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Escheatment Information

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By Michael C. Dennis, M.B.A., C.B.F.

A company does not have the right to arbitrarily reverse credits or write off unapplied cash

Many companies reverse credit memos as well as on-account cash from dormant accounts and from customers that have gone out of business. This practice is inappropriate and may be unlawful. Companies are required to report when property has been abandoned or unclaimed to the State. Because a company does not have the right to arbitrarily reverse credits or write off unapplied cash, it should make a commercially reasonable effort to locate and notify the owner of the abandoned property. If a credit memo, on account cash, or abandoned property remains unclaimed and the company is unable to locate the rightful owner, the asset must be turned over to the state through the escheatment process.

A majority of states follow mandate that any money or credits owed to a customer have a dormancy period of three years. Companies are required to remit payment to the state each year it holds escheatable funds that have exceeded the dormancy period. Each state provides a simple form to be used in preparing the report and paying the escheatable funds. In turn, the state will hold the money in trust for the benefit of the rightful owner.

Failure to report unclaimed property, or conversion of unclaimed property [such as writing off credits or on-account cash] may subject a creditor company to penalties including fines, penalties, interest, compensation for the use of money, and other damage claims. These can be asserted against a creditor even if the mishandling of escheatable property is the result of poor record-keeping practices.

To avoid problems and penalties, creditors should:

Maintain a proper accounting system

Develop controls to prevent credit memos and on account payments from customers [and vendors on the A/P side] from being absorbed by the company unilaterally and arbitrarily
Write policies and procedures that describe the escheatment process in the state or states in which the company does business
Create reports that identify on-account cash, in addition to open customer credit memos

Some companies argue that on account cash and open credit from business to business transactions should not be subject to escheatment for the following reasons.

First, business transactions are not similar to consumer transactions since businesses have the capability to audit accounts and an incentive to collect outstanding balances.

Second, unclaimed property arising from business transactions is usually the result of administrative errors or a credit issued against future purchases to preserve customer goodwill.

Third, compliance results in an administrative burden that exceeds any benefits to society.

The best way to avoid escheatment related problems is reconcile accounts on a regular basis; issue credits in a timely manner; and working with customers to find how payments are to be applied - and reminding and encouraging customers to use credit memos issued to them.

Reprinted with permission from the Covering Credit Newsletter 02/1/05 Edition

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