Are State Enforcement Activities Dominated by Contract Auditors?

Blog Post by Moyer & Osibodu

Nobody likes to be audited, and unclaimed property audits are no exception (because an average audit routinely generates multi-million dollars in assessment). Enforcement activities are ways that states ensure compliance with their laws and these activities can also generate (significant) revenue for the states. Many of the states unclaimed property agencies are understaffed to keep up with all the entities that don’t file or comply with their laws as required. So in many instances, the states hire contract auditors to handle their out of state audits, as well as, to help supplement their regular audit staff. While it sounds good for the state, many businesses will disagree.

Controversies are rising over the use of contract auditors in states’ enforcement activities. Both the state and the contract auditors benefit from this arrangement. The contract auditors work on commission, which is based on the audit findings or amount of unclaimed property they determine to be due. There are various schools of thought as to whether the contract auditors follow the same audit procedures, as the states require. So in essence, the contract auditor could subject a business to examinations that may seem overreaching and unfair.

A growing concern has surfaced over several issues, and this blog post discusses a couple of these issues. The first issue being the aggressiveness of the contractors, unfortunately, in some cases the state has very little control over the day to day practices of the auditors. While the constitutionality of these arrangements has been challenged in the courts, many have ruled in favor of the states. The second issue, which could be far worse than the first, is the confidentiality issues; anytime information is released to an outside agency you run the risk of a breach. While some companies have attempted to work with the auditors, they felt that the auditors made unreasonable requests for information such as “demanding unlimited access to accounting records and refusing to keep confidential the information contained within such records.”

While there is no assurance that your company will not be selected for an audit, we can inform you that the best way to avoid being audited is to make sure you maintain adequate unclaimed property policies & procedures and report all your past due unclaimed property to the state annually as required by law.