Auditing player reward programs: casino incentive clubs pay out big for frequent customers, but fraud and the lack of controls are turning them into a huge liability for the gaming industry

Internal Auditor, April, 2007 by John R. Mills

Property cut-offs. Originally, player clubs were limited to a specific property. A player was not allowed to use any points accumulated at another property. The current trend is to accumulate points across all of a gaming company's properties. Accounting for the accumulated points and then applying appropriate cost factors requires extensive analysis of the different characteristics of each of the individual properties. Mergers of reward programs due to industry consolidation can cause considerable headaches for the accounting staff because of the different methods used by each program to calculate the total points. The audit risk associated with property cut-offs is that points earned at a property may not be accumulated at the corporate level. The corporate audit team should review the policy and procedures for accumulating individual property reports and test to prove that these reports are correct.

REDEMPTION RATE Once auditors are satisfied that the point accumulation is correctly recorded, the next step is determining the redemption (breakage) rate--the percentage of regular players who actually redeem their reward points. Some casino properties determine the redemption rate by segregating players by location (local versus national or international). Reward programs where most customers are local have an extremely high redemption rate--close to 90 percent at one casino. On the other hand, players who travel more than 200 miles tend to have much lower rates. Segregating local players from national players can result in a reasonable redemption rate for the property.

Another way to calculate the redemption rate is to age the player points by activity date. The longer the aged points are outstanding, the less likely they are to be redeemed. This approach is quite subjective because it requires the redemption rate to be calculated or estimated for each month outstanding.

The concern for internal and external auditors is whether the estimated redemption rates come close to the actual redemption rates. Material differences between prior year actual redemption rates and estimated rates should result in changes in estimates. In recent years, there has been an upward trend in the redemption rates as properties have extended cut-off times and more players have joined reward programs. Auditors should question the redemption rate being used and have the accounting person making these adjustments prove that this rate is reasonable.

To evaluate the estimates used by management to calculate the redemption rate, auditors should look at play activity reports (see "Slot Club Activity Report" on page 66). This report should address concerns such as total points, points used to determine player liability, and current redemption rates. Usually, this report is generated monthly from the accumulation of the daily recaps of the total coin-in for the current month compared to the player program coin-in. Additional comparisons can be made with the same month last year as well as the year to date compared with the prior year to date. This data tells management the percentage of play by members.