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
Engaging with an experienced unclaimed property advocate that has a comprehensive understanding of the auditor’s methodologies and the states’ enforcement tactics, can help you develop a proactive audit defense strategy. There are many benefits for holders when they engage with an advocate including:
- Provide in-depth knowledge of state statutes and audit methodologies
- Preemptively identify and remediate potential exposure, allowing the company to adequately plan and reserve for any amounts that will be due to the states
- Navigate complex legal entity structures including merger and acquisition history to ensure the auditor’s scope relates only to entities for which the company has an escheat obligation
- Reign in overly aggressive auditors from expanding the audit scope and making unnecessary and overly burdensome requests
- Assist in compiling records and remediating potential liability, reducing the drain on company resources
- Manage requests and correspondence with auditors ensuring the company is afforded a reasonable period to respond and refute the auditor’s findings
- Utilize experience to ensure limited and valuable company resources are focusing on the most impactful activities
- Ensure audit techniques and estimation methods are within permitted state guidelines
- Identify areas for process improvement to ensure on-going compliance and protection against future audits
Who makes up an effective team of advocates?
Unclaimed property audits are complex and include a myriad of intricate accounting, technical, and legal issues. We recommend that the team include these two key members:
- Unclaimed Property Consultant. A consultant will have the experience and ability to manage the audit process and limit the impact on your organization. A consultant can ensure that the overall process is fair, including making sure that auditors do not overstep appropriate boundaries, that document requests and response deadlines are reasonable, that audit methodologies are permissible, and that differences in opinion regarding the adequacy of provided data and supporting documentation are resolved efficiently and effectively.
- Counsel that specializes in unclaimed property law. While most audits do not result in litigation, there are still many important protections that experienced legal counsel can provide, including in-depth analysis and understanding of your organization’s contractual obligations, the creation of legal privilege for workpapers and communications, and creation and negotiation of non-disclosure agreements and settlement and release agreements.
Even for companies with a seemingly strong compliance history, an unclaimed property audit can pose a significant risk, both from a financial and company resource perspective. As states continue to become progressively more aggressive in their efforts to drive unclaimed property receipts through the use of third-party audit firms, it is becoming increasingly more important to consider engaging the services of an experienced unclaimed property advocate. In doing so, a company can greatly reduce the impact on time, money and resources needed internally and allow them to focus on their area of expertise leaving escheat matters to those who know it best.
Check out MarketSphere’s Knowledge Vault for valuable resources including the free white paper: The Pitfalls of Managing Your Own Unclaimed Property Audit. This resource has more information about the challenges holders can encounter when facing an unclaimed property audit.