books & records in the audit...

The Devil is in the Details:Books & Records in the Audit Context

Presented by:

James Santivañez

JMS Advisory Group, LLC

Troy Wangen

True Partners Consulting LLC

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Today’s Agenda

• Why are records important?

• Typical Audit Requests

• What should a holder consider for “COMPLETE” records?

– General Ledger, Disbursements, A/R

• Current Estimation Methodology

• The Proof is in the Lawsuits

Why are records important?

• Auditor will use “complete” records to define its “base years” to review in order to determine an “escheatable rate” to estimate liability in years with “insufficient” records

• Auditor will use base year records to identify property to “participating states”


• Burden of Proof rests with the HOLDER


• Holder will need to demonstrate, for example:

– 3rd party documentation of check clearing

– Clear linking support for reissued checks

– Communication from owner with specific property detail

– Screenshots showing application of credits and copy of the invoice

Typical Auditor Requests

• For As Many Years As Available

– Organizational Chart

– Tax Returns

– Prior Unclaimed Property Filings

• Balance Sheet and Income Statement General Ledgers (“G/L”) with DR/CR activity

• G/L Reconciliations

Typical Auditor Requests

• Disbursements

– Electronic Check Registers

– Bank Statements / Bank Reconciliations

• Receivables

– Year End Aging Reports

– G/L activity for selected G/L accounts

• Attestation to Complete Records

– “Under penalty of perjury?”

What Should a Holder Consider for “Complete” Records?

Available Researchable COMPLETE

General Ledger

• System of Record

• G/L account entries

– Summary vs. Detail

• Sub-ledger Detail– e.g. Accounts Receivable sub-ledger

• Conversions and/or Upgrades

– G/L and sub-ledgers

Disbursements

• Electronic Check Registers

– Manual or automatic feed from bank

• Bank Statements / Bank Reconciliations

• Invoice Copies / Check Requests

• Void Check Requests

• Payroll Records

– What does your TPA agreement define they need to retain?

Accounts Receivable

• Point-In-Time Aging Report(s)

• Manual/Automatic write-offs

– Detailed by customer & invoice or credit memo

• Customer remittance documentation

• Invoice copies

• Bank Statements

– Proof of refund check clearing the bank

Current Estimation MethodologyUP Errors in Base Year (All States)

+ Prior UP Filings in Base Year

+ Funds returned to owner through DD

= Base Year Unclaimed Property

/ Gross Revenue in Base Years

= Escheatable Rate

X Gross Revenue in Non-Base Years

= ESTIMATED LIABILITY

REASONABLE?

Current Estimation Methodology

• Trends/Hot Topics in Estimations

– Application of direct deposit and/or EFT percentage to gross revenue

– Inconsistent trends for revenue regression

– Ignoring change of state of incorporation

The Proof Is In the Lawsuits?

• Temple-Inland Case (DE)

• Osram-Sylvania Case (DE)

• Thrivent v. Chiang (CA)

Temple-Inland: Facts

• Reviewed all G/L accounts

• Detailed review of 1 AP account

– 2003 through 2007 detail provided

• Detailed review of 1 Payroll account

– 2004 through 2009 detail provided

• UP reports provided - $1.3MM reported from 1986-2007

Temple-Inland: Facts

• Only 1 payroll item was found to be reportable to DE, pursuant to Kelmar’s examination of the “researchable” records.

• Grand total of $147.30

• Extrapolation done anyway?as detailed records were deemed unavailable for prior periods

The Unclaimed Property Reports

• Kelmar Logic:

– amounts reported to other states;

– amounts exempted under other state law

– amounts satisfied directly with the owner prior to the expiry of the dormancy period

• All became elements of an extrapolated liability

Mathe-magicians

• $1,372.72 – issued to a TN vendor

– DE extrapolated liability: $101,463.27

• $3,050.49 – issued to a Louisiana individual


• $4,335.19 – 4 AP checks voided/reissued


• $619.60 – AZ payroll item


Double-Counting

• A check in the outstanding AP population – counted once related to the bank account review

• And Voilà! - again when it is identified in the property escheated to other states

Double-Counting

• Outstanding payroll check – counted once related to the payroll account review

• And Voilà! - again when it is identified in AP (where it was originally reissued)

Osram-Sylvania

• Did not go through the Admin. Appeals process

• Extremely interesting information about how Kelmar gets paid

• Kelmar’s “proprietary” methodology highlighted again

Thrivent v. Chiang

“You’re asking for everything, millions of things, when what you need are a very circumspect group of things. You need death — in instances where there is a death certificate or there is a policy, or you have an insured and their projected statistical date of death by actuarial standards has passed, and then there is a — with three years passed.

What I’m hearing here, and which was in the warp and woof of your papers? is that the Government gets what they want, when they want, how they want it, and the way they want it. And the Constitution, as I read it in those cases, doesn’t say that.”

What Do These Cases Tell Us?

• Road maps for first line defenses

• Advocates must collectively hold Kelmar to the standards enumerated by these holder’s arguments

• Cooperative, yet judicious with what you provide to the auditors

• A final recommendation?

Questions?

James SantivañezJMS Advisory Group, LLC

(404) 474-7733

[email protected]

Troy WangenTrue Partners Consulting LLC

(312) 588-3430

[email protected]

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