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Editorial

Nothing to hide
Bear Stearns report says gaming companies can easily avoid the “creative” accounting that did Enron in

By Jamie McKee

The Enron scandal has struck fear into the hearts of investors everywhere, and the gaming sector is no exception.

Everyone is at least a little afraid that what happened to the now bankrupt energy trader could happen to another public company, one in which they just happen to have substantial holdings.
And that they would have no idea anything was amiss until it was too late.

Big Five accounting firm Arthur Andersen’s role in the scandal hasn’t helped allay those fears, given the large part it has historically played in the gaming industry.

Andersen served as chief auditor for Enron, whose financial collapse is under investigation by the Justice Department with an eye to such charges as securities fraud. The Department has indicted Andersen for obstruction of justice, alleging that it hampered the Enron investigation by destroying critical documents. Andersen has denied the charges.

In March the New Jersey Division of Gaming Enforcement ordered its gaming companies to cut all ties with the once-renowned accounting firm by May 15. Six Atlantic City properties, those owned by Trump Hotel & Casino Resorts, The Sands and Harrah’s Entertainment, have contracts with Andersen totaling more than $2 million annually.

New Jersey’s gambling laws call for such measures whenever anyone doing business with its casinos has “pending charges.”
Meanwhile, Louisiana Gaming Control Board Chairman Hillary Crain sent letters to casinos there telling them that Andersen would no longer be deemed suitable. And the Mohegan Tribe, operators of the Mohegan Sun casino in Connecticut, dropped Andersen in favor of PricewaterhouseCoopers.

Andersen is set to go to trial this month, but it’s already looking as though that might be too late for the Chicago-based firm to repair the damage, even if it’s cleared of the charge. It announced early last month that it was breaking up its U.S. operations and dividing most of them between competitors Deloitte & Touche and KPMG Peat Marwick. Following on the heels of that announcement was the pending lay-off of 7,000 employees, a quarter of its work force.

Post-Enron, many investment analysts have attempted to reassure the gaming industry by making the case that gaming companies differ greatly from other investment groups.

Bear Stearns has gone a step further with its report, “Outside the Box: Exploring Important Investor Issues,” which is previewed in Jason Ader’s column in this issue of Casino Journal (see page 6).
According to Bear Stearns, gaming is less likely to fall prey to fraud because its accounting is, by its nature, straightforward. The gaming industry is highly regulated and has a relatively simple business model—mostly cash with large fixed assets. Both of those factors provide an additional level of security that helps limit the potential for “creative” accounting.

The report goes on to point out, however, that such additional security can be a double-edged sword. One reason the gaming industry has such “transparency,” or visibility, in its casino revenues is precisely because companies are required to report their revenues to state regulatory agencies. Consequently, there is always the possibility that states could choose to raise taxes or change operating regulations, a risk that ultimately offsets the benefits.

But gaming companies do have an interest in hitting the Wall Street consensus for their earnings each quarter, which provides incentive for management to present earnings attractively. And the Bear Stearns report says there are areas to watch out for where management has some flexibility under generally accepted accounting principles. Several areas in particular may require discretion or interpretation and could potentially be considered “managing” earnings:

• adjusting the provision for doubtful accounts
• the capitalization of interest
• impairment of assets
• restructuring charges
• pre-opening expenses
• one-time exclusions
• off-balance-sheet liabilities

The fact that the gaming industry may be subject to closer financial scrutiny is a positive development if it means individual companies respond by tightening up their own standards.
Those who make it a priority to provide their financial information in a clear and thorough manner could see a higher multiple, especially in a post-Enron climate that has investors seeking higher levels of earnings transparency, according to the report.
 
In other words, industries that respond to the Enron scare with more rigorous accounting practices will be rewarded.

Let’s make sure the gaming sector is among that group.

Jamie McKee, editor and associate publisher, can be reached at 702-735-0446 or at .

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