Tag: audits

Reminder: Deadline for Converting Delaware Audit to VDA Approaching

As we noted earlier, Delaware legislation passed October 1 (effective October 11) commenced a 60 day period during which some holders undergoing Delaware unclaimed property audits have the option of converting that audit to a Voluntary Disclosure Agreement.

Unlike a traditional unclaimed property audit, in the VDA program a holder completes a self-review of its records and reports those items believed to be in scope.  In return for this remittance, the Secretary of State agrees to waive the interest and penalties that could otherwise be assessed the holder for noncompliance.  Note that while the VDA program offers a holder more autonomy and control over the review process, the holder’s ultimate report, methodology and remittance are subject to approval by the Secretary of State’s office.

According to the Delaware Secretary of State’s website, any holder currently under audit that received a notice of examination from the State Escheator on or before July 22, 2015, except any securities examinations in which estimation is not required, is eligible to convert.  Conversion forms are available from the Secretary of State’s website.  According to the website, the deadline for conversion is December 11.

Delaware Adopts New Unclaimed Property Audit Regulations, Starting 60 Day Audit Conversion Clock for Some Holders

On October 1, 2017, the Delaware Department of Finance issued long-awaited unclaimed property regulations, effective October 11.   The new regulations continue the overhaul of the State’s unclaimed property program and provide numerous and detailed instructions to both holders and auditors relating to unclaimed property audits.  The regulations specify, among other things, the State’s process for initiating and audit, the process of information requests and inquiries by the auditors, and specific guidelines on the use of estimation.  The guidelines also address a number of substantive issues of interest in the normal reporting process, such as:

  • a specification of records to be maintained by the holder in the ordinary course of business;
  • details on calculating the “maximum cost to the issuer” associated with gift-card or stored value instrument that must be escheated to the state;
  • specifications concerning what activities do, or do not, constitute “owner activity” sufficient to void the presumption that property has become abandoned;
  • what information is sufficient to establish the state of the owner’s last-known address; and
  • standards for requesting an extension of the annual reporting deadline.

In coming posts, we will review the details of some of the new regulations.  In the meantime, however, holders should be aware that the promulgation of these new regulations starts a 60 day period during which certain companies under audit by the State of Delaware will have the option of converting the audit to a Voluntary Disclosure Agreement with the Secretary of State.

Pursuant to legislation adopted earlier this year, for audits commenced on or before July 22, 2015, (except for securities examinations in which estimation is not required) the holder “may notify the State Escheator and the Secretary of State of the person’s intent to convert the pending examination into a review under the Secretary of State’s voluntary disclosure program.”  Holders are required to make that election “within 60 days of the adoption of regulations under § 1176(b) of this title.”  Thus, the new regulations kick-off that election period.  Holders that are currently under audit by Delaware should take this opportunity to assess whether the VDA program is more favorable.

Notice of the conversion period, as well as forms for implementing the conversion process, can be found at the Secretary of State’s VDA website.

Delaware Unclaimed Property Legislation on the Fast Track

The unclaimed property community is abuzz regarding new legislation in Delaware that is being touted as a fix for the numerous deficiencies and questionable practices that a federal court vigorously criticized last summer.  The new legislation — Senate Bill 13 — is intended to fix the problems identified by U.S. District Court Judge Gregory M. Sleet in Temple Inland v. Cook, as well as to adopt some of the new proposals set forth in the Revised 2016 Uniform Unclaimed Property Act.

Some of the highlights of the proposed legislation include:

  • a uniform due diligence requirement;
  • more clarity on what information constitutes a last-known address;
  • notice to the owner by the State Escheator for certain types of property;
  • clearer standards for determining when a debt has been discharged;
  • a 10 year record retention provision;

While these are all welcomed potential developments, what really has the unclaimed property community intrigued are the provisions relating to audits.  In particular, a 10 year period of limitation on the state’s audit rights (except for cases of fraudulent or willful misrepresentation), and a provision limiting the state’s use of estimation to those periods where statutorily required records are not kept.  Even more notable is a potential provision impacting audits that are already underway.

For any audit commenced on or before July 22, 2015 (except for certain securities examinations where estimations are not being used) the holder under audit may exercise the option of converting the audit into a review under the Secretary of State’s Voluntary Disclosure Agreement (VDA) program, and limit the period under audit to 10 report years from the date of the original audit notice.

The legislation, introduced on January 12, has already passed the Senate and been approved by the House Administration Committee and is currently on the “Ready List” (meaning that it is ready for debate by the full House).

 

Arizona to Take a Closer Look at Contingent Fee Audits

A few days ago, the Governor of Arizona signed House Bill 2343 into law.  The legislation makes some welcome and well-meaning changes to the way that unclaimed property audits (including, specifically, contingent fee audits) are conducted.  For example, the legislation provides that all holders will receive a “notice of rights” (1) making clear that the Department of Revenue makes all final decisions “that any unclaimed property is reportable;” (2) setting forth appeals procedures; (3) notifying holders where they can file complaints regarding auditor conduct; and (4) contact information for designated employees.

In addition to these changes, the new legislation also signals that Arizona is taking a fresh look at the use of contingent fee audits, and whether there are any practical alternatives.  The law requires the Department of Revenue to issue a Request for Information by the beginning of next year to “explore the feasibility of contracting for audits . . . that are not directly or indirectly contingent on the auditor recovering unclaimed property.”  This is obviously an important issue to the holder community.  Because the audit firm’s payment at the end of an unclaimed property audit is generally calculated as a percentage of reportable property “identified” by the auditor, it is in the auditor’s financial interest to take aggressive and novel positions intended to increase the amount due.  That is not to suggest that all audit firms do so, but the incentive alone is enough to cause many in the holder community to question the fairness of impartiality of these audits.  Hopefully, this is a first step in Arizona to formulating an audit process designed to locate unclaimed property actually due to the state, no more and no less.

Friday Lost + Found: California’s Audit Haul, Delaware Faces Threats, AARP Says “Open Your Mail”

California Unclaimed Property Audits Bring in Over $1B Per Year — The Lake Arrowhead, California Mountain News has an article about a recent speech given by California State Treasurer John Chiang.  In addition to discussing the state budget, new technology initiatives, and “his perspective on the ‘American Dream,'” Treasurer Chiang gave some information relating to his time as the State Controller.  As reported by Mountain News, Treasurer Chiang claimed that California’s unclaimed property program was “broken” when he took over as Controller, and that his focus on “high profile audits brought in $9.3 billion” during his time in office (or about $1.2 billion per year).   To put that number into some perspective, $1.2 billion per year is more than the GDP of at at least 17 countries.

Delaware Online Chronicles Threats to Delaware’s Revenue — In Delaware Online there is an editorial by Harry Themal which outlines some of the “clouds on the horizon” with regard to Delaware’s future financial outlook.  Along with many of the same problems that plague other states, the article specifically notes Delaware’s vulnerability to fluctuations in revenue from abandoned property and the possibility of future lawsuits (as suggested by Justice Alito’s comments in Taylor v. Yee).  As Mr. Themal notes, “[e]scheat has netted Delaware half a billion dollars – an eighth of the budget – so court rulings could be deadly.”

AARP:  “Open Your Mail!”The AARP recently posted an article entitled “Abandoned Funds May be at Risk” which sounds the alarm over the speed and relative ease with which some states declare investment accounts and securities as “abandoned” property.  While many investors favor a “buy and hold” or similar passive investment strategy, the article notes that investors need to stay in contact with financial institutions (and open their mail) to prevent funds from being deemed “abandoned.”

Florida Senate Bill 970 — Will Florida Expand the Use of Estimation?

One of the most controversial issues surrounding unclaimed property audits is estimation — the use by auditors of statistical sampling and extrapolation to calculate a holder’s historical unclaimed property liability in years that there are no researchable records available. Holders and states dispute, among other things, when such estimation is appropriate, how it should be performed, and whether estimation can be used at all when not specifically authorized by statute. Estimation has been a commonly contested issue arising in litigation between holders and states, and is one of the issues hotly contested in connection with the proposed revision of the Uniform Unclaimed Property Act.

While states, auditors, holders, and holder advocates dispute a number of issues with regard to estimation, until now they all agreed on at least one thing: that unclaimed property liabilities for “estimated” years (where actual records were not reviewed) were all payable to the holder’s state of incorporation. As you may recall from our post about unclaimed property jurisdictional rules, unclaimed property generally gets turned over to the state where the owner’s last-known address is located. Where the holder has no owner-address information, unclaimed property gets reported to the holder’s state of incorporation. Using that same logic, estimated liabilities (which, being a simple calculated liability are by definition not associated with owner names) have historically been escheatable only to the holder’s state of incorporation.

Recently introduced legislation in Florida seeks to change all that. Florida House Bill 783 / Senate Bill 970 proposes to amend the audit provisions of the Florida Unclaimed Property Act to provide:

If the records of the holder that are available for the periods subject to this chapter are insufficient to permit the preparation of a report of the unclaimed property due and owing by a holder, or if the holder fails to provide records after being requested to do so, the amount due to the department may be reasonably estimated, regardless of whether the holder is incorporated, formed, or organized in this state.

In other words, the proposed legislation not only expressly authorizes Florida’s auditors to estimate the liabilities of holders incorporated in states other than Florida, but it also provides the auditors with the authority to estimate “the amount due to the department” (i.e., Florida). That runs contrary to most auditors’ current practices, and is likely to cause significant disputes among the states, as most states clearly instruct that all estimated property gets reported and delivered to the holder’s state of incorporation. While holders may be concerned by this development, it is really the private auditing firms that run the risk of being forced to try to reconcile multiple state demands for the same property.

The legislation is currently in committee in both the Florida House and Senate.