Despite tens of billions of dollars in abandoned property that has been reported to states, businesses and, yes, CPAs continue to struggle with the many complexities related to unclaimed property. Believe it or not, it is estimated that less than 25 percent of companies in the United States are in full compliance with UP reporting laws.
Over the past decade, states have accelerated their efforts to enforce UP laws, mostly driven by their need to stem the tide of rising deficits. Many states use third-party auditors who are paid a percentage of what they find in companies that have not been properly complying with UP reporting laws. Today, states are holding over $35 billion dollars of reported UP, of which less than half is ever returned to the rightful owners. But that is just the tip of the UP iceberg, because states are also implementing changes to existing UP laws, reducing the dormancy periods and adding new types of property to be tracked and reported. In short, they are stepping up their efforts to capture more monies.
So how does this impact accounting professionals? Simply being knowledgeable of UP management and reporting requirements positions them to help clients improve their compliance practices and their visibility over ongoing UP liabilities, avoid costly audit assessments (including interest and penalties), and improve customer relationships.
Even if the liabilities are not material (on an annual basis) to client financial statements, they can be substantially material to cash flow and cash management requirements, as first-time report filers may not have the funds needed to pay the liabilities that have accumulated over the past ten or even 25 years.
How can unpaid liabilities go back so far? The answer is simple: There is no statute of limitations on UP liabilities. Plus, like income tax laws, the burden of proof to mitigate liabilities falls upon the "holder" of the property: the company. Just those two facts alone make it easy to see how being out of compliance could be devastating to a business.
CPAs can provide a valuable service to their clients by taking time to learn the basics about UP so they can help their clients:
* Identify "at-risk" property (unreported dormant property);
* Implement oversight and operational procedures and systems to track and manage potential UP;
* Implement "due diligence" processes to find owners (customer, vendors, employees, etc.) of dormant property; and,
* Implement compliance reporting processes.
The first step in helping client companies improve their UP governance and compliance practices is to quantify the value of "at-risk" property. "At-risk" property is third-party (owner) property held by an organization (the holder) that, due to its age, is considered dormant under UP regulations and thus, if the owner cannot be located, must be turned over to the proper state. This effort to quantify "at-risk" property includes a review of:
* Existing policies, procedures and systems used to track, manage and report UP;
* Prior report submissions; and,
* Acquisitions of other companies.
The goal of these reviews is threefold:
1. To quantify the potential UP liability;
2. To identify deficiencies in current policies, practices and systems; and,
3. To provide a roadmap for resolving those deficiencies.
Once this effort is complete, the company is ready to take the next steps needed to become compliant with UP regulations.
In some cases, where compliance reporting has been non-existent or woefully inadequate, the company may find it beneficial to approach states in order to enter into "voluntary disclosure agreements." VDAs allow the company to become proactive in its compliance efforts by committing to implement proper reporting practices. The benefits to the company are numerous, including:
* Limiting of "reach-back" for unclaimed property to 10 years;
* Taking control of the review and implementation of procedures currently lacking or inadequate;
* Avoidance of costly audits; and,
* Waiving of penalties and interest.
VDAs notwithstanding, once the potential liability is quantified, the company needs to become compliant as soon as possible. This compliance effort consists of conducting a "due diligence" effort - trying to find owners of the dormant property - and reporting remaining UP to the proper states.
Concurrent with these efforts, the company needs to make the changes needed to resolve deficiencies in existing policies, practices and systems. Here, CPAs can help client companies execute the roadmap developed. Oftentimes, these changes will impact the underlying IT systems, requiring modifications to core transaction processes in order to properly "tag" and track potential dormancy situations. Ideally, the oversight and management of inactive accounts and dormancy situations will be imbedded into normal operations, thus making the process easier to manage.
Sarbanes-Oxley requirements also interface with the various unclaimed property laws. Section 404 of Sarbanes-Oxley requires the company to ensure that sufficient internal controls have been implemented. Section 302 requires the certification and accuracy of the company's financial statements, executed by an officer of the company. To maintain independence with the compliance process, while it is encouraged to seek guidance, it is critical to avoid using your external auditor to perform these functions, especially in an audit or voluntary compliance initiative.
CPAs can play a pivotal role in helping clients improve their compliance with UP regulations. With the advent of Sarbanes-Oxley and the increased aggressiveness of states on compliance enforcement, companies need to become compliant as soon as possible and thus avoid costly audits and gain control over UP liability management.
Michael Wood, CPA, is an IT and process improvement specialist at Keane, a consultancy specializing in unclaimed property reporting and compliance solutions.
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