Keanotes

Audit Trends

By Ann Fulmer, National Practice Leader

March 24, 2020

As we enter a new decade, concerns around methodologies employed by auditors continue to create tension between the unclaimed property authorities and holder community. While states continue to seek out methods to increase compliance with their unclaimed property laws, companies are equally concerned about the risks of over-escheatment and inflation of populations deemed to be reportable properties. Companies are also concerned about the identification of accounts as escheatable according to parameters defined by auditors, rather than in accordance with state statutes.

Although this situation has been a concern for many years, tactics to increase unclaimed property compliance continue to evolve and take on new dimensions. Most notably, third party auditors continue to push the boundaries regarding property that should rightfully be considered preserved from escheatment. States repeatedly profess that the true nature of unclaimed property compliance is to ensure that property owners are reunited with their funds (which we strongly support). Yet, third party auditors hired to represent their interest, with most auditors paid via a contingency fee based on what  they identify as “out of compliance,” continue to include larger and larger populations of accounts that are not truly lost or forgotten based on their expanded interpretation of unclaimed property compliance.

Death Master File (DMF) Usage

One of the more notable trends is the expanded use of the Social Security Death Master File (DMF) to identify account owners believed to be deceased. Originally introduced through audits within the life insurance industry, usage of the DMF continues to spread to new industries including banks, credit unions, broker-dealers and transfer agents.

While it is logical to assume that a deceased person cannot transact business on their account, it negates the fact that legitimate activity can continue on accounts through heirs and estates. Questions around who’s entitled to receive funds can take years to settle. Demanding that accounts in situations such as this be escheated to the states can create undue risks and potential financial harm to those entitled to receive the proceeds of the account. Systems with strong controls governing the monitoring and tracking of owner generated activities (OGA) and the updating of date of last contact (DOLC) will naturally identify those accounts that fall silent due to the death of the account owner. A lack of OGA, coupled with an indication that the account owner is lost as established by mail returned from the post office (RPO), should be the primary focus of identifying escheatable accounts. Testing to confirm the parameters controlling and monitoring OGA and RPO should be the focus to confirm compliance with unclaimed property laws.

Look-back Periods

Another interesting development is massive record requests consisting of thousands of transactions reaching back into periods well beyond typical company record retention policies. While we understand that most state statutes include an audit look-back period of 10 years plus dormancy, or 13 – 15 years, it’s unfair to deem transactions that remained outstanding for 90 days or voided after 30 days from issuance as automatically considered unclaimed property simply because they don’t have the underlying support documents to demonstrate that they were properly settled. This is especially true for companies that have strong unclaimed property reporting histories and maintain documents to demonstrate their compliance efforts.

Record Retention

This situation is further exaggerated when you consider that certain auditors are being “proactive” and provide companies with detailed listings of records that will be needed to remediate properties that meet their description of being “at risk” of escheat at the kick-off of the engagement. However, when companies don’t have the detailed remediation to support the final disposition of outstanding or voided checks, the assumption that the property is unclaimed is automatic. This occurs without consideration for the fact that the record requests go way beyond most company’s record retention policy. Auditors and states then argue that destruction of records should cease upon receipt of audit notification letters, while failing to recognize that organizations, especially large ones, cannot simply change their corporate record retention policies on short notice. While we recognize their argument, corporate America doesn’t respond so quickly.

Other Trends

Other trends to watch include:

  • The pursuit of equities held by foreign incorporated parent organizations
  • Aggressive requests for due diligence to be performed despite ongoing research efforts being conducted by companies to find remediation support that will satisfy audit demands
  • The push to close individual states in audits that include multiple states
  • Using the states as muscle to push an audit when companies are providing records on a continuous basis
  • Inclusion of properties in audit findings that haven’t yet met

One last issue currently facing companies is the demand for due diligence to be mailed on accounts that are not considered lost for states that require shareholder accounts to be dormant and lost before being considered unclaimed. This situation even exists when the company is able to demonstrate that accounts are being actively monitored for RPO via the usage of first class mailing for proxy materials and tax forms. The question that auditors don’t answer is what happens when the due diligence letter reaches its intended recipient, as demonstrated by a lack of returned mail, but the account owner fails to respond? Will the auditors demand that the account be reported as unclaimed property even though the account clearly does not meet the state definition of reportable property? If they do, who will be held accountable for the early escheatment of the accounts and possible financial harm caused to the account holder?

Conclusion

We agree that there is an argument to be made in support of unclaimed property audits as a tool to increase compliance and ensure that companies are employing methodologies to protect assets belonging to others. History has demonstrated that property can become abandoned and that audits are useful to spread education and encourage holders to come into compliance. We encourage states to recognize that audits can also create undue hardship on companies that are striving to do the right thing. The contingency fee pay structure employed by most states to avoid having to include auditor fees as a budgetary line item can create an atmosphere that encourages expanding definitions of what it means to be “out of compliance.”  We encourage states to closely monitor the activities employed by their third- party auditors to ensure that they are not exceeding the parameters defined by their unclaimed property laws. We also encourage states to recognize the compliance efforts employed by companies to achieve and maintain compliance with the magnitude of compliance requirements created by individual states. Finally, we highly recommend that companies continuously monitor their internal operations to help ensure that property is properly identified, remediated, tracked, and reported in a timely manner. Proactive measures on both sides of the fence will help further the underlying goals of unclaimed property and protect assets from becoming lost and forgotten.

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