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By: Keane’s Unclaimed Property Consultant Team
Introduction
As states struggle to balance their budgets, they increasingly look to generate revenue by enforcing unclaimed property laws—a goal they pursue by conducting an unprecedented level of corporate audits. As a result, the question companies must ask themselves is not “Will I be audited?” but rather “Am I prepared to address and survive an audit when it happens?” The following document contains information and guidance from Keane’s unclaimed property consulting team regarding the key “red flags” or audit triggers that states look for, as well as other circumstances and operational procedures that can increase the risk of an audit. In addition, we share several best practices and proactive measures that companies can employ to help prepare for and minimize the impact of an audit when it happens.
Have You Been Audited Before?
If you have never been audited the chances are now greater that you will be audited given the current economic environment. The states have more to gain by auditing new firms than they do in conducting follow-up reviews. However, the fact that one or more states have already audited you does not preclude additional states from following their lead and doing the same thing. Further, even states that have conducted an audit may return again to ensure compliance or to conduct a new audit for completely different property types. It’s also important to remember that even those who have been filing consistently throughout the years are also vulnerable to audit. Even for those who have been filing consistently throughout the years, there is a tangible risk of being audited by states or third party auditors to identify circumstances of “underreporting” or the omission of specific property types.
Have You Previously Filed a VDA?
If you have not previously filed a Voluntary Disclosure Agreement (VDA) in a state, you may have the opportunity to do so now. Filing a VDA will allow you to come into full compliance while avoiding the fines and penalties associated with overdue filings. A VDA also reduces the period for which you have to report property. Example: if your company is selected for audit by Delaware, the audit period will be back to 1981. If you enter a VDA with Delaware, the reporting period only goes back to 1991, saving 10 reporting years. Some businesses attempt to come into compliance by simply filing an initial unclaimed property report. This may have the undesired effect of triggering an audit due to the state’s desire to determine a company’s historical accounting practices.
Do You Have Written Policies and Procedures?
Every company should have written policies and procedures for handling all potential unclaimed property from disbursement of the check through filing of the reports. Auditors will request and review such policies to determine whether your business operates under a “culture of compliance”. Without written policies and procedures your compliance efforts will lack consistency, leading to overlooked property types and unaccounted for exposures/liabilities.
State of Incorporation
A company’s state of legal incorporation is the state that benefits the most from an unclaimed property audit. In addition to the right to demand property with last known addresses within the state, the domiciliary state can also extrapolate back to periods for which records are no longer available. This results in significant revenues to boost their state budgets. A company is most likely to be audited by its state of incorporation. Consequently, states such as Delaware, which is domiciliary to numerous companies, are aggressively pursuing unclaimed property audits. Most states use third party “contingent fee” audit firms to conduct the audit. These firms generally audit concurrently on behalf of numerous states.
Date of Incorporation
Generally, a company’s date of incorporation establishes the timeframe for the scope of the audit. Delaware, for example, audits back to 1981. If a company was incorporated in Delaware in 2005, then Delaware cannot extrapolate prior to 2005. Hence the date of incorporation, in conjunction with the aggressive nature of the state of incorporation, is a critical factor in assessing risk for unclaimed property.
Your Industry
No industry is “safe” from an unclaimed property audit. Though some industries, such as financial institutions, were historically targeted, the onset of the third party auditor has shown an expansion in the industries traditionally audited. As a result, state audits have expanded to include, among others, manufacturers, fulfillment houses, funeral homes, retailers, pharmaceutical companies. States are successfully identifying significant unreported liability held by these industries.
Books and Records: Centralized or Decentralized?
The decentralization of books and records can lead to inconsistency in accounting practices and ultimately underreporting. As a result, companies with decentralized accounting processes can expect audits to consume more time and resources. The more records there are to review, the more time an unclaimed property audit will consume.
Number of States to Which You Report
The number of states to which you are reporting should be consistent with the size and nature of your business. If you are conducting business with a national customer base or a regional supplier base, yet only reporting property to a single state (such as the state in which you are headquartered) other states will identify you as an audit target.
Many companies mistakenly report all property to a single state believing that they will be covered by reciprocal agreements between the states. This practice can lead to inaccuracies in compliance details such as the dormancy period and the aggregate amounts and, ultimately, the filing of untimely reports, which may be subject to interest and penalties. Additionally, reciprocal reporting, if done incorrectly, can negatively impact the state indemnification available to your company for accurate, complete and correct reporting.
Total Value You Report Each Year
States track information on the volume and value of unclaimed property filings by industry. If your company is reporting an amount that is inconsistent with your industry peer group, it raises an audit red flag.
Filing Negative Reports
Filing negative or zero reports is appropriate if you conduct a thorough records review and find that your company has no reportable liability to that state. If you have not conducted such a review, and the state determines that you have liability, your company could be charged with engaging in fraudulent business practices. In this circumstance, again, states may assess interest and penalties.
Relationships With TPAs
Unclaimed property liabilities are your company’s responsibility even if the administration is managed by a third-party administrator (TPA). Historically these types of relationships are robust sources of unreported or under-reported liabilities that auditors have uncovered and are now focused on. It is important that each of your TPA’s is in compliance by either reporting unclaimed property liability on your behalf or by providing your company with the liability details so as to enable you to report it. If the TPA is reporting on your behalf, you should obtain annual certification of such compliance and copies of the reports.
Volume of Checks or Drafts Each Year
There is a direct relationship between the number of checks th at are issued annually and the incidence of unclaimed property liability. Higher volumes of checks require that you have clear policies and procedures and thorough remediation processes in place.
Maintaining a Reserve for UP?
Liabilities of a material nature must be reserved and included within the financial reports of all publicly traded companies. Financial accounting standards (FAS 5) require that corporate auditors sign off on financial reports which must identify all exposure and reserves. Unclaimed property liabilities uncovered under audit have caused some companies negative publicity and financial strain. Careful consideration should be given to whether a reserve should be created for unreported liabilities. There is a clear return on investment to cleaning up historical liability by filing the necessary annual reports and entering into Voluntary Disclosure agreements. Proactive reporting will limit the audit reach-back period.
Statutory Exemptions and Deductions
Over-reporting is common among businesses that do not have knowledge of exemptions and deductions which may apply to certain property types. Application of available exemptions and deductions can save your company thousands of dollars. There are specific exemptions in a number of states for business to business and other transactions.
Remediation Tactics
A variety of internal research and external outreach measures can result in a measurable reduction in your reportable liability. Accounting errors and poor practices can mimic reportable unclaimed property. Identification of such errors, with documentation to prove that an obligation is not owed, as well as due diligence outreach to customers, payees and employees will also lead to reduction of liability to be remitted to the states.
Monthly Account Reconciliation
Bank and general ledger account reconciliations are GAAP requirements. If you are not performing these types of reconciliations accounting errors will result, leading to significant unclaimed property liabilities.
Do You Write-Off Liabilities?
The historical practice of writing-off unclaimed property liabilities as income or to bad debt is a common practice among businesses, but it is a red flag for auditors. Such a practice circumvents the unclaimed property laws and overstates the financial statement. States auditors will identify those items and presume them to be abandoned property, and will employ look-back and estimation techniques to maximize the amount of liability.
For more information on Keane’s Unclaimed Property consulting and compliance services contact questions@keaneco.com or call 1-(800) 848-8896 x3132.
By: Keane’s Compliance Department
In a stunning turn of events, the State of Delaware and CA, Inc. (“CA”) have settled their litigation pending in the Delaware Court of Chancery. According to the terms of the agreement, CA has agreed to pay to the State a staggering sum of $17,650,000, including interest and penalties. This amount represents CA’s liability to the State for all past reporting years, starting in 1991 through and including the 2010 reporting year. The amount does not reflect any liability for equity property owed under the Abandoned Property Law. The portion of the settlement amount that CA claims relates to reporting years 2009 and 2010 is $983,057.65. The remaining $16,666,942.35 relates to the VDA period.
It is worth noting that the settlement figure is five times the approximately $3.5 million CA last offered to the State during the VDA process. Indeed, it appears that information has been uncovered drastically increasing CA’s exposure. There seem to be clues contained with the settlement agreement.
First, within the recitation of the facts of the matter, it is reported that on two occasions the Court granted the State’s Motions to compel the production of documents that CA wanted to withhold and ordered CA to produce the documents to the State. It is then stated that CA reviewed and considered materials exchanged with the State during the discovery process, including previously undiscovered facts and circumstances, when determining that it was desirable and beneficial to settle the matter.
Second, within the agreement CA makes the following representations that are clearly favorable to the State:
It appears that the information contained in the documents that CA was compelled to produce greatly increased CA’s liability. The result was an agreement by CA to pay a settlement 5 times its final offer under the VDA and to make representations within the Settlement Agreement and Release conspicuously favorable to the State of Delaware.
State Treasurer Michael Fitzgerald and Attorney General Tom Miller announced on February 12, 2010, that Iowa has reached a settlement in a lawsuit against Sprint over uncashed rebate checks. Thirty-six states have signed on to the $22 million settlement.
The settlement arises out of a lawsuit that began in 2006 when State Treasurer Fitzgerald brought an action against Young America Corporation, a rebate processor company from Minnesota. Fitzgerald later expanded the suit to include retailers T-Mobile, Walgreens, and Sprint as companies that used Young America to process their rebates.
The lawsuit contended that either Young America or the retailers were responsible to report uncashed rebate checks to the Treasurer, making it possible for rebate holders to make a claim for their rebate check. The retailers contended that Young America was responsible by asserting that they are not in possession of the unclaimed rebates and therefore they are not the “holders” of unclaimed property. Young America, on the other hand, contended the retailers were responsible. Iowa settled with Walgreens and T-Mobile in 2009.
Sprint will pay over $127,000 to the Treasurer to resolve the matter. Young America also turned over names and addresses of Iowans to whom the Sprint uncashed rebate checks were sent. In addition, Sprint has agreed to report all future unclaimed rebates annually.
The attorney general for Washington D.C. has filed a lawsuit against AT&T, seeking to recover ' unused balances on prepaid calling cards. The suit claims that based on the District’s Unclaimed Property Laws, AT&T should turn over unused balances on the calling cards of consumers whose last known address was in Washington, D.C. and have not used the calling card for three years. According to the attorney general's office, that sum, known in the industry as "breakage," represents 5 to 20 percent of the total balances purchased by consumers who use the calling cards.
