You Have Been Assigned Responsibility for Unclaimed Property Compliance Now What? With more and more states focused on unclaimed property compliance, knowledgeable businesses have taken steps to assign responsibility within their organization for unclaimed property compliance thereby proactively managing risks for their organization. If you have been assigned responsibility now what? No need to panic! Take heed that with the appropriate knowledge and information you can develop a robust compliance program that mitigates risks and manages costs while adding value to your organization. The first step is to educate yourself about the foundational principles of unclaimed property. A little history U.S. unclaimed property escheat rules are based on the English feudal system of returning property to the crown. The U.S. unclaimed property system has evolved from this historical perspective to today where the primary function of the states (including the US territories) unclaimed property laws is to return abandoned property to the true owner. If that is not possible, then the property is remited to the appropriate state for safe keeping until the true owner claims the property if ever. What is unclaimed property? A liability that is or was once reflected on the books and records of a business as being owed to Page 1
another. Although this appears to be a very simple concept, it is a very complex area that can be a challenge to implement in practice. To identify potential unclaimed property, a business must evaluate its transactions with five key groups (1) customers; (2) vendors; (3) employees; (4) creditors; and (5) shareholders. Interactions with these groups create the potential to generate unclaimed property. However, all property that has the appearance of unclaimed property may not be a liability that is ultimately owed to anyone. For example, your business issues a credit memo to a customer (maybe for a price difference, damaged product, rebate, etc.), and your customer takes the credit by short paying an outstanding invoice. When payment is received, rather than cancel the credit memo, your cash application department applies the payment to the customer s account, automatically writes off the short payment to an expense account or sales account and business continues as usual. The problem with this approach is that when your company is selected for audit, this credit memo may still be open on the company s books and records or may have been later written off to income without any ability to connect the credit memo to your customer s short payment of the original invoice. By understanding this challenge and working with your organization to change processes to capture situations like the one described above and ensuring that an audit trail is developed to trace similar transactions, you will be saving your organization potentially thousands of dollars in Page 2
extrapolated liability down the road. Second, once you have educated yourself on unclaimed property, you will need to educate management. The unclaimed property rules and the way in which some states enforce their laws are foreign to most businesses. As such, education and awareness within the organization is very important. A great source of information regarding state unclaimed property audits and the implications for businesses is The Conference Board report titled Expanded Liability in Unclaimed Property Are States Going Too Far? In The Conference Board report it was noted that some states are using a limited set of company information to extrapolate significant liability assessments for companies. One example sited was the McKesson Corp. v. Cook case which involved approximately $19,337 of identified unclaimed property that was extrapolated out to $4.5 million in liability. Extrapolation was pursued in this case, as in many cases, because the state believed McKesson did not have the detailed information to prepare a report for all years under audit. This example clearly demonstrates the significance of understanding the audit process utilized by some states, the importance of understanding the records that will be utilized in audits and the methodology that will be used if this information is deemed not available or incomplete. A good offense in this case is to develop a good defense knowledge of the state laws and their audit process. Page 3
Third, develop an understanding of your organization s accounting processes and business operations and what the implications are from an unclaimed property perspective. Some key questions to which you should know the answers include What is the lifecycle of a sales transaction? What is the process if a customer overpays? What is the process if a customer short pays an invoice? What detailed information is maintained by the organization and for how long is this information maintained? How is an uncashed check treated? Where is your organization doing business? What accounting systems have been used by your organization and for how long? Where is there a potential to generate unclaimed property? Fourth, evaluate your organization s unclaimed property compliance, audit and voluntary disclosure history. This information will be invaluable in assessing your company s compliance risk, years potentially open under audit and in developing a strategy to address the risks identified. Fifth, develop a best practice process for your company to get into and stay in compliance. In developing this process you will need to have a clear understanding as to where there is a potential to generate unclaimed property and ensure that there are policies and procedures developed around these risk areas. The key here is to ensure that the policies and procedures augment the current accounting policies and procedures being utilized and not be so Page 4
foreign that they will not be effectively implemented. In other words, the policies and procedures should be tailored to the particular function s normal business operations. Sixth, educate all the functions that have unclaimed property implications for your organization. Ensure that they have a general understanding of the states unclaimed property rules, how these rules impact the organization, the unclaimed property procedures applicable to their function, the risk to the company if the procedures are not followed, and how they can also be a superhero. Seventh, create a compliance time line that allows sufficient time for each key step in the compliance to be completed within the process. For each impacted function, provide them with the opportunity to review the draft procedures and provide feedback. Ensure that each function understands the important role they play in managing the company s compliance risk. Eighth, implement the procedures you and your organization so painstakingly developed and file reports in a timely manner. Ninth, develop a periodic process to review and ensure compliance with the written policies and procedures. Through this process you can identify areas that need improvement. Tenth, keep the necessary records that will support the company through an audit. Make sure all the resources invested to develop a Page 5
robust unclaimed property process are available during an audit. This will allow the organization to develop an effective audit defense strategy (a position of strength) that minimizes the impact of excessive extrapolated liability assessments. If you have the knowledge and information to help your organization develop a proactive unclaimed property compliance process you will be a superhero for your organization. You will also be able to demonstrate how you have added value to your organization by minimizing risks related to noncompliance and potentially excessive extrapolated liabilities. Page 6