Originally published in
Reprinted with permission

What Should You Do When A Supplier Fails To Cash a Check?

What does your company do with uncashed checks? Does it

• carry the outstanding checks on its ledgers forever;
• write-off any amounts to miscellaneous income after six months
• turn the money over to the state?

As strange as this may seem, the correct answer, in many instances, is to turn the money over to the state. Uncashed checks fall under the Uniform Unclaimed Property Act, which requires every company and banking institution to file unclaimed property reports with the states annually, and to make a good-faith effort to find the owners of their dormant accounts. State laws governing unclaimed property dictate that the company must attempt to locate the owner in a procedure called due diligence. If the owner can’t be found during a specified period of time known as the dormancy period, the property is classified as abandoned. When the rightful owners can not be found, the money must be turned over to the state.

States take this law very seriously. The 1995 Uniform Unclaimed Property Act allows penalties up to $25,000 plus 25% of the value of the property for willful failure to report. Claiming that they were not aware of the law has not helped companies as ignorance of the law is not deemed as acceptable defense and is also penalized. Companies can be fined up to $5,000 for inadvertent failure to report. A 12% interest is also added on as penalties, which states do not waive. This is calculated from the initial date of the obligation.

The Dilemma

The issue for accounts payable professionals is to make sure that their companies are turning the money over to the state that is required- but not one penny more than they must. This is easier said than done. Here’s why:

• The states are becoming more aggressive in their audit and collection approaches. There are reports that some states are working together. One auditor may actually represent two, three, or more states.

• The amounts of money involved are staggering. Experts estimate that states are currently holding $11 billion with another $2 billion being escheated every year. This is believed to be only a small portion of what should be turned over.

• Not all uncashed checks have to be turned over. If those checks represent duplicate payments which the payee recognized and did not cash, the money does not represent an unclaimed payment. (This does occasionally happen!)

• Money has to be turned over to the state where the intended recipient is believed to reside. Thus, most companies will find they are responsible for escheating to all the states.

• Rules as to what has to be turned over and when it has to be turned over vary by state.

For states, this money is very attractive. True, it must be turned over tot the rightful owner, should that person or institute claim it. However, much of it remains unclaimed forever. States having difficulty balancing their budgets are looking at the escheatment process with renewed vigor- and who can blame them.

What Can Be Done

Here’s how three accounts payable professionals handle the issue in their organizations:

• Unclaimed Property Reporting to state authorities (outstanding checks) is currently handled by its legal department, based upon information provided by the AP Department, says a large specialty retailer with locations in 49 states, the UK, Puerto Rico, and the Virgin Islands.
• Another manager indicates they handle it in the A/P department. However if the funds have to be turned over tot he state, the tax department actually handles the processing forms and filing and accounts payable cuts the check. There is no separation of duties issue because the escheat process is handled by accounts payable accounting staff who have no permission to process invoices or cut checks, explains a large pharmaceutical company.
• A third indicates the bank administration department handles this function. This department is under the umbrella of the Treasurer’s sector head. A pharmaceutical company uses the Freedom Tracker software package to download this information from accounts payable to its PC platform database.

Necessary Documentation

For starters, every company should have an escheatment policy. It should clearly state who does what. As can be seen from the above scenarios, this is not an issue that falls solely in the lap of accounts payable. It is likely that some of the following will be involved: legal, tax treasury, and other parts of accounting. Which areas handle escheatment vary from one company to another. In virtually all companies, however, accounts payable is involved as it generally provides the check information.

It is important to keep every scrap of paper that might be of use in defending against an escheatment claim by the state. Thus, if a letter is sent out asking a vendor about an uncashed check and the supplier has replied that the money is not owed, the letter should be saved in the envelope in case it is later asked as supporting document.

Software Solution

As indicated above, this is an issue that can be best handled by software. To even begin to try and complete the forms and track this information manually would be a nightmare. Several states offer simple forms tat can be used and even transmitted electronically. However, these are on a state by state basis. A much more attractive solution is to use software that covers all the states. One such solution is available from a company called The Freedom Group. Although most of the company’s products are devoted to the insurance industry, its escheatment product can be, and is used by companies in many industries. The product is called Tracker 2000.

Tracker 2000 is a software package available for tracking and reporting unclaimed property to the states. Each state requires abandoned funds to be reported annually, utilizing differing dormancy periods, aggregate levels, and reporting formats. Tracker 2000 keeps track of due diligence requirements and provides a link to Microsoft Word to create search letters. It will:

• Report on the amount of unclaimed property associated with each state
• Create search letters to send to owners to inform them of unclaimed property
• File reports on paper, diskette, or magnetic tape
• Keep track of specific state information, such as property types and dormancy values, reciprocal agreements, and contact persons for each state. For more information point your browser to www.freedomgroup.com.

Other Sources of Information

This is a complicated and serious topic. Information, unfortunately, is not widely available and changes as each state modifies requirements on reporting periods. Information can be obtained from each state. Many have this information posted on their websites. There are also two companies that offer escheatment services. They are:

• RECAP, which readers of this newsletter know for its post audit services. Thtey can be reached at their website at www.recapinc.com. This useful site has information about escheatment.
• Record Time, can be reached at 512-345-0291

As states look for alternative sources of revenue, escheatment will become a bigger issue. Accounts payable professionals who want to improve (or establish) their companies escheatment policies should begin a dialogue with their managers to determine what needs to be done to establish a policy that will protect the company from fines while simultaneously allowing the company to turn over the minimum amount required. This is not an issue to ignore. This is an issue where accounts payable can play an active role in a serious management concern. Don’t let it pass you by.

Useful Sources of Escheatment Information

• The Freedom Group www.freedomgroup.com
• Recap www.recapinc.com 781-449-2927
• Record Time Inc. 512-345-0291
• www.unclaimed.org

"What Should You Do When A Supplier Fails To Cash a Check?" ©1998 Institute of Management and Administration, Inc. For subscription information call (212) 244-0360 or send e-mail to SUBSERVE@IOMA.COM

For more information about RECAP or its services,
please send e-mail to info@recapinc.com