Corporations and financial institutions that are subjected to an unclaimed property audit often come away from the process with a number of complaints. The process is usually (very) lengthy, disruptive to ongoing operations, and more often than not, bears precious little resemblance to a process designed to uncover property that will actually go to a rightful owner. Of all holder complaints about audits, however, the most pervasive and significant is skepticism regarding the states' use of contingent fee auditing firms to carry out the process. In most instances, instead of conducting an audit through its own unclaimed property department, bank examiner, or other regulator, most states use private auditing firms that collect a percentage of the unclaimed property that they "find."
Many holders question whether an auditor who is given a direct financial stake in the outcome of the audit has the objectivity and independence necessary to conduct a fair examination. Notwithstanding these objections, the vast majority of states have ignored this critique, claiming that they don't have the resources to enforce compliance any other way.
Now, a recent announcement from the Delaware State Senate suggests that at least some legislators have noticed. The Republican Caucus has announced its plan "introduce legislation
intended to disallow commission-based contracting for escheat." The attached press release goes into more detail, and contains some startling (or not, depending on your view) statistics. According to Senate Republicans, during Fiscal Year 2013 "the state paid Kelmar Associates, a firm that provides government auditing services, $53.4 million, according to the State of Delaware Online Checkbook."
That's a lot of money, and whether the auditing firms are overly-aggressive or not, it suggests a potential misalignment of state priorities. If, on the one hand, this huge amount is a product of overly-aggressive auditing (a question upon which this blog takes no position for purposes of this article) this represents a significant amount that companies have paid, but potentially should not have been required to pay, to settle these audits. If, on the other hand, these amounts are all truly unclaimed property belonging to owners (or failing that, the state) then this seems like a tremendous amount of money that is being diverted from the state and its citizens.
Only time will tell whether this press release represents a huge shift in the way unclaimed property law enforcement is handled or just a PR move to be announced and just as quickly forgotten. Remember, until the legislative process is complete, this is Just A Bill.