Delaware Promulgation of Regulations: Holder Options to Consider
Ann Fulmer, Director, Keane Consulting & Advisory Services
December 13, 2017
December 13, 2017
The last few months have been very busy for the state of Delaware. On October 1, 2017, Delaware released the long awaited Department of Finance Abandoned or Unclaimed Property Reporting and Examination Manual. While the Manual does not address issues raised by recent court cases, it provides certain protections for Holders in the event of an audit.
The Manual also preserves the opportunity for companies to enter into a voluntary disclosure agreement (VDA) with the Delaware Secretary of State’s Office to complete a self-review to identify and report current and past due unclaimed property due to the state, prior to being considered audit eligible.
Options for Holders Under Audit by Delaware
In an effort to extend this privilege to companies placed under audit prior to July 22, 2015, companies can elect to participate in an expedited audit with the current third-party auditors or convert to the Secretary of State’s VDA program (“DE SOS VDA.”) Impacted companies have 60 days from the effective date of the promulgation of the regulations, October 11, 2017, to elect conversion to either program.
As such, the appropriate parties must receive the required notification forms no later than end of business, Monday December 11, 2017. The Secretary of State’s policy statement “Conversion from Department of Finance Unclaimed Property Examination to the SOS VDA Program” details the expectations of companies who enter into the program.
In addition to preserving the right to participate in the DE SOS VDA program and to elect an expedited audit, the Manual also extends various rights to companies placed under audit and defines several key issues including record retention and availability of past holder reports, researchable records, audit scope and exclusion of certain properties from projection calculations.
Prior to providing requested information to the third-party auditors, the Manual memorializes the right to establish a non-disclosure agreement (NDA) between the parties. While the Manual contains an NDA template, companies have the opportunity to negotiate revisions, as they deem necessary, to protect company and client information per industry requirements.
Record Retention Requirements
The Manual also defines the records to be maintained by holders to include the date, place, and nature of the circumstances that gave rise to the property right. These records may include the following:
- tax returns (including consolidated and affiliation schedules),
- organizational charts and charts of accounts,
- unclaimed property filing history (for all states if the Holder is incorporated or formed in the State of Delaware),
- prior completed and accepted VDAs and examinations,
- policies and procedures related to record retention, accounting, and unclaimed property,
- Other financial documents such as bank statements, bank reconciliations, outstanding check lists, detail general ledgers, aged accounts receivable reports, aged accounts payable reports,
- information surrounding gift card issuances and redemptions (if applicable)
In addition to the records required to be held by the companies, Section 2.15.2 also states “upon request by the Holder, the State shall provide to the Holder all records of prior unclaimed property reports filed previously in the State.” This is a change from past practice, which required companies to provide proof of past compliance with the state, including past reports.
The Manual goes further to define complete and researchable records, in section 2.20.2, as “those that reconcile to the general ledger with the understanding that immaterial differences may occur. Researchable records are records to which the Holder may research the resolution of an item. At a minimum, researchable records shall include those items that contain a last known address of the owners of property.”
Audit Scoping & Estimation
Additional considerations also appear in the scoping of audits. Per section 2.16.3, “once entity scoping has been determined by the State, no additional entities may be scoped into the examination without the Holder’s consent”. Scoping of the audit should occur at the onset of the project and memorialized in writing to establish the entities and years considered included in the audit period. Once established, third party auditors cannot expand the scope of the audit without the company’s consent to do so.
Finally, the Manual speaks to the properties that can be included within a base period for purposes of estimation. While the calculations and rationale for estimations are still hotly contested, the Manual defines when and how the estimations should be calculated. A key provision of that definition is the clause that states, “Funds returned in the normal course of business shall not be included in the population of potential unclaimed items.”
The key issue for companies is the definition of “normal course of business”. Companies, therefore, need to demonstrate what their normal course of business looks like for their industry so that transactions are appropriately considered remediated and compliant with Delaware’s unclaimed property provisions.
Companies who are currently under audit, as well as those who are placed under audit in the future, should be familiar with the provisions of the Manual to ensure that the audit methodologies employed by the third party auditors are consistent with the defined provisions and are not excessive. It is also important for companies to remain vigilant to recognize when an invitation to participate in the DE SOS VDA program is received so that the appropriate next steps are followed within the 60-day response period to avoid being audit eligible.
Keane also recommends that companies enhance their record keeping systems to include documents to support the determination of unclaimed property for a minimum of 10 report years. Finally, Keane encourages companies to take a proactive approach to all audits to ensure that they are conducted in an efficient manner and do not exceed the parameters permitted to the states. Audits may be a tool states believe necessary to promote compliance, but they should be conducted in a manner that is respectful of the company’s limitations and historical efforts to be in compliance with state unclaimed property requirements.