solutions summit 2014 audit trends david tanner & mark vogel – chesapeake systems

Solutions Summit 2014

Audit Trends

David Tanner & Mark Vogel – Chesapeake Systems

Chesapeake System Solutions, Inc. • Proprietary and Confidential

What you need to know…

• Compliance is mandatory in every state• Unprecedented # of audits (DE and other states).• Third-party audit firms (Kelmar, UPCH, SAS, Audit

Services, ACS/State Street) are thriving and hiring.• Just a matter of time until your company will be audited.• Even companies who have a robust filing history are

being targeted.• Enforcement is increasing and penalty assessments are

becoming more common


Current lay of the land…• States are facing significant budget constraints• Consumer protection vs. revenue generating• Predominant use of contract auditors• New companies/audit firms surfacing• Use of estimates• Calculations that include suggested liabilities not defined by statute• Enforcement focus on new property types• Due diligence enforcement• Penalty and interest assessments• Foreign jurisdictions• Economic crisis has generated an increase in mergers and

acquisitions


Types of Audits

• Comprehensive/all inclusive audits• General Ledger Audit vs. Equity Audit• State auditors vs. contract auditors• Local accounting firms are getting involved• Multi-state third party audit firms


Audit Triggers

• Non-reporting• Owners contacting the state to claim funds• Negative reports• Missing property types• Comparison to like-companies• Spikes and dips in reporting• Company in the news• Industry under audit


Self audit / Voluntary disclosure

• Waiver of interest and penalty• Reduced look-back period• Control of the review• Opportunity to correct issues• Company-specific facts and circumstances applied

throughout the process


Fines and Penalties

A holder can be assessed penalties and/or interest for:

• Failure to report/remit the property

• Failure to comply with the statuteInterest generally applied at 10%–25% of property valueCivil/Criminal penalties for failure to report/remit/deliverOR filing a fraudulent report may include

• $100 – $200 per day ($10,000 maximum)• Varies from $1000 – $25,000 fine plus some states access an additional 25% of the value

of the property• Some States – Class B misdemeanor


Audit notice received. Now what???• Timely response to the state to confirm receipt of the audit

notice• Reinforce message that you intend to cooperate with the

auditors• Enlist legal counsel to negotiate a confidentiality agreement (if

conducted by a thirdparty auditor)• Try to limit # participating states• Assign one point of contact to lead and respond to all requests.• Form an audit management team (Accounting, Treasury, HR, PR,

AP, AR, Risk, Internal Audit).• Interview and retain experienced outside consultants and legal

counsel as soon as practical.


Audit Process• Confirm state authorization and years in scope• Opening conference• Understanding of the company’s structure, filing and audit

history• Review of subsidiaries, types and availability of complete

records• Acquisitions, reviewing contracts, filing and audit history• Reviewing basic financial data• Prior reporting history/compliance• Identifying other accounts for audit• Tracing Accts Receivable credits• Auditing potential “write off” accounts


Audit Process (cont.)• Conduct regular team status calls/meetings.• Be organized!• Closely track documents requested/provided (monitor Task

Management Report closely).• Thoroughly research auditors’ requests to confirm legitimacy.• Negotiate deadlines for delivery of documents.• Enlist temporary staff for routine tasks, such as scanning

documents (provide clear direction and inspect work).• Establish a virtual file room, used for document review by outside

advisor and delivery to auditor.• If auditors on site, restrict access to employees and other areas

of the office.


The Role of External Consultants and Legal Counsel • Incredibly valuable, but need to maximize efficiency and control

costs.• Discuss and confirm roles and responsibilities at the outset.• Be specific on the extent of their involvement (e.g. how often

status calls; need for being copied on emails, memo’s etc.).• Legal counsel not needed for routine calls/discussions, only ones

involving legal issues.• Where litigation is possible, strongly recommend use of “Privileged

and Confidential Prepared at the Request of Legal Counsel” on emails, memos, and work products. • Explore with legal counsel reliance on B2B and other exemptions

that can mitigate liability .


Keep Senior Management Informed

• Consider forming a Steering Committee of executives (CFO, Controller, Treasurer, VP Tax, Legal).• Have quarterly meetings; include consultant by phone

or in person.• Provide interim updates as audit milestones are

reached.• Auditor may require a call or meeting with a company

officer on a disputed matter.• Bring new senior level leaders up to speed on the audit

as roles change or retirements occur.


Common areas of weakness• Writing off credit balances• Not reviewing all open and closed bank accounts for stale dated

checks• Not documenting voids, stops and reissues• Incorrectly aging items for reporting (dormancy periods do

change)• Missing property types (AR, benefit plans, workers comp,

rebates, gift certificates)• Assessing inactivity fees incorrectly or where prohibited• Not reporting property post-merger/acquisition• Third-party agent related liability (e.g. PR, Transportation, Utility


Estimation of Liability• Depends on audit look back period and years of complete

records.• Auditor establishes base year escheat % by account/property

type.• Uses revenue or other factor to extrapolate liability for years with

no records.• Consider requesting consultants to do alternate calculations.• Make sure only in scope entities are included.• Confirm that reported items are netted against calculated

liability.• Double check the auditor’s calculation!• Involve counsel to preserve any legal arguments or positions.


Finalizing the Audit

• Negotiation with state of final assessment by Holder C level officer and legal counsel• Extensive preparation is essential – factual summaries,

assumptions and alternate liability calculations based on legal arguments• Critical to nail down the period that is being closed by the

audit settlement • Agree on payment terms and method• Written Closing Agreement to be signed by state and holder• Preserve all audit work papers and final settlement

documentation


It’s over. What now???

• Must be vigilant and learn from mistakes!• If not done already, draft and implement policy and procedures for

managing potential liability.• Stay abreast of legislative and regulatory changes.• Join Unclaimed Property Professionals Organization (www.uppo.org)

and be active.• Network with other Holders and attend conferences and webinars.• Enlist senior management to hold areas within company responsible

for maintaining compliance.• Pursue Voluntary Compliance filings in non-audit states to clean up

liability.

http://www.uppo.org/


Questions???

Thank you!

solutions summit 2014 audit trends david tanner & mark vogel – chesapeake systems

Documents

audit slide

chesapeake system solutions

confidential audit notice

audit services

internal audit

equity audit state auditors

process slide

thirdparty audit firms