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Pursuant to 12 Del. C. § 1172(a), the State of Delaware cannot initiate a new abandoned or unclaimed property examination unless the company has first been notified in writing by the Secretary of State (SOS) that it may enter into the DE VDA program.  The VDA program allows a company to come into compliance by utilizing the DE VDA guidelines to conduct a self-audit of their books and records.

Since the latter part of 2018, Delaware’s SOS has been consistently mailing VDA invitations, and our information is that Delaware will continue this practice on an on-going basis. The SOS correspondence notes that recipient companies must respond to these notices within 60 days or they will be referred to the Delaware Department of Finance (DOF), which would then have the option to commence an unclaimed property audit.  

What Should A Company Do If It Receives Correspondence From Delaware?

Managing unclaimed property compliance involves multiple pieces of the puzzle to come together. Firstly, the statutory requirements vary across jurisdictions and change regularly. Secondly, it likely requires coordination across a variety of departments, divisions or entities, many of which may not regularly interact. These complexities can increase exponentially for organizations with complex organizational structures, decentralized accounting functions or a complicated merger and acquisition history. So what should you concentrate on if you want to ensure your organization maintains compliance?

Key Areas of Focus:

• Ownership: Assign the responsibility to a specific group
• Understanding: Analyze your organization and develop a good understanding of where unclaimed property is created and how you can minimize risk and exposure
• Education: Ensure all areas of the business are educated on the basic requirements of unclaimed property and how their areas are impacted
• Documentation: Document and enforce adherence to policies and procedures

Regardless of prior escheat compliance history, an audit can be a disruptive and costly event for any organization.  As states continue to become increasingly more dependent on unclaimed property receipts to fill state budget gaps, the number of companies being subject to audits continues to rise.  Often times the outcome of the audit is less about a company’s past compliance history and more about their ability to understand and defend themselves. 

There are several issues that a company must face when under audit.  Many of the most problematic of these revolve around the varied protocols used by the states and/or their third-party auditors when conducting the audit. This can include issues such as, individual jurisdictional auditing guidelines, varied and extensive lookback periods, states’ ability to use estimation techniques, and states’ statutory authority to assess interest and penalties.

In certain scenarios, it is not unusual for the estimated liability and penalty and interest assessments to be significantly in excess of the addressable property identified to be due and owing.  Scenarios like this can be further amplified when other complexities such as merger and acquisition history, ERP system migrations, and historical accounting restructuring is factored into the audit.  Due to the risks that unclaimed property audits can pose to an organization, the creation and implementation of a comprehensive audit defense strategy is essential.

A team of experienced advocates can help

Accounts receivables (A/R) is an important component to most companies and often overlooked when it comes to unclaimed property compliance. This is unfortunate because A/R can create a substantial amount of unclaimed property and be a key focus in unclaimed property audits. Consequently, any effective escheat program should include policies and procedures for reviewing and including accounts receivables in the reporting process.

How Does A/R Become Unclaimed Property?

Accounts receivables become an unclaimed property issue when credit balances occur that go unresolved and age beyond the respective dormancy period (typically 3 to 5 years). These unclaimed credit balances typically can be found on a company’s books and records in three forms.

1. On Account Customer Credit Balances
2. Unidentified Receipts
3. Write-offs

On Account Customer Credit Balances

On account customer credit balances can become unclaimed property when activity with the customer ceases and the credit balance ages beyond the statutory dormancy period which can vary across jurisdictions.  Customer credit balances can result from a variety of reasons including but not limited to returned product, overpayments and invoice adjustments.  It’s important that an organization understand their specific causes for credit balances, and has standard procedures in place to regularly review and resolve them before they age and become unclaimed property.

With any unclaimed property type, including A/R, it’s vital to maintain documentation sufficient to substantiate the resolution of any credit balance. Procedures should include standardized documentation requirements for resolved credit balances to ensure the outcome can be proven under the scrutiny of an unclaimed property audit.