If your business made nearly $6 million in billings from a client in one year, you'd need a pretty good reason to walk away from that client, right?
This is why I'm alarmed by Las Vegas Sands' (NYSE: LVS) announcement that its accounting firm is resigning.
Las Vegas Sands' 2013 proxy indicates that PricewaterhouseCoopers, or PwC, "declined to stand for reelection as the Company's independent registered public accounting firm" and said that its audit committee was "currently in the process of selecting an independent registered public accounting firm to replace PricewaterhouseCoopers."
The proxy points out that PwC's reports for fiscal 2011 and 2012 "contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles." It also claims that as of the date of the proxy's release, there hadn't been any "disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure." It clarified that if there had been any unresolved disagreements, the accounting firm would have mentioned them in its reports on Las Vegas Sands' consolidated financial statements for the years in question.
Why I'm concerned
But the question remains, why would PwC stop working for a client that accounted for $5.9 million of its revenues in 2012?
Some speculate that the accounting firm's decision was motivated by a desire to avoid the risks associated with Las Vegas Sands' large reliance on Macau, which brings a different set of regulatory risks than those associated with U.S.-based business and accounted for about 52% of the company's operating profit in 2012. Las Vegas Sands also faces upcoming risks related to a possible violation of the Foreign Corrupt Practices Act, or FCPA, and allegations that the company was involved in money laundering.
If PwC walked away from millions of dollars in possible client billings because of regulatory risks, then that strikes me as a pretty good reason to fear those risks as an investor.
The risks associated with exposure to Macau aren't unique to Las Vegas Sands. In 2012, all of Melco Crown Entertainment's (NASDAQ: MPEL) profit came from its Macau properties. MGM Resorts (NYSE: MGM) and Wynn Resorts (NASDAQ: WYNN) also relied heavily on their Macau properties. Macau accounted for about 27% of MGM's operating companies' income and about 74% of Wynn's operating profit. These companies all employ either Deloitte & Touche or Ernst & Young as their auditors.
The Foolish bottom line
Despite Las Vegas Sands' recent success in increasing revenues and earnings per share, I believe the cautious investor should note the risks of doing business in Macau. I also think investors should heed the possible warning signs associated with having an auditing firm abandon such a major account with no suggestion as to why it's doing so -- especially given the threat of increased scrutiny surrounding the casino's alleged money laundering and possible FCPA violation.
More advice from The Motley Fool
For many companies, successfully capitalizing on a booming Chinese economy is like winning the jackpot. That's indeed the case for Las Vegas Sands, which made a big bet on Macau gaming about a decade ago that's paid off in spades. The company is now looking to spread its empire further, but will it be able to replicate its prior successes? Learn about all these opportunities, and the risks they pose, in our premium report on Las Vegas Sands. Be sure to claim your copy today by clicking here.