Unclaimed Property and the Internal Auditor

April 28, 2011

The normal everyday functions of a company’s operations result in the generation of obligations that can become “abandoned and unclaimed property” (“unclaimed property”).   As a result, the role and duties of the internal auditor must include an audit plan to review the company’s unclaimed property compliance process on a regular and consistent basis.

This task requires the internal auditor to first become knowledgeable regarding the following: (1) the unclaimed property rules and reporting requirements; (2) the areas within the company that can generate unclaimed property; (3) the reasons why existing processes may result in a need for reporting; and, (4) the realization that non-compliance in this area can materially impact the financial statements.

What is Unclaimed Property?

Each of the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam and some foreign countries, including three provinces in Canada, have Unclaimed Property laws.  Within the United States, Unclaimed Property laws require companies, both public and private, including not-for-profit entities, to annually report and remit all unpaid/unfulfilled liabilities owed to third parties – such as patients, vendors, employees, customers, clients, shareholders, bondholders and policyholders –once the prescribed statutory number of years, known as the “dormancy period” has expired.  Obligations that remain outstanding once the dormancy period has expired are required to be reported and remitted to the applicable state(s).  Generally speaking, three to five years is the trigger for dormancy, with the exception of payroll, which is generally one year.  However, it is important to note that dormancy periods vary by state and by property type.

Can Unclaimed Property Impact the Financial Statements?

Unclaimed Property has not generally been a priority on the audit plans of most internal audit groups, if included at all.  This omission may be due to a lack of unclaimed property knowledge by the internal audit group or a failure to recognize unclaimed property’s potential impact on a company’s financial statements.  Succinctly stated, if management is not in compliance with the Unclaimed Property rules, past due liabilities coupled with state penalty and interest assessments can quickly become material to the annual financial statements.  The materiality is impacted by the fact that the company’s risks for assessment are not limited to the current year but can impact as far back as 25-30 years, given the general lack of a statute of limitations in most states.

Enhancing the Duties and Responsibilities of the Internal Auditors

Here are some ways the internal audit group can help management achieve and maintain compliance in the area of Unclaimed Property:

Define Liabilities Impacting the Company:
Assist management in identifying each area/department/function/group within the organization that has the potential to generate Unclaimed Property.

Understand Why Unclaimed Property is Being Generated:
Review the existing practices, policies or procedures specific to each property type to understand why liabilities exist once the dormancy period has expired.  Is it a failure to communicate with the owner to resolve the obligation?  Are there practices of miscellaneous income entries or reversal of the expenses merely to take liabilities to income?

Draft and Implement Written Policies and Procedures:
Create detailed written policies and procedures for each property type and each group/department that impacts the process.  These procedures should not just outline the means to timely remit funds to the states but should ensure, through remediation efforts, amounts that are not truly owed by the company are retained and not remitted to the states in error.

It is important that these policies and procedures be implemented and that the internal audit group review management’s adherence thereto consistent with a written audit plan.  It is also critical that all findings and/or observations inconsistent with the policies and procedures be raised within the management hierarchy to ensure corrective action is taken and taken in a timely manner.

I'm looking for information on...