As part of recent changes to Delaware’s unclaimed property statute, the state must give holders the opportunity to enter into its voluntary disclosure agreement (VDA) program before initiating audits. In addition, holders that were already under examination had the option to convert to a VDA by Dec. 11, 2017. Expectedly, interest in Delaware’s VDA process is high. 

To provide UPPO members with insight into Delaware’s VDA process, Delaware Unclaimed Property VDA Administrator Alison Iavarone outlined the program and responded to questions during a recent UPPO webinar. 

“The VDA program is not an examination—it’s not an audit—but the holder is expected to conduct a comprehensive and detailed self-review of its books and records to determine whether the holder has past-due abandoned or unclaimed property reportable to Delaware,” she said.

Once enrolled, qualified unclaimed property holders accepted into Delaware’s VDA program will proceed through a four-phase process.

Phase 1: Scoping

During the initial phase of the VDA, the participating holder analyzes its organizational history, accounting functions and records to determine areas of potential unclaimed property exposure and underreporting. 

“The review should be customized to the holder,” Iavarone said. “In order to determine how it’s customized, you need to understand the corporate activity, whether companies were acquired during the VDA review period and how they were rolled into the company for accounting purposes, for example. Another big thing to address during the scoping phase is the compliance history—whether they have been filing and what property types they have been filing. This could help minimize the review you need to do.”

The holder determines the entities and property types where unclaimed property exposure exists and submits a Scoping Worksheet and Information Request to the VDA administrator assigned by the secretary of state’s office—either Drinker Biddle or TL2Q. 

The administrator reviews the holder’s submission and responds to any questions the holder may have about the process. The Delaware Department of State communicates with the administrator throughout the VDA process and remains available to address holder concerns. 

At the conclusion of this phase, the administrator and holder will agree on the scope of the VDA and establish a timeline for completion of the other phases. 

Phase 2: Quantification

During the second phase, the holder will review its books and records to quantify past-due unclaimed property reportable to Delaware for the entities and property types established during the scoping phase. The methodology for the quantification of amounts due to Delaware will generally be based on whether an entity is domiciled in Delaware and the records availability for each entity and property type. 

The holder and administrator periodically complete status updates to ensure the process is proceeding. The holder provides preliminary quantification schedules or other documentation for the administrator’s review and feedback. 

Phase 3: Submission and Validation

During the third phase, the administrator reviews the holder’s work and conclusions with the goal of establishing a settlement agreement, including the amount reportable to Delaware. The holder presents its VDA Submission to the administrator. It should include:

• Entity or company background information (in narrative form). 
•  Summary of the work performed (in narrative form). 
•  Summary of findings (in narrative form). 
•  Supporting schedules. 
•  Supporting documents. 
•  Other applicable documentation (e.g., legal opinions, management representation letters, etc.).

“This is the nuts and bolts of the VDA,” Iavarone said. “It should include is a summary of what was done in narrative form and then quantification schedules summarizing how you came up with the numbers, along with supporting documentation.” 

Upon receipt and review, the administrator responds with questions and follow-up items needed to proceed. Depending on the request, the holder may respond with supporting documentation and/or edits and updates to calculation spreadsheets. The holder also provides a management representation letter from its chief financial officer, describing what records are available for property types and for which years. 

The administrator presents the VDA Submission to the secretary of state’s office for review and approval. The Department of State reviews the VDA Submission and the administrator’s recommendations.

Phase 4: Closing and Documentation

Upon acceptance of the VDA Submission, the holder and secretary of state’s office work together to close the VDA. An officer or authorized representative completes and submits Form VDA-2 – Voluntary Self-Disclosure Agreement, along with several attachments:

• Exhibit A: List of Entities: This attachment includes a list of entities include in the VDA and their federal identification numbers. Dates and states of incorporation are also requested but not required.
• Exhibit B.1: Summary of Amounts Due: This attachment includes a table summarizing reportable amounts by property type. 
• Exhibit B.2: Line Item Owner: This attachment, provided in a printable format should include the name, address, property type and amount that will be included in the NAUPA file that will be uploaded by the holder after receiving the VDA Demand Letter. 
• Exhibit C: SOS VDA Submission: This attachment may consist of many documents and should include: the narrative summarizing the VDA analysis; a summary and detailed schedules quantifying amounts; copy of VDA-1 and any applicable amendments; management representation/records availability letter; legal opinions/memoranda related to the VDA; and any other relevant documents. 

After the holder and secretary of state have signed Form VDA-2, the Department of State will issue a Demand Letter, requesting payment and providing instructions for uploading the necessary NAUPA file. The holder will have 10 days to make payment of the amount due. 

Following completion of the VDA process, the holder is required to file unclaimed property reports electronically to the Department of Finance for the next three years. 

For additional information regarding Delaware’s VDA program, including forms, sample documents and answers to frequently asked questions, visit http://vda.delaware.gov.

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.