By: Laurie Andrews, Gary Joseph and Brian McCarthy
The unclaimed property audit landscape is forever changing. Just a few years ago there were only a handful of active third party contingent fee audit firms, whereas today there are currently 8+ audit firms contracted by the states to audit companies to ensure compliance with unclaimed property. Many audit firms take different approaches with regard to how they conduct their unclaimed property audits. Some audit firms focus on specific property types while others generally include any or all property types for a specific holder or industry. A few of the more active and well known audit firms are Kelmar, Verus Analytics LLC, Treasury Services Group, and Discovery Audit Services.
In recent years, there has been an increase in multiple audit firms and/or states auditing the same holders at the same time. In the past this was unheard of, but it has unfortunately become the “new norm.” Some holders may be subject to four to five different audits at the same time, with different third party audit firms and/or states performing these simultaneous audits. Competing requests, and the need to juggle multiple audits with the same internal resources, can cause delayed responses to the various audit data requests.
It is important to define the audit scope at the outset of the audit. Proper scoping ensures that the same entities and property types are not being reviewed by multiple audit firms or individual states. If an overlap of audits on the same property types or entities has already occurred within your company, it is recommended to identify the overlap with the states directly. In most instances, the states will review the approved audits for your company and confirm the scope by entity and property type for each respective audit. There are even instances where a state may withdrawal from the overlapping audit.
Another observed impact on the audit landscape is audit firms stepping in to industries where they have little or no institutional knowledge of the holder type or industry. Audit firms who do not know or understand a specific industry tend to “learn as they go,” which can cause strain on both internal and external holder resources. Much of the resource strain occurs from trying to educate the auditor about the specific industry or nuances within the specific holder; such as, explaining property types that are undefined, while trying to keep the scope of the audit as tight as possible. As a result of the auditor’s lack of knowledge of a particular holder or industry, the audits tend to span across several years.
Audit Notifications Letters
State audit notification letters are the primary resource in determining the audit scope and entities under review. These notices, issued by the applicable state’s unclaimed property division, contain lots of useful information, including but not limited to:
- Date of Audit Notice
- Statutory provisions under which compliance is being evaluated
- Third party audit firm
- Name of entity and/or entities to be examined
- Property Types to be reviewed
- Specific instructions for future filing cycles
While some state audit notification letters include the review period that the audit will cover, many do not expressly provide this information. Holders must rely on statutory guidance to confirm the years the administrator is authorized to review the records of, and tie in the date of the audit notice to ascertain the in scope periods. State unclaimed property laws include provisions that expressly provide the authorized lookback period for any examination. For most states, an audit scope is limited to ten report years plus dormancy depending on the property types.
Lookback Provisions by State
The lookback period refers to the total transaction periods includable in the examination scope. The dormancy period defined by the state statute is essential in determining the lookback period of any examination.
Although an audit’s scope may reference certain report years, the property type’s dormancy period may extend the lookback period three to five years beyond the oldest report year in scope. This results in a total audit scope review that includes 13 to 15 years of records.
|Audit Scope||10 years||10 years||7 years|
|Dormancy Period||5 years||3 years||3 years|
|Total Lookback||15 years||13 years||10 years|
Limitations on Lookback by Industry
An audit’s scope may also be determined by the holder’s industry. Some states provide a shorter dormancy period due to conflicting record retention requirements imposed by the industry or administrative guidance.
An example of such limitation can be found in the manner the state examines financial institutions in Louisiana. Holders operating as a bank, credit union or other financial institution classification have a limited lookback period of six years as opposed to the standard 10 years for other industries.
Complete and Researchable Records
With the enactment of DE SB 13 in February 2017, Delaware performed one of the most pivotal unclaimed property statutory compliance overhauls since Texas v. New Jersey. In an effort to favorably augment its unclaimed property compliance methodologies and criteria, the state made sweeping changes to some of the most contentious provisions of its prior law – primarily its lookback periods, record retention requirements, and statute of limitations.
Additionally, by providing that completeness and researchability of records constitute the basis for determining the number of years holders are obligated to gather, review, and submit records while under involuntary audit or voluntary disclosure (VDA) arrangements, the state has provided a roadmap to mitigate the risk of what can feel like never ending compliance examinations.
The completeness and researchability of records allows for record retention constraints to be weighted heavily in the compliance process. Although it cannot alone result in a reduction of the lookback period or scope of an audit, it does limit the years for which holders must gather and submit records in an audit or VDA in Delaware.
Scoping – Property Type Review
Property Types of Exposure Depends on Industry
Every industry and business is subject to unclaimed property laws and in most industries an audit of unclaimed property compliance will include a review of general ledger property. In a general ledger audit, you can expect the auditor to review your chart of accounts to determine if there are pockets of unclaimed property sitting in a number of places such as cash accounts, accounts receivable, suspense accounts, accounts payable, miscellaneous income and expense accounts.
In addition to general ledger property, you could have a whole host of other potential property types that will be reviewed under audit depending on your industry. Some common industries and property types are:
|Banking||Checking and Savings Accounts, Certificates of Deposits, Official Checks, IRAs, Loan Overpayments, Safe Deposit Box Contents, etc.|
|Insurance||Policy Benefits, Claim Payments, Annuities, Premium Refunds, etc.|
|Oil and Gas||Royalties, Mineral Proceeds, AR JIB, etc|
|Retail||Stored Value Cards|
|Securities||Dividends, Stocks, Bonds, Mutual Funds, IRAs, Brokerage Accounts, Mutual Fund Accounts etc.|
The type of property may influence the auditor’s records request and the focus of the review. For some property types, single period reports will be requested while for other property types multiple period reports will be requested.
Single Period Reports
In the case of customer accounts, auditors typically ask for a current list of all accounts, by account type, and other various data points including social security numbers. Depending on the auditor, a review of inactivity and types of owner generated activity could occur. Meanwhile other auditors will use databases such as the Death Master File as an audit tool to identify a population of potentially reportable accounts.
Single period reports are also a standard request used by auditors to evaluate unclaimed property compliance for royalties. Holders typically provide the royalty suspense report as of an agreed upon date – commonly, the end of year. Depending on the property type, the dormancy trigger date can be either the last activity date, production/sales date, or last contact date.
Multiple Period Reports
When reviewing general ledger property types such as accounts payable, payroll and accounts receivable, auditors will request multiple point in time reports over the entire lookback period to review and compile a population of potentially reportable items.
For payroll and accounts payable checks, auditors may request monthly or quarterly uncashed check lists and voided check lists for testing. For accounts receivable, auditors may request monthly or quarterly aged trial balances to review accounts receivable credits that were outstanding for 30 or more days. If monthly reports are requested over the entire lookback period, this could be 120 reports – for each account! Of course, record availability is a factor in what can be provided and should be discussed and carefully reviewed to ensure that the records the holder provides can be supported with the appropriate remediation documents prior to providing any records to an auditor.
Audit scoping remains one of the most scrutinized points of interest in unclaimed property compliance evaluations. It is a vital component of the review process, and care must be taken in its finalization. The scoping exercise may be the determinant of how long an examination lasts. It can have a direct impact on efficiency of the review, and the amount of effort required over the course of the examination. Our team recommends that holders carefully evaluate the variables presented in this article, as well as any which may be unique to your organization and industry, before finalizing audit scope and progressing to the next phase of an examination.
Learn more about managing unclaimed property compliance here.