Credit Managers are trained to focus on bringing in as much cash and to keep payments as close to terms, as they can. Collection performance typically targets Average Days Past Due, Percent Past Due, or DSO. There is another exposure that is less visible but can be a material risk to your company.  Aged unresolved credit balances can be a threat to your company's bottom line as an outcome of an Escheatment Audit.

What is Escheatment? 

By definition Escheatment is the process of transferring assets to the state that go unclaimed and dormant for a defined period of time. This is based on the state law where the account is held. Timeframes depend on State requirements, but typically range from three to five years.

Your company is responsible for the timely disposition of aged credits.  Your Credit Team is likely the first line of defense. Compliance may involve refund payments to the companies with open credit balances, or with the customer's approval, credit balances can be applied to open invoices.  Ultimately, they can revert to the State in compliance with the applicable Escheatment rules.

These days State governments are hungry for any source of revenue. Unclaimed property on a company's books for too long (for example, unapplied credit balances), are attractive targets for seizure and payment to the State. This adds to their coffers until claimed. Penalties and interest charges can make the amount claimed by the State even more ominous.

Beware of Audits and Auditors

In some cases, Escheatment Audits may be conducted by third-party auditors who are paid on a contingency basis. They have an incentive to maximize the unclaimed property claims. Many jurisdictions do not have a statute of limitations on Escheat claims enabling a State to impose a lengthy look-back period where your company may lack adequate records. In those cases, the auditor is left to estimate the unclaimed property liability.

If not worked regularly, your company could accumulate decades of unclaimed property liabilities. States can also assess costs, fines, and interest to what your company owes. If you are not consistently addressing aged credits it could result in a significant and unexpected financial exposure.  In severe cases, the interest and fines can exceed the amount of unclaimed property at issue.

Here are ten actions you can take to prevent this type of exposure:

1. Create a formal escheatment compliance process as part of your company's credit collections policy.
2. On an annual basis systematically work aged credit balances. Issue refunds or apply open credits as directed by existing or past customers.  Action is particularly important for isolated credits for customers your company no longer does business with.  The older an unworked credit balance ages, the less likely you will be able to resolve it. Don't wait until you receive notice of an audit.
3. Make a diligent effort to locate the customer leaving a documented trail of attempted contacts and correspondence.
4. Be aware of the timeframes allowed by the State where the account is held.
5. Set up an annual review to ensure your company is in compliance with applicable State requirements.
6. If attempts to reach the customer are unsuccessful, forfeit unresolvable credits to the State in advance of a violation.
7. If an aged item is identified as out of compliance, take advantage of any “cure” period offered by the applicable State. Attempt to reach the customer owed the credit for directions on how to dispose of the balance.
8. Before you receive notice of a pending audit, check to see if the applicable state(s) have amnesty or voluntary compliance programs. Your company may be able to make late payments without being charged interest and penalties.
9. Train the Credit Team on escheatment compliance requirements, your company policy, and dispensation procedure.
10. If your company is making an acquisition, or you are taking on an additional AR portfolio, make an assessment of Escheatment liability part of your due diligence, and corrective action process.

Conclusion

Credit Managers have many priorities. Small unresolved credit balances may seem low on the list. However, if they are not routinely worked, they can become a major liability. Be prepared in advance and protect your company from a painful Escheatment exposure.

Editor www.highako.com Highako.com is a video-first microlearning platform trusted by over 10,000+ Credit and Collections professionals. Drive skill growth with role-specific, expert video lessons. Measure practical expertise through hands-on assessments. Connect and collaborate with the largest credit community and get access to ready-to-use templates.

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