Every company’s budgeting situation is different, but it’s not uncommon for unclaimed property budgeting considerations to be overlooked or deemphasized compared to other, more familiar, budgeting concerns. In truth, because unclaimed property management is an ongoing discipline with potentially costly consequences for mismanagement or neglect, it should be addressed with the same level of concern as many other budget items.
The challenge is documenting and justifying costs for a financial discipline not everyone in the company understands. But the reality is, in a normal year, unclaimed property management requires routine funding for items such as staff hours, software and due diligence services. If a company faces an audit, especially if a potentially large assessment could be in the cards, it is necessary to prepare by setting aside special funds.
How can a company forecast unclaimed property expenditures for any given year? You can begin by studying common scenarios and accompanying costs. Below, to help you understand budget considerations in varying circumstances, we provide three common hypothetical business scenarios, each containing unique budgeting considerations. Start with one of these scenarios closest to your own situation, then add or subtract unique unclaimed-property-related items for your company to come up with a list of costs you can research to put together your tailored unclaimed property budget for 2016.
When you’re ready, contact us and we’ll help you walk through expectations for next year. Most unclaimed property holders seek professional assistance in estimating potential exposure and establishing a reserve within the budget to account for potential liability.
Budgeting Scenario #1:
Ordinary Annual Compliance with Unclaimed Property Laws
Every unclaimed property holder must budget for ordinary annual compliance, whether it is managed in-house or outsourced. To come up with budgetary needs for this, simply identify known and estimated costs, which should be relatively static from year-to-year. The only normal variation would be in the volume of last-contact mailings from one year to the next, which would result in varying postage costs.
If your company is outsourcing ordinary annual compliance processes, the costs typically include base fees for the service, plus any variable components. If compliance activities are performed in-house, unclaimed property costs typically include FTEs plus variable costs.
A professional risk assessment can help you determine the likelihood of any out of the ordinary costs.
Budgeting Scenario #2:
Coming into Unclaimed Property Compliance for the First Time
For several reasons, it has been common to put off unclaimed property reporting for a span of years. Depending how a company has handled past stale-dated obligations and the remediation approach chosen to come into compliance for the first time, there can be a wide range of budget considerations.
For example, if a company has routinely written off stale-dated obligations for many years, there could be a substantial P&L impact. The company might be required to reverse most or all past write-offs in the current year. If you’re talking about a lot of years and aggressive states, this hit to P&L could be very sizable.
Most companies reporting for the first time need to allocate higher than normal funds for first-time statutory due diligence actions to bring things up to speed and either reissue cumulative past amounts to owners or escheat them. A final escheatment amount could be even more substantial if interest and penalties come into play. Some first-time assessments, with the added pressure of a third-party audit—which is often a possibility if a company has never reported—can surpass the value of the original unclaimed property.
An unclaimed property consultant can help you work through your situation to arrive at a reserve amount, as well as an amount to budget for next year to fully remediate past errors.
Budgeting Scenario #3:
Unclaimed Property Audit Costs
If your company hasn’t reported before, it’s important to act quickly to avoid an audit. If an audit is begun, costs could be significantly higher than if your company comes into compliance voluntarily. Many states offer voluntary disclosure agreements (VDAs) that are likely to result in lower costs than if you are compelled to undergo an audit.
Companies that know they will be under audit in the coming year must set aside funding for internal resources needed during the audit and possible external consulting costs for defense. These costs can be somewhat predictable. However, one wildcard is the specific auditor in charge of the audit. There are a few auditors who have reputations for long, drawn-out audits with large assessments.
The best way to estimate audit costs for 2016 is to first perform an independent, confidential assessment of your potential exposure. This will quantify your exposure using metrics such as age of property, the jurisdiction to which amounts are owed and the specific auditor who will be handling your case. Subjective aspects of these risk assessments include knowledge of state administrators’ habits in the jurisdictions involved and potential negotiating flexibility with a particular auditor, based on past experience.
Common audit costs can include, but are not limited to, professional consulting time and expenses, last-contact mailing expenses, reinstatement of past written off items, internal time and resources for records retrieval and testing, and (last but not least) the face value of the property, plus interest and penalties.
Many of these costs, for the purposes of budgeting, require making some assumptions. Some are nothing but educated guesses that might be off by a small amount or a large amount. Where no past transaction data is available on a company’s unclaimed property, estimated amounts can be wildly different from actual audit assessments. For these reasons, this particular budgeting situation should not be faced without the benefit of advice from your professional unclaimed property advisor.
Thinking ahead to future years
Remember, each company’s needs are unique. It’s important to know where your unclaimed property is generated and what condition data is in, so you can anticipate what it will take to get your processes where they need to be. It might not all happen in one year if your records and processes have not been attended to for a while. Set a goal for 2016 to get things as close as possible to your ideal operating scenario, then plan to fine tune in upcoming years.