Last June, the Delaware Senate created a task force to look at unclaimed property practices in the state. Recently, that task force sent its findings to the legislature. Underlying the entire report is the fact that Delaware relies heavily on unclaimed property in its budget process.
The task force noted that from 2008 to 2013, estimation of companies' liabilities resulted in approximately 80-85 percent of revenues from general ledger audits. This means that up to 85% of audit findings can never result in property being reunited with owners, as there are no names and no addresses to the properties. In fact, the amounts are just a guess by the auditor of what a company should have reported if the company had records. Considering that the audits could go as far back as 1981, most companies do not have adequate records for audit purposes as record retention policies are often set at seven years for federal income tax purposes.
The task force recommended that the state:
- Create a detailed audit manual which auditors would be required to adhere to
- Modify the appeals process for more third-party review and replacing the Secretary of Finance as the final decision-maker
- Shorten the look-back period
- Review of the "revolving door" practices between the state and the state's contract auditors
- Shorten the term for audit contracts and provide more balance between auditors
- Bring more audits in-house
- Modify the statute of limitations to require an indicia of fraud before auditing prior periods if a company is filing
- Create a new VDA process
- Enhance efforts to reunify property with its owners
The recommendations focus heavily on the state's audit practices, which have long been a concern of holders nationwide. Kelmar is the state's leading contract auditor, with $35.5 million in payments last year. The next highest contract auditor received $12.9 million in payments. Kelmar's payment scheme was the subject of criticism in one of the latest Delaware audit lawsuits. Kelmar audits typically last three to five years, although many may last much longer. Due to the aggressive nature, these audits often lead to litigation as the holder disagrees with the outcome and the application of the extrapolation methodology. This often happens when the result appears to have no basis in reality.
The full task force report is available on the Delaware legislature website.