RWB-44-11-00020-P Generally Accepted Auditing Standards for Off-Track Betting Corporations

11/2/11 N.Y. St. Reg. RWB-44-11-00020-P

NEW YORK STATE REGISTER

VOLUME XXXIII, ISSUE 44

November 02, 2011

RULE MAKING ACTIVITIES

RACING AND WAGERING BOARD

PROPOSED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. RWB-44-11-00020-P

Generally Accepted Auditing Standards for Off-Track Betting Corporations

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following proposed rule:

Proposed Action:

Amendment of sections 5208.1 - 5208.6 of Title 9 NYCRR.

Statutory authority:

Racing, Pari-Mutuel Wagering and Breeding Law, sections 101, 516, 517, 520, 524 and 621

Subject:

Generally accepted auditing standards for off-track betting corporations.

Purpose:

To establish uniform auditing standards for off-track betting corporations.

Text of proposed rule:

Section 5208.1 of 9 NYCRR is amended to read as follows:

5208.1 Method of accounting.

Each corporation shall use Generally Accepted Accounting Principles [standard accounting procedures] so as to record and summarize financial information in order to produce financial statements and reports and to provide adequate internal fiscal controls.

Section 5208.2 of 9 NYCRR is amended to read as follows:

5208.2 Annual report.

Within one hundred and twenty (120) days after the end of the fiscal year of the corporation, [E]each corporation shall submit to the State Board a copy of its annual report of operations audited by an independent certified public accounting firm in accordance with Generally Accepted Government Auditing Standards as prescribed by the Comptroller General of the Untied States for approval prior to its distribution. The report shall include the following supplemental schedules in a form prescribed by the State Board:

(a) Statement of Section 516 Revenues and Expenditures;

(b) Statement of Revenue and Expense by Branch;

(c) Capital Acquisition Fund Balance Sheet and Statement of Changes in Section 509-a Capital Acquisition Fund.

The report shall include an opinion from the independent certified public accounting firm, in relation to the basic financial statements taken as a whole, on the required supplemental schedules listed above.

Section 5208.3 of 9 NYCRR is amended to read as follows:

5208.3 Quarterly reports.

Each corporation shall file with the State board, within 15 [30] days of the close of each fiscal quarter, a quarterly report [of revenue income and disbursement on analyses] of the activities of [each branch office] the corporation in a form prescribed by the board.

Section 5208.4 is amended to read as follows:

5208.4 Signatures on reports.

Each quarterly report shall be signed by at least one [two] of the corporation's principal officers, and by the person who prepared the report.

Section 5208.5 of 9 NYCRR is amended to read as follows:

5208.5 Other reports.

The corporation shall furnish to the State board annual [monthly] reports which shall include:

(a) simulcast handle by track including out-of-state and special events [copies of weekly payrolls of all personnel];

(b) a listing of every track with which the corporation conducted simulcasting for the year and the percentage paid to each track [copies of all written contracts, and written reports of all verbal agreements for the purchase of supplies or services];

(c) a list of directors and of officers, and the compensation paid to each;

(d) a report of any change of directors or of officers;

(e) the total number of and dollar amount of uncashed tickets at the end of the year [a statement depicting all unclaimed ticket fund accruals for the preceding month and to date];

(f) the total number of and dollar amount of uncashed vouchers at the end of the year; and

(g) a list of the total number of wagering devices by type (e.g. self-service terminal, teller operated terminal, etc.) at each branch and location.

Section 5208.6 is amended to read as follows:

5208.6 Books and records.

The State Board may conduct such investigations as it deems necessary in order to effectively carry out the purposes and objectives of off-track pari-mutuel betting as provided by law. The State Board may determine the [personnel practices,] method of accounts, and maintenance of books and records of each corporation, consistent with the powers of the New York State Department of Taxation and Finance [State Tax Commission] and of the Office of the State Comptroller [Department of Audit and Control] to prescribe uniform methods of accounts, records and books so as to adequately reflect the method of doing business and all financial transactions of the corporation including revenue received and distributions made thereof. Books and records of a corporation shall be maintained by the corporation as ordered by the State board and shall not be destroyed by the corporation or abandoned without the prior approval of the State Board.

Text of proposed rule and any required statements and analyses may be obtained from:

John Googas, New York State Racing and Wagering Board, One Broadway Center, Suite 600, Schenectady, New York 12305, [phone], email: [e-mail]

Data, views or arguments may be submitted to:

Same as above.

Public comment will be received until:

45 days after publication of this notice.

Regulatory Impact Statement

1. Statutory Authority: Racing, Pari-Mutuel Wagering and Breeding Law (RPWBL) Section 101 grants the Board general jurisdiction over all horse racing and all pari-mutuel wagering activities in New York State. RPWBL 516 grants general and specific jurisdiction to the Board to supervise the books and accounts of regional OTBs. RPWBL 517 requires OTBs to submit annually a complete and detailed audited report setting forth its operations and accomplishments; its receipts and expenditures, its assets and liabilities; details of planned branch offices to be constructed; and any other pertinent information related to operations. RPWBL Section 520, subdivision 1 grants the Board general jurisdiction over the operation of off-track betting facilities within the State and the authority to adopt rules accordingly. RPWBL Section 524, subdivision 1 requires that the Board prescribe uniform methods of keeping accounts, records and books, and that the Board prescribe forms of accounts, records and memoranda to be kept by regional off-track betting corporations. RPWBL Section 621 requires the directors of the New York City OTB to submit annually to various public officials a complete and detailed report setting forth its operations and accomplishments; its receipts and expenditures, its assets and liabilities; details of planned branch offices to be constructed; and any other pertinent information related to operations.

2. Legislative Objectives: This proposed amendment advances the legislative objective of regulating the conduct of pari-mutuel wagering activity in a manner designed to maintain the integrity of racing while generating a reasonable revenue for the support of government.

3. Needs and Benefits: This rule is needed to ensure the integrity of auditing procedures used by off-track betting corporations by establishing uniform standards for reporting and auditing activities. Currently, all but one of the New York State Regional Off-Track Betting Corporations' (OTBs') annual audits are performed in accordance with Governmental Auditing Standards. OTBs appear to be covered under the definition of "local authority" as prescribed by Public Authorities Law Section 2.2(a), and therefore should be subject to the Governmental Auditing Standards requirements under the Racing Law and State Finance Law Section 2.11, where Governmental Auditing Standards fall under "principles of government accounting specified by authoritative national standard-setting bodies." The Comptroller General of the United States has issued Government Auditing Standards that are followed by auditors and audit organizations that receive federal funds as required by law, regulation, agreement, contract, or policy. As a tried and proven governmental standard, the use of Government Auditing Standards by OTBs would create a uniform method of reporting that the public and regulatory agencies can understand. Similarly, independent auditors must follow Governmental Auditing Standards when performing audits when required by law, regulation, agreement or policy. With these proposed rules, the Board will integrate these standards to the oversight and regulation of off-track betting corporations.

Government officials are responsible for carrying out public functions efficiently, economically, effectively, ethically, and equitably, while achieving desired program objectives. High-quality auditing is essential for government accountability to the public and transparency regarding linking resources to related program results. Auditing of government programs should provide independent, objective, fact-based, nonpartisan assessments of the stewardship, performance, and cost of government policies, programs, and operations. Government audits also provide key information to stakeholders and the public to maintain accountability; help improve program performance and operations; reduce costs; facilitate decision making; stimulate improvements; and identify current and projected crosscutting issues and trends that affect government programs and the people those programs serve.

By requiring the OTBs annual audits to be performed in accordance with Government Auditing Standards, the annual financial statement audits will require OTBs to provide reasonable assurances that financial information is presented in accordance with established criteria and that each OTB has adhered to specific financial compliance requirements. This will require additional audit procedures, modification to the independent auditors report that is currently provided and a separate report describing the independent auditors consideration of each OTB's internal controls over financial reporting and compliance with laws, regulations, (including New York State Racing, Pari-Mutuel Wagering and Breeding Laws and Rules) and provisions of contracts agreements.

In addition, the rules will require auditors to express an opinion, in relation to the basic financial statements taken as a whole, on the required supplemental schedules to the annual audit report, Statement of Section 516 Revenues and Expenditures; Statement of Revenue and Expense by Branch; Capital Acquisition Fund Balance Sheet and Statement of Changes in Section 509-a Capital Acquisition Fund. These schedules provide relevant information pertaining to various regulatory matters. Such statements have been a requirement for the OTBs for several years, but have not previously been subjected to audit. By doing so the reliability of the information presented will be strengthened.

Audits of financial statements in accordance with generally accepted Government Auditing Standards (GAGAS), requires the auditor to assume certain responsibilities beyond those of audits performed in accordance with Generally Accepted Auditing Standards (GAAS). GAGAS includes general standards, as well as fieldwork and reporting standards that are in addition to those required by GAAS. Those standards are in such areas as independence, competence, quality control systems, audit documentation requirements, audit follow-up, obtaining and reporting the views of responsible officials about findings and planned corrective actions, and report distribution.

GAGAS also requires additional reporting on internal control over financial reporting, compliance with laws, regulations, and provisions of contracts or grant agreements, which affect audit procedures. Specifically, in addition to an auditor's report that expresses an opinion or disclaimer of opinion on the financial statements as required by GAAS, Government Auditing Standards requires a written report on internal control over financial reporting and on compliance and other matters. New York State Racing, Pari-Mutuel Wagering and Breeding Laws and Rules would be included in this requirement.

The addition of such requirements will provide a useful tool not only for the Racing and Wagering Board but also to the OTBs as well as to each of their municipalities. Copies of a draft independent audit report's on financial statements and a draft report on internal control over financial reporting and on compliance and other matters based on and audit of financial statements performed in accordance with Government Auditing Standards are attached. A summary regarding the various intricacies of internal control structures is also attached for easy reference and is identified as OTB Internal Control Requirements Summary.

The Board is also recommending that in addition to the new audit requirements identified above (incorporated into proposed changes to 9E NYCRR sections 5208.1 and 5208.2) that various sections of the rule be revised to update the text (9E NYCRR 5208.6), conform to the statute (9E NYCRR 5208.3) and ease and update the reporting requirements to current practices (9E NYCRR sections 5208.4 and 5208.5).

Lastly it should be noted that the Government Auditing Standards are largely regarded as governments' equivalent to the Sarbanes-Oxley (SOX) reporting requirements that publicly traded entities are required to follow. SOX requirements were developed to increase controls and audit reporting requirements to protect investors and ensure the confidence of the public. It is hoped that these rule revisions will do the same.

Perhaps the most persuasive statement regarding the need for Government Auditing Standards by public benefit corporations like OTBs was made by Louis Grumet, Executive Director of the New York State Society of CPAs, in the May 2008 edition of The CPA Journal: "Citizens should not be taking risks when they pay their taxes. If [Government Auditing Standards] were required for New York State-funded entities, taxpayers would benefit from those standards' independence, continuing education, and peer review requirements. Broader implementation of the [Government Auditing Standards] would improve the quality of audits of government and not-for-profit organizations. It would also promote audit economy and efficiency, and ensure professional competence."

4. Costs:

(a) Costs to regulated parties for the implementation of and continuing compliance with the rule: The accounting firm that audits Capital Region OTB and formerly audited NYCOTB stated that the rule would result in an approximate 15 percent to 20 percent increase in time to address the internal control and compliance requirements. NYCOTB is no longer in operation. For Capital OTB, the added cost would be less than $15,000.

(b) Costs to the agency, the state and local governments for the implementation and continuation of the rule: None. This rule would not impose any new costs upon local governments and the New York State Racing and Wagering Board. In fact, the rule may lower local and state agency costs by reducing the amount of time and travel needed to meet with OTB auditors and discuss audit findings. By adopting auditing standards, audit review will become systematic and more efficient, mitigating the need for extensive post-audit follow-ups by local and State staff.

(c) The information related to costs was obtained from the Board staff, who in turn obtained the information from the regulated entities prior to publication of this rule as a proposed rulemaking. Costs were communicated directly to Board staff after copies of the proposed rules were provided to the regulated entities.

5. Paperwork: This rule will require the filing of several forms in addition to audit reports already required by statute. Auditors will be required to express an opinion, in relation to the basic financial statements taken as a whole, on the required supplemental schedules to the annual audit report, Statement of Section 516 Revenues and Expenditures; Statement of Revenue and Expense by Branch; Capital Acquisition Fund Balance Sheet and Statement of Changes in Section 509-a Capital Acquisition Fund. These schedules provide relevant information pertaining to various regulatory matters. Such statements have been a requirement for the OTBs for several years, but have not previously been subjected to audit. By doing so the reliability of the information presented will be strengthened.

6. Local Government Mandates: There is no program, service, duty or responsibility imposed by the rule upon any county, city, town, village, school district, fire district or other special district. Counties and cities are already under a statutory duty to review the financial activities of off track betting corporations. This rule will make audits uniform and therefore lower costs and facilitate the audits that localities are required to perform under current statutory mandates.

7. Duplication: There are no relevant rules or legal requirements of the state and federal governments that duplicate, overlap or conflict with the rule.

8. Alternative Approaches: One alternative would be to allow current accounting practices to continue. However, this alternative was rejected because the use of Government Auditing Standards creates a uniform method of reporting that the public and regulatory agencies can understand. Furthermore, independent auditors must follow Governmental Auditing Standards when performing audits. If this alternative is not adopted the continued use of non-standard accounting principles and recordkeeping procedures could compromise the integrity of the racing industry.

9. Federal Standards: There are no federal standards for pari-mutuel wagering. The New York State Racing and Wagering Board and, to a limited fiscal extent, the Department of Taxation of Finance are solely responsible for regulating pari-mutuel wagering in New York State.

10. Compliance Schedule: OTBs are required to submit annual audits every April. The Board would like to have this rule in place for the April 2012 reports.

Regulatory Flexibility Analysis, Rural Area Flexibility Analysis and Job Impact Statement

A job impact statement, statement of regulatory flexibility for small businesses and a rural area flexibility analysis is not necessary for this rulemaking.

This rule will not adversely impact jobs or employment opportunities. The rule does not require audits - OTB audits are required under the law. Instead, the rule will enact standards for audits that are currently required by law. In light of the threatened loss of 1,500 jobs at New York City OTB that was averted in June 2008, these new standards may help to preserve OTB jobs by ensuring transparency of fiscal operations within OTBs and bolster public integrity in the financial operations of these public benefit corporations. These rules may also have a positive job impact on private auditing firms that are not presently affiliated with OTBs and would qualify as independent auditors. As is apparent from the nature and purpose of the rule, these rules may also positively impact private sector jobs statewide by economizing revenues derived from pari-mutuel wagering, that in turn help reduce local property taxes and reduce the overall tax burden on residential and commercial property owners.

This rule will not adversely impact small businesses or local governments because the rule affects public benefit corporations that do not meet the definition of either entity. OTBs are not local governments, and all of the OTB corporations have more than 100 employees. This rule does not impose reporting, recordkeeping or other compliance requirements on small businesses or local governments. In fact, the rule may have a positive impact by reducing time and manpower costs on local governments that receive payments from OTBs by facilitating the accounting and auditing processes. Local governments who already are familiar with Governmental Auditing Standards, which are required for localities that accept federal funds, will benefit because OTBs audits will be prepared under a standard they are already familiar with.

This rule does not require a rural area regulatory flexibility analysis because it will not impose an adverse impact on rural areas and it would not impose reporting, recordkeeping or other compliance requirements. The use of Governmental Auditing Standards have already been established and should already be in use by rural governments that accept federal funds. There is no need to establish differing compliance or reporting requirements or timetables that take into account the resources available to rural areas. While some regional OTBs have remote operations in rural areas of the state (e.g., OTB branches and automated tellers located in rural counties), these public benefit corporations maintain their business offices in -- and mainly operate from -- urban or suburban areas. Therefore, they already have the administrative ability meet the auditing requirements as mandated by statute and are not subject to the compliance issues described in Section 202-bb of the State Administrative Procedure Act. These rules will merely establish a uniform standard for the preparation of these audits and will not have an adverse impact on rural areas.