Act • Standards for voluntarily established pension or welfare-benefit plans • Not applicable to benefit plans if it covers employees in traditional governmental roles • Applicable to plans where the tribe is engaged in commercial activities • Consolidated Omnibus Budget Reconciliation Act • Requires continuation of health insurance for up to 18 months after an employee leaves • Not applicable to insurance plans maintained by tribes if employee is employed in a traditional governmental role • Applicable to plans for commercial tribal enterprises

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Workers’ Compensation Laws

• Generally – State labor and employment laws not applicable to employers operating solely on a reservation • California v. Cabazon Band of Mission Indians , 480 U.S. 202 (1987) • Except …. • 40 USC § 290 provides state authority to apply workers’ compensation laws to all lands owned or held by the US with a state • So … State workers’ compensation laws may apply • Other factors

• Gaming Compacts • Other documents

Take Away • Failure to include or exclude tribes does not make law inapplicable • Ownership and structure matters • Purpose/intent matters • Internal tribal issue • Treaty Rights involved • Traditional governmental role • Structure matters • Applicability based upon other factors • Constitution • Other law • MOU/MOA • Compacts

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Remember Edward Employee?

The Gaming Commission received an employment action notice and a request to act on EE license … what are your concerns??

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Journey of Submission What happens when a gaming machine is sent to a gaming test lab? February 15, 2017

company confidential

Different laboratories… Do different testing.

Electrical

Safety

Gaming

And many more…

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General Process

Manufacturer submits to a lab

The lab tests according to requested standards

The lab issues a report

The TGRA makes a finding based on the report

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Submission to the lab 25 CFR 547.5 (c) Submission, testing, and approval – generally. Except as provided in paragraph (b) and (d) of this section, a TGRA may not permit the use of any Class II gaming system, or any associated cashless system or voucher system or any modification thereto, in a tribal gaming operation unless: …

company confidential

Submission to the lab (1) The Class II gaming system, cashless system, voucher system, or modification thereto has been submitted to a testing laboratory;

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Submission to the lab What does the lab need?

Hardware including peripherals, i.e. BV, printers

Submission letter

Math

Software

Servers

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Testing (2) The testing laboratory tests the submission to the standards established by: (i) This part; (ii) Any applicable provisions of part 543 of this chapter that are testable by the testing laboratory; and (iii) The TGRA ;

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Testing Scope of work / Submission management • Each submission is entered into a project tracking system • Kick off meeting – Engineers are assigned to the project

– Resources assigned – Timeline established – Any foreseen compliance issues

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Testing Random Number Generators (RNGs) • Source code review • Algorithm implementation • Samples • Analysis against Die-Hard battery

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Testing

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Testing Math Analysis • Review all combinations / patterns (wins & losses) • Calculate the game cycle • Calculate the game volatility • Calculate the RTP / hold or edge • Calculate the top award odds • Compare with manufacturers math • Emulate combinations on device and verify payouts

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Testing Functional testing

• Generate list of test scripts to be used • Based on Part 547 & 543 for Class II • Based on GLI-11/NV for Class III • Additional tests based on location or tribe the device will go to.

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Results of Testing (3) The testing laboratory provides a formal written report to the party making the submission, setting forth and certifying its findings and conclusions, and noting compliance with any standard established by the TGRA pursuant to paragraph (c)(2)(iii) of this section;

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Results of Testing (4) The testing laboratory’s written report confirms that the operation of a player interface prototype has been certified that it will not be compromised or affected by electrostatic discharge, liquid spills, electromagnetic interference, radio frequency interference, or any other tests required by the TGRA;

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Results If everything works • Technical reviews of the testing • A draft report is generated

• A regulator and/or client review of the report • Final report issued to both regulator and client

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Results What happens if issues were found during testing? • Document the problem(s) • Steps to reproduce and/or show frequency • Assign a severity (Low to High) • Resubmission or withdrawal of the submission

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Final part of a submission (5) Following receipt of the testing laboratory’s report, the TGRA makes a finding that the Class II gaming system, cashless system, or voucher system conforms to the standards established by: (i) This part; (ii) Any applicable provisions of part 543; and (iii) The TGRA.

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Key Items for Class II • Bingo Patterns • Ball Draw Process • Bingo card distribution / generation • Minimum number of players • Game Ending Pattern • Bingo game type • Disclaimers

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Key Items for Class III • RNG Review & Analysis • Game Determination

• Game Play • Accounting • Game Recall • Emulation • Security

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Internal Audit What is Required? & How Should It Be Approached?

Ryan Burns, CPA Partner, BlueBird CPAs

What is an Internal Audit? • An independent appraisal function to examine and evaluate the organization’s activities as a service to the organization

• Monitoring how management is achieving their objectives on an on-going basis

BlueBird CPAs

Compliance Audits • NIGC MICS • Title 31 • IRS Reporting • Tribal Regulations • System of Internal Control

Audit Charter • Defines the role of the internal auditor within the organization

• Forms the basis for his/her authority

• Must be defined in a formal document and be adopted, usually by the Tribal Council or the Tribal Gaming Commission

BlueBird CPAs

Audit Charter

• Internal audit should have access to all areas of the Casino without any limitation on the information or areas subject to audit. This includes access to the:

o Financial statements, o General ledger detail, o Revenue Audit documentation, o Departmental budgets, o Annual audit results, o Payroll, o Expenses (especially credit cards and travel costs), and o Non-gaming revenue centers.

Internal Auditor Communication & Independence • Internal auditors can communicate anything but surprise observations or when a special investigation is in progress, such as: o Audit plans o Timing of audit fieldwork • Communicate findings to management prior to the issuance of a report • Document the results of work performed • Timing of management responses • For independence, report to Tribal Council/Gaming Commission, Audit Committee or Board

BlueBird CPAs

Internal Auditor Required Testing • All Gaming & • Relevant Support Areas

Should be tested at least once a year (or more frequently based on internal requirements.)

Internal Audit Standards (IIA) • Independence o Organization status o Objectivity • Professional proficiency • Scope of work • Performance of audit • Management of internal audit department

BlueBird CPAs

Five Steps of Internal Audits First, let’s look at the five steps for performing internal audits.

Performance of Audit Work • Planning • Developing/customizing master plan • Performing the fieldwork (checklist, audit program)

• Evaluating and documenting evidence • Communicating results & follow-up

BlueBird CPAs

Step 1: Planning • Evaluate overall control environment • Risk assessment & monitoring • Evaluate the written policies and procedures • Evaluate communication process

Audit Planning - Obtain An Understanding

• Regulatory Environment - Working Knowledge of Industry, Tribal- State Gaming Compact, Tribal Gaming Ordinance, and applicable Tribal Minimum Internal Control Standards (TMICS).

• Operating Environment – Type and Volume of Transactions, Management Attitude, Computer Information Systems, Data Flow, Documented Control Systems, etc.

• External Environment – Regulators, Lenders, Tribal Membership, Competitive Environment, etc.

BlueBird CPAs

Audit Planning – Risk Assessment

• What can go wrong? – Who is relying on the numbers? • Which accounts have more risk? • What controls are in place? • Which compliance areas are most important or subject to scrutiny? • Potential for fraud? • Materiality of account? • Assess the level of risk (Low, Medium, High)

Inherent Risk - Indicators • Prior audit compliance findings, prior areas that required adjustment.

• Changing environments (industry conditions, regulatory requirements, political, management, accounting policies).

• Non-routine transactions, complex calculations, change in estimates or accounting principles.

BlueBird CPAs

Inherent Risk • Common examples:

o Complex Accounting Cycles (Gaming Revenue) o State Fees, Management Fees, Interfund Accounts o Related Party Transactions (Management Company) o Complex Regulations or Accounting Standards o Prior unresponsiveness to identified control weaknesses • Importance of follow-up of risk monitoring and assessment • Prioritizing corrective action based on significance / likelihood of occurrence

Fraud Risk Assessment TWO TYPES OF FRAUD RISK: o RISK OF FRAUDULENT FINANCIAL REPORTING (Cooking the Books) o RISK OF MISAPPROPRIATION OF ASSETS (Stealing Company Assets)

BlueBird CPAs

Fraud Risk Factors 3 RISK FACTORS: • Incentive / Pressure to Commit Fraud • Opportunity (Lack of Controls, Override, Collusion) • Rationalization

AS ANY ONE FACTOR GROWS – THE RISK OF FRAUD INCREASES

Red Flag Warnings • Audit requested items concealed by withholding evidence, requested items. • Misrepresentation (aka – lying) • False or Altered Documents • Reports of Alleged Fraud • Ratios / performance different than industry norms or past performance (Analytics)

BlueBird CPAs

Fraud Indicators • Questions of integrity and competence • Unusual pressure within or on the entity • Unusual transactions • Problems in obtaining sufficient and appropriate audit evidence • Factors unique to information technology

Control Risk - Assessment & Testing

• Determine major transaction cycles (for example: gaming revenues).

• Walkthroughs of transactions – inception to recording to reconciliation.

• Compliance with documented control systems.

BlueBird CPAs

Control Risk - Continued • Inquiry alone is not sufficient to test controls.

• Determine if control system design satisfies general segregation of duties (Authorization, Recording, Custody).

• Perform tests of transactions.

Gaining an Understanding…

NIGC, State………… NIGC MICS

State Compact

Step 1

Tribal Gaming

Tribal MICS

Regulatory Authority

Or TICS

Step 2

Implement Internal Control System (SICS) including Title 31

Tribal Gaming Operations……………

Step 3 Auditor verify SICS is in substantial compliance with Tribal MICS As soon as Step 2 is done

Internal Auditor………………………..

BlueBird CPAs

Gaining an Understanding

Step 4

Verify the Gaming Operation implemented SICS and is in substantial compliance with SICS As soon as Step 3 is done or in conjunction with the

Internal Auditor………………………….

annual audits

Step 5

CPA prepare a report of findings to the Tribe &

CPA ………………………………….

Management (542.3 (f)/543.23)

Step 6

Submit a copy of the CPAs report to the NIGC by 120 days after the fiscal

Tribal Gaming

Regulatory Authority ……

year end

Step 2: Developing/Monitoring Master Plan • Establishing objectives • Establishing criteria & scope of work • Determining nature of testing o Substantive, attribute, compliance

o Reliance on internal controls o Testing of internal controls

BlueBird CPAs

Prioritize Audit Work • Compliance with NIGC MICS, Tribal MICS, & Compact

• Risk Based Selection of Audit Areas

• Assist External Audit

• Special Projects (Rotation of Cycles)

Step 3: Performing the Fieldwork • Using checklists & audit programs • Use professional skepticism • Sampling consideration o Statistical vs. Judgmental o Sample size • Gathering evidence (quality and quantity of evidence) • Conclusion

BlueBird CPAs

Attribute Sampling • Is the most common for Internal Auditors - usually concerns yes/no or error/non-error propositions

• It tests the effectiveness of controls because it can estimate a rate of occurrence of control deviations in a population

• Attribute sampling requires the existence of evidence indicating performance of the control being tested

Sampling Based On NIGC Checklist Within the checklists provided by the NIGC, unless specified otherwise, the standard document testing for gaming machines and table games involves a sample size of two (2) days, all shifts. One test date should be selected from the first six (6) months of the audit period and the second test date selected from the six (6) month period immediately preceding the examination.

BlueBird CPAs

Sampling Based On NIGC Checklist • Standard document testing for all other areas involves a sample selection of one (1) day, all shifts, from the twelve (12) month period immediately preceding the audit.

• The days are to be randomly selected.

• Where monthly testing is required, the months used will be the months that include the selected test dates.

Sampling Based On NIGC Checklist • “Review supporting documentation” means to test the most recent documents to the standard.

• “Examination of records” means to use the sample test dates, unless an expansion of scope is justified by the auditor.

BlueBird CPAs

Sampling Based On NIGC Checklist • “Review policies and procedures” (or SICS) means to examine written internal controls or policies and procedures of the gaming operation. • “Review TGRA approval” means to complete the following: o Review TGRA approval o Review supporting documentation of the gaming operations submission to the TGRA o Review TGRA’s policy for approval or disapproval.

Sampling Based On NIGC Checklist • “Inquiry” means to question personnel knowledgeable of the standard.

• “Observation” means to physically observe the performance of the standard.

• “Review other” means to review/test named documents.

BlueBird CPAs

Quality Control • Workpaper documentation

Step 4: Evaluating & Documenting Evidence • Materiality vs. Significance • Quantify • Fraud Indicators • Finding Worksheet

BlueBird CPAs

Step 5: Communicating Results & Follow-Up • Verbal & written • Interim vs. final • Levels of management involved in communication • Whom to report to • Management responses • Encyclopedic coverage not desirable

Findings should include: • What should be? (criteria)

• What is? (statement of condition)

• So what? (effect)

• Why did it happen? (cause)

• What should be done? (recommendation)

BlueBird CPAs

Report Writing Techniques • The NIGC Guidelines recommend that the following information be included in the internal audit report: • Audit objectives. • Audit procedures and scope. • A narrative description of the noncompliance, including the number of exceptions. • The citation of the applicable National Indian Gaming Commission Minimum Internal Control Standard, Tribal Internal Control Standard, and State Compact, as applicable, for which the instance of noncompliance was noted. • Recommendations, if applicable. 37

Report Writing Techniques

• The NIGC Guidelines recommend that the following information be included in the internal audit report (cont.): • Management’s responses to the noted instances of noncompliance. • If the instance of noncompliance is determined to be immaterial, a broad management response acknowledging the instances of immaterial noncompliance is acceptable. The immaterial instances of noncompliance may be disclosed as a separate section of the report. • Instances in which the written system of internal control does not reflect the actual control procedures in effect as they relate to compliance with the NIGC MICS and approved MICS variances.

BlueBird CPAs

Advice to a New Internal Auditor • Present the audit as a tool to help all people within the organization.

• Discuss preliminary audit findings prior to report issuance – clear up misunderstandings.

• Try to avoid adversarial relationships.

Ryan Burns, Partner rburns@bluebirdcpas.com Thank you!

BlueBird CPAs

Financial Controls & Accounting Standards

Ryan Burns, CPA Partner, BlueBird CPAs

Session Agenda • Financial Statements - Financial Controls • Accounting Standards • Gaming Audit & Accounting Guide

BlueBird CPAs

Various Financial Statements • External Financial Statements – Lenders, Regulatory Agencies (NIGC, Compacts), Tribal Council & Tribal Gaming Commissions • Internal Financial Statements - Property Management for Analysis (Flash Reports, P/L Summaries, Condensed Financial Information)

Financial Statements & Financial Controls

Ryan Burns, CPA Partner, BlueBird CPAs

BlueBird CPAs

Enterprise Financial Statements • Management’s Discussion & Analysis (RSI) • Balance Sheets / Statement of Net Position • Statement of Revenues, Expenses, and Changes in Net Position • Cash Flow Statement • Notes to Financial Statements • Combining Financial Statements (SI)

Balance Sheet (aka the Statement of Net Position) • Assets - Things of value owned by the entity • Liabilities - Things of value owed by the entity • Equity = Assets – Liabilities

• Equity Classifications (Invested in Capital Assets, Net of Related Debt, Restricted, Unrestricted)

BlueBird CPAs

Balance Sheets – Appendix B

Balance Sheets – Appendix B Continued

BlueBird CPAs

Statement of Revenues, Expenses, and Changes in Net Position • The connection between the current year balance sheet and previous year balance sheet.

• Shows how and why tribal equity changed from what it was last year to what it is this year.

• Why did the business get richer or poorer?

Income Statement GASB Structure • Revenues o Direct operating expenses o General and administrative operating expenses • Equals Operating Income o -/+ Non operating Items (Interest) • Equals Net Income o Transfers to the Tribe • Equals Net Change in Net Position

BlueBird CPAs

Statements of Revenues, Expenses, and Changes in Net Position – App. B

BlueBird CPAs

The Statement of Cash Flows • Where the cash came from and where it went o Cash flow from operating activities o Cash flow from non capital investing activities o Cash flow from capital and related financing o Cash flow from investing activities

Income Statement vs. Cash Flow • Accrual vs. Cash • Where the cash comes from & goes • Big differences: o Depreciation, Loss on Disposal, etc.

o Cash needed to replace assets o Cash needed to pay off loans o Cash received from loans o Cash loaned/transferred to Tribe

BlueBird CPAs

Statements of Cash Flows – Appendix B

Statements of Cash Flows – Appendix B Continued

BlueBird CPAs

What is unique about Tribal Casino Accounting? • GAAP Issues (Net Win, State Fees, GASB, etc.) • Layers of Regulations (TRGC, State, NIGC) • Cage/Vault Accountability • 24-Hour Operations / Staggered Drop • Volume of Cash Transactions • No source revenue documentation (invoice, shipping document, etc.)

• Reliance on Computer Systems • Tribal Government Transactions

Accounting Issues Specific to Gaming Operations • Cage Accountability – The central artery system of your daily financial accountability and recording processes.

• Revenue Audit – Independent verification of gaming departments’ sources and uses. (Matching transfers, verifying actual to meters, over / short review, etc.)

• Casino Bankroll – Cash, Chips, Tokens, Preprinted Tickets, Redemption Machines, Uncounted Drop Proceeds, Etc.

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Accounting Issues Specific to Gaming Operations – Cont’d • Progressive Jackpots – In House vs. Externally Funded / Wide Area

• Players’ Club – Accounting for Free Play, Cash & Coupons

• Accounting for Complimentary Items

• Reliance on Controls & Computer Systems

Common Internal Control Weaknesses – A/P • Stale Policies and Procedures – Purchasing/Procurement, Payable Processing, Processing Payments, Maintaining Vendor Master Files. • Training and Staff Development • Improper Timing and Routing of Purchase Orders • Paying from Invoice Duplicates (copies) • Inadequate Segregation of Duties (ARC-Authorization, Recording, Custody)

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Common Internal Control Weaknesses – Payroll • Stale Policies and Procedures – Timekeeping System & Payroll Preparation Policies, HR Policies, Payroll Distribution • Training and Staff Development • PTO Authorization and Perpetual Tracking System • Inadequate Segregation of Duties (ARC-Authorization, Recording, Custody)- HR & Payroll Functions

Common Internal Control Weaknesses – Financial Reporting • Stale Policies and Procedures • General Ledger Access Controls • Training and Staff Development • Untimely Account Reconciliations

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Common Internal Control Weaknesses – Financial Reporting • Recognition of Unique Events or Transactions (Asset Impairments, Losses Due to Asset Disposals, Natural Disasters, Insurance Recoveries, Derivatives, Long-Term Financing Arrangements, New Acquisitions or Business Lines) • Inadequate Segregation of Duties (ARC-Authorization, Recording, Custody)

CAGE PAPERWORK

BANK STATEMENT

GENERAL JOURNAL

PAYROLL REGISTER

CHECK REGISTER

THE GENERAL LEDGER

THE TRIAL BALANCE

COMPUTER SLOT SYSTEM

ADJUSTMENTS

FINANCIAL STATEMENTS

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Accounting Standards

Ryan Burns, CPA Partner, BlueBird CPAs

What is GAAP? • What is GAAP?

• Who establishes GAAP?

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Governing Structure of Standard- Setting Boards

Fi nanci al Account i ngFoundat i on (FAF)

Financial Account ing Standards Advi sory Counci l

Financial Account ing Standards Board(FASB)

Government al Account ing Standards Board(GASB)

Government al Account ing Standards Advi sory Counci l

Financial Reporting – Different GAAP for Different Folks • Type of Entity: GAAP Set By: • Government GASB • Business FASB • Non-Profits FASB • Public Companies PCAOB / FASB

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Why Are Tribes Considered Gov’ts for Financial Reporting? • Power to Enact and Enforce a Tax Levy? • Established via Governmental Legislation? • Provide Services in Lieu of Another Government? • Ability to Issue Tax-Exempt Debt? • Tribes are considered Sovereign entities, similar to state governments by the United States Federal Government.

Tribal Entities – GASB Applies to All!

• Tribal Enterprises (Casinos, Hotel, Retail, Mini-Mart, Tobacco, Etc.) • Tribal Government • Tribally Sponsored Benefit Plans • Component Units

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GASB’s Authority • Has no authority to require compliance with any of its standards. GAAP is not a regulation.

• Governmental entity must follow GASB standards to conform with generally accepted accounting principles (GAAP) and receive a “clean” audit opinion.

• Other bond covenants, state law, local ordinances, grantor agencies, etc., may require compliance with GAAP.

GASB Board Members and Director of Research and Technical Activities

www.gasb.org They set your accounting standards!

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Important GASB Statements for Your Tribe’s Gaming & Non-Gaming Businesses

GAAP Hierarchy – GASB 76 • GASB Statements (Category A)

• GASB Technical Bulletins; GASB Implementation Guides, and literature of the AICPA ‘Cleared’ by the GASB (Category B) • Then, non-authoritative accounting literature:

o GASB Concepts Statements o FASB, FASAB, IPSASB, IASB o AICPA literature not cleared by GASB o Practices that are widely recognized & prevalent

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AICPA Gaming Audit & Accounting Guide

Ryan Burns, CPA Partner, BlueBird CPAs

AICPA Gaming Accounting & Audit Guide

• AICPA Casino Audit Guide o The AICPA Audit and Accounting Guide Audits of Casinos (the Guide) was originally issued in 1984. The Guide was not revised or amended, other than for conforming changes, since its issuance until 2011 (updated in 2014, 2017 and 2020).

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AICPA Gaming Accounting & Audit Guide

• Why the need for change? o Change in accounting principles. o Impact of technology. o Impact of multiple jurisdictions and the introduction of Native American gaming. o Diversity in practice. o Accounting and auditing issues not contemplated in the existing Guide.

AICPA Gaming Audit & Accounting Guide

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Some items in the 2020 Guide • Clarification that cash sales incentives/change in progressive jackpot liabilities should be accounted for as a contra revenue. • Clarification is provided that adjustments to chip/token floats due to breakage estimates or chip line discontinuation are to be recorded as a component of net gaming revenues.

• Using the work of internal auditors • Illustrative financial statements

Some Items in the 2020 Guide

• Tier Status – Material Right? • “Gross Gaming Revenue” or “Win” Definition • Net Gaming Revenue Definition • Jackpot Insurance and Recoveries • Chips and Tokens • Base Progressive and Incremental Progressive JP • Promotional Allowances

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Tier Status

• Main issue here is does it result in a liability to customers, • Or is it a promotional expense?

Gaming Revenues Redefined Gross vs. Net (Chapter 3) • Gross Gaming Revenue (or Win) = The difference between gaming wins and losses from banked games before deducting incentives or adjusting for changes in progressive jackpot liability accruals.

• Net Gaming Revenue = Gross Gaming Revenue – incentives +/- change in progressive jackpots + revenue from related gaming activities.

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Gaming Revenues – (Appendix B)

Above the line

Below the line

Jackpot Insurance (Chapter 11)

• Wins are computed in the same manner as non-insured • Payouts reduce the Win

• Insurance Payments are an expense • Insurance Recoveries are other income (not gaming)

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Chip Float (Chapter 11)

• Purchasing New Chips, Capitalize or Expense? • Adjusting the Liability Periodically or Breakage: o Public Notice o Reducing the Liability with an offset to Net Gaming Revenue

Jackpot Liabilities (Chapter 4)

• Accounting for Jackpots: • Accrue jackpot liabilities only for amounts the entity is legally obligated to pay as of the reporting date. o ‘Base’ or ‘Reset’ JP amounts. o Local-area progressive jackpots – accrue incremental amount above the base or reset JP amounts. o Non-progressive jackpots – no accrual until won. o Wide area progressives (“WAP”) – not a liability of the casino.

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Accounting for Goods & Services • Food & Beverage • Hotel • External Comps – gas, golf, etc.

Record Points at Expected Cost (Gross Margin Analysis)

Promotional Allowances – Comps (Chapter 3)

Above the line, reduce revenues

Below the Line, increase expenses

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Incentive Programs (Chapter 6) (Slot Clubs, Promos, etc.) Characterization of Incentives:

(1) marketing incentives to induce potential customers to enter into transactions (Discretionary); or

(2) loyalty programs for customers based on activities or transactions undertaken (Non-discretionary).

Incentive Programs (Chapter 3)

• Free play o Discretionary – should be revenue neutral, no accrual (watch out for statistical reports!!) o Non-discretionary – accrue estimated cost and treat as a contra revenue • Cash or cash equivalent incentives o Discretionary – net against revenue o Non-discretionary – accrue estimated cost and treat as a contra revenue • Complimentaries o Discretionary – report as expense rather than reduction of revenue. No revenue should be reported for discretionary comps o Non-discretionary – accrue estimated cost of providing comps to expense.

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Participation and Similar Arrangements (Chapter 5) • Participation arrangements are typically operating leases and fees paid under these arrangements should be reported as an expense rather than a contra- revenue. (i.e. 80/20 Splits)

• Third party license arrangements are typically not leases and would also be reported as an expense. (Yahtzee, Monopoly, etc.)

• Wide Area Progressives that are not accounted for as leases should report fees paid as contra-revenue. (Wheel of Fortune, etc.)

Governmental Gaming Entities (Chapter 12) • GAAP Hierarchy (GASB 76) • Allocation of Assets & Liabilities (Tribe vs. Casino) • Reporting of Transactions Between Tribe & Casino • Asset Impairments • GAAP Determination for Transactions

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Other Gaming Guide Highlights • Other casino industry issues including currency transaction reporting, managing properties for third parties, guarantees, long-lived assets and impairments, accounting uniforms and other long-lived stock assets.

• The Guide illustrates financial statements with footnote disclosures for FASB and GASB entities.

• Background information on rules of games.

Free Play Issues

• Free Play is not ‘Free’! - AICPA Guide Requires Accrual at Average Theoretical Payback % !! • Statistical Reporting (Actual vs. Theoretical Win) • General Ledger Reporting Issues • Financial Statement Reporting • State Revenue Sharing Fee Computation • Continuous Program Monitoring for Actual vs. Forecasted Results!

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Internal Reporting - Free Play Based on Statistical Report:

Internal Reporting - Free Play Recording in the general ledger: • NCEP (Contra Revenue) 4,711 • NCEP (Revenue) (4,711)

At the end of each reporting period an entry can be made to keep track of the free play for comparison purposes.

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Gaming Regulatory Overview • Audit Requirement; >$2M Gaming Revenues • Annual Review; <$2M Gaming Revenues • Consolidated Financial Reporting • MICS AUP; >$1M Gaming Revenues (III and II) • NIGC TB 13-1 (Guidance on AUP Reports)

Ryan Burns, Partner rburns@bluebirdcpas.com Thank you!

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