A Port in the Storm: Our Tradition of Strict Regulation Makes Us a Reliable Haven in Troubled Corporate Times

Last month, in the middle of one of the most volatile periods in the history of the U.S. stock market, Harrah’s Entertainment Chairman Phil Satre sat down with investors to discuss the company’s second-quarter earnings report.  As accounting scandals and plummeting stock prices have shaken international confidence in the American economy and wreaked havoc on the Dow Jones Industrial Average, Satre presented the picture of a company flush with growth and seemingly above the fray of the scandals that have rocked the American financial system to its core.

As those of us familiar with the gaming industry are aware, the situation at Harrah’s is no anomaly.  Indeed, as investors struggle to salvage their portfolios in the new bear market, investors are pointing to the gaming industry as a potential refuge from the storm.  Amid an overwhelming aura of distrust, instability and skepticism, the view among experts is that the gaming sector is one industry you can trust.

Why the overwhelming confidence in the gaming industry?  The rationale is simple, and no surprise to those of us who have seen our industry weather other difficult economic times.  As one of the most regulated and closely monitored industry in the country, the very nature of our business makes us impervious to the types of accounting and financial scandals that have brought about the demise of some of America’s most profitable corporate giants.

Because the state governments holding the primary role in regulating our industry depend on casino earnings for a substantial portion of tax revenue, regulating agencies apply a significant number of financial disclosure rules on casinos to make sure the states receive the taxes due to them each year.  The total cost of state regulation reaches hundreds of millions of dollars each year, and the Nevada Gaming Control Board alone employs more than 400 regulators.

The National Gambling Impact Study Commission made significant note of gaming industry regulation in its 1999 report on the casino industry.  The report highlighted most states’ requirement that casinos adopt and adhere to a set of state-designated procedures, typically called the “Minimum Internal Control Standards (MICS).”  These MICS focus on several aspects of our industry, including the conduct of games, the movement and handling of cash and equivalents, and the accounting and record trail of all transactions.

And unlike other industries, state casino regulatory agencies direct and review audits of casino operators to ensure accurate measurement of the revenue numbers that result in state tax dollars.  Often, state regulatory bodies enlist private audit firms to conduct compliance audits, but even these projects are strictly monitored.  The arrangement was reinforced earlier this year when, following the indictment of Arthur Andersen in the Enron scandal, New Jersey’s Casino Control Commission voted to force state casinos and their parent companies to sever ties with the accounting firm in an effort to maintain the integrity of the casinos’ accounting procedures.  The move rankled many industry leaders, but it ensures we once again will remain above the fray.

The extent of the federal government’s involvement in regulation of the gaming industry has expanded over the past several years.  In 1985, the Bank Secrecy Act was amended to include casinos and other cash-intensive businesses in a list of financial institutions subject to special requirements designed to prevent money laundering.  The Act requires casinos to report every deposit; withdrawal; exchange of currency, gambling tokens or chips, or other payment; or transfer that is made by, through, or to the casino in amounts greater than $10,000.

These regulations, coupled with our ongoing commitment to ongoing corporate responsibility, have created an industry that is transparent and long considered a sound, stable choice for investors.  In fact, our companies are considered such good investments that many retirement funds own a large portion of stock in the industry.

This transparency is even more attractive now as so many other business sectors suffer from a lack of investor confidence in the accuracy of corporate earnings statements, and Wall Street insiders are picking up on the trend.  As many analysts suggest, the regulation of our industry, combined with its resiliency, consistent cash flow, and record of full financial disclosure, makes the gaming industry a smart investment choice in these uncertain times.

As the White House and members of Congress grapple with how best to address the threats to our economic stability and ensure the legitimacy of our financial institutions, it is clear that the American and global gaming industries will continue to be affected by related developments for years to come.  In the latest action in the ongoing U.S. government probe of national corporate accounting scandals, the Securities and Exchange Commission (SEC) recently announced it will require all SEC-registered companies with revenues above $1.2 billion - including the four leading global casino operators - to submit sworn written statements verifying the accuracy and completeness of each companies’ latest financial statements.  Once again, our industry’s long history of regulation and fiscal transparency should allow us to weather the storm.  

As a spokesman for the American gaming industry in Washington, I am proud to represent an industry the American people can trust.  We have worked hard to build a reputation of fairness and openness in all our financial dealings, and I am confident our commitment to excellence will ensure that our industry remains strong whatever the economic future may hold.