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Compliance Risks

What Are The Risks of Being Audited For Unclaimed Property?

States have substantially increased their unclaimed property audit enforcement activities in the past few years.  Most states have increased their audit staff and hired third-party contingent fee audit firms to bolster their unclaimed property collection efforts.  Unclaimed Property departments are partnering with the Business Registration departments in their state governments to locate companies registered to do business in their states that have never filed unclaimed property reports.  In addition, states have developed industry standards for unclaimed property reporting according to their past audits and targeting companies in certain industries that appear to have underreported their unclaimed property, compared to other businesses in their same industry.

Because of the perception of noncompliance, the aggressiveness of states and their third-party auditors, and the potential for multi-million dollar assessments, most companies can expect to be contacted for audit.

Should a Company Allow Third-Party Auditors to Conduct Unclaimed Property Audits?

Most third-party auditors work on a contingent fee basis, which means that the more money they collect from a company, the higher their fee.  Several confidentiality issues and fiduciary concerns need to be addressed and resolved before a company should allow a third-party auditor to review its records.  These contractors may not be objective and may not have the competency or the authority to accurately audit a company's records.  Third-party auditors may also be conducting audits on behalf of a number of states, which can significantly increase the assessment issued in a single audit. 

What Is The Scope of An Unclaimed Property Audit?

One of the main concerns of any unclaimed property audit relates to the lack of any practical statute of limitations for items of unclaimed property never included in any past unclaimed property report.  Because of this lack of time limits, most unclaimed property audits cover a minimum of 10 to 15 years.  As most companies do not keep records for such a lengthy period, auditors often rely on miscellaneous income and ledger entries, rather than source documents, as well as sampling methods, to calculate a company's liability.  Many states also assess substantial interest (at annual rates of up to 18 percent) and penalties, often far exceeding the liability itself.