The risks associated with outstanding checks can be significant. The risks include unintentional or intentional errors resulting in loss of assets, significant penalties for not reporting unclaimed property to the appropriate state and inappropriate reporting. These risks are further compounded because there is no statute of limitations for reporting unclaimed property; time will not make this matter go away. It is very important that processes are put in place to minimize these risks.
Intentional or Unintentional Errors
Risk for intentional or unintentional errors increases the longer checks remain outstanding because it gets harder to research these transactions as time passes. An unintentional error could be reissuing a check when it was paid by the corporate credit card. The weaker the controls regarding outstanding checks and the check voiding process, the more susceptible to fraud and could cause costs to increase due to audit and attorney fees.
Unclaimed Property Rules
State regulations require unclaimed property, including outstanding checks, are turned over to the appropriate State after their dormancy period, usually one year for payroll checks and three years for AP checks, to safeguard these funds for the rightful owner. Each state has its own rules for reporting and lack of reporting is the trigger for an audit. The purpose of the audit is to estimate the liability for past transactions that had not been properly turned over to the appropriate State. This liability can have a significant impact on the bottom line and in some circumstances can threaten operations. Additional costs include obtaining expertise to negotiate the liability and staff time to research significantly old transactions that in most cases have been inappropriately written off to the P&L. As a result, many of these documents may not exist causing this estimate to be even more difficult to determine. The estimated liability is turned over to your state of incorporation.
Inappropriate Reporting
The organization is responsible for documenting steps taken to contact the rightful owner and maintain these documents for the appropriate period. If the rightful owner cannot be located, reflect a liability on the Statement of Financial Position (Balance Sheet) in accordance with FASB #5. After the dormancy period, the funds should be turned over to the appropriate state.
For more information, visit NAUPA who represents state governments that actively find owners while protecting forgotten funds until they are claimed.
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Transitional Accounting Services acknowledges that this blog is for information only. These best practice recommendations should be implemented from a practical standpoint which requires an understanding of your organization. Let us know if we may be of further assistance.