Delaware’s Recent Legislative Activity – How does it Impact Companies Currently under Audit as well as Those Considering the SOS VDA Program?

Debbie L. Zumoff, Chief Compliance Officer & National Consulting Practice Leader and Ann Fulmer, Director, Consulting & Advisory Services

July 12, 2017

The introduction of Delaware Senate Bills 13 and 79, together with the release of regulations governing audits and the Secretary of State (SOS) Voluntary Disclosure (VDA) program, collectively have created opportunities and concerns for companies currently under audit by the state of Delaware.

These companies are no longer held captive by audits initiated prior to July 2015 as they now have the option to transition out of the audit and into the SOS VDA program, or to enter into an accelerated audit process. With this new flexibility comes various pros and cons associated with each choice. As such, it’s extremely important for companies to carefully weigh each option before choosing the best path.

New Options for Holders to Consider

A recent outreach conducted by Delaware’s Bureau of Unclaimed Property sought to increase awareness of the new opportunities available to holders under examination created by SB 13.  Per the outreach, SB 13 created two new opportunities for some holders to resolve examinations.  The first option is defined as an expedited audit process, which promises to have audits closed within 18 to 24 months. Little guidance has been released with regard to the expedited program. As such, many questions remain unanswered and it’s difficult to know if or how this option would be beneficial.

The second option provides companies placed under audit prior to July 2015 an opportunity to convert the audit into a SOS VDA. There are many benefits to the SOS VDA program.  It extends audit protection to those that complete the VDA according to the terms defined by the VDA-2 agreement. The SOS DE VDA program also forgives interest and penalties that could be attributed to past due properties.  Because an auditor is not driving the process, a DE VDA can be done more efficiently and in a shorter timeframe than an audit.

Not everything is good news. It is important to note that in order to convert an audit into a VDA, each company must first agree to the VDA guidelines and methodologies.  The methodologies include the calculation of a projected liability for years where records are not complete and researchable, which is based on the actual liability due to all states in the base period.

Audit Conversion Process

There has been some guidance provided as to how the transition from audit to VDA might work. Per dialogue with the Secretary of State and the VDA Administrator, Drinker Biddle & Reath (DBR), those companies that elect to convert their audits will be able to utilize the scoping previously conducted during the audit to help move the project forward quickly. If there were issues between the company and auditors concerning the scoping of the audit, DBR stated that they would be open to discussions to reevaluate the scope to find a solution that works for both parties.

While auditor work papers will not be forwarded to the Secretary of State, in most situations companies should be able to utilize the same source documents, testing parameters, and remediation efforts to prove the final disposition of at risk transactions. Overall, while the work effort will be heavy, the benefit of converting to the VDA is something that companies should consider if they are not in a position to achieve final resolution with the auditors in the near term.

If neither of the two new options are appealing, companies can choose to stay the course to see the audit through to its normal conclusion. This option may be beneficial for those who are seeking to pursue legal arguments at a later date due to the preservation of the right to counter audit findings through the court system. If a company is considering future legal action against the state, staying the course in audit mode guarantees your right to do so. The negative associated with this option is that there is no assurance regarding how quickly the audit will be resolved. It also does not provide protection against interest and penalties.

The decision associated with the opportunity to convert to the expedited audit or SOS VDA options must be indicated in writing to both the Department of Finance and the Department of State on required forms within 60 days of the promulgation of Delaware Abandoned or Unclaimed Property Regulations.

The promulgation of Delaware’s Abandoned or Unclaimed Property Regulations was expected before July 1, 2017. However, with the amendment of Senate Bill 79, the deadline for the Secretary of Finance to promulgate regulations pertaining to estimations was extended to December 1, 2017. As such, the deadline to notify the Department of Finance and the Department of State would be expected to occur before the end of January 2018.

Factors for Consideration

Companies presented with the opportunity to consider the expedited audit or the SOS VDA program should carefully consider the benefits and potential downfalls associated with each option well in advance of the pending deadlines.  Relevant facts for consideration of options include the company’s state and date of incorporation, how long the current audit has been ongoing, how much progress has been made to date, the company’s reporting history, and the testing methodologies the auditors are utilizing for each property type.

While there is no one solution that fits every company, the current atmosphere demands that you evaluate each option to choose that which will generate the greatest benefit for your company. Failure to do so will result in a default position to stay on the current course. Once the deadline to pursue other options has passed, companies will be considered eligible for interest and penalties and there is no guarantee regarding the timing and duration of the audit. The decision to stay the course should be carefully considered and should be a choice, not a default solution imposed upon your company resulting from the lack of consideration.

If your organization is currently weighing its options regarding a Delaware unclaimed property audit and future course of action, contact a Keane representative for an initial consultation.

Debbie L. Zumoff, J.D.
Chief Compliance Officer & National Consulting Practice Leader
(610) 232-0704

Ann Fulmer
Director, Consulting
(610) 232-0712

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