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Deadline Approaches for Converting Delaware Audits to VDAs

Posted By Administration, Wednesday, November 22, 2017

Under Delaware Department of Finance regulations that became effective on Oct. 11, 2017, unclaimed property holders that received an examination notice from the department on or before July 22, 2015, have the option to convert the audit to the state’s Voluntary Disclosure Agreement Program. The deadline for submitting the Notice of Intent to Convert Audit to VDA form is Dec. 11, 2017. Holders undergoing a securities examination are not eligible to convert.

 

Converting from an existing audit to a VDA holds several potential benefits for holders.

 

Waived interest and penalties

Delaware officials have stated that waiving the mandatory 25 percent interest charge and other penalties is intended to be a significant incentive for holders to come into compliance via the state’s VDA program.

 

Limited carryover of audit work

“The only aspect of the audit that will have precedential impact on the VDA is the scope of the examination,” said Kendall Houghton, partner with Alston & Bird. “That includes any determination by the Department of Finance and its contract auditors about which entities will come under review, and the applicable property types and years. Other than that, holders that convert to a VDA have the option to incorporate other aspects of work performed during the audit, but are not required to do so.”

 

This limited carryover of audit work has two noteworthy advantages to holders:

  1. They don’t have to start over, redoing every aspect of the audit. Holders that qualify for the VDA conversion have been under examination for at least two years and have likely dedicated significant resources to the process. They can choose to use completed work as they prepare their VDA analysis, submission and quantification of liability.
  2. They are not required to use the audit firm’s work papers and determinations made during the examination.

Closing and release agreement

Upon completing the VDA program, holders have the opportunity to secure a closing and release agreement from the secretary of state. That can be quite valuable, as it protects holders from liability for the period covered under the VDA, as long as there was no willful misrepresentation or fraud, and they meet future reporting requirements.

 

Flexibility

Holders that elect to convert their examinations to VDAs are not required to complete the VDA program. If they are unable to reach acceptable terms or anticipate that the results of an unclaimed property lawsuit may deem Delaware’s estimation practices unconstitutional, for example, holders may choose to withdraw from the VDA program. This gives them the option to challenge their liability or litigate it later, which would not be an option once the VDA closing and release agreement is finalized.

 

Control

Undergoing a self-directed review under the VDA process gives holders greater control of the process than completing an audit. The self-directed review is typically more targeted, freeing holders from overly broad information requests from the auditor. They also have the ability to set their own timelines.

 

“If you’re engaged in yearend closing and need to put the VDA process aside for a few weeks, you can do that without the constant tension of having to fulfill the auditor’s record requests,” Houghton said.

 

Relaxed review standards

The VDA’s review standards are generally less stringent than those imposed during an audit. For example, under an audit, checks voided after 30 days need to be researched and remediated. Under the VDA process, the standard increases to 90 days for voided checks. This standard is more in line with common business practices and is likely to generate a lower error rate for liability estimation.

 

“The remediation standards employed in the VDA program are more appropriate because the holder knows its policies and procedure, and is in the best position to assess whether an item on the books has been proven not to be unclaimed property,” said Houghton. “There is effectively a presumption in the audit process that anything on the books is unclaimed property, and the level of documentation required to rebut that presumption is more rigid.”

 

Greater cooperation

The VDA program is designed to give holders the opportunity to complete the self-directed examination, secure a release and move forward with proactive compliance. As such, even when issues between holders and the VDA administrators are contested, they are generally able to discuss, vet and settle the differences. Everyone involved typically approaches challenges with the common goal of collaborating on a solution.

 

Potential downsides

Despite the advantages available to holders through the audit-to-VDA conversion, opting to convert is not a clear-cut decision for everyone. As mentioned previously, upon execution of a closing and release agreement, holders forfeit the right to challenge the liability or later litigate it. In the event of a significant lawsuit that changes the unclaimed property audit landscape, holders that completed the VDA would not have the right to file a refund claim or dispute the estimated liability they paid.

 

For some holders that have substantially completed the audit process, the VDA process may represent an additional burden. Although not starting from scratch because they can use material from the examination period when preparing their VDA analysis, the self-directed review process still requires dedication of resources. A holder may decide that completing the audit process is more prudent than dedicating additional consultant, outside counsel and staff resources to the VDA program.

 

Finally, if the holder is subject to a multi-state audit, converting to a VDA in Delaware would not affect the audit from the other states. So, entering into the VDA could effectively shift the holder from a single process to multiple processes, posing potential resource issues.

 

The third option

In addition to completing the examination or converting to a VDA, holders may instead elect to convert to an expedited audit. Much like the VDA, this option includes a waiver of interest and penalties. However, very little information regarding the expedited audit process has been published, and the waiver is subject to the escheator’s determination that a holder cooperated with the auditor.

 

“The VDA and audit processes have been around a long time, but the expedited audit process is new and has a lot of unknowns,” said Houghton. “The administrative comments and guidelines don’t exist yet. That creates a lot of questions that aren’t yet answerable.”

 

For more information about Delaware’s VDA conversion initiative, refer to Delaware’s Convert Audit to a VDA web page.

Tags:  audits  Delaware  VDAs 

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