More aggressive state legislation and Sox are prompting companies to look more closely at their unclaimed property.
For years, it was common practice for companies to write general ledger unclaimed property over to income. Assets like un-cashed payroll checks, abandoned bank and brokerage accounts and vendor payables were swept under the carpet of financial reports. But the advent of the Sarbanes-Oxley corporate reporting law and other changes in the corporate governance climate, along with increased state scrutiny, have spurred companies to tighten their auditing processes.
The result has been that states collected nearly $23 bn in unclaimed property in 2003 – a 44 percent jump over the $15.8 bn collected in 2000. Yet many companies still fail – through ignorance, neglect or fraud – to track unclaimed property and escheat it to the state. And the noncompliance risks can be significant with companies facing the possibility of a state audit, fines and interest. California, for example, charges a twelve percent compounded annual interest fee. Some states also file criminal charges against companies failing to comply with reporting requirements. Moreover, mishandling unclaimed liabilities could lead to material misstatements within financial statements and result in federal penalties under Sox.
In their evolving role as ‘chief compliance officer’ many corporate secretaries are being called on to help their organizations develop a systematic plan to ensure company wide compliance with unclaimed property laws and guard against the possibility of misstatements. ‘That means tracking unclaimed property that goes significantly beyond [the traditional corporate secretary’s responsibilities of] equity and debt,’ says David Epstein, special consultant at ACS unclaimed property clearinghouse. ‘It could be any obligation the company owes. In fact, there are literally over 100 property types that get covered by all the different states.’
As a result, companies and the corporate secretaries that represent them can no longer assume they are protected by their transfer agent’s unclaimed property filings. ‘Transfer agents have done a pretty good job keeping companies in compliance on the securities side,’ says Sherry Moreland, principal at unclaimed property consultant Red Roar Tech. ‘So the states, keen to increase revenue, are spreading their search into new areas on the general ledger side.’
Increasingly, companies are using the Section 404 review process, which requires all public companies to establish adequate internal controls over financial reporting, to sleuth out nooks and crannies within the company that may be holding unclaimed property. ‘The question corporate secretaries should ask is: Who else within the corporation is handling other sorts of unclaimed property and are they adhering to the law adds Mike Ryan, director at Red Roar Tech. ‘Then, if you outsource aspects of unclaimed property outside your corporation, do you review compliance?’ Ryan notes that third parties, such as transfer agents and payroll service providers, can trigger unclaimed property liability for a company.
For many companies, the first step in ensuring that all unclaimed property is accounted for is to set up a committee devoted to defining procedures and policies appropriate to the task while at the same time educating the rest of the organization. According to Karen Anderson, vice president in the consulting practice at Unclaimed Property Recovery and Reporting (UPRR), the logical person to oversee company-wide compliance is the corporate secretary or governance officer.
Compliance is complex given ever-changing state laws, dormancy periods and a variety of filing formats. Anderson, who sits on the Securities Transfer Association’s (STA) unclaimed property committee, has been working to create awareness at the state level of the issues facing corporations. She points out that some state and SEC regulations overlap when it comes to certified mailing requirements. ‘It’s like saying we will give you two vaccinations for the same thing,’ says Anderson. ‘It is an unnecessary burden. At the same time, a handful of states have different dormancy periods for dividends and shares. That makes no sense. It should be the same dormancy period for both. While states will never entirely standardize how they do things, it is important to keep up a dialogue so they understand how policy affects companies.’
Companies have several options when it comes to tackling unclaimed property. They can manage data in house, often with an intranet and a purchased software system. Or they can outsource it to accountants or a specialist consulting firm. Given the task’s complexity, most companies outsource unclaimed property reporting as much as possible, according to Robert Irvine, principal and a founder of UPRR. ‘Obviously, as an outsourcing company, we think the most practical thing to do is to outsource it to us or one of our competitors,’ says Irvine. ‘You can do it yourself, but in most situations people want experts involved. There’s little point in reinventing the wheel.’
‘Most public companies outsource because keeping up with ever-changing technology would be expensive,’ says Lisa Rose-Sherpinskas, chief compliance officer at California-based Vanacore International. ‘Outsourcing means someone else is responsible for that technical upkeep.’
For those who want to do it themselves, or simply give colleagues throughout the company an update of where liability exposure may lie, public information from all states is consolidated at the STA’s web site. Progressing from state to state, the ‘Unclaimed Property Matrix’ stresses the securities side, but addresses all main property types, and includes information on dormancy periods, cut-off dates and filing deadlines.
Still, corporate secretaries need not overextend themselves. While they may be taking on a more central role in the unclaimed property compliance arena (or not, depending on the company), their essential function remains the same.
‘I don’t see my role as being in charge of day-to-day compliance,’ says James Brashear, senior vice president and corporate secretary at travel industry technology provider Sabre Holdings. ‘I’m not tracking down individual lost beneficiaries. My responsibility as corporate secretary is to ensure there are processes in place within the appropriate units of the company to ensure unclaimed property reporting compliance.’
Making sure a company has enterprise-wide internal controls to track unclaimed property has a flipside. Moving beyond a ‘What must I do?’ perspective, those in a compliance function are in a good position to ask the more important question ‘What might my company be owed?’
