Unclaimed property audit activity has been on the increase over the past few years, with Delaware starting an audit binge with Kelmar as their lead auditor. New audit firms, including companies like IA Group, have begun auditing on behalf of states. As a holder, what can you do to lower your chances of intrusive audits lasting years and costing millions? Annual compliance has been your best bet for years.
Compliance Processes and Procedures
One of the best benefits of compliance is that you are continually looking at your processes and procedures, attempting to minimize unclaimed property reporting. This is best done on a continual review. By performing annual compliance, you can institute procedures that will benefit your employees, customers and vendors - establishing best practices. Would you like to tell a customer that you are sending money from five plus years ago to the state because you never told them about outstanding credits on their accounts? Or would you rather generate goodwill by proactively reaching out to them to return the money? During this process, you may also be able to remind them that a credit is outstanding and apply it to the next invoice, generating additional sales in the current time period. At Barganier, we often tell our clients that the best reporting is no reporting. But that comes with the caveat that all the potential unclaimed property has been returned to its rightful owner instead of sending it to the state.
If you wait until an audit to review your company's processes and procedures, you've waited too long. You have lost valuable time and goodwill with key stakeholders. It's an opportunity lost.
Time of Compliance vs. Audit
Unclaimed property will appear in all financial areas of a company, including payroll and employee benefits, accounts payable, accounts receivable, promotional activities, and legal. Every one of these departments or functional areas have other responsibilities and deadlines to meet. During the audit process, the auditors will require data and information to be produced within a short timetable, often with little regard for your other operational requirements. How would you like to have year-end and quarter-end responsibilities with an extensive document request thrown in on top? With compliance, you know the deadlines months in advance and can schedule around other events as necessary.
Costs of Compliance vs. Audit
If you look at just the cost of annual compliance versus an audit, you'll come out better with compliance. First off, the cost for professional advisors is spread out over years instead of concentrated in a one to two year span. Often companies hire a team of outside professionals, including lawyers and accountants. Audit defense hourly rates are often higher than annual compliance rates for these advisors. Audit defense teams are generally larger and require more manpower to respond to data requests in short time periods.
With proper compliance, you reduce the likelihood of penalties and interest for late reporting. In Delaware, the penalties and interest can amount to 100% of the property being reported during the audit. In Nevada, you have $200/day for non-compliance with an 18% interest rate. California has a daily interest rate of 12% with few waivers available. To make matters worse, some states will even assess the costs of the audits to you as the holder, adding another layer of cost to an audit. New Jersey law allows the state to assess costs of the exam up to 100% of the property recovered. Florida law permits costs at $800 per day, per examiner, along with travel and per diem expenses. Penalties, interest and costs often add three to four times the property recovered to total assessment in an audit.
How Companies are Picked for Audits
While there is no guarantee that your company will or will not be picked for audit, it is important to remember that many of the third-party auditors are paid on a contingency fee basis. They are only paid if they find unclaimed property in your company during the audit. As a result, you can decrease your likelihood of an audit if you have robust compliance programs. If the state or auditor determines that your company has a history of compliance and reporting substantial sums of unclaimed property, they may assume that there is not enough to collect to make it worth their own resources to audit your company. States with an in-house audit staff are still trying to maximize their ROI and will target companies not in compliance.
Most of the auditors will ask for copies of your prior unclaimed property filings near the beginning of the audit, during the scoping process. If you are picked for an audit and have a robust compliance program, they may determine it is not in their best interests to continue with the audit process. Barganier clients have seen auditors decide not to proceed after the initial scoping process, without asking for detailed general ledgers, bank reconciliations or other document requests, due mainly to the history of compliance.
Bottom line, a history of compliance makes you an unattractive target for auditors.