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Delaware publishes proposed examination regulations

Posted By Administration, Wednesday, April 12, 2017

As required by the recently passed Delaware S.B. 13, the secretary of finance, in consultation with the secretary of state, developed new unclaimed property examination regulations in the form of the proposed Department of Finance Abandoned or Unclaimed Property Reporting and Examination Manual. Following is an overview of the proposed regulations.

 

The guiding principles for the proposed regulations include a goal that every examination be predictable, fair and consistent. The state escheator is prohibited from establishing collection goals or quotes related to unclaimed property assessments, and contracts with third-party auditors are available by request.

 

Upon assignment of a third-party auditor to examine a holder’s books and records, both parties will enter into a confidentiality agreement before any confidential information is produced, if requested by the holder. The proposed regulations include an example of an approved confidentiality agreement.

 

Examination Process

The state is permitted to examine a holder for any reason. Examinations begin with an official examination letter from the abandoned property audit manager, notifying the holder that its books and records are subject to examination, identifying the assigned auditor and providing auditor contact information. The proposed regulations include an example of a notification letter.

 

The state is permitted to initiate an examination only on holders who previously have been notified by the secretary of state of their right to enter into a voluntary disclosure agreement (VDA) or who have failed to comply with section 1172 of the state’s unclaimed property law. The examination notice terminates the holder’s ability to enter into a VDA.

 

Holders are responsible for complying with all information requests. If a holder retains a third-party advocate to assist with the examination, the state will communicate with both the holder and the advocate.

 

Examinations are not limited to a review of work papers, compilations or record summaries prepared by the holder or the holder’s advocate. They also include access to the holder’s original books and records.

 

Opening Conference

Once an examination is assigned, an opening conference will be scheduled with the auditor and representatives of the holder. Before the opening conference, the auditor will provide the holder with a list of documents the holder must produce before or at the opening conference. These documents may include tax returns, organization charts, charts of accounts, unclaimed property filing history in all states, prior completed and accepted VDAs and examinations, and policies and procedures related to record retention, accounting, unclaimed property, or any other practices the state deems relevant.

 

During the opening conference, the auditor will:

  • Advise the holder of Delaware’s reporting requirements
  • Provide an overview of the examination process, including state-approved methodologies, record availability, sampling and the potential for projection and estimation
  • Provide an examination work plan
  • Identify the maximum time period to be covered by the examination and discuss potential scoping issues
  •  Request additional records and materials necessary to proceed with the next steps of the examination, including tax returns, unclaimed filing history for all states, bank statements, bank reconciliations, outstanding check lists, detail general ledgers, aged accounts receivable reports, and if applicable, information surrounding gift certificate issuances and redemptions

Scoping

A typical examination will not exceed 24 months. If it lasts longer, the audit manager will meet with the holder to help complete the examination. Interest and penalties may be assessed on or abated at the discretion of the state escheator.

 

Examinations may include all of the holder’s subsidiaries and related entities. Once entity scoping has been determined by the state, no additional entities may be scoped into the examination without the holder's consent. At the holder's discretion and with the consent of the state, legal entities whose acquisition began after the conclusion of entity scoping can be added to the existing examination.

 

Record Review

During the examination, the auditor will review all necessary books and records, interview key personnel and review relevant policies and procedures related to abandoned property. The auditor may make subsequent requests to the holder for additional books and records.

 

The auditor will submit record requests to the holder in writing. The auditor will also provide a reasonable timeframe for the holder to respond, based on the type and extent of the information requested and other relevant circumstances. Upon receipt of submissions received from the holder, the auditor will provide confirmation with projected response times.

 

If “applicable and practicable,” the auditor will provide to the holder:

  • The process used to determine that items are unclaimed property
  • Why documentation provided by holder is not sufficient to remediate an item
  • Support for determining the proposed assessment
  • Steps the holder can take to remediate the assessment
  • The remediation timeline

Holders will have the opportunity to review, reconcile, remediate and, where applicable under Delaware law, perform due diligence on any items that have been identified as potential unclaimed property. The auditor will verify that the holder has mailed due diligence letters to the owner’s last known address. The auditor will also provide guidance regarding the due diligence process and ensure the holder is performing the outreach within the timelines established by the state. The holder will submit all due diligence letters to the auditor for review and approval before sending them.

 

The state may, at the holder’s request or with the holder’s agreement, divide the examination by property type and year. Thus, portions of examinations may be concluded while other portions remain ongoing. The auditors will keep the holder informed of any potential for such division to expedite the examination.

 

Status Reports

The holder will be kept informed of the progress of the examination and may contact the state directly to address issues or concerns. The holder has the right to contact the state directly to address issues arising from or related to the examination, including the right to report alleged misconduct, unethical behavior or lack of professionalism by the auditor.

 

At the end of any defined portion of the examination, the auditor will present the preliminary findings to the holder. The preliminary findings identify the work performed, property types reviewed, time period reviewed, estimation techniques employed, and a calculation showing the potential amount of unclaimed property due. The auditor will allow the holder reasonable time to complete required research and gather more records to address matters raised in the preliminary findings.

 

Estimation

Delaware requires that holders retain records for a minimum of 10 years plus dormancy (15 years total for most property types). If records are unavailable for the full 10-year period, holders are expected to possess several years of dormant records. The state may use any available dormant records to estimate an unclaimed property liability for the period of time for which the holder does not possess complete and researchable records.

 

If the holder fails to retain sufficient dormant years of records, the audit manager and holder will discuss which records will be used for the base period. In the absence of an agreement, the state escheator possesses the sole authority to make a reasonable determination of the base period in order to prepare an estimate.

 

Base periods consist of complete and researchable records. To draw a representative error rate, the base periods will consist of at least three years from the available complete and researchable records. Depending on the circumstances, the state may include nondormant periods in the base periods.

 

The holder must provide to the state escheator a representation of which records are available, for which property types and what years. A false statement will be considered willful misrepresentation made with intent to mislead the state escheator.

 

Items payable to a U.S. federal department or agency will be removed from the population before review. Funds returned in the normal course of business before issuance of the examination notice will not be included in the population of potential unclaimed items.

 

When transactions for a particular property type are deemed too large of a population to be reasonably tested on an actual basis, a statistical sampling methodology will be employed. If a holder prefers to research the entire population of a given property type, the holder is permitted to do so within a reasonable time.

 

Generally, the population will be divided into strata from which samples will be drawn. For each strata, a sample size will be determined using generally accepted statistical principles such that the sample mean will be within 10 percent of the population mean for that strata at a 90 percent confidence interval. In the instance of a lower-valued stratum, where the results are generally immaterial to the overall liability, a relaxed confidence and precision level intervals may be considered.

 

In some circumstances where the holder has not maintained records for the entire examination period, the state may sample a number of entities of a holder during an examination in lieu of testing all Delaware entities. The auditors will identify an appropriate sampling of entities based on factors including revenue, line of business, commercial activity and property types being held.

 

The results will be extrapolated, if applicable, to the other appropriate Delaware entities that have not been selected for detailed review to determine the liability. The holder will be given the option to use this sampling methodology or to test all entities that fall within the scope of the examination.

 

Delaware's sampling process for estimation includes the following steps:

  • Define the population, including base period and sampling unit (e.g. aged checks or customer net credit balances) and remove potential anomalies, such as duplicate records
  •  Determine appropriate stratification, if necessary, including number of strata and stratum boundaries
  • Calculate sample size, including desired confidence and precision
  •  Perform random computerized sample selection
  • Evaluate results

If the amount of reportable property cannot be ascertained from the holder’s records, projection techniques may be used to determine the reportable amounts for such periods. Such determination shall be made by first examining records during periods in which records exist to establish a base period of data from which statistical inferences can be made for periods in which records are incomplete. To the extent permitted by law, names and addresses identified in the base period will not be used to determine which state has the priority claim to the abandoned property estimated to be due over periods where records of owners’ addresses do not exist.

 

The state must approve all sampling, projection and estimation techniques before they are used by the auditor. The state will permit the holder to suggest an alternative technique. However, the ultimate decision to employ a particular technique is at the sole discretion of the state. The holder may challenge this decision after the examination ends.

 

Remediation

Holders have the opportunity to review, reconcile, remediate and perform remediation outreach on any items that have been identified as potential unclaimed property. The form of the outreach letter must be approved by the state, and all letters must be submitted to the auditors for review and approval before they are sent. The holder must provide confirmation of the date of the outreach mailing to the auditor. The proposed regulations include a sample approved outreach letter.

 

Bankruptcy

If filing for bankruptcy before or after an examination, the holder must provide bankruptcy notification to the auditor. Within seven days of receiving the holder’s notice or the discovery of the event, the auditor will notify the state and assist the escheator in filing a proof of claim in the bankruptcy action.

 

Statement of Findings

If the audit manager determines at the conclusion of the examination that the holder failed to report or underreported the amount of unclaimed property due to the state, the state will issue a statement of findings and request for payment to the holder.

 

This letter will outline the findings of the examination and make a formal demand for the property under question. The holder has 90 days to remit any abandoned property identified during the examination as owed to the state. The holder’s appeal rights to contest all or part of the findings as outlined are triggered by the statement of findings and request for payment.

 

Comment Period

Interested parties may submit comments regarding the proposed regulations to State Escheator David Gregor at david.gregor@state.de.us by May 3, 2017. The UPPO Government Relations and Advocacy Committee (GRAC) is currently drafting comments on behalf of UPPO for submission.

 

 

Tags:  audits  compliance  Delaware  examinations  unclaimed property  VDAs 

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