As expected, Mark Udinski, the former head of Delaware's Unclaimed Property division, has officially joined Kelmar Associates, according to a press release on the company's website. His new job title is Managing Director of Kelmar's Glenn Mills, PA office. According to the press release, Udinski will work in tandem with Sam LaRosa, "in the areas of Practice Development, Marketing, Business Development, and Client Relations."
For companies that have ever received a letter from Delaware initiating an unclaimed property audit, LaRosa is not an unfamiliar name. LaRosa's contact information is given in most, if not all, Delaware audit notices. The letters instruct the company to notify LaRosa within seven to fourteen days of receipt of the letter, "in order to facilitate the exchange of prefatory information and to discuss scheduling an opening conference." For most companies, LaRosa is their first contact with Kelmar and the world of unclaimed property audits.
Given Udinski's new role within Kelmar, one can surmise that he will continue to be actively involved with unclaimed property audits. The trend of aggressive audits are most likely to continue; companies should be prepared to fight inflated extrapolations, high assessments, and voluminous document requests during an audit. One recent document request asked the holder to provide ten years of electronic check registers for all disbursement accounts, including all checks (with full name and address detail) that had cleared or were outstanding, including stops and voids, as well as hard copies of year-end bank statements and reconciliations.
Contingent Fee Auditors
States have several options available to them to enforce tax and other regulatory schemes, such as unclaimed property. States often have in-house investigators and auditors that may review filings for accuracy. California and Texas both have large in-house team of auditors that allow them to ensure that they are collecting the maximum amount of revenue from companies. Florida has said that it hires many of its auditors from the ranks of sales tax auditors, as they are the most familiar with the operations of both the state and the companies they audit.
The other option for states is to use outside auditors. These third-party audit firms often have contracts with multiple states, allowing the states to share the overhead of an unclaimed property audit. This is often beneficial for states that are not commonly the state of incorporation and are therefore less likely to be entitled to large sums from holder companies. Like many law firms, these audit firms have three main methods of compensation: 1. Flat fee; 2. Hourly; 3. Contingent.
- Flat fee: A set fee is given to initiate and complete an audit of a company. Flat fee arrangements are not common within the audit world, as audits can be unpredictable from both sides. Most auditors have little idea of what they will be presented with going in and there is a large risk that they will be overpaid (not favorable for the state) or underpaid (not favorable for the auditor). Flat fees may be used on a piecemeal basis - each step or action is a certain fee.
- Hourly: This is an arrangement that consulting and law firms are familiar with. Work is performed and billed at hourly rates depending on the experience and qualifications of the individual. States have found that using hourly rates for audits to be difficult to base budgets on. Furthermore, they may audit and determine that no additional amounts are due, further constraining the budgets. Hourly billing can also lead to inefficiencies in the process as billing parties take longer than necessary in order to reach certain billable goals.
- Contingent: In this arrangement, an auditor receives a certain percentage of the amounts collected. From the states' perspective, this allows them certainty that they will collect money before paying any amounts out to their third-party auditors, while also encouraging efficiency as the auditors will not get paid until the money is collected. From an auditor's perspective, it gives them high potential earnings, offsetting the risk that they would not find any amounts due and receive no payment.
Holders and their advocates have often criticized the contingent fee payment model. Whether confirmed or not, the appearance that an auditor would artificially inflate their findings in order to personally profit is unsightly. Moreover, holders have often complained about their records and legal precedent being ignored by auditors. When coupled with their billing arrangement, this has led to a widespread belief that third-party auditors are holding companies to higher threshold of record keeping and burden of proof to increase their own benefit rather than actually trying to reunite owners with their property. This is a logical assumption when extrapolations are made, whereby states claim properties with no names and address under the second priority rule of Texas v New Jersey.
In response to these criticisms, some states have moved away from contingent fee auditing. Last July, North Carolina limited contingent fee audits to life insurance companies and bond funds; other companies are no longer be subject to contingent fee audits. Texas introduced a bill to up the percentage paid to contingent fee auditors; that bill failed to pass in the 2013 legislative session.
Compliance Protects Your Company
No matter the billing arrangement that the auditor has with the state(s) it represents, your best protection against an audit is a comprehensive compliance program. This includes document retention, policies and procedures and effective data analysis. Due diligence requirements, which differ among the states, must be followed to ensure complete compliance processes.
When a technically accurate compliance program is implemented and maintained, there will be little to no additional property for any auditor to find. A quick, zero audit is the goal for any audit; compliance makes that easier to obtain; without compliance, you are starting an audit from behind. Barganier and Associates' compliance programs have withstood the scrutiny of many audit firms, including Kelmar. Contact us for more information on building a best in class compliance program for your company and put the worry of unclaimed property behind you.