Unclaimed Property Audit Series – Audit Letter

We Received an Audit Letter. Now What?

In MarketSphere’s first Unclaimed Property Audit Series blog post, we examined the current unclaimed property audit environment. Regardless of whether a business is aware of its unclaimed property reporting obligations, has failed to properly comply with such obligations or has consistently reported as accurately as possible, it may receive an unclaimed property audit letter. Part two of this four-part series explores how to respond to an audit letter.

Typical Audit Letters

As with many aspects of unclaimed property compliance and enforcement, audit letters differ by state. However, several critical pieces of information are included in a typical audit letter that help recipient holders begin to understand the audit and their responsibilities. Details may include:

• The type and scope of the audit. An audit notice will generally include the business entities and property types under examination. The details may specify certain subsidiaries and property types, such as general ledger or securities, or may be all-inclusive, covering all corporate entities and all property types subject to reporting.
• The party conducting the examination. The notice usually specifies whether a state representative or a third-party auditor will conduct the audit. Many states retain the services of outside auditors, such as Kelmar Associates, Specialty Audit Services, Innovative Advocate Group, Discovery Audit Services, and Kroll Government Solutions, to name a few.
• Periods under review. Audit letters often specify the number of years that will be included in the examination. Audit lookback periods frequently span as many as 10-15 years.
• Record destruction hold notice. To ensure that the auditor has access to the records it believes are necessary to assess the audit subject’s liability, the audit notice may include instructions to maintain specific records, such as bank statements, bank reconciliations, outstanding check lists, general ledgers and other essential documents.
• Statutory reference and notice of potential penalty and interest assessments. The letter may cite the statutes that authorize the unclaimed property division to conduct examinations and state that holders may be subject to penalties and interest assessments based on the audit findings.
• Instructions for proceeding. The audit letter will likely include the next steps in the audit process so the recipient can prepare and respond promptly.

While undergoing an examination, the company may receive additional audit letters. Because third-party auditors often work for multiple states and are often paid on a contingency fee basis, other state clients may be solicited to join an audit. In addition to multi-state audits under a single auditor, states may separately identify a holder who happens to be under examination and begin their own audit. In either case, the audit subject will receive additional letters notifying it of the expanded scope or additional audits.

Audit Defense Team

Unclaimed property audits are inherently complex, and it is essential to establish a team to advise and assist. Identifying audit defense team members quickly assists in responding appropriately to the audit letter and preparing for the subsequent work required to research questions and gather records throughout the audit process. This team should include outside counsel, consultants, and the company’s internal departments.

Outside counsel specializing in unclaimed property can provide valuable analysis of the company’s contractual obligations, creation of legal privilege for work papers and communications, preservation of legal rights, negotiation of nondisclosures, and settlement and release agreements. These protections help minimize the holder’s risk throughout the audit process and after the audit has ended.

An unclaimed property consultant has expertise in managing the audit process and limiting its effect on the holder organization. A consultant can ensure that the overall process is fair, auditors don’t overstep their authority, deadlines and document requests are reasonable and timely met and that audit methodologies are permissible. When the company and auditor disagree about data quality and supporting documentation, a consultant can help resolve such differences efficiently and effectively.

Additionally, a full-service consulting firm can provide other highly specialized resources to help reduce the workload and exposure. This can include owner reunification teams, focused on locating owners and reducing populations of past due property, IT professionals to assist with heavy data lifts or system challenges, or staffing solutions to assist with the workload. These additional services can also help reduce the impact on a company’s resources. We will discuss the components of audit exposure in more detail in future posts in this series.

Because an audit typically includes requests for records from several departments, the audit team should include representatives from each affected area. Including team members from key departments ensures a division of responsibilities and an efficient response. Affected departments will depend on your industry, but often include legal, tax, compliance, payroll, accounts payable, accounts receivable, and corporate accounting.

Establishing who will serve as the auditor’s point of contact is critical. This team leader should work with outside counsel and consultants to contact the auditor to understand the audit process, expectations, and timelines. If a third-party auditor is conducting the examination, putting a non-disclosure agreement (NDA) in place before responding to record requests is critical. An NDA safeguards sensitive data and maintains the holder’s legal and ethical responsibility to protect personal information contained in its records.

Communication, Education, and Planning

Unclaimed property audits can last multiple years, so spending time on the front end to educate the impacted departments can go a long way towards preparing them for success. Holding initial meetings helps educate each department on the process and allows them to plan for the expected impact. If your team includes experienced consultants or counsel, they can help walk through the phases of the audit and discuss expectations, estimated timelines, records requested, testing procedures, estimated workload, and other key topics that will allow for proper planning. This can also be a time to highlight how their efforts can help limit exposure to the company.

Lastly, communications with leadership are important as well. Helping your leadership team understand the audit process, resource impacts, and potential exposure will be significant towards securing leadership’s support and preparing them to participate in the strategic decisions that will need to be made during each phase of the audit. The audit phases and defense strategies will be the topics of the next two posts.

Navigating the intricacies of unclaimed property compliance can be challenging. Watch for our next Audit Series blog post, which will help holders understand the audit process.

For help with your unclaimed property needs, contact us so we may assist you in considering your available options and determining your next steps.

*Content contained in this article is considered accurate as of the publish date.