Keane's Unclaimed Property Blog

An Interview with a Former Third-Party Unclaimed Property Auditor

Gary Joseph, Senior Manager

The editors of Keane’s Unclaimed Property Blog recently sat down with Gary Joseph, Senior Manager within its National Consulting & Advisory Practice, to hear his perspective on the unclaimed property audit and enforcement landscape, as well as current trends taking place within the oil and gas industry.

Gary brings nearly a decade of unclaimed property auditing and consulting experience to Keane, focusing on the oil and gas, healthcare, construction, and manufacturing industries. Gary is a Certified Internal Auditor and an armed forces veteran, serving 12 years within the United States Army and Army National Guard.

KeaneUP Blog: As somebody that’s been on both sides as both an unclaimed property auditor and a holder advocate, what do you find more rewarding? What are the intricacies of both sides?

Gary Joseph: Since I’ve transitioned to the consulting side after seven years of leading an unclaimed property audit firm, I take pride in the fact that I’m able to assist businesses with their challenges rather than be the bearer of bad news.

I honestly don’t believe that companies intentionally hide or avoid reporting any unclaimed property, but that complying with these requirements is often lower on the priority list of financial professionals until it’s ultimately too late.

KUP: And by too late, you’re referring to your previous role as a third-party auditor.

GJ: Correct. There remains a gap between State revenue and spending budgets, and the current contingency-fee structure allows the State to supplement the budget while avoiding any fixed cost of employing auditors. Unclaimed property tends to be low-hanging fruit for both the states and auditors.

Being that the third-party auditors are compensated based upon the amount of past-due property they discover, I think it creates an improper balance in the effort of ensuring compliance with a Statute meant to protect the public versus a intent to discover as much property as possible.

KUP: How would you suggest States change their approach to enforcing its unclaimed property laws?

GJ: Many within the holder and advocate community honestly and truthfully believe that the unclaimed property firm should be compensated at an hourly rate, just as any other firm conducting a tax audit on behalf of the states. I believe you would actually be taking away the aggressive perception of it all, if you will, due to the contingency structure.

KUP: Is there really such a thing as audit defense – or is it really just audit preparedness at this point?

GJ: If there is noncompliance, a good auditor will discover it. I would say that the best type of audit defense is to ensure that the auditor remains consistent within the scope of the audit as defined by the state audit authorization letters and parameters established by the state laws.

Additionally, holders can defend themselves throughout the course of an audit with a proactive offense. That offense should include maintaining adequate supporting documentation in order to provide proof of a transaction’s disposition. This includes proper documentation to support voids, outstanding checks, and AR credit balances.

KUP: What are the perils of attempting to tackle an unclaimed property audit without the help of counsel or an experienced holder advocate?

GJ: I believe that having an individual that’s knowledgeable on state unclaimed property laws does protect holders. Being that the laws are so broadly written, if a holder were to attempt to undergo an unclaimed property audit without proper guidance or oversight, they may find themselves in a position where they feel they are being manipulated, or if you will – bullied.

Unfortunately, as well documented and legally challenged in some instances, you do have some auditors and audit firms out there that will take a more aggressive approach because of the incentivized fee structure in place. Some States are moving to prohibit contingent fee audits, just as they are prohibited on most tax audits.

KUP: What are some of the more aggressive audit tactics you have seen or heard?

GJ: We’ve heard and seen scenarios where an auditor will advise a holder not to conduct due diligence – when in fact due diligence is required by States. Certain auditors will have conversations and then negotiate what documents are readily available and researchable, knowing that most holders may not understand the implications of such acknowledgements.

Counsel or appropriate representation should be solicited in such discussions, as this may directly impact or justify the extrapolation and estimation methodologies. Many holders don’t understand how an auditor will actually view or interpret what’s due and payable, or what’s considered available and researchable.

The result is often an assessment that includes properties that probably shouldn’t be included in audit scope. Proper representation and cognizance of the unclaimed property environment is often the difference between a multi-million dollar audit discovery and true immaterial liability.

KUP: You have extensive experience within the Oil & Gas industry as both an auditor and consultant. What’s a current trend you’re seeing in the energy space at the moment.

GJ: One particularly eye opening issue pertains to bankruptcy filings and audits. In environments where a holder has emerged from bankruptcy or has actually filed the petition to enter into bankruptcy, the common understanding is that any liabilities up to the petition date are released upon court order confirmation.

Several states are getting more aggressive in their pursuit of properties that would have actually met prescription for escheatment. Under such scenario, several States are now submitting claims to the state, and ultimately challenging the release of properties that should have been reported prior to the bankruptcy ruling.

KUP: Have the auditors and the states they represent been successful in these efforts?

GJ: Yes! I’ve been a part of legal proceedings where the State successfully settled for 30-50 percent of the properties identified in the audit. I’ve also been a party to unsuccessful pursuits of those released due to bankruptcy properties, where the argument of the Supremacy of federal bankruptcy law to State escheatment law has prevailed. Timing of the States response to bankruptcy notice, as well as holder due diligence has been the critical element(s) in all outcomes.

Depending on when the bankruptcy petition is filed or granted and when the examination is issued, we’ve seen auditors go back to the state requesting to amend the scope of the audit to include property owed to creditors listed on the official creditor’s matrix filed with the bankruptcy court.

The state takes the position that in the absence of owner responses to the property, those properties should be reported as unclaimed property so that the state may fulfill its custodial duty and respond to any claims that may arise.

KUP: Is there any advice that we can give holders that either are contemplating bankruptcy, or that may be presented with this scenario?

GJ: Yes. Again, due diligence is key. Performing due diligence mailings prior to the filing and even during the course of the filing of the bankruptcy will allow holders to anticipate what properties may be released during the course of a bankruptcy. Without this effort, the state will continue its aggressive pursuit of those properties. Demonstration of proper controls and adequate record keeping are key!

KUP: Has this scenario played out in any other industries?

GJ: It’s largely been isolated to the energy industry. This is because the oil and gas industry is such a volatile industry, meaning that a downturn in the industry is often accompanied by bankruptcy filings by exploration and production companies.

KUP: What other concerns or issues facing the oil and gas industry at the moment?

GJ: Another issue in the oil and gas community lies in the interpretation of what is actually reportable. Many companies believe that there are mineral proceeds or suspended liabilities that are not subject to escheat. Some holders operate under the impression that there are several suspense codings of properties that are precluded from escheat.

I have yet to speak with a holder representative that can cite the terminology or statute that supports the hard position that has been taken across industry. Even through the use of legal counsel to cite or challenge the unclaimed property statutes, the terminology that they are relying upon is highly discretionary.

KUP: Obviously, holders that are intentionally withholding escheatable property, put themselves at higher risk of audit.

GJ: Absolutely. States are aware that many holders don’t conduct their due diligence nor adequately seek to cure suspense issues. Properties that are coded as unsigned division order or legal issue or unleased mineral proceed, from my experience, are often left unresolved and efforts to release the liability are limited. States, by way of their third party auditors, test those properties just as they would any historically reportable suspended liability.

KUP: What is the one “must-do” activity for holders?

GJ: Proper record keeping. Ensuring that your controls are in place for unclaimed property and that the existing controls are being followed. Unclaimed property needs to be given a heightened risk priority level as well, especially for firms or companies that have yet to or never have filed unclaimed property in the past.

Additionally, firms with transient personnel and vendors bases spread out either domestically or internationally, as well as those active in the merger and acquisition space, should be well aware of its compliance requirements and its heightened likelihood of an audit.

KUP: Lastly, what advice or guidance would you give the holder community at large?

GJ: Ultimately, unclaimed property laws exist for a legitimate reason – for consumer protection. They’ve been in place for some time, and its true intent is to protect the public good and consumer interests. Holders must recognize that noncompliance with these laws creates a very real, material risk to their financial statements – more specifically, the company’s bottom line.

The approach to determining whether or not an entity is in compliance and the objective, has a negative overcast due to the fact that compensation of the audit firms is contingent fee-based, and perceived by the business community as incentivizing the aggressive audit methodologies we see today.

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