New Michigan Law Will Apply "Generally Accepted Auditing Standards" to Unclaimed Property Audits
Last week, the Governor of Michigan signed House Bill 4289 into law. The new law revises the "Examination of Records" provision of the Michigan Unclaimed Property Act to provide certain specific standards relating to audit techniques, memorializes the holder's right to receive a copy of the audit report, and guidelines for the use of estimates in connection with unclaimed property audits. For example the new law requires that audits conducted by the state (or by private firms on behalf of the state) "be performed in accordance with generally accepted auditing standards to the extent applicable to unclaimed property audits." Those Generally Accepted Auditing Standards require, among other things, that an auditor maintain "independence in mental attitude in all matters related to the audit," which may provide a holder with some protection from unreasonable, overzealous, and/or legally incorrect positions taken by private auditing firms in connection with unclaimed property audits. The new law also requires the Administrator to propose rules for "auditing standards" within six months.
The law also contains a number of provisions concerning the use of estimates in connection with audits. First of all, the law expressly provides statutory authority for the use of those estimates (as did prior law), but now further provides that such estimation shall only be used when the holder does not have "substantially complete records," now defined as "at least 90% of the records necessary for unclaimed property examination as defined under the principles of internal controls." The ambiguity of that provision (e.g., how do you determine what records are "necessary"? Who gets to decide? What are the "principles of internal controls" referred to?) is compounded by the clarification that the calculation is not made "solely as a percentage of the total overall individual records to be examined, but also on a materiality level of value of the records." Other provisions make clear that the determination of "substantially complete records" can be made on a property type by property type basis. The new law thus appears to provide some helpful protections, but the scope and extent of those protections will have to be fleshed out by regulations, administrative practice, and subsequent lawsuits.
All in all, even somewhat malleable or unclear auditing standards are preferable to the complete lack of standards in most states' laws. Congrats to Michigan for taking the first step.
The law also contains a number of provisions concerning the use of estimates in connection with audits. First of all, the law expressly provides statutory authority for the use of those estimates (as did prior law), but now further provides that such estimation shall only be used when the holder does not have "substantially complete records," now defined as "at least 90% of the records necessary for unclaimed property examination as defined under the principles of internal controls." The ambiguity of that provision (e.g., how do you determine what records are "necessary"? Who gets to decide? What are the "principles of internal controls" referred to?) is compounded by the clarification that the calculation is not made "solely as a percentage of the total overall individual records to be examined, but also on a materiality level of value of the records." Other provisions make clear that the determination of "substantially complete records" can be made on a property type by property type basis. The new law thus appears to provide some helpful protections, but the scope and extent of those protections will have to be fleshed out by regulations, administrative practice, and subsequent lawsuits.
All in all, even somewhat malleable or unclear auditing standards are preferable to the complete lack of standards in most states' laws. Congrats to Michigan for taking the first step.