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STATUTE OF LIMITATIONS

Holders frequently ask the auditor what statute of limitations period applies on the reporting and delivery of unclaimed property. The usual four-year audit period that sales tax auditors are accustomed to does not apply here.

Effective September 1, 1987, Section 74.308 was added to the Texas Property Code which eliminated this defense prospectively. With a four-year statute of limitations period on debt in Texas, September 1, 1983, is often established as the earliest date from which the State could require delivery of the types of property to which this statute of limitations applied. Periods of limitations applied under the Texas Civil Practice and Remedies Code 16.070 could, by contract, place the limitations cutoff at September 1, 1985.

There are a few types of unclaimed property for which no statute of limitations could ever be used as a defense against unclaimed property reporting. These are:

  • Demand deposit accounts
  • Savings accounts
  • Safekeeping items
  • Safe deposit box contents
  • Stock or other intangible ownership interests

Certificates of deposit did have a six-year statute of limitations period, starting on the date the customer demanded a return of the money, provided the certificate had matured at the time of the demand. If the demand is made before maturity of the certificate, the six-year period of limitation begins to run on the maturity date.

Texas Property Code, Section 74.103 (b) states unclaimed property records must be kept for ten (10) years from the date on which the property was reportable.  This is the reason we generally limit audit periods to the last ten reports.  The records to support property that was reportable on the first report considered in an audit will go beyond ten years to included any applicable abandonment periods.


RECORDS RETENTION

Holders of unclaimed property must retain records for ten years from the date on which the property is reportable.  This means that the detail and summary documents supporting all unclaimed property reported, or which should have been reported, on the last ten unclaimed property reports must be maintained by the holder (see above section).  These records include:

  • the name and last known address of each owner;
  • the social security number of each owner, when known;
  • a brief description of the property, including identification number, if any; and
  • the balance of each account, if appropriate.

AUDIT PERIOD

The audit period includes all unclaimed property which should have been reported on the last annual report plus all property included in the ten-year record retention period described above. An exception to this ten-year audit period would generally occur when the holder has previously been audited in the past ten years. The current audit period will usually not reach back to years covered in the last audit.  An audit of equity related property (stocks, dividends, dividend reinvestment programs, demutualization, royalties, etc) conducted by one of our contract auditors is not considered a “prior audit” and has no effect on our nominal ten (report) year audit period. 


ENTRANCE CONFERENCE

Once an audit is assigned, an opening conference should be scheduled with an officer who has the authority to represent the holder to be audited and to produce records and other information that will be needed during the course of the audit. This officer will usually be the holder's controller or treasurer, but may be another designated officer, and will occasionally request the holder's legal counsel to attend the opening conference.

The major purposes of the opening conference are to advise the holder of reporting requirements under the unclaimed property law and to discuss the general conduct of the audit. At the time of the conference, the auditor will schedule a time period for the field work to be commenced, if a time has not been previously established, and will request records and materials necessary to initiate the audit. The preliminary scope of the audit is also discussed at this time.


PRE-AUDIT RESEARCH

Gathering background information regarding the holder at the beginning will help to limit the scope of the audit, in most cases, and guide the auditor in tailoring an audit plan to meet the specific circumstances. Some of this information can be obtained before, or requested during, the entrance conference.

  • What are the holder's state and date of incorporation or if an LP or LLP, the holder’s state and date of organization as on record with the Secretary of State?
  • Has the corporation ever changed its state of incorporation? If yes, obtain details.
  • What is the name and title of the officer responsible for compliance with the Texas unclaimed property statute?
  • What is the name and title of the person assigned to prepare the report?
  • How are reports filed?                Consolidated?                By division?
  • What is the holder's history of reporting unclaimed property to Texas?       How much and what types of property are being reported?  (a summary of the holder’s reporting history should be included in the audit plan)
  • Are file copies of reports and related working papers maintained by the holder and currently available? If yes, where are they located and who has custody?
  • Are reporting procedures or policies relating to unclaimed property documented in procedure or policy manuals? If yes, obtain a copy.
  • Does the holder use the criteria established in Texas v. New Jersey when reporting to the states? If not, what are the variances and reasons?
  • Does the holder consider any category or type of property exempt from the Texas Property Code that is at variance with the auditor's understanding of the law?        If yes, obtain details and legal position and discuss in the audit plan.
  • Have any policies relating to unclaimed property or services thereon been adopted by a formal resolution of the Board of Directors or a committee thereof?             If yes, obtain a copy.
  • Is the holder relying on an opinion from legal counsel regarding its reporting responsibilities under the unclaimed property law of this state or any other states? If yes, obtain a copy.
  • Is the holder making any deductions or withholdings from property that is subject to the unclaimed property statute? If yes, obtain copies of the contract(s) authorizing charges and review for improper deductions or withholdings.
  • Is it the policy of the holder to refund or reinstate any service charges or other amounts deducted if the owner reactivates or claims the property prior to the completion of the statutory reporting period? If yes, obtain details.
  • Review the chart of accounts for selection of accounts to be analyzed and tested.  

INTERNAL CONTROL

Unclaimed property, by its very nature of being several years old and belonging to unlocated owners, is vulnerable to both intentional and unintentional misappropriation. Accordingly, it should be an area of strong internal control.  Internal control must be evaluated and appropriate comments included in the audit plan. 

OUTSTANDING CHECKS

For ease of tracking, the abandonment period for an outstanding check is normally measured from the issue date. However, the auditor must determine the materiality of any period of time that may have passed between the date the obligation was originally payable and the actual issuance of the check. Checks are sometimes reissued with new dates in effort to avoid unclaimed property reporting.  Outstanding checks have a three year abandonment period with the exception of payroll , wage and salary checks.  Effective January 11, 2004 (per HB7, 78th Legislature, 3rd called session), payroll, wages and salary checks (property type MS01) have a one year abandonment period.  This affects MS01 property beginning on the property report due November 1, 2004.  Since MS01 property will likely have two different abandonment periods within an audit period, the auditor must exercise care in all interest calculations.

Some holders will assert that simply printing VOID AFTER 90 DAYS or something similar on all their check stock exempts them from unclaimed property reporting. It doesn't. The check itself may be void, but the debt to the payee remains, and it is the money owed that is subsequently reported as unclaimed, not the piece of paper. Other holders may print terms on their check stock which state that the issuer will not honor claims for the funds specified on the check if it is not negotiated within a specified time. When this is found, it may be an example of private escheat, which is specifically prohibited by the unclaimed property statute, and should be referred to the auditor's supervisor for further guidance.

Use the following list in reviewing outstanding checks and drafts at most holders. Refer to the Checks Issued by Banking Organizations section in this manual for checks issued by financial institutions.

  • Obtain a list of all open and closed bank accounts.
  • Review the internal control maintained over outstanding checks and any other reconciling items on bank reconciliations.
  • Review all closed commercial checking accounts to determine the amount of outstanding checks at the time of closing.
  • Review liability accounts to which outstanding checks are transferred:
    • Evaluate aging procedures.
    • Test debit entries to determine their nature.
    • Reconstruct any checks written off to income or retained earnings.
  • Review income accounts to determine if any other checks have been written off.
  • Review the contra or related expense accounts to determine if outstanding checks are reversed to the account for which they were drawn.
  • Determine if checks returned by the Post Office (RPO checks) are handled differently from other outstanding checks to avoid misunderstandings and omissions when requesting records.
  • Determine if checks are prepared for payroll, vacation pay, severance pay, retirement and pension plan refunds, etc., belonging to terminated employees for periods subsequent to termination.
  • Review procedure for contacting payees of uncashed checks.

 

PROPERTY AND CASUALTY INSURANCE
CLAIM CHECKS AND DRAFTS

In addition to the above discussion of outstanding checks, property and casualty insurance companies can present additional challenges to the auditor:

First is the question of when the company recognizes a claim as paid for purposes of reporting to the Texas Department of Insurance (TDI). Paid claims are considered in establishing premium rates for future periods. If the paid claims reported to TDI by the company is based on the total claim drafts issued during the period, it is said to be accounting for them on the issued basis. If the company reports only those claim drafts that were actually presented for payment and cleared, it is said to be using the paid basis of accounting. The use of the paid basis of accounting for claim payments is no longer common. Still, to avoid reporting claim payments as unclaimed property, some companies attempt to argue that their outstanding claim payments are simply offers of settlement, not liquidated debt, even though they account for these payments on the issued basis for reporting to TDI.

The second and most time-consuming challenge for the auditor is that of true offers of settlement commingled with payments for liquidated damages on the insurance company's list of outstanding claim checks or drafts. Upon examination of the related claim files, the auditor may find that offers of settlement continue to be carried on the list of outstanding claim payments long after subsequent settlements have been made and replacement checks or drafts have been issued and cleared.

  • Review policy provisions relating to the payment of claim benefits.
  • Obtain a list of all open and closed bank accounts.
  • Evaluate the system of internal control over all cash disbursements.
    • Determine if drafts are accounted for on the issued or paid basis.
    • Determine if payments of fixed and certain nature can be differentiated from offers of settlement.
      (1) Do drafts have release terms on them?
      (2) Are separate release agreements used?
  • Review the internal control maintained over outstanding checks/drafts and other reconciling items on bank reconciliations.
  • Review all closed commercial checking accounts to determine the amount of outstanding checks/drafts at the time of closing.
  • Review liability accounts to which outstanding checks/drafts are transferred:
    • Evaluate aging procedures.
    • Test debit entries to determine their nature.
    • Reconstruct any checks/drafts written off to income or retained earnings.
  • Review income accounts to determine if any other checks have been written off.
  • Review the contra or related expense accounts to determine if outstanding checks/ drafts are reversed to the account for which they were drawn.
  • Determine if checks returned by the Post Office (RPO checks) are handled differently from other outstanding checks.
  • Determine if checks are prepared for payroll, vacation pay, severance pay, retirement and pension plan refunds, etc., belonging to terminated employees for periods subsequent to termination.
  • Ascertain if sales commissions are always paid by check.
  • If drafts are/were accounted for on paid basis:
    • Review past and/or present internal control specifications to determine if reports of unpresented drafts are generated.
      • Are listings of unpresented drafts prepared?
      • Are copies of unpresented drafts retained?
      • If no other information is available, develop a nonpresentment rate by comparing data from periods for which information is available.
    • For insurance claim payments, analyze claim files to determine if:
      • Claim files and unpresented draft reports agree.
      • The unpresented draft report includes offers of settlement.
  • Review procedure for contacting payees of uncashed checks and drafts.
  • Determine if RPO checks/drafts are canceled and posted to another account or accounted for separately.
Analyze income or surplus accounts to determine if any payments have been written off.

[Table of Contents]
[Basic Rules]
[Statute of Limitations to Property and Casualty Insurance Claim Checks and Drafts]
[Mineral Interests to Unidentified Deposits/Remittances]
[Checks Issued by Banking Organizations to Collateral]
[Employee Benefit Trust Distributions to Matured Endowments, Policies Reaching Limiting Age, and Other Maturities Due]
[Agent Credit Balances to Penalties and Interest]
[Interest Calculation Worksheet Illustration]
[Commonly Reported Types of Unclaimed Property Listed by Industry]