(This blog entry is an excerpt of Don DeCelles’ introduction to MarketSphere’s e-book, The Invisible Plan: Navigating and Negotiating Unclaimed Property for Least Impact.)
Risk management in a factory is all about reducing the possibility of negative consequences. It isn’t about eliminating risk. It’s about balancing risks with benefits and operating with the least possible negative impact. Unclaimed property holders must strike a similar balance between risks and benefits.
In this industry, just as in manufacturing, it’s impossible to eliminate risk. You can only try to reduce it as much as possible without jeopardizing important benefits.
- You can reduce the likelihood of being audited, but you can’t completely eliminate it.
- Even if you create the industry’s best internal unclaimed property system, people are still going to make human mistakes.
- Ignoring the laws, neglecting to identify dormant properties, or refusing to report and escheat to the states creates a different kind of risk and potential liabilities.
As in the factory, unclaimed property holders can choose the level of risk they want to take on as it relates to the potential liabilities and negative impacts of unclaimed property. A holder might choose to expend more funds, for example, if it means reducing potential harm to the company. The risk versus benefit choice for holders often is influenced by the character of the industry. Some companies cannot afford to risk their reputations, while others are more concerned about cash flow.
Under escheating and over-complying
Some holders have accepted a high level of risk by ignoring unclaimed property responsibilities altogether. By contrast, other unclaimed property holders have chosen what they see as a very low level of risk. They have insisted on conservative application or no application of legally allowed exemptions, which has resulted in over-reporting and overpaying.
There is a happy medium between these two extremes. An unclaimed property holder must look for balance and the least possible negative impact. They must determine the smallest possible risks that allow them to achieve the greatest possible gain.
Risk management can be both an unclaimed property holder’s greatest challenge and greatest opportunity.
Zero escheatment impact: a real but unrealistic target
Even though there’s no such thing as risk elimination, in a factory, that is exactly what they work toward every day. This is true of any industry — in fact, any human endeavor. We are always working toward goals we know we can’t meet. Why? Because “stretch” goals push us farther and allow us to work toward an absolute goal we can easily visualize.
In the world of unclaimed property, even though we admit it’s not possible to completely eliminate the negative impact of unclaimed property, we still shoot for zero impact. We want unclaimed property to be as invisible as possible, because if these processes don’t run smoothly, they can steal away an inordinate amount of focus. At its worst, unclaimed property can cost millions, absorb hundreds of hours, and jeopardize a company’s reputation.
To make unclaimed property as invisible as possible, holders must:
- reduce the likelihood of an audit
- reduce costs associated with unclaimed property
- reduce personnel hours required to manage unclaimed property
- reduce unclaimed property steps
- reduce potential reputational damage
- reduce stress
- reduce distraction from more important business functions
Notice the common theme of reduction? The goal is to use proven risk management techniques to reduce the impact of unclaimed property on your organization — to make unclaimed property problems disappear, ensuring compliance while keeping costs and liabilities low.
The good news: unclaimed property holders are no longer trailblazers
One of the most important lessons we’ve learned with our clients is that it’s very difficult for holder companies to remediate the risks of unclaimed property internally. It takes too much time and requires more sophisticated knowledge and experience than internal accounting, tax, treasury and finance personnel normally possess to do it well. Unclaimed property is not a primary focus of most businesses. And it shouldn’t be.
The key to reducing the impact of unclaimed property is working together to create efficient systems. Your expert provider can help you avoid the pitfalls of unclaimed property by creating a proper risk profile, helping you make informed decisions, and creating a plan designed specifically for your organization. The final goal? A plan for unclaimed property that is as invisible as possible.