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Managing Multi-State Audits

Posted By Administration, Thursday, December 7, 2017

In today’s unclaimed property environment, the constant threat of a multi-state audit is very real for holders. Those who find themselves under examination face a daunting process that will likely last three to five years and will most certainly result in a significant resource strain across many departments.

 

Multi-state audit liability can be quite costly. The third-party firm conducting the audit works on a contingency fee basis, providing an incentive to discover a large liability in every state for which it is working. If one of those states is the holder’s state of incorporation, estimated liability with a lookback period of 10-15 years is in play, depending on the specific state.

 

Company-wide engagement in the audit process is essential. Several departments, including accounts payable, payroll, accounts receivable. finance, IT and legal, will likely be called on to commit their time and effort to the audit process – all while continuing to carry out their regular day-to-day responsibilities.

 

So, with this looming threat, what should a holder do to manage the multi-state audit process?

 

First, be proactive. If a multi-state audit has not yet been initiated, conduct a risk assessment to understand potential exposure. Identify holes in existing procedures that could lead to potential unclaimed property issues – small dollar balance write-offs, stale-date check write-offs and lack of documentation to support voided checks, for example. Evaluate the level of risk so you can address areas likely to cause significant problems. Consider signing up for states’ voluntary disclosure agreement (VDA) programs to come into compliance voluntarily, rather than waiting for an audit notice.

 

If it’s too late for proactive measures and you’ve already received a multi-state examination notice, get organized. Appoint a lead person to manage the audit process, serve as the point of contact for the auditors, compile documentation and review materials before submission to the auditors. Evaluate whether to hire an experienced advocate to help manage the process.

 

Get legal counsel involved early. Because a significant amount of litigation surrounding unclaimed property audits has occurred, legal counsel may be able to identify industry-specific legal defense issues to help mitigate the audit.

 

The first 12-18 months of a multi-state audit are especially critical. Expect frequent document requests from the auditors, each with a 30-60-day timeline. The initial requests will be used to establish the audit scope – which entities and property types will be included. Auditors will then likely review trial balance and general ledgers, disbursement bank account information, accounts receivable reports and aging reports.

 

Depending on the holder’s industry, record requests may fall outside of the accounts payable, payroll and accounts receivable departments. For example, retailers may need to supply gift card records, or manufacturing companies may be asked for customer rebate records.

 

It is critical for the person managing the audit process to review all information before submitting it to the auditors, ensuring they receive exactly what they need but nothing more that could complicate the process.

 

As the audit proceeds, the holder should recognize its exposure in additional states not covered as part of the audit. If a company doing business in 40 states undergoes an audit covering 10 of them, there may be existing exposure in the other 30. The audit provides an opportunity to manage that additional risk, enter into VDA programs and enact processes to prevent the problem from spreading.

 

Undergoing a multi-state audit is never pleasant, but it provides an incentive for holders to improve their practices. Through the hard work required to complete the audit, best practices can be implemented to ensure better procedures and controls in the future. Executives are more likely to remain aware of unclaimed property issues following an audit, increasing the likelihood of increased support to prevent another such audit in five, six or 10 years.

 

To get a more in-depth look at navigating the challenges of a multi-state audit, join UPPO for the Multi-State Audits webinar on Dec. 12, 2017, at 1 p.m. EST. Matt Hedstrom from Alston & Bird LLP and Heela Popal from PricewaterhouseCoopers LLP will provide insight into managing the process, tackling business continuity challenges and preparing for a potential audit. 

Tags:  VDAs 

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