Audit Procedures for Unclaimed Property
Oil and gas companies hold royalties in suspense for many good and sufficient reasons, such as title disputes, clouded titles, or unpaid amounts due from the royalty owner on other business. A 1991 amendment to the Texas Natural Resources Code, dictating the form and content of division orders, had the effect of adding unsigned division orders to this list. Royalty suspense ledgers are a necessary part of the accounting system and here, as elsewhere, unclaimed property appears as an exception to the normal flow of business.
In addition to royalties payable from a company's own production, unclaimed royalty payments are also acquired through the buying of leases from other oil and gas companies. The abandonment periods for these suspended royalties should be calculated from their original payment dates, not the date received by the acquiring company.
- Review the internal control maintained over the mineral interest suspense account.
- Request a detailed printout of the suspense ledger used in preparing unclaimed property reports.
- Review the suspense ledger for accounts reported and those not reported.
- Schedule the significant accounts not reported and obtain documentation as to why they were not reported.
- Review owners previously reported and test to determine if all money owed to those owners has been remitted to the State.
- Review owners not reported and test the dates of production for reliability.
- Obtain reports filed with other states and determine if:
- Property, with associated owner addresses, is reported to the state of last known address or state of production.
- Property, without associated owner addresses, is reported to the state of incorporation or state of production.
- Determine if the production cutoff dates conform with reporting requirements.
- Determine if the holder has removed owners from suspense for reasons other than payment to the owners:
- Inactive accounts purged from the system.
- Old dates of production transferred out of system.
- Wells plugged and abandoned.
- Sale of the leases.
- Change in the EDP system.
- Write-offs to income, other revenue, etc., for any other reason.
- Determine if leases that have been sold have documentation to provide the terms of the contract as they apply to the liability suspense.
- Determine if any mergers/acquisitions with other producers have taken place.
- Obtain information as to the disposition of the previous company's suspense system.
- Were there any suspense funds not converted into the surviving suspense system? (If so, obtain details.)
- Determine if RPO checks generate a transfer of the owner's underlying interest from pay status to suspense.
- Determine if original production dates are retained in suspense ledger when interests are transferred as a result of outstanding or RPO checks.
- Inspect outstanding check lists for recurring names. Determine if these are being transferred to suspense.
The five-year abandonment period is measured from the date of last contact with the depositor as defined earlier in the Basic Rules section. Positive, documented contact between the holder and the owner is required for keeping an account in active status. Change of address notifications, payments on loans, activity in other accounts belonging to the same owner, are all valid contact. However, the auditor must test for what else updates the last contact field in the holder's system. Examples of invalid updates to a depositor account's last contact date include automatic deductions of safe deposit box rental, automatic deposits of interest from one account into another, statement mailings and internally-generated file maintenance.
Special rule for certificates of deposit (CDs): The abandonment period begins to run on the first maturity date. In the case of automatically-renewable CDs, the first maturity date is used. This is not specifically mentioned in the statute, but was established many years ago as the only fair method to handle CDs because the first maturity date is the first date upon which the depositor may recover the funds without incurring an interest penalty for early withdrawal.
Depositors' accounts are protected from service charging after one year of inactivity. Since September 1, 1993, when the Property Code was amended, this one-year period is measured from the same date as the five-year abandonment period. Before that amendment, a customer-generated deposit or withdrawal was required to keep an account in an active status for the purpose of service charging, regardless of any other existing contact with the account owner.
Depositors' accounts are also protected from a banking organization's unilateral action to stop paying interest because of inactivity. An auditor discovering that this has occurred may be challenged by the bank to demonstrate where in the Property Code it says they are required to pay interest on inactive accounts. It doesn't. It does say, however, that they may not, by any procedure, reduce an inactive account to their own profits. A banking organization's unilateral action to stop paying interest on inactive accounts reduces the value of the account and is often in violation of their own contract with the depositor which specifies that interest will be paid. Thus, the bank must pay the contract-required interest on abandoned accounts up to the date they are closed and remitted to the state as unclaimed property.
When examining this type of property:
- Obtain a list of the categories of deposits offered by the organization.
- Review the system of internal control over the deposit accounting system.
- Evaluate the controls placed over inactive accounts.
- Test system as documented above:
- Trace accounts from active files to dormant control.
- Trace accounts from dormant control to active files.
- Trace accounts reported to State:
(1) Identify all unlawful service charges taken.
(2) Compute interest not accrued and credited to the accounts.
- Review automatically-renewable certificates of deposit for customer-generated activity.
- Reconstruct accounts service charged off prior to becoming reportable:
- Add back all unlawful service charges taken.
- Compute interest from date interest no longer accrued to nearest preceding month as of the examination.
Banks, savings associations, and credit unions will typically hold unidentified deposits in a demand deposit account under that name, Unidentified Deposits. With on-line computer terminals at every teller station, unidentified deposits occur less often than in the past because tellers attempt to post deposits with customers still at the window. Most unidentified deposits now result from nighttime and mail deposits with incorrect or missing deposit slips.
Other companies with large volumes of direct billing to customers also receive unidentified remittances. Insurance companies, utility companies, and hospitals occasionally receive payments by mail from people who intend to pay someone else's bill or send their payment to the wrong company. Posting to the correct account is delayed, or sometimes not possible, when the party making the payment doesn't include a payment voucher from the bill, doesn't include an account number with the payment, has an incorrect address on their check, or pays with a money order containing no address. Until the true owner is identified, or the funds are written off to income, unidentified remittances are often held in liability accounts with titles such as Unidentified Remittances, Unapplied Payments, or Unapplied Cash.
Unidentified deposits and remittances are usually a small part of an auditor's findings but, despite the holders' best efforts to prevent them, they continue to occur when the holder has a large volume of transactions with the general public.
Steps to be followed include:
- Review the internal control over unidentified deposits and remittances.
- Review the accounting procedure on unidentified deposits and remittances.
- Analyze suspense and liability accounts utilized for all unidentified payments received.
- Analyze aging procedure on the transferal of unidentified payments.
- Determine the ultimate disposition of uncleared unidentified items.
- Analyze all amounts taken into income or surplus.
Table of Contents
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