Insight into the Contract Auditor Process

Transcription

1 2014 Holders Seminar - Atlanta September 17-18, 2014 Insight into the Contract Auditor Process Presented by: Loredana Pfannenbecker, PwC Steven Swaigenbaum, True Partners Consulting LLC UPPO Presentation Disclaimer Use of the Unclaimed Property Professionals Organization, Inc., (UPPO) name of copyrighted materials in this presentation does not constitute an endorsement by UPPO of a member, vendor, product or service. The content represents the opinions of the author and not necessarily those of UPPO. This information is not intended as legal advice and should not be used to replace the advice of legal counsel. UPPO Antitrust Statement UPPO has a policy of strict compliance with U.S. federal antitrust laws. UPPO members and/or meeting attendees cannot come to understandings, make agreements, or otherwise concur on positions or understandings, make agreements, or otherwise concur on positions or activities that in any way tend to raise, lower or stabilize prices or fees. Members and/or attendees can discuss pricing models, methods, systems, and applications, as well as certain cost matters that do not lead to an agreement or consensus on prices or fees to be charged. However, there can be no discussion as to what constitutes a reasonable, fair or appropriate price or fee to charge for any service or product. Information may be presented with regard to historical pricing activities so long as such information is general in nature and does not include data on current prices or fees being charged in any trade area. Any discussion of current or future prices, fees, discounting, and other terms and conditions of sale, which may lead to an agreement or consensus on prices or fees to be charged, is strictly prohibited. 1

2 TODAY S AGENDA Who is the Contract Auditor? High-level Review of Audit Process Remediation Support Best Practices Hot Topics Recent Happenings Who is the Contract Auditor? Agent of the State(s) Holder s state of incorporation Any number of other jurisdictions Independence What Independence?! Work for a contingent fee Aggressive presumption of guilt Auditors on the Rise Growing headcount/additional firms Increasing Skillset Employing a forensic approach CPAs, CFEs, JDs Who is the Contract Auditor? Third-Party Auditors Kelmar Associates, LLC ( Kelmar) ACS Unclaimed Property Clearing House ( UPCH ) Specialty Audit Services, LLC ( SAS ) Audit Services U.S., LLC ( ASUS ) Treasury Services Group ( TSG ) Verus Financial, LLC ( Verus ) Others 2

3 High-Level Review of Audit Process Audit Notification Initial Document Request Opening Conference Scoping General Ledger/Trial Balance Review Presumed Unclaimed Property Populations Remediation Report of Examination ( ROE ) Negotiations/ Appeals & Payment Remediation Support Best Practices Communication in Preparation of Remediation Phase: Confirm researchable periods and systems PRIOR to testing phase Suspend destruction of all records Confirm due diligence letter will be accepted by auditor Remediation Support Best Practices Organization/Presentation is Paramount to the Remediation Phase: Maintain a document log and track the status of requested information Establish a web-portal for document delivery to/from auditor Where possible, provide data in requested format Label supporting documentation with audit reference/test number Don t allow auditor to draw conclusions; connect the dots for them 3

4 Remediation Support Best Practices Third-party support (Primary): Validate amount was resolved Bank Statement Copy of Cleared Check Signed Affidavit/Due Diligence Letter Internal support (Secondary): Explain transaction activity and story behind disposition of an amount ERP system contemporaneous notes Journal entries Customer History Reports/Customer Statements Documented Correspondence/Agreement Remediation Support Best Practices Reasons Auditors Generally Deny Support: Cannot Link Original Check to Reissuance Varying dollar amounts Unclear link in liability (e.g., invoice #, purchase order #, etc.) No Third-Party Corroborating Support Bank statement or cleared check may be required Standalone bank statement showing clearance may not be sufficient for a reissued check Difficulty interpreting accounting systems/sub-ledgers The general approach to calculating unclaimed property exposure is typically the same across audit firms as well as advocates: Determine base years for testing Identify property presumed abandoned in base years Compute error rate as a percentage of a benchmark (i.e., revenue) Apply error rate to revenue of earlier periods to extrapolate liability Repeat for each property type subject to review But what goes into determining the error rate from the base years? 4

5 Populations of unclaimed property generally scheduled and presumed abandoned: Payroll A/P A/R Voids (30 days) O/S Checks Voids (30 days) O/S Checks Aged Credit Balances Credit Balance Write-Offs Unremediated Items Prior Unclaimed Property Filings Funds Returned during Examination Errors / Basis of Estimation = UP ERROR RATE CALENDAR SALES (Base Years) Impact of Extrapolation Can Be Very Material Have seen multipliers in excess of 40X Be Mindful of Data Utilized to Determine Error Rate In-scope vs. out-of-scope entities Researchable periods Confirm Credit is Given Reported items should be netted against calculated liability Double Check Auditor s Calculation Overextending reach back (state and date of Inc.) Estimating/trending revenue (reverse growth trend w/o basis) Outliers (anomaly in base years) 5

6 Purpose of Statistical Sampling Test population is simply too large to review on an actual basis Results likely to be representative of the entire population Key Sampling Terms CONFIDENCE LEVEL Probability that a sample is expected to yield a population s true result within a given precision interval PRECISION INTERVAL The degree by which sample results may vary from a population s true result (i.e., margin of error) Exposure Calculation Data Universe Techniques (all data available anywhere in any system) Target Population (population of audit (e.g., outstanding checks, AR credits) Sampling Frame (list of possible sample items/researchable) Sample Base (selected items) Projection Sample Results (error ratio or escheat ratio) 6

7 Closing an unclaimed property audit may require significant further expenditure of resources: Moving from Interim Status Report (ISR) to Report of Examination (ROE) Anticipate, then Negotiate Settling the Liability with Mandate State (state of incorporation) Addressable Property for Other Participating States Appeals Process: For an audit that cannot be resolved through settlement, a Holder must understand the available forums, procedural considerations for each, likely duration and expense of appeal, etc. Holder must manage its audit to the desired end-result: Identify and document all disagreed issues, and prepare outline of arguments for each to be discussed with Mandate State - Educate State and identify all elements of auditor unreasonableness, especially in estimation process Consider what can be traded off in order to obtain a mutually acceptable settlement Consider both principled and dollar-based settlement strategies, and be prepared to engage in both Identify team to meet with Mandate State and assign roles Settlement Agreement must be carefully drafted and vetted Scope of release from liability as broad as possible? Scope of indemnification with respect to potential claims of other states: Is fact of payment deemed to constitute good faith for purposes of the indemnification statute? Is fact of payment deemed to constitute good faith? For purposes of any claim to property that was deemed abandoned during the years under audit? 7

8 Demand for Payment should be checked carefully for conformity to the terms of settlement ALL settlement documents should be retained for years (i.e., expect the Mandate State to come back, and that it will NOT have maintained the audit file, so as to ensure there is no double-jeopardy exposure to the Holder in Audit #2) Audit participating states with first-priority (ownerknown) claims also receive a report of examination from the contract audit firm, and then issue their demands for payment Closing Agreements must also be executed by these states - Terms are similar, though no estimated liabilities to address - Scope is still important for these agreements Hot Topics Recent Happenings Nondisclosure Agreement (NDA) What does it outline? Can states be added to the review after the audit commences? Equity and insurance audits States issuing increased number of notices for audit: - DE, NY, and NJ very active Expectation for supporting documentation has increased (presumption of abandonment) 8

9 Hot Topics Recent Happenings California resigned Kelmar Associates Address Property vs researchability NJ & NY is a partial address enough for 1 st priority rule? Contact Information: Loredana Pfannenbecker Director PricewaterhouseCoopers Telephone (203) loredana.c.pfannenbecker@us.pwc.com Steven Swaigenbaum Senior Manager True Partners Consulting Telephone (213) steven.swaigenbaum@tpctax.com 9