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BREAKING NEWS….
CALIFORNIA RECEIVES INJUNCTION, preventing it from receiving or selling any unclaimed property. As of June 1, the California State Controller has been ordered by a federal judge in Sacramento to not accept or sell unclaimed property until new laws are passed giving owners of potentially escheatable property adequate notice that their property, if unclaimed, may be turned over to the state and sold. Holders are still required to follow the due diligence requirements and prepare their reports for submission. Reports should not be filed, nor should any property be remitted until the state notifies holders that the injunction has been lifted. What’s not included but worth paying attention to are some of the facts that led to the injunction in the first place. Affiliated Computer Services (ACS), parent of Unclaimed Property Recovery & Reporting (UPPR) and an advisor to the states, is the subject of a state audit and legislative probe, according to Tom Chorneau of the SF Chronicle’s Sacramento Bureau. Mr. Chorneau indicates that the attorney who brought the lawsuits that ultimately led to this injunction believes damages may be as much as $4 billion in California.
We have expressed our deep concerns about how companies, such as ACS (through its UPPR subsidiary), used to provide “free” reporting services to Holders and all the while were being compensated by the states for amounts being turned over to the states. In his article, Mr. Chorneau, indicates that ACS has received over $40 million dollars from California alone over the past few years to track down property that should belong (be escheated) to the state, in return for a percentage of the assets remitted and has had a contract with the state for decades. This contract has itself never been audited by the State for compliance with state rules, regulations and procedures. This blatant exploitation of the process reminds us of what happened in the public accounting sector in the wake of the Enron scandal. Arthur Andersen, one of the largest CPA firms in the country at the time, perished in the aftermath due to the conflict of interest it clearly demonstrated in acting as an “independent” outside auditor on the one hand, and an advisor to some of the off-balance sheet activities that ultimately destroyed Enron. Sarbanes-Oxley was then introduced to ensure that corporate officers and their outside advisors would be held accountable for the decisions and actions they make for the organizations they lead.
The states have a sworn duty to not only safeguard citizens and their property, but also to ensure that all agents representing them act in a manner that is above reproach. We have had dealings with state representatives in many of our clients’ audits. Most states approach the audits with the Holder’s concern in mind, while others, most notably Delaware, have used “strong-arm” tactics and have given bad advice to our clients, who feel they are in no position to argue with a “state representative.” Other states have written threats directly into their Notice of Audit, stating “Fines and penalties will be assessed based on the Holder’s cooperation.” The states have run amok, in our minds, in terms of unclaimed property audits.
This includes the outside “contingency fee” auditors (bounty hunters) engaged by the states to examine the books of holders. Once the auditor has been notified of an impending audit, they will make sure to contact other states to broaden the scope of their investigation (and increase their fees!). These outside auditing companies charge the states an hourly rate that is offset by a percentage of the amount they discover while performing their audit. The auditors have every incentive to take as much time as possible to try and find property that has not been escheated properly. The majority of third-party audit firms have been started, and are run by, former state unclaimed administrators. These third party “auditors” do not care one bit about the Holder, nor are they true experts in determining whether an item is truly escheatable or not. They are very good, though, at determining that the states accept everything as unclaimed property, validity be damned!
Clearly, there is a great conflict of interest here that must be resolved. ACS and other companies cannot work for the states and serve the best interests of Holders at the same time. The use of incentive based compensation without limitation raises questions about the independence and integrity of these outside auditors and agents. We have always maintained the best way to ensure that the work is done properly and serves everyone’s best interests is to charge a set fee based on the amount of work to be done, not the dollar amount involved.
This situation in California has finally opened the door to the unclaimed audit issues that should’ve been dealt with a long time ago. The use of incentive-based compensation clearly undermines the objectivity of outside auditing firms. We recommend that every Holder undergoing an audit demand copies of the state/third-party agreements in place that specify how the auditor is to be paid. It is our contention that ACS is not the only “bounty-hunter’ out there with unclaimed “blood” on its hands.
We respect the states’ right to audit Holder records. We encourage and expect our clients to provide the auditors what they request in a timely fashion and expect them to reciprocate. Demand that your auditors provide the results to you in a timely fashion! Are you aware that Delaware’s unclaimed property rules specify that the audit should be completed within 12 months, and if they don’t, the state unclaimed manager is expected to make arrangements with the Holder to try and reach closure? We have not heard of one case where that has actually happened, not one! The states need to find a better way to achieve their objectives while eliminating these conflicts of interest. We will update our site as new information becomes available. Should you have any questions or concerns about the impact this issue may have on your company, please call Kevin Johnson @ (919) 740 9948. Should you wish to read Tom Chorneau’s story, please use this link: http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2007/06/17/PROPERTY.TMP
STATE AUDITS ARE ON THE RISE….
More and more states are increasing their scrutiny of holders’ adherence to their compliance laws. Individual audits are on the rise. The following are actions your company can take to ensure that you are prepared in the event of an audit.
Make sure that you are aware of current regulations for each state since they can change on an annual basis. Recent changes have included types of remittance, the report formats to be filed, the media that the reports are delivered, dormancy periods, due diligence requirements and excluded property to name a few.
Your escheatment process should be well documented to ensure people in your organization know their roles and responsibilities. This will be required to present to state auditors should they request it. This would include your processes for due diligence, annual reporting, remittance, record retention of required supporting documentation and accounting process for booking stale dated items. Be sure to include a review of transactions from businesses you recently acquired or merged with. The successor company is responsible for predecessor liabilities.
Ensure that your company conducts frequent quality control routines to avoid costly errors such as: failure to record voided checks, duplicate payments, or checks which were subsequently offset by a credit. This root cause analysis helps save your company in many ways, such as eliminating unnecessarily remitting money and by implementing fixes, reduce the number of records to be analyzed in future periods. Make sure you retain adequate documentation to support those journal entries made to reverse items from your unclaimed liability account as well as the reconciliation of the unclaimed account itself.
ECS would welcome the opportunity to provide any consulting to your organization in response to any state audit inquiries or to proactively assist your team in eliminating any future risk. Please contact any member of our staff for further questions.
REBATES
The states have adapted their unclaimed regulations over the past few years to accommodate the rise in popularity of gift cards and stored value cards. One area under scrutiny is the handling of uncashed rebate checks. A review of the various state regulations indicates there is not much clarity on this particular subject. Only two have indicated that they do not require uncashed rebate checks be reported. The vast majority of states believe uncashed rebate checks are reportable as miscellaneous accounts payable items. They also believe the company itself is responsible for reporting these items, regardless of whether or not they use a third party administrator (TPA) to handle their rebate program. Many states say the contract in place with the TPA might determine who has initial responsibility for filing (and due diligence), but the existence of a contract does not exclude the company from its obligations with respect to uncashed rebate checks. The states’ rationale for this is simple: the company, whose product the customer bought, benefited from the rebate program. The TPA merely acted as agent to expedite the process. Therefore, the states believe the company has ultimate responsibility to make certain uncashed rebate checks are handled as other unclaimed property items are, regardless of who manages the rebate program. To make things more interesting, there is a current court case involving one of the largest TPAs, Young America Corp., and more than 40 states, over the way Young America has handled uncashed rebate checks. Contracts with TPAs generally run in one of two categories: fixed fee for service, or reduced rate and the TPA keeps some or all of the pool of money that is not claimed by customers. This money is known as “slippage” and is at the heart of the Young America litigation. Clearly, this could create a potential conflict of interest for TPAs. More importantly, state administrators have indicated the court case will have a significant impact on the approach they will take with respect to the companies and TPAs who manage rebate programs. What can you do today? Check the language of the contract you have with your TPA. Does it clearly address who handles this responsibility? Even if it clearly identifies the TPA as being obligated to handle this from an escheat perspective, is there any requirement to prove to the company that it has done so? That proof may be the key to insulating your company from this potential liability. If you are uncertain as to your company’s exposure in this area or would like more information, please give Kevin Johnson a call. His number is (919) 740-9948 and he has conducted an extensive review of state regulations, as well as had discussions with a number of state administrators on this subject.
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