Overview
The last decade has seen Malta emerge as the undisputed front-runner in the regulation of the online gaming industry. As of the end of 2020, the number of companies licensed by the MGA, including online and land-based entities, stood at 323, holding 328 gaming licences and 357 game type approvals to offer various types of games under the B2C licence.
The gaming sector has also distinguished itself as one of the economic pillars most resilient to the pandemic’s changes. As a matter of fact, during an exceptional year where the total economic value added fell by 4.3%, the gaming industry has recorded one of the highest growth rates in value-added relative to other sectors, which growth rate is equivalent to 15.3%.
This industry is continuously evolving given it is relatively new, with several challenges being faced by these entities daily. Therefore, auditors must possess the necessary tools to keep abreast of these changes and to be aware of specific aspects when auditing clients in this high-risk industry, whether large or small. Our audit team at GCS Malta outline further.
Materiality
The most relevant benchmarks that an auditor may use in setting materiality for a gaming entity are PBTCO, Total Revenues, Net Gaming Revenue (NGR) or Gross Gaming Revenue (GGR). Other metrics that an auditor might consider applying include Total Assets or Net Assets, depending on the type of entity and situation.
Significant risks and estimates
Typical risk areas in an iGaming scenario include:
- Revenue,
- Litigation and claims,
- Regulatory compliance,
- Intangible assets valuation,
- Related party receivables valuation, and
- Acquisition accounting
In contrast, typical estimates comprise gaming taxes, provisions for litigation and claims, valuation of intangible assets, recoverability of related party receivables, recoverability of bank and PSP balances, recoverability of investments in the subsidiary, and valuation of pending bets.
Compliance with laws and regulations
Management with the oversight of those charged with governance is responsible for compliance with laws and regulations. Having said that, auditors are required to obtain sufficient and appropriate audit evidence on laws and regulations that directly affect the determination of material amounts and disclosures in the financial statements, e.g., gaming tax. When it comes to other laws and regulations that do not directly affect the financial statements (e.g. penalties), the auditor performs specified audit procedures to help identify non-compliance. In both cases, the auditor should respond appropriately to any identified or suspected non-compliance with laws and regulations identified during the audit.
Keep an eye out for licenses soon to expire or expired, completeness of lawyers list, identified litigation and claims, provisions for litigations and claims, operations in non-licensed jurisdictions.
Obtaining an understanding of IT – Controls-based or fully substantive approach?
The auditor needs to understand control activities relevant to the audit to assess the risks of material misstatement at the assertion level and design further audit procedures responsive to assessed risks. In understanding the entity’s control activities, the auditor shall comprehend how it has responded to IT risks.
The auditor should consider whether they have the appropriate skills necessary to adopt a controls-based audit approach in which General IT Controls (GITCs) and other controls are tested. In case of ineffective controls or a lack of IT skills to perform such testing, a substantive approach should be taken around the IT system.
Player liability, revenue and pending bets
Player liability (also known as customer balance or wallet) is usually reconciled by adding deposits, wins, and bonuses to the opening player liability balance and deducting withdrawals and bets placed from it to arrive at the closing player liability balance. Any chargebacks, jackpot wins, or unrealised exchange differences should also be considered in this reconciliation.
For revenue, various audit procedures can be performed when taking a fully substantive approach to testing, such as vouching of deposits and withdrawals to bank statements, agreeing on GGR to returns submitted to authorities, reviewing minutes, lawyers’ replies, forums, web searches, customer complaints, and cut-off procedures. With a controls approach, and when controls are found to be effective, a reconciliation of player balance to the trial balance is sufficient.
Pending bets may be tested by performing a high-level analytical procedure and applying the wins-to-bets ratio to bets at year-end. One could also obtain a pending bets report after year-end to identify closed bets and wins or get odds at year-end to assess the fair value.
Gaming taxes, bonuses and jackpots
The auditor needs to assess whether the entity operates in countries that require a license and understand what licenses the Company holds. Typically, one would obtain revenue reports split by country and product to recalculate the Compliance Contribution in line with Gaming license fees regulations and Directive 4 of 2018, recalculate the gaming tax expense, vouch to monthly returns, and vouch for payments to bank statements.
Types of bonuses in gaming entities include sign-up bonus, deposit bonus, reload bonus, free bet, referral bonus, match bonus, money back bonus. A bonus is usually recognised as a liability by the entity when granted to the punter.
Jackpots may refer to fixed, progressive, pooled, or local jackpots. One should only accrue a liability and charge a base jackpot to revenue once the entity has an obligation to pay.
PSP balances and player funds requirements
Payment Service Provider (PSP) is a third-party company that assists businesses in accepting a wide range of online payment methods, such as PayPal or Adyen. Direct confirmation of PSP balances, as well as PSP charges, can usually be obtained through emails.
The auditor should pay attention to whether player funds requirements are being adhered to; namely, that player funds are kept segregated (Gaming Player Protection Regulations, SL 583.08, Article 7), that player funds are safeguarded (Gaming Act, Cap. 583, Article 19), and the player funds cover requirement (Player Protection Directive, Directive 2 of 2018, Article 38).
Why GCS Malta?
At GCS Malta, our audit team are highly experienced individuals that stay up-to-date with the latest regulations within the industry to ensure we provide our clients with a high-quality service. Contact us today for more information.
This article and any related material are intended for general information only and should not be used in relation to any specific application/matter without independent examination and verification of its applicability and suitability by professionally qualified personnel. Those making use thereof or relying thereon assume all risk and liability arising from such use or reliance.
