What Every Credit Manager Needs to Know About Escheatment

In lean economic times, states are often hard pressed to secure revenues. Regulations, fees and fines that may not have been as strictly enforced in more robust environments make their way to the surface to become key enforcements.

“When budgets are tight and states are looking to increase revenue, we have seen unclaimed property enforcement step up,” said Valerie Jundt, senior manager, Deloitte & Touche, LLP, during the CMA-sponsored teleconference
“Escheatment: What Every Credit Manager Needs to Know.”

Like many U.S. laws, escheatment and unclaimed property laws have roots that go back several centuries to British common law. Under the regulations, after a certain period of time, companies are required to turn over all unclaimed or unapplied customer credit balances, rebates, dividends, un-cashed paychecks, commissions, discounts and a host of other properties to the state. Escheatment is actually the physical transfer of property to the state that has the effect of making the state legal owner, rather than merely the custodian, of the transferred property. More often than not, states are interested in cash or cash equivalent property that can be liquidated quite easily.

Companies that are acting as holders for unclaimed property are required each year to submit reports to the government outlining their unclaimed property activities and to remit funds as necessary. The problem is that oftentimes, companies are simply unaware of their unclaimed property responsibilities or are culpable of some sort of infraction as laws and statutes vary widely from state to state.

“What we’ve found is that oftentimes many companies who feel that they’ve been filing reports for years are not in compliance; and that tends to be a mess,” explained Jundt. “The reality is that all holders are likely to have some
unreported unclaimed property liability. And the larger you are, the more complex you are, the more dispersement accounts, the more merger and acquisition activities that you have, the greater the risk that you have. So, if you are a
very large company and have somewhat of a complex organization structure, the likelihood that you are going to have unclaimed property issues is high.”

Unclaimed property fines are not a tax, though they are often perceived as one. Both civil and criminal penalties can be applied for unclaimed property violations. Fines can be assessed for not reporting unclaimed property, for not
performing due diligence or complying with state statutes or for not handing over the property to the state. Knowingly filing a fraudulent report can have devastating financial impacts. Fines up to $25,000 and interest up to 75% can be tacked on to the property. Plus, failure to properly account for unclaimed property liability can be viewed as a violation of Generally Accepted Accounting Principles (GAAP) or Sarbanes-Oxley Act internal control and reporting requirements. States are also vigilant for any warning signs from companies that could trigger an audit on a company, resulting in unclaimed property laws violations.

“The likelihood of you being audited is greater than it used to be,” said Jundt. “Though from my experience most states are very reasonable.”

SOX 404 Requirements Delayed for Small Businesses

The Securities and Exchange Commission recently approved a one-year extension of
the compliance date for smaller public companies to meet the auditor attestation
requirement of Section 404(b) of the Sarbanes-Oxley Act (SOX), meaning that
smaller companies will be required to start providing an attestation report in
their annual reports in fiscal years ending on or after December 19, 2009.
Additionally, the commission also announced that it had secured approval from
the Office of Management and Budget (OMB) to begin collecting data for an
analysis of the costs and benefits of the implementation of Section 404 and the
consequences that compliance may have for smaller companies.

An extension in the compliance date has been championed by congressional
small business leaders and regulators alike, with SEC Chairman Christopher Cox
first discussing the one-year delay in late 2007 and formally proposing it
before the House Small Business Committee in early 2008. The cost-benefit study
was first announced in February and is being led by the SEC’s office of economic
analysis with assistance from the office of the chief accountant and the
division of corporate finance. The study will include interviews and a web-based
survey in an effort to collect real-world data from a number of smaller
companies to determine what about Section 404’s requirements drive compliance
costs upward.

"Over the past few years, the commission and Public Company Accounting
Oversight Board (PCAOB) have committed extensive resources to improving the
efficiency and cost-effectiveness of the implementation of Section 404’s
requirements, particularly for smaller companies," said John White, director of
the SEC’s division of corporate finance. "I am optimistic that this study of
real-world data will help further inform our efforts to improve the
implementation of SOX 404."

Results of the survey are expected to be available before the new delayed
compliance date.