Table of Contents - Texas Comptroller of Public Accounts Procedures for Unclaimed Property Table of...

August 2017 Texas Comptroller of Public Accounts • Audit Division i

Table of ContentsAudit Procedures for Unclaimed Property

Table of Contents

Chapter 1 Overview 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Chapter 2 Basic Rules for Most Types of Unclaimed Property 2

Chapter 3 Audit Procedures for Unclaimed Property 4Statute of Limitations 4Records Retention 4Audit Period 5Entrance Conference 5Pre-audit Research 5Internal Control 6Outstanding Checks 6Property and Casualty Insurance Claim Checks and Drafts 6

Chapter 4 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Mineral Interests 8Deposits Held by Banking Organizations 9Unidentified Deposits/Remittances 9

Chapter 5 11Checks Issued by Banking Organizations 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Traveler’s Checks and Money Orders 11Safe Deposit and Safekeeping 12Credit Balances 12Collateral 13

Chapter 6 14Employee Benefit Trust Distributions 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Personal Trust Property 15Corporate Trust Property 15Equity and Debt 17Credit Memoranda, Gift or Merchandise Certificated, Electronic Gift Cards, Scrip or Instruments Representing Cash Sold or Originally Issued Prior to September 1, 2005 18 . . . . . . . . . . . . . . . . . . . . . . .

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Credit Memoranda, Gift or Merchandise Certificated, Electronic Gift Cards, Scrip or Instruments Representing Cash Sold or Originally Issued on or After to September 1, 2005 19Life Insurance and Death Claims 20Matured Endowments, Policies Reaching Limiting Age and Other Maturities Due or Payable 20

Disclaimer: This manual has been written for the purposes of a training tool and as a reference guide for the auditor . Any references to taxability, administrative policies, laws, and rules are subject to change due to administrative hearings and actions of the courts or legislature . While the content of the manual is current as of the revision date, the reader is responsible for any changes occurring after this date and should verify the current status of any information by contacting the Comptroller of Public Accounts toll free at 800-252-5555 .

ii Texas Comptroller of Public Accounts • Audit Division August 2017

Table of Contents Audit Procedures for Unclaimed Property

Chapter 7 22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Agent Credit Balances 22Policyholder Dividends 22Escrow Funds 23Preneed Funeral Contracts 23Other Special Provisions 23Penalties and Interest 24

Chapter 8 Interest Calculation Worksheet Illustrations (PDF) 25

Chapter 9 Commonly Reported Types of Unclaimed Property Listed by Industry 26

August 2017 Texas Comptroller of Public Accounts • Audit Division 1

Chapter 1 OverviewAudit Procedures for Unclaimed Property

Chapter 1 OverviewUnclaimed property is simply personal property, both tangible and intangible, belonging to a missing owner . It is presumed abandoned and subject to reporting to the State if, for longer than the applicable abandonment period:

• the location of the owner is unknown to the holder of the property; and• according to the knowledge and records of the holder, a claim to the property has not been asserted or an act of ownership

of the property has not been exercised .• Unclaimed property is NOT a tax .• The State of Texas takes custody, not ownership, of unclaimed property .• The right of the true owner, or the owner’s heirs, to claim the property from the State of Texas is never extinguished .

There are several special rules that apply to specific types of property, but everything written above remains true throughout the following discussion and is the basis upon which everything else is built .

All 50 states and the District of Columbia have unclaimed property laws, but they are not all alike . Laws in some states include exemptions for certain industries or types of property . The principal differences, however, generally lie in the length of the applicable abandonment periods .

In its Texas v. New Jersey decision (1965) the U .S . Supreme Court established the precedence of states’ claims to unclaimed property . In accordance with that decision, unclaimed property must be reported to the state in which the owner’s last known address was located . In the case of an unknown owner, no last known address or the owner’s address was located in a state without an applicable unclaimed property law, the property is be reported to the holder’s state of incorporation .

A holder is defined as one (this includes all legal entities) who is:

• in possession of property that belongs to another;• a trustee; or• indebted to another on an obligation .

The auditor will occasionally hear holders use the word escheat in describing the process of reporting unclaimed property . It is a proper word but, in this context, improperly applied . When an individual dies intestate and without heirs, title to that person’s real and personal property may vest in the State . That is escheat; something quite different from what is discussed here .

2 Texas Comptroller of Public Accounts • Audit Division August 2017

Chapter 2 Basic Rules for Most Types of Unclaimed Property Audit Procedures for Unclaimed Property

Chapter 2 Basic Rules for Most Types of Unclaimed PropertyOn July 1 of each year, holders of personal property presumed abandoned as of the previous March 1 must deliver that property to the Comptroller with an accompanying report listing pertinent information, prescribed by statute, regarding the rightful owners . This report must be submitted electronically .

Unclaimed property can be any financial asset that appears to have been abandoned by the owner. In Texas, the abandonment period for most types of property is three years . The only exceptions to this three-year rule are:

Current Production of ongoing Mineral Interest 0 year

Wages 1 year (A)

Wages 3 years (A)

Demutualized Insurance Companies 1 year

Utility Deposits 1 year (C)

Utility Deposits 3 years (C)

Stored Value Card 1-3 years

Checking/savings and matured CDs 3 years (D)

Checking/savings and matured CDs 5 years (D)

Money orders 3 years (B)

Money orders 7 years (B)

Money orders 5-year (B)

Safe deposit box contents 5-years

Other Deposit accounts 5-years

Traveler’s checks 15 years

A . The abandonment period for wages changed from three years to one year effective January 11, 2004 . The November 1, 2004 report will be the first report to reflect this change. The November 1, 2004 report should contain wages with an abandonment period of 07/01/00 through 06/30/03, this period includes two additional “catch-up” years.

B . Money Orders º The abandonment period for money orders changed from seven year to three years effective September 1, 2011 . The

November 1, 2012 report will be the first report to reflect this change. The seven year abandonment period is still applicable to money orders that should be reported through November 1, 2011 . The November 1, 2012 report should contain money orders with abandonment period of 07/01/2003 to 06/30/2008, this period includes four additional “catch-up” years.

º The abandonment period for money orders changed from five years to seven years effective June 1, 2004. The November 1, 2004 report will be the first report to reflect this change. The five year abandonment period is still applicable to money orders that should be reported through November 1, 2003. Due to the “fall-back” years, no timelyfiled money orders are reportable on either the November 1, 2004 or 2005 reports.


Chapter 2 Basic Rules for Most Types of Unclaimed Property Audit Procedures for Unclaimed Property

C . The abandonment period for utility deposits changed from three years to one year effective September 1, 2011 . The November 1, 2012 report will be the first report to reflect this change. The November 1, 2012 report should contain wages with an abandonment period of 07/01/07 through 06/30/10, this period includes two additional “catch-up” years.

D . The abandonment period for checking/savings and matured CDs changed from five years to three year effective September 1, 2011. The November 1, 2012 report will be the first report to reflect this change. The November 1, 2012 report should contain wages with an abandonment period of 07/01/05 through 06/30/08, this period includes two additional “catch-up” years.

The variety of business relationships that can give rise to unclaimed property is much too great to attempt a complete listing here . A short list of property types with a three-year abandonment period includes:

• employee wages (both 1 and 3 year abandonment periods – see above)• utility deposit refunds• uncashed checks of any type• mineral royalties• insurance proceeds• credit balances on customer accounts• loan collateral• stocks and bonds• tangible items held in safekeeping

Refer to Chapter 9, Commonly Reported Types of Unclaimed Property Listed by Industry, for a guide to which types of property can be expected to be reported by several different industry types .

The abandonment period is measured from the date at which the property became due and payable . It ceases immediately upon the exercise of an act of ownership by the owner regarding the property or any other documented communication with the owner . A new abandonment period commences on the same date the old one ended if the property was not delivered into the custody of the owner at that time .

Any positive contact the holder may have with the owner restarts the abandonment period from the date of that contact if the property hasn’t already been delivered to the Comptroller at that time . Mail not being returned to the holder by the Post Office does not, by itself, qualify as contact with the owner. Positive contact includes:

• Letters, completed forms, or change of address notifications on file containing the owner’s dated signature.• The owner’s cashing of a check written by the holder .• An owner-generated deposit or withdrawal to the owner’s account with the holder .• Telephone conversation between the holder and the owner; but phone contact must be documented in writing with the date

and time of the conversation .

Many types of property are written off to income, or applied as an offset to expenses, before the running of the abandonment period. After the auditor identifies these write-offs, the challenge is then to identify the names and last known addresses of the rightful owners .


Chapter 3 Audit Procedures for Unclaimed Property Audit Procedures for Unclaimed Property

Chapter 3 Audit Procedures for Unclaimed Property• Statute of Limitations• Records Retention• Audit Period• Entrance Conference• Pre-audit Research• Internal Control• Outstanding Checks• Property and Casualty Insurance Claim Checks and Drafts

Statute of LimitationsHolders 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 RetentionHolders 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 PeriodThe 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 ConferenceOnce 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 ResearchGathering 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’ 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’ 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 ControlUnclaimed 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 ChecksFor 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:

º Evaluate aging procedures . º Test debit entries to determine their nature . º 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 DraftsIn 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 .

º Determine if drafts are accounted for on the issued or paid basis . º 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:

º Evaluate aging procedures . º Test debit entries to determine their nature . º 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:

º 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 .

º 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 .


Chapter 4 Audit Procedures for Unclaimed Property

Chapter 4

• Mineral Interests• Deposits Held by Banking Organizations• Unidentified Deposits/Remittances

Mineral InterestsOil 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 .

º Review the suspense ledger for accounts reported and those not reported . º Schedule the significant accounts not reported and obtain documentation as to why they were not reported.

º Review owners previously reported and test to determine if all money owed to those owners has been remitted to the State .

º Review owners not reported and test the dates of production for reliability .• Obtain reports filed with other states and determine if:

º Property, with associated owner addresses, is reported to the state of last known address or state of production . º 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:

º Inactive accounts purged from the system . º Old dates of production transferred out of system . º Wells plugged and abandoned . º Sale of the leases . º Change in the EDP system . º 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. º Obtain information as to the disposition of the previous company’s suspense system . º 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 .


Chapter 4Audit Procedures for Unclaimed Property

Deposits Held by Banking OrganizationsThe 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:

º Trace accounts from active files to dormant control. º Trace accounts from dormant control to active files. º Trace accounts reported to State:

(1) Identify all unlawful service charges taken .(2) Compute interest not accrued and credited to the accounts .

º Review automatically-renewable certificates of deposit for customer-generated activity.• Reconstruct accounts service charged off prior to becoming reportable:

º Add back all unlawful service charges taken . º Compute interest from date interest no longer accrued to nearest preceding month as of the examination .

Unidentified Deposits/RemittancesBanks, 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 .

Sample suspense accounts and liability accounts used for recording and controlling unidentified items.



Chapter 5

• Checks Issued by Banking Organizations• Traveler’s Checks and Money Orders• Safe Deposit and Safekeeping• Credit Balances• Collateral

Checks Issued by Banking OrganizationsFor the purposes of this section, the terms bank and banking organization should be considered to include savings associations and credit unions as well .

The most common reason for checks to go unreported is that they are simply overlooked . Many banking organizations have multiple series of cashier’s checks and the inadvertent omission of a single series is not uncommon . Writing them off to income is less common, but has been discovered by auditors in past .

On occasion, some banking organizations have been found to have altered all their check stock to say MONEY ORDER on the face of the instruments. This was done solely to take advantage of the five-year holding period on money orders, thereby giving the bank interest-free use of the funds for an additional two years . This is not an acceptable practice . The actual manner in which an instrument is used outweighs what is printed on its face .

• Obtain a list of all instruments issued by the bank .• Evaluate and document the system of internal control over outstanding bank checks .• Review aging process .• Test system as documented above as follows:

º Trace items from issuance register to outstanding control . º Trace items from outstanding control to issuance register . º Trace items reported to State .

(1) Agree issue dates, issue amounts and names .(2) Add back all service charges taken .

• Reconstruct bank checks charged off prior to becoming reportable . º Add back all charges to obtain the original issuance amount .

(1) From actual records .(2) From projections, if necessary .

The owner of a check is the payee . Occasionally, banks will mistakenly not report cashier’s checks because they know the whereabouts of the purchaser but, unless it is positively known that the purchaser is still holding the original copy of the check, contact with the purchaser is irrelevant .

Traveler’s Checks and Money OrdersBoth traveler’s checks (15 year) and money orders (7 year-see last paragraph below) are reportable to the state in which they were purchased . This is an exception to the general rule that property is to be reported to the holder’s state of incorporation when there is no last known address for the owner .



While the 15-year abandonment period for traveler’s checks may seem excessively long, the reason for it lies in the many unused checks that remain in the purchasers’ possession in anticipation of future vacations . This is supported by the large volume of claims for reimbursement received by the state from the issuers after they’ve honored these 15+ year-old traveler’s checks . The purchasers do still use them after all that time .

The auditor may follow the same procedures as listed above for checks issued by banking institutions . Banks and small money order companies have been found to write money orders off to income in the past . A more common problem found at some large traveler’s check and money order companies is the service charging of the unclaimed items before reporting them as unclaimed property . Because of differences between the Texas unclaimed property statute and other states’ statutes, service charging is allowed on instruments sold in some states but was not allowed in Texas until a recent statute change . Effective June 1, 2002; a service charge is allowed on money orders at a maximum rate of $ .50 per month per money order .

Effective June 1, 2004 the abandonment period for money orders changes from five years to seven years. The November 1, 2004 report will be the first report to reflect this change. The five year abandonment period is still applicable to money orders that should be reported through November 1, 2003 . No timely filed money orders are reportable on either the November 1, 2004 or 2005 reports .

Safe Deposit and SafekeepingBoth these property types, found at banking organizations, will require a trip to the vault for the auditor .

For safe deposit boxes, the five-year abandonment period begins to run on the date the last rental payment expired. The bank must deliver the contents to the Comptroller intact and may not recover past-due rent or box-drilling expenses except as provided in Section 59 .109 of the Texas Finance Code which prescribes rules for selling the contents . Any excess sale proceeds, after the bank’s expenses have been recovered, remain reportable as unclaimed property .

Safekeeping items have a three-year abandonment period and certificates for stocks and bonds, pledged as loan collateral, are often found there . In anticipation of future loans, they are commonly left at the bank by the owners after the original loan is paid off . Don’t expect the Safekeeping Department to have information on the owners of collateral, however . Usually, their records will only indicate when the items were deposited in Safekeeping by the Loan Department .

Another item appearing in safekeeping departments, though with decreasing frequency, is bearer bonds . Banks sometimes hold bearer bonds for good customers (usually those with large account balances), clip the coupons as they mature, and submit them for payment on behalf of the owner . Occasionally, the owner is missing or deceased and the only activity in the owner’s account is the deposit of coupon proceeds from the safekeeping department . Unless the bank’s data processing system is programmed appropriately, these deposits give the false impression of customer-generated activity in the account, preventing it from being reported as unclaimed .


• Evaluate the system of internal control over safe deposit boxes on which rent is due and unpaid . º Document system . º Review controls over signature cards and entry cards . º Examine contents of drilled boxes . º Trace items reported to inventories of drilled safe deposit boxes .

• Evaluate the system of handling safekeeping items . º Document system . º Examine safekeeping register:

(1) Prepare a schedule of unreported items .(2) Note items appearing on register not accounted for in safekeeping .

Credit BalancesUnclaimed property found in credit balances is not always found in accounts payable . Patient accounts receivable at hospitals and customer accounts receivable at credit card and utility companies are good examples of the types of holders who, by the



nature of their business, have relatively large volumes of accounts receivable credit balances . When checks are not routinely issued to the owners for these balances, the auditor will often find that these balances are absorbed into income before the running of the three-year abandonment period and not reported as unclaimed property .


• Obtain a list of categories of credit balances generated by the holder .• Evaluate and document the systems and procedures for processing credit balances .• Review a listing of credit balances .

º Evaluate aging procedures . º Determine if balances of less than $1 .00 are refunded . º Determine amounts that are reportable . º Test debit entries to determine their nature . º Reconstruct any items written off to an income or related expense account .

• Analyze income accounts to determine whether credit balances have been taken into income . Also, review related expense accounts to determine whether credit balances are used to offset expenses/bad debts.

• If holder is a retail company, determine if holder entered into a consent decree with FTC . If so, º Obtain information provided to FTC . º Ascertain what periods were included in the consent decree and whether balances unclaimed under the decree have been

reported . º Examine for pre-decree balances .

Among other things, the Federal Trade Commission’s (FTC) Regulation Z prescribes customer-notification requirements for credit balances of $1 .00 or more held by credit card companies . Since Regulation Z is silent as to the disposition of credit balances under $1 .00, some credit card issuers incorrectly refer to it as their authority to absorb these small credit balances . They often do so by programming their computers to net credit balances of less then $1 against debit balances of less than $1 . The net figure is then used in the general journal entry to write off these small balances. However, there is no minimum value to be met on any type of unclaimed property subject to reporting .

CollateralCollateral has a three-year abandonment period, measured from the date the associated loan was paid off . Of course, the same criteria regarding subsequent contact with the owner still applies, as it does with any type of property . The auditor should check the lender’s central information files for current contact with the borrower before assuming that collateral being held for long periods is unclaimed .

In anticipation of future loans, particularly in the case of commercial loans, certificates for pledged stocks and bonds are often intentionally left with the lender by the borrower after the original loan is paid off . At banking organizations, the Loan Department likely deposited these items with the Safekeeping Department and has copies of the safekeeping receipts on file. Using those receipts makes it easier for the auditor to physically locate collateral. Occasionally, it’s found that the Safekeeping Department has a record of collateral being returned to the owner, but the safekeeping receipts were not removed from the Loan Department’s files.


• Review and document the system of internal control over collateral held .• Examine collateral register for aged items:

º Trace collateral to loan files. º Review central information files.

• Inspect all collateral held . º Trace aged items to collateral register for activity .

Determine the status of collateral being held on fully-paid loans .



Chapter 6

• Employee Benefit Trust Distributions• Personal Trust Property• Corporate Trust Property• Equity and Debt• Credit Memoranda, Gift or Merchandise Certificated, Electronic Gift Cards, Scrip or Instruments Representing Cash Sold

or Originally Issued Prior to September 1, 2005• Credit Memoranda, Gift or Merchandise Certificated, Electronic Gift Cards, Scrip or Instruments Representing Cash Sold

or Originally Issued on or After to September 1, 2005 • Life Insurance and Death Claims• Matured Endowments, Policies Reaching Limiting Age, and Other Maturities Due or Payable

Employee Benefit Trust DistributionsLarge employers often establish some form of employee benefit/retirement plan. Retired and ex-employees move away, the plan administrator loses contact with them and their benefit distributions remain unclaimed. Often, a bank’s trust department is the plan administrator and the auditor will require an introduction from the company before auditing records at the bank .

This is an area of continuing controversy. Employee benefit trusts (EBTs), established under the provisions of the Employee Retirement Income Security Act (ERISA), call for unclaimed distributions to be absorbed back into the trust for the benefit of the remaining members . This contradicts the prohibition against private escheat included in the unclaimed property statutes of Texas and many other states as well .

Much has been written over the years about whether ERISA, a federal law, preempts state unclaimed property laws . Some states have challenged it in the past; others continue to do so . The few actual court cases on this subject have been inconclusive . Texas has not taken a formal position on the issue, preferring to defer audits of ERISA-based plans until after the question is settled .

The results of step 1, then, will assist the auditor in deciding whether to continue with the rest of the audit of the employee benefit plan.

• Determine the legal nature of EBT plans for the treatment of unpaid benefits.• Review the internal control over distributions .• Review the accounting procedure on distributions .• Age all outstanding or unpaid distributions subject to reporting .• Analyze liability accounts related to distributions or payments .• Trace reported distributions through the holder’s system to determine their origin and disposition .• Review trust accounts and related declarations of trust .• Analyze accounts used in connection with revocable or irrevocable trust deposits . Review trust agreements as deemed

necessary .



Personal Trust PropertyThe most frequently occurring form of unclaimed personal trust property is the excess of dividends over what can be allocated to personal trust accounts . This occurs as a result of timing differences between the sale of securities on behalf of one or more trust accounts and the declaration of dividends by the issuer of the securities .

Usually, the issuer’s dividend disbursing agent will follow up with a refund request for excess dividends after being contacted by the new owner of the securities, but not always . Some dividend disbursing agents even refuse the trust company’s attempts to return unallocable dividends when they haven’t heard from the new owners because, left as is, their records balance .

• Evaluate and document the system of internal control over unclaimed items .• Examine dividend and interest clearing accounts:

º Analyze aging procedure . º Trace items from active accounts to special control accounts . º Trace items reported to the State .

– Reconcile dates and amounts . – Add back all charges taken and amounts offset improperly .

• Undeliverable fiduciary checks: º Analyze controls for outstanding checks and the disposition of same .

– Prepare a schedule of unreported outstanding checks . – Test for write-offs of outstanding checks .

• Suspense accounts: º Obtain a list of general ledger suspense accounts .

– Select accounts for further testing . – Evaluate the internal controls over these accounts .

º Test claims: – Trace items reactivated from suspense accounts . – Test for write-offs of suspense account items . – Trace items reported to the State .

» Add back all charges taken . » Reconstruct amounts offset to unrelated debit items .

º Reconstruct amounts improperly charged off or taken into fees prior to becoming reportable .• Analyze controls for uncleared unallocable dividends and the disposition of same .• Analyze suspense stock and bond positions for unclaimed stock, dividends, and interest that cannot be allocated to

individual trust accounts .• Test for the sale of suspense stock certificates and the ultimate disposition of the proceeds.

Corporate Trust PropertyCoupon-Bond Paying AgentThe bond-paying agency of a bank’s corporate trust department is frequently out of balance in many of its client accounts when the bonds are bearer instruments . Bond issuers transfer funds to the paying agent at each coupon maturity date to cover that period’s interest payments . Though some commingling of funds may occasionally be found, the common procedure is for the agency to deposit the funds to the appropriate demand deposit account (DDA) set up for each specific bond series. Bond and coupon redemptions are then paid directly from those accounts .

Some bond paying agents have such tight controls on these DDAs that they are able to report exactly which coupons from which numbered bonds remain outstanding . However, the many similar names of the different bond series increase the chances for clerical errors when interest coupons are received for payment . Coupons from one series of bonds are redeemed with funds received for another series and, within a few years, the accounts can be hopelessly out of balance .

• Evaluate and document the procedures for processing of undeliverable and outstanding interest payments .



• Review document files for debt accounts and obtain copies of pertinent sections of the indenture agreements instructing the trustee .

• Evaluate the internal control over undeliverable property .• Test currently open and closed principal and interest control accounts for:

º Unreported property . º Property service charged or charged off .

• Test transaction journals for questionable entries for: (Redemption accounts, debt maturity accounts for both principal and interest .) º Service charging . º Charge-offs . º Fees being charged . º Offsetting to recoveries accounts . º Return of funds to principal . º Accounting offset of unrelated property .

Dividend Disbursing AgentEven when the actual certificates are presumed to be in the possession of the missing owner, stock shares must be reported as abandoned if:

• All distributions have remained unclaimed, or mail addressed to the owner has been returned as undeliverable, for at least three years,

• The owner has not communicated with the holder, in writing or otherwise, within the past three years, and• The location of the owner is unknown .

When reported, these are identified as underlying shares . Please note, the only time mail not returned by the Post Office prevents the assumption of abandonment is when there have been no distributions during the previous three-year period .

• Document the system of internal control over the issuance of cash dividends . º Obtain a listing of cash dividend bank accounts . º Obtain oral evidence as necessary to supplement the working papers .

• Evaluate and document the system used for the processing of undeliverable or uncashed cash dividends .• Evaluate the internal control over undeliverable or uncashed cash dividends .• Test transaction journals for questionable entries .• Determine if underlying shares are subject to reporting .

Stock Transfer Agent/Exchange Agent• Document the system of internal control over the issuance of stock dividends and fractional-share payments .• Document the internal control over undeliverable stock dividends and fractional-share payments .• Evaluate and document the system used for the processing of undeliverable stock dividends .• Test transaction journals for questionable entries .• Age undelivered stock dividend records and determine if unreported dividends and fractional-share payments exist .• Evaluate the internal control over unexchanged stock and fractional-share payments .• Evaluate and document the system used in accounting for unexchanged stock .• Test transaction journals for questionable entries .• Age unexchanged stock records and determine if unreported stock and fractional-share payments exist .• Determine if underlying shares are subject to reporting .

Receiverships• Obtain a list of liquidated corporations for which the holder has been appointed a receiver .• Evaluate the internal control over unclaimed distributions .• Test transaction journals for questionable entries .• Age liquidation distribution records and determine if any unclaimed distributions are subject to reporting .



Equity and Debt

The auditor may find the required records at the holder’s office, but frequently this function is contracted out to one or more agents .

• Research outside sources such as Capital Clearinghouse (CCH) Changes Reports prior to commencing the examination . Analyze the history of holder, i .e ., classes of stock outstanding, stock splits, stock dividends, mergers, acquisitions, spin-offs, etc .

• Prepare a list of all merged or acquired companies where acquisition was made in a stock-for-stock deal . Determine: º The date of merger or acquisition . º The exchange ratio . º If there was cash in lieu of fractional shares or liquidating distribution rates . º If the merged company was a public company . º The merged company’s predecessor transfer agent . º The merged company’s dividend history . º The disposition of unclaimed dividends subsequent to merger .

• Obtain a list of matured or called debt (bonds, debentures, or notes) for the holder and/or merged companies.• Determine if the merged company filed reports with the State. Obtain and review copies of these reports for any previously

reported property .• Request an introductory phone call or letter from the holder to review the accounting records of the outside agent, if

necessary .• Request a copy of written procedures used to handle and account for unclaimed equity and debt .

º Evaluate and document the adequacy and utilization of the above procedures . º Evaluate the internal control over reportable property .

• Determine if the aging of items is proper .• Reconstruct charges on any items or items charged off completely .• Trace items previously reported to the State to source records and note exceptions .• Obtain oral evidence as considered necessary to supplement the working papers .• Determine if authorization has been given by the holder to an agent to report unclaimed property to selected states .

Shareholder Equity• Obtain any legal opinions relating to the reporting of stock, dividends, underlying shares, etc .• Evaluate the system of internal control over records of inactive shareholders .• Analyze the procedures used to identify and report underlying shares and/or lost shareholders.• Obtain copies of agency contracts relating to applicable mergers, acquisitions and liquidations .• Evaluate and document the carrying forward of potential unclaimed property from prior transfer or paying agents and the

ultimate disposition of same .• Determine the disposition of potential unclaimed property held for or by subsidiaries of the holder by prior agents .

Cash and Stock Dividends• Document the system of internal control over the issuance of cash and stock dividends .

º Obtain a listing of cash dividend bank accounts . º Age check register and determine if unreported dividends exist .

• Evaluate procedures used to report outstanding dividend checks . º Reconstruct any dividends charged off . º Obtain oral evidence as necessary to supplement the working papers .

• Evaluate and document the system used for the processing of undeliverable cash and stock dividends .• Evaluate the internal control over undeliverable cash and stock dividends .• Test transaction journals for questionable entries .• Determine if underlying shares are subject to reporting .



Unexchanged Stock• Evaluate and document the system used in accounting for unexchanged stock .• Evaluate the internal control over unexchanged stock and fractional-share payments .• Age unexchanged stock records and determine if unreported stock and fractional-share payments exist .• Test transaction journals for questionable entries .• Determine if underlying shares are subject to reporting .

Principal and Interest on Debt Issues• Account for debt redemptions, maturities, and the disbursement of interest payments for registered and bearer debt

instruments . (Until the early 1960s most debt securities were issued in bearer form .) º Evaluate and document the system of internal control and procedures for the processing of undeliverable and outstanding

interest payments . º Review pertinent sections of the bond indenture agreements requiring the trustee to return outstanding and undeliverable

interest checks or proceeds from unpresented coupons or uncashed checks to the holder after a stipulated period . º Review registration requirements of each security . º Review currently open and closed principal and interest control accounts for:

– Unreported property . – Property service charged or charged off .

º Test transaction journals relating to principal redemption or interest payments for questionable entries: (Redemption accounts and debt maturity accounts for both principal and interest .) – Service charging or other fees . – Charge offs . – Offsetting to unrelated accounts . – Return of funds to principal . Requires a separate follow-up .

Credit Memoranda, Gift or Merchandise Certificated, Electronic Gift Cards, Scrip or Instruments Representing Cash Sold or Originally Issued Prior to September 1, 2005Some holders successfully prevent states from collecting unredeemed gift certificates by strictly adhering to a policy of redeeming them for merchandise or services only. That is why the auditor’s identification of a waiver of this policy (addressed in step 2) is so significant. While the unclaimed property laws of many states, like Texas, include tangible property, most states are unwilling to go through the process of receiving and selling merchandise .

Gift certificates that are redeemable for merchandise or services only, and have a stated expiration period that is less than the statutory period required for the presumption of abandonment, will not be considered as reportable unclaimed property in Texas .

• Determine if last known address of purchaser can be obtained, e .g ., credit records, original issuance records, etc .• Determine whether terms of the instrument require presentation within a specified time period and whether only

merchandise or services can be obtained . Also, determine if these terms are waived .• Determine if the accounting system permits aging of outstanding instruments . If not, use estimating procedures .• Analyze selected accounts to determine whether any outstanding credit memos have been taken directly into income or

credited to an expense account .• For gift certificates, if these are not segregated in liability or reserve accounts, review tax returns to determine the amount

unpresented and reported to the IRS as income . The holder may have reported the amounts in the taxable year following receipt, in accordance with U .S . Treasury Regulation 1 .451-5 .

In summary: All gift certificates with expiration dates of less than three years are not considered unclaimed property . Gift certificates with no expiration date or with expiration dates of three years and longer are considered unclaimed property . However, as a practical matter, those gift certificates considered unclaimed property and redeemable only in merchandise or services should not be considered in an audit without prior approval .



Credit Memoranda, Gift or Merchandise Certificated, Electronic Gift Cards, Scrip or Instruments Representing Cash Sold or Originally Issued on or After to September 1, 2005 EFFECTIVE SEPTEMBER 1, 2005 The 79th regular session of the State Legislature passed Senate Bill 446 (as amended) on May 9, 2005 . The Governor signed the bill on May 17, 2005 with an effective date of September 1, 2005 .

First and foremost; SB446 applies to stored value cards sold or originally issued on or after September 1, 2005 . All stored valued cards issued prior to this date will be subject to the audit policies and procedures in place prior to this date . Effectively this means it will be a minimum of three years before this change becomes an audit issue .

Senate Bill 446 is primarily a consumer protection statute relating to stored value cards. This bill clarifies the definition of a stored value card and changes the criteria in which stored value cards (gift cards/certificate) would be consider unclaimed property and alters the manner and method they will be treated in an unclaimed property audit .

“Stored value card” means a record that evidences a promise made for monetary consideration by the seller or issuer of the record that goods or services will be provided to the owner of the record in the value shown in the record, that is prefunded, and the value of which is reduced on redemption. The term includes a gift card or gift certificate

From an audit perspective the bill’ wording is confusing as to when or if a stored value card becomes reportable as unclaimed property . For audit purposes it makes no difference whether the stored value cards are redeemable for cash, merchandise or service . In all cases the following guidelines should be used:

• A stored value card is not reportable as unclaimed property if the stored value card has no expiration date AND no fees are assessed, other than those permitted under Section 35.42(d) listed under (a) below. º Fees permitted under Section 35 .42(d) must be disclosed and reasonable and may only be charged for:

– Fees or charges for issuing the card or – Fees or charges for increasing the value or balance of the card or – Fees or charges for accessing or changing the balance at an unmanned teller machine or – Fees or charges for reissuing or replacing a card that was lost, stolen or that has expired .

º If the fees noted (a) above are not disclosed or not reasonable, then the stored value card’ balance is reportable as unclaimed property after the applicable abandonment period of three years except for wages (MS01 property) which is one year based on the latter of: – Card expiration date – Card issue date – Card last use date

• If the stored value card has either an expiration date OR charges monthly service fees, other than those permitted under Section 35.42(d) (see specific items listed under 1(a) above), the net amount is reportable as unclaimed property . º Additional service fees not specifically covered under Section 35.42 (d):

– must be disclosed and – must be reasonable and – may not be assessed until the 13th month after the date the card was sold or issued and – may not be assessed beyond the 36th month of inactivity . – If i, ii, iii, OR iv above do not apply, the stored value card’ net balance is reportable and/or should be included in an audit .

• If a card has an expiration date and does not represent wages and : º the stored value card has not been used, the net balance reportable three years from the earlier of:

– the stored value card’ expiration date or – the stored value card’ issue date .

º the stored value card has been used, the net balance is reportable three years from the card’ last use date .• If a card has an expiration date and represents wages (MS01 property type) and

º the stored value card has not been used, the net balance is reportable one year from the earlier of:



– the stored value card’ expiration date or – the stored value card’ issue date .

º the stored value card has been used, the net balance is reportable one year from the stored value card’ last use date .• Disclosure of the following information must be clear, conspicuous and legibly printed:

º the stored value card’ expiration date (if applicable) and º the stored valued card’ expiration policy (if an expiration date is applicable) and º any fees noted in 1) (a) above and º any periodic reductions or fees of the unredeemed value not included in 1) (a) above and º any other material restrictions placed on the use of the card

• If the holder cannot provided an address of the stored value card’ owner/purchases, then the last know address is presumed to be Austin, Texas, the address of the Comptroller of Public Accounts .

Note: A stored value card sold without the disclosure as required by this section is valid until redeemed or replaced .

Life Insurance and Death ClaimsThe auditor will often find that the reasons some death claim payments are still unpaid years after the date of death relate to disputes between the heirs. Questionable circumstances surrounding the death of the insured, such as the beneficiary’s contribution toward bringing about the death, can also hold up payment .

These are certainly valid reasons for delaying payment, but they cannot be used indefinitely. The auditor’s inquiries may bring long-standing unpaid death claims to the attention of the holder, with the only reasonable resolution being to report the benefits for an unknown owner .

When examining this type of property:

• Review the internal control over the death claim payment procedure .• Review the accounting procedures utilized to handle death claims .• Review the company’s follow-up procedure on paying death claims .• Review the death claims register or listing for any aged items .• Trace a sample of unclaimed payments to policy files.• Analyze all death claims held in suspense or unpaid after a specified cutoff. Interview company attorney regarding disputed

death claims .• Trace claims reported as unclaimed property through the system to determine their origin and disposition .• Analyze all claims taken into income or surplus .

Matured Endowments, Policies Reaching Limiting Age and Other Maturities Due or PayablePeople usually know if they’ve been named as beneficiaries on life insurance policies. In the event they don’t, however, they are unable to inform the life insurance company of the insured’s death. Without that information, the death benefits are not yet payable, the abandonment period cannot begin to run and, if the company doesn’t learn of the insured’s death through other means, the abandonment period won’t commence until the limiting age specified in the policy is reached.

In the case of annuity payments and other obligations that are conditioned upon the continued life of a person, those payments are not considered to be “due and payable” in the absence of proof that the payee was alive at the time required by the contract . So, while losing contact with a payee often starts the abandonment period for other types of personal property, it will generally, and properly, result in the cessation of payments made pursuant to an annuity contract .

If the payment of premiums on a policy ceases, and the company is unable to locate the insured or make a determination of death, the cash surrender value may be consumed under an automatic premium loan or other non-forfeiture provision . This is an unfortunate, often unavoidable, consequence for the beneficiary when the insured cannot be located.




• Review the internal control over matured items .• Review the accounting procedures utilized in handling maturities .• Review reserve tabulations for matured items .• Analyze all maturities reserved at face value .• Analyze unpaid matured endowments and annuity payments .• Analyze terminated policies with cash value . Determine options available .• Analyze all policies having reached the limiting age and obtain a reserve listing . Interview the actuary and review any

reports prepared by him/her.• Analyze any maturities taken into income or surplus or otherwise disposed of .• Review company follow-up procedures on maturities .• Trace, on a test basis, items reported as unclaimed property through the system to determine their origin, accounting

treatment and disposition .• Sample the master policy file to determine that no maturities are unrecorded.• Review policy files relating to questionable maturities.• Trace, on a test basis, purported payments of previously abandoned maturities to a canceled check or other documentation .

º Determine if interest and/or supplemental benefits have been paid. º If so, examine reports of unclaimed property and verify that such amounts are included in report .

• Obtain specimen copies of appropriate policies as deemed necessary .• Test dates of last contact on a sample basis .

Test the ratios of reportable maturities from year to year . Analyze variances .



Chapter 7

• Agent Credit Balances• Policyholder Dividends• Escrow Funds• Preneed Funeral Contracts• Other Special Provisions• Penalties and Interest

Agent Credit BalancesAn insurance company will have unclaimed agent credit balances or unclaimed premium refunds but usually not significant amounts of both at once . The determining factor is whether the company’s insured clients remit their premiums to independent agents or directly to the company .

Unresolved agent debit balances are a frequent occurrence for many insurance companies that use independent agents . Consequently, the auditor should pay particular attention to step 6, below:

• Review the internal control over agent credit balances .• Determine vesting provisions for agents . Obtain agency contracts .• Review the accounting procedures for agent credit balances to determine if checks are automatically written for credit

balances .• Determine aging process on credit balances and follow-up attempts .• Analyze miscellaneous income and expense accounts for charge-offs of agent credit balances .• Determine if agent credit balances have been netted against other agents’ debit balances .• Review suspense or liability accounts used for aged agent credit balances .• Trace balances reported as unclaimed property through records on a test basis to determine actual procedures .

Policyholder Dividends• Review the internal control over dividend payments on participating policies .• Review the accounting control and procedures on dividend payment options .• Review participating policy contracts to determine options available to the policyholder .• Trace all participating policies with insufficient addresses to the policy files and original applications to determine original

options elected .• Determine if the company changes the policy dividend options without the policyholders’ authorization .• Analyze policies with a dividend accumulation option that were changed by the company unilaterally from a cash dividend

option . Determine that accumulations are credited to the policies . Verify that accumulations on policies no longer in force are reported as abandoned .

• Trace reported dividends through the system to determine origin and disposition .• Ascertain whether premium overpayments are returned to the policyholder or credited to the policy .



Escrow FundsLike many types of unclaimed property, this is not specifically addressed by the statute. Still, the money being held does belong to someone else and is subject to unclaimed property reporting .

When this money is held for the duration of the three-year abandonment period by a title insurance company, it is generally due to some dispute between the seller and the buyer . If the locations of both parties are known it is, of course, not unclaimed property . Often, however, the location of only the buyer or the seller is known and it has not yet been determined which party is the rightful owner . In that case, it is still reportable as unclaimed property, each party is determined to have an undivided interest in the whole, and it cannot be claimed from the state until both parties are found .

• Examine the internal control over escrow funds .• Examine the accounting procedure used to maintain escrow funds . Include depository policies, procedures and agreements .• Identify what efforts are made to determine ownership and locate owners of escrow funds after contract closing dates .• Determine the accuracy of dates used in aging escrow fund trial balances .• Verify that fund disbursements are in accordance with agreements and contracts . Note, in particular, if service charges are

made without authorization .• Analyze selected funds to determine whether any outstanding amounts have been taken directly into income or credited to

expense accounts .

Preneed Funeral ContractsContracts sold under the provisions of Chapter 154, Subchapter F, of the Texas Finance Code are backed by trust accounts and are regulated by the Texas Department of Banking . Refunds due on partially-paid contracts are reported under the same three-years-with-no-contact rule as most other types of property .

To protect the rights of the contract beneficiaries who are entitled to a funeral, fully-paid contracts are covered by special provisions in the Finance Code that must be met before a presumption of abandonment can be made . These are:

• at least three consecutive years have elapsed since the existence and location of the purchaser or the beneficiary of the contract was known to the seller;

• at least three consecutive years have elapsed since, according to the knowledge and records of the seller, a claim to or act of ownership of the funds or the contract has been asserted or exercised;

• at least 60 years have elapsed since the date of execution by the purchaser of the contract; and• at least 90 years have elapsed since the date of birth of the beneficiary of the contract.

In either case, partially or fully-paid, the seller may be entitled to keep some of the funds as its own under the provisions of this section of the Finance Code .

Other Special ProvisionsIndividual Retirement Accounts (IRAs)The three-year abandonment period begins to run on the mandatory distribution date which, under federal law, is April 1 in the calendar year following the year in which the owner reached the age of 70½ . If the owner is known to have died before that date, the abandonment period commences at the date of death if the existence or whereabouts of any beneficiaries are unknown .

Local Telephone Exchange CompaniesThese companies may deliver reported unclaimed money to scholarship funds instead of the Comptroller, with certain limitations, as described in the Texas Property Code, Sections 74 .3011 and 74 .3012 .

Nonprofit Cooperative CorporationsThese holders may deliver reported unclaimed money to rural scholarship funds, economic development funds or to provide energy efficiency assistance instead of the Comptroller, with certain limitations, as described in the Texas Property Code,



Section 74 .3013 . HB3693, effective September 1, 2007, amends the Property Code, relating to the delivery of money by nonprofit cooperative corporations for rural scholarship, economic development, and energy efficiency assistance to add “energy efficiency assistance” among the permissible uses for unclaimed property and to increase the cap on unclaimed property diverted for these purposes that would normally be escheated to the state from $1 million to $2 million .

County Treasurers’ ChecksThe Texas Local Government Code, Section 116 .116(c) states that checks and warrants issued by county treasurers are considered overdue and nonnegotiable on the 366th day after issuance . They are to be credited as revenue to the county if delivery to the payees was attempted or occurred within a reasonable time following issuance . It also says that no right to full settlement of a proper claim is extinguished by this subsection . While the State normally steps into the shoes of the missing owners to exercise the owners’ right to recover their property, this provision is seen, in practice, as effectively exempting county treasurers’ checks and warrants from unclaimed property reporting .

School Districts, Municipalities and CountiesThe addition of Chapter 76 to the Texas Property Code requires school districts, municipalities, and counties to report unclaimed property items of $100 or less to their own treasurers, instead of the Comptroller . Each school district, municipality, or county treasurer is required to establish an unclaimed money fund and procedures for paying claims, similar to what exists in the Comptroller’s office. Audit authority to enforce this chapter lies with the school district, municipality, and county treasurers, themselves .

Penalties and InterestFor property due prior to September 1, 1997 (on or before the November 1, 1996 annual report):

No penalties are assessed for periods prior to September 1, 1997, without the involvement of the Office of the Attorney General and proof of willful noncompliance .

Interest is assessed at 10%, compounded annually, from the date on which the property was due or September 1, 1987, whichever is later, through August 31, 1997, or the actual delivery date, whichever is earlier . The following pages illustrate the Excel spreadsheets used for compound interest calculation . When the delivery date is after August 31, 1997, 10% simple interest is assessed on the undelivered principal from September 1, 1997, through the actual delivery date, in addition to the compound interest already accrued .

Until September 1, 2001, the Comptroller had no statutory authority to waive interest that accrued on unclaimed property that was reportable prior to September 1, 1997 . This changed the with passage of H .B . 1840 by the 77th legislative session which became effective September 1, 2001 . This bill provided the Comptroller with the authority to waive interest imposed on delinquent property reportable on or before November 1, 1997 .

For property due on or after September 1, 1997 (on or after the November 1, 1997 annual report):

A 5% penalty shall be assessed on the value of property not delivered by the statutory due date, with an additional 5% penalty (10% combined) assessed when the property is still not delivered on the 31st day after the due date .

10% simple interest is assessed on the undelivered principal from the due date through the actual delivery date .

Penalty may be waived when the holder has made a good faith effort to comply with the unclaimed property statute and has been cooperative and professional during the audit. The fact that an audit is the holders first unclaimed property audit is not in and of itself grounds to waive penalty. All penalty and/or interest waivers over $10,000 must be approved by Audit Headquarters . Interest waivers may only be granted with prior approval of Audit Headquarters .



Chapter 8


Chapter 9 Commonly Reported Types of Unclaimed Property Listed by Industry Audit Procedures for Unclaimed Property

Chapter 9 Commonly Reported Types of Unclaimed Property Listed by Industry(Not intended to be all-inclusive)

All industries

• Employee wages Vendor payments• Uncashed checks of any type

Banks; Savings Associations; Credit Unions

• Demand deposit accounts• Savings accounts• Certificates of deposit• Individual retirement accounts• CD Interest checks• Cashier’s checks• Certified checks• Loan overpayments• Loan collateral• Safe deposit box contents• Safekeeping items• Unidentified deposits

Electric and Telephone Cooperatives

• Capital credit distributions• Member deposits• Member overpayments

Title Insurance

• Escrow funds

Utility Companies

• Customer overpayments• Customer deposits• Unidentified remittances

Trust Companies

• Personal: º Fiduciary checks º Dividend credit balances

• Corporate: º Cash dividend payments º Stock dividends º Stock splits


Chapter 9 Commonly Reported Types of Unclaimed Property Listed by IndustryAudit Procedures for Unclaimed Property

º Unexchanged stock º Liquidation proceeds º Bond interest and º Principal payments

Hospitals

• Patient overpayments• Unidentified remittances

Oil and Gas Companies

• Royalties• Delay rentals• Bonuses

Property & Casualty/Accident & Health/Life Insurance

• Premium refunds• Claim payments• Unidentified remittances• Agent commissions

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