A recent Michigan bill (House Bill 4289), delivers a useful example to other states regarding administration of abandoned and unclaimed property ("AUP") audits. House Bill 4289 is in the hands of the Governor, who must sign or veto the bill by November 7, 2013. Notably, the bill mandates the documentation that must be provided to an audited company by the auditor; limits the auditor’s ability to extrapolate if the audited company (the "holder" or "person") has substantially complete records; and requires regulations to be developed regarding the audit procedures. This bill represents a step in the right direction, as it requires transparency in the audit calculation and rewards holders for filing reports and retaining records.
Key provisions in House Bill 4289
The legislation provides that a holder who has been audited shall be given a complete copy in printed or electronic format of the audit report, which shall identify, in detail, the work performed, the property types reviewed, any estimation techniques employed, calculations showing the potential amount of property due, and a statement of findings. Most interesting, the bill requires that an auditor must provide all other correspondence and documentation that formed a basis for the findings. While giving the holder an audit report is nothing new, specifying that the auditor must include the estimation techniques and the calculations used in the report will make it much easier for holders to understand and, if necessary, challenge the auditor’s calculation. This also compares favorably with the current practice of the contingent fee auditors used by other states. These auditors often will provide holders with a report indicating that documentation is insufficient for certain transactions, but rarely will they give holders any guidance regarding what level of documentation would have been sufficient.
The bill also provides that if the person being audited has filed all the required reports and has maintained substantially complete records, then all of the following apply to the audit: (a) the audit shall include a review of the person’s books and records, (b) the audit shall not be based on an estimate, and (c) the administrator or agent shall consider all evidence presented by the holder to remediate the findings. These changes, if enacted, would place severe limits on the ability of auditors to come up with inflated amounts of property due through the use of extrapolation. Such limits are consistent with the actual purpose of Michigan’s AUP law, which is to reunite owners with their property, not to generate revenue for the state’s budget.
However, the bill does not reward non-compliant holders. If a holder does not maintain substantially complete records, then an auditor can still base the holder’s liability on an estimate. The bill defines "substantially complete records" to mean at least 90 percent of the records necessary for unclaimed property examination purposes. The determination of whether a holder’s records are substantially complete depends not only a percentage of the actual individual records, but also on the materiality of the records. The bill also specifies that where a holder’s records for one particular property class are insufficient, this does not provide an auditor with the authority to apply estimation techniques to other property classes for which the holder has filed adequate reports and maintained sufficient records.
What does this mean for holders in Michigan?
File annual reports and retain records! The key provision in the bill limiting the ability of an auditor to use estimation is contingent on the holder having filed unclaimed property reports. In addition to filing reports, holders in Michigan should be retaining the records necessary to support those reports. Specifically, holders should retain transaction-level detail for any reported property. Transaction-level detail means check number, check date, dollar amount, and payee name and address, and if retained, the state will only audit the actual records and not use estimations. Furthermore, if a holder is filing for multiple entities or divisions, the retained records should include an identifier for the entity or division.
Holders should also be keeping a close watch for the new Michigan AUP audit procedure regulations. The bill mandates that these regulations be developed within six months. These regulations should provide holders with the additional framework for the audit procedure and guidance in going through the audit. A subsequent update will be provided when the regulations are released.