Audit Update: Texas
By Alex DeFruscio – Vice President, Sales & Gary Joseph – Senior Manager, Consulting & Advisory Services Team
December 19, 2019
December 19, 2019
The Texas Comptroller of Public Accounts (“TX CPA”) serves as the government body that administers and enforces compliance with the State’s unclaimed property statute. The TX CPA Unclaimed Property department has authorized, and currently oversees, hundreds of examinations of holders in various industries including oil and gas, financial services, healthcare and manufacturing. Over the past several years, these examinations were primarily performed by third party auditors who are compensated based on a contingency fee tied to the amount of property deemed to be reportable to the state. As additional resources have been allocated to the department, the TX CPA has also begun to conduct examinations – having hired its own auditors who focus solely on unclaimed property examinations directly.
As Texas’s economy continues to flourish, and its population continues to grow, it is not surprising that the State has increased its efforts to ensure holders are in compliance with its unclaimed property laws. The State is home to thousands of hospitals, banks and other financial institutions, and serves as the energy capital of the US. It also has a rapidly growing tech sector, with Fortune 500 companies, such as Apple, investing billions of dollars and hiring workers in several of Texas’s largest cities.
Given Texas’s actions, we foresee many companies receiving audit notices by year’s end, and well into 2020. How do we know this? Because it has already begun…
Texas Audit Notices
TX CPA has issued hundreds of audit notices over the past couple years, with many issued in the last quarter of 2019. As suspected, holders in the oil and gas industry are still a focus. Midstream and upstream oil and gas companies continue to be targeted for audits as many of these companies struggle to stay in compliance; mainly due to industry volatility (i.e. M&A activity). Additionally, the omission of otherwise standard property types not applicable in the oil and gas industry, such as accounts payable and receivables, continues to place a “bullseye” on many holders operating in the energy sector.
Holders who have received an audit notice from Texas through one of its third party auditors should be on the lookout for additional audit notices from other states. This is due to the fact that most 3rd party audit firms contract with many different States, and often solicit other States to participate in an ongoing examination. Multiple participating states and the lack of uniformity of States’ unclaimed property statutes create additional burdens on holders under audit.
Many non-energy Texas holders mistakenly assume that the State’s focus on the energy sector reduces the risk that they will be audited. As several holders in the financial services and securities sectors have realized in the fourth quarter of 2019, Texas does not have a single industry focus, and firms outside oil and gas are also subject to audit by Texas.
Texas Audit Notices: Financial Services & Securities
Many of the recent audit notices issued by TX CPA were directed to national and regional financial institutions, some of which were audited before. While many of these institutions may not be headquartered in the State of Texas, all have a jurisdictional nexus to the state in that they maintain a physical presence or, at minimum, have account owners or customers with a last known address in the State. Although presence does not dictate a State’s right to audit any holder to confirm compliance with its unclaimed property statute, the likelihood of a holder being audited by a State which it has a presence is higher than that to which it does not.
Historically, holders in the financial services industry have reported the following property types:
- Checking & Savings Accounts
- Certificates of Deposits (“CDs”)
- Individual Retirement Accounts (“IRAs”)
- Outstanding Cashier & Other Official Checks
- Money Orders
Financial institutions that are required to file reports in Texas that are not regularly reporting these property types risk subjecting themselves to audit.
In addition to financial institutions, many holders who issue security type properties recently received audit notices. The apparent cause of the increase in audit notices focused on securities is due to several third party audit firms expanding their focus to this property type. Many of these firms have not historically conducted securities audits, and may have decided to expand their ongoing general ledger (“G/L”) focused examinations to include securities.
Texas Audit Notices: Fintechs & Payment Processors
We continue to see an uptick in financial technology companies (“Fintechs”) receiving audit notices. Just this past year, Texas authorized the examination of a vast number of Fintechs – many of which are household names that consumers use for retail, investments, and bill payment services. As the Fintech industry is relatively new in terms of unclaimed property compliance, and continues to develop its product offerings through innovation, it is imperative that compliance with State unclaimed property laws is considered proactively in order to ensure compliance into the future.
Areas of special concern for Fintechs firms center around the facilitation of payment processing between multiple parties and the potential for inactive balances. Both situations create an opportunity for unclaimed property exposure that should be monitored and reported upon expiration of the dormancy period. Property resulting from failed delivery of disbursements, whether electronic or paper, should be researched to determine if there was an error in the transmission to enable a follow-up disbursement. Balances owed to customers or clients should be monitored for owner initiated activity to identify those at risk of becoming dormant so proactive outreach can be conducted to re-establish contact.
Employing proactive measures such as these will help to ensure that properties at risk of being considered escheatable are identified, tracked and reported in accordance with state requirements. These measures may also help reduce the overall amount of property due to the states as a result of successful reunification with the rightful owners.
Awareness of current developments and audit activity at the state level provides a glimpse into the future as it relates to unclaimed property compliance. Knowing where the states are headed and the approaches being employed, also enables companies to take proactive measures to ensure that their unclaimed property compliance efforts address the concerns being raised, and that records are maintained in order to be responsive to auditor requests.
Through a combination of awareness and knowledge, companies can reduce their unclaimed property exposures while also increasing their compliance the spirit and letter of unclaimed property laws, including a focus on preventing lost and dormant accounts.