Unclaimed Property As A Control Threat

If the phrase “unclaimed property” recalls that overcoat you left at last year’s Christmas party, think again.

Sure, states collect “UCP” such as abandoned bank accounts or family jewelry and publish lists of the goods to help find the rightful owners. But businesses also accumulate unclaimed property, from outstanding checks to balances in accounts payable and unredeemed gift certificates.

After a certain time, states will demand companies hand over those funds. And while Sarbanes-Oxley does not directly address UCP, funds in limbo can present a very real problem for accounting and internal controls.

Errors as a result of UCP can lead to “a significant overstatement of revenue or understatement of liabilities,” says Karen Anderson, vice president of unclaimed property recovery and reporting at Affiliated Computer Services. “You don’t want to be the CEO that has to report this.”

Unclaimed property caused Online Resources Corp., a $92 million IT consulting firm, to restate its financials for 2003 and 2004 and report a material weakness. Likewise, Bally Total Fitness included UCP reporting in its 2005 list of accounting failures.

Peters

They haven’t been the only ones, says Robert Peters, a partner at SMART Business Advisory and Consulting. “Far more have struggled to identify what their range of exposure might be,” he says. “It’s the uncertainty that’s associated with the potential range that’s causing the headache.”

UCP is typically the purview of state regulators, often treasurers or state auditors. Forty states have engaged third-party audit firms to review the Fortune 1000 companies specifically for unclaimed property violations, Peters says. If companies haven’t been reporting, the state can estimate and claim the funds retroactively—up to 25 years’ worth.

“The potential exposure … can be a very large number and liability if unchecked,” Peters says. For many Fortune 100 and 500 companies, he estimates that UCP exposure can reach tens of millions of dollars, and possibly even higher.

The scope of the problem is equally large, since all manner of retail businesses offer gift certificates, and they are what can land a company in trouble. “The single largest area is uncashed or unredeemed gift certificates,” Peters says. “Have you ever had a Starbucks card with five cents left on it?”

That nickel might seem a pittance, but adds up when considering that gift cards bring in $50 billion each holiday season. “Breakage,” or unredeemed card value, represents 2 to 8 percent of the gift card revenue, Peters says. “It’s a multiple billion-dollar industry for companies that get to keep that breakage, and the states want a piece of it.”

Indeed, UCP is an especially juicy target for states, always eager to find new sources of cash. “State governments looking for ways to increase revenues or maintain revenues without increasing taxes, and unclaimed property is not a tax,” Peters says. “It’s a perfect avenue for governments to enforce rules that are already on the books politically. It’s very popular for the state to collect the unclaimed property.”

Stephen Larson, deputy state treasurer of Iowa and first vice president of the National Association of Unclaimed Property Administrators, readily agrees that states “are always looking for new areas of noncompliance. The main thing we try to stress is that unclaimed property law is a consumer protection law, and the states do compliance to protect the owner.”

Valerie Jundt, a UCP specialist at Deloitte and Touche and the former executive director of NAUPA, says she sees “an elevated interest in enforcement” among state auditors at the moment. Regulators can pile interest, penalties, and audit costs onto an errant company, and some states (Delaware among them) levy an extra fine for filing false UCP reports.

Multiply all those costs by the 20-year stretch of some retroactive unclaimed property claims, Jundt says, and the final price gets pretty painful.

Staying On Top Of The Rules

While the Fortune 500 and other large corporations almost always report, Larson says, that’s not the case with smaller or nontraditional companies. He estimates that in total only 30 percent of companies regularly report their UCP.

“They’re generally unaware of the requirement because their accountants have advised them that if they had something that was outstanding, it’s probably an error,” he says.

State regulators, however, will approach companies with copies of the Sarbanes-Oxley Act in hand, and argue that UCP falls under the scope of effective internal controls over financial reporting. By and large, “once [companies] became educated, they came into compliance,” Larson says.

That is not to say compliance is easy; there are 54 separate U.S. jurisdictions for unclaimed property (the 50 states, Puerto Rico, Guam, and the U.S. Virgin Islands), and “hence the compliance nightmare” for national companies, Peters says.

“It definitely is a challenge keeping up with state laws. They’re changing constantly,” says Anderson at ACS, who tracks UCP legislation. Right now she has her eye on nearly 70 bills, and expects 10 to 15 of them to pass and create some change in corporate compliance obligations.

“It definitely is a challenge keeping up with state laws. They’re changing constantly.”

— Karen Anderson, ACS

Some states, like Washington and North Carolina, she says, make a point to keep businesses in the loop about regulatory changes. Most, however, leave companies to track those changes on their own.

The first step in avoiding UCP problems, experts say, is a frank assessment of the company’s UCP risks. Companies should also size up the potential liability from previous years and establish a policy for unclaimed property. (Another often overlooked area: Parent companies forgetting to check for outstanding UCP when completing mergers and acquisitions.)

Rob Rogers, managing editor of the Accounts Payable Network, agrees that staying on top of the issue is the best defense. Accounts payable officials should ensure “you’ve put into place a follow-up mechanism so you’re not waiting a couple years along the road, when you see checks uncashed. You should follow up right away,” he said.

“It’s one of the last [compliance issues] you hear about,” he says. “But you can see how your normal good practices and good controls are going to help you stay on top of it.”