CSA
Summary
Read the report at California State Auditor ↗
State Controller’s
Office:
Does Not Always Ensure the Safekeeping,
Prompt Distribution, and Collection of
Unclaimed Property
June 2003
2002-122
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June 19, 2003 2002-122
The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814
Dear Governor and Legislative Leaders:
As requested by the Joint Legislative Audit Committee, the Bureau of State Audits presents its audit report
concerning the State Controller’s Office’s operation of the Bureau of Unclaimed Property (bureau).
This report concludes that the bureau’s controls over its information technology system are insufficient
to ensure the proper safekeeping of property in its custody and that its processes do not sufficiently
ensure the proper distribution of unclaimed property to their rightful owners. It also concludes that the
Financial-related Audits Bureau failed to pursue unclaimed property estimated to total $6.7 million. The
State Controller’s Office has taken action to correct some of the problems we identified, but needs to
implement further changes.
Respectfully submitted,
ELAINE M. HOWLE
State Auditor
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CONTENTS
Summary 1
Introduction 7
Chapter 1
Controls Over the Bureau’s Unclaimed Property
System Are Insufficient to Ensure the Proper
Safekeeping of Property in Its Custody 15
Recommendations 23
Chapter 2
The Bureau of Unclaimed Property’s Processes Do
Not Sufficiently Ensure the Proper and Timely
Distribution of Assets to the Rightful Owner 25
Recommendations 41
Chapter 3
The Controller Does Not Ensure the Collection
of All Unclaimed Property 45
Recommendations 48
Appendix
Property Belonging to Governmental Agencies
and Some Private Entities Are Excluded From the
Bureau of Unclaimed Property’s Web Site 49
Response to the Audit
State Controller’s Office 53
California State Auditor’s Comments
on the Response From the
State Controller’s Office 67
SUMMARY
RESULTS IN BRIEF
The primary purpose of the Bureau of Unclaimed Property
(bureau) is to reunite owners with their lost or forgotten
property. Common types of unclaimed property include
Audit Highlights . . . checking and savings accounts, contents of safe deposit boxes,
and securities. Since 1959, the State has accumulated more
Our review of the State
than $3.4 billion in unclaimed property in approximately
Controller’s Office (controller),
5.2 million accounts. Since fiscal year 1997–98, the bureau’s
Bureau of Unclaimed Property
(bureau), revealed the following: receipts of unclaimed property have exceeded its disbursements.
The increase in receipts has been accompanied by a significant
þ The bureau’s computerized
increase in the number of paid claims for property held by the
Unclaimed Property System
lacks sufficient controls bureau. Between fiscal years 1997–98 and 2001–02, the number
to prevent unauthorized of claims paid increased from 115,236 to 204,621.
changes, and the
duplication of account
The Unclaimed Property Law (law) requires business associations,
data, potentially resulting in
the payment of fraudulent banking and financial organizations, life insurance corporations,
or duplicate claims. and others (holders) to review their records each year to
determine whether they hold any unclaimed property. The
þ The bureau’s manual
tracking of securities is amount of time that the holder can hold unclaimed property
unreliable and the bureau before reporting and remitting it to the bureau varies by type,
is inconsistent in how
ranging from six months to 15 years, with the majority of types
quickly it sells securities.
reportable after three years. Further, the law requires both the
þ The bureau excludes holders and the bureau to attempt to notify the owners that the
more than $7.1 million in property will escheat, or has escheated, to the State.1 Additionally,
unclaimed property from
the law authorizes the State Controller’s Office (controller) to
its Web site.
audit holders if there is reason to believe they failed to report
þ The bureau does not property as required.
consistently review and
distribute claims in a
We found that the bureau’s computerized Unclaimed Property
reasonable amount of time.
System (property system), which it uses to track and disclose
þ The bureau does not
unclaimed property, is not sufficiently reliable. Because the
ensure that it receives all
controller discovered that staff could make unauthorized
of the reported contents of
safe deposit boxes. changes to the property system, the controller’s Information
Systems Division prepared programming changes to prevent
þ The controller’s Financial-
unauthorized changes to the property system and the
related Audits Bureau did
not pursue an estimated potential payment of fraudulent claims. However, because of a
$6.7 million in unclaimed reprioritization of the workload, not all of these programming
property from one holder.
changes have been made and the bureau’s staff could still make
1As used here, escheat is the transfer of unclaimed property from the holder to the
bureau for safekeeping until claimed by the owner or the owner’s heir.
California State Auditor Report 2002-122 11
unauthorized modifications to data in the property system,
such as owners’ names and amounts remitted on their behalf,
as recently as May 8, 2003. As a result, bureau staff could make
unapproved changes that may go undiscovered, potentially
resulting in the payment of fraudulent claims to themselves
or others. The Information Systems Division installed
programming changes, on May 16, 2003, that will prevent staff
from making some unauthorized changes but not others.
In addition, until recently no effective controls existed to
prevent the duplication of account data in the property system.
Although in 2002 the controller implemented controls to
prevent duplicate entries from occurring, the bureau has not
eliminated all existing duplicate entries from the property
system. We identified 16 holder reports totaling more than
$535,000 that are duplicated in the property system, potentially
resulting in the payment of duplicate claims and the provision
of inaccurate information to the public. Although the controller
states that it has taken action to prevent payments on the
duplicate reports, at least some of the duplicate properties still
appear on the bureau’s Web site.
Furthermore, inaccuracies in the property system may result
in the incorrect billing of holders for interest penalties from
which they should be exempt under the controller’s amnesty
program. Beginning in 2000, holders were allowed amnesty for
their past failures to report unclaimed property on or before
November 1, 1999, and were exempted from paying an interest
penalty. However, the bureau did not include an amnesty indicator
in the property system for all qualifying holder reports, and the
controller has not modified its program that calculates interest
penalties to exclude holder reports that were granted amnesty.
The controller will have to correct both problems to avoid
inappropriately billing the holders that it granted amnesty.
Because the bureau cannot use the computerized property
system to track changes in securities, it tracks these manually,
increasing the probability of error and the number of staff
needed to accommodate the workload. We found that the
bureau’s manual tracking of securities is unreliable and that
the bureau is inconsistent in how quickly it sells securities.
Moreover, because the bureau tracks securities by company
name rather than by individual owner, when corporate actions
such as stock splits result in the issuance of additional securities,
the bureau does not consistently associate the new securities
22 California State Auditor Report 2002-122 California State Auditor Report 2002-122 33
with the original securities. This results in securities for the same
owner being sold on different dates for different prices, further
complicating the bureau’s reconciliation process, increasing
both the potential for errors and the risk of allegations that the
bureau has mismanaged owners’ assets.
We also found that the bureau excludes a large amount
of unclaimed property reported to it for federal and state
departments, local governments, schools and school districts,
other states, and some private entities from its Web site. As
of April 30, 2003, the bureau held more than $7.1 million
in unclaimed property for various entities that it had not
posted on its Web site. As a result, even if the entities check
the bureau’s Web site to see if the State has some of their
property, they would erroneously conclude that it did not.
The bureau does not consistently approve or deny claims
within 90 days after it receives them. We found that claims for
securities require more research than claims for most other types
of property and generally are not approved within 90 days. In
addition, the bureau often takes an unreasonable amount of
time to pay claims once they are approved. We found that only
30, or 68.2 percent, of 44 claims we examined were distributed
within 30 days of approval. Only two of the 10 claims for
securities were distributed within 30 days of approval—a further
indication of problems caused by the bureau’s cumbersome
system for tracking securities.
Also, the bureau does not ensure that it receives all of the
reported contents of abandoned safe deposit boxes. Although
the holders prepare an inventory of the contents of safe deposit
boxes they remit, the bureau disregards this inventory and
prepares its own, creating unnecessary work. In addition, the
bureau does not compare the contents it receives to those
reported by the holders. Such a comparison would reduce the
bureau’s liability for items not remitted by the holder.
In addition, the bureau has not sold the contents of safe deposit
boxes on a frequent basis. Although it is not required to sell the
contents, failure to do so results in higher costs to the State to
store and safeguard those contents and the overcrowding of its
safe deposit box vault. Further, the bureau does not consistently
take measures to ensure that it receives all of the proceeds from
the sale of these assets. Instead, it relies on what the auctioneer
reports as sale prices.
22 California State Auditor Report 2002-122 California State Auditor Report 2002-122 33
Lastly, the controller’s audit bureau does not always fully pursue
unclaimed property that its auditors have a reasonable basis for
believing should be remitted to the State. Specifically, we found
that even though its auditors estimated in January 2002 that
one holder failed to remit $6.7 million beginning as far back as
1978, the audit bureau did not move forward to substantiate
or invalidate the estimated findings. After we brought this
to the controller’s attention, the audit bureau reopened the
examination of the holder. Assuming that the audit bureau
substantiates the $6.7 million and the holder remits the funds
on June 30, 2003, the estimated interest penalty would be nearly
$8.2 million, resulting in the potential collection of more than
$14.9 million. By not exercising due diligence in pursuing the
collection of unclaimed property that there is a reasonable
basis to believe should have been remitted, the controller is not
fulfilling its responsibility to reunite owners with their lost or
forgotten property.
RECOMMENDATIONS
To increase the reliability of the data in the property system, the
bureau should do the following:
• Implement the programming changes necessary to ensure
that employees cannot make unauthorized and undetected
changes to the property system.
• Remove all duplicated account data from the property system.
To avoid issuing incorrect bills to property holders granted
amnesty, the bureau should ensure that all qualifying reports are
identified in the property system and that necessary changes are
made to the billing program.
To eliminate the bureau’s manual tracking of securities and
dispel any impressions that it exercises judgment in deciding the
best time to sell securities, the controller should seek legislation
to require it to sell securities immediately upon receipt.
Additionally, the bureau should immediately sell all securities
already in its custody.
To fully inform all entities that it has their unclaimed property
in its possession, the bureau should discontinue excluding any
properties from its Web site.
44 California State Auditor Report 2002-122 California State Auditor Report 2002-122 55
To ensure that it distributes assets to bona fide claimants in a
timely manner, the bureau should do the following:
• Review all claims and either approve or deny them within
90 days of receipt.
• Distribute assets on approved claims within 30 days of approval.
To ensure that it has properly accounted for all of the owners’
properties, the bureau should develop a standard inventory
form for holders to report the contents of safe deposit boxes and
for the bureau to verify that it has received all of the reported
contents from the holders. To reduce the cost of storing the
contents of abandoned safe deposit boxes, the bureau should
hold auctions at least monthly. It should also take measures to
independently verify that it is receiving all of the proceeds from
the auctions.
To ensure that it collects all unclaimed property, the controller
should complete its examination of estimated unclaimed
property that its auditors have a reasonable basis for believing
should be remitted to the State. Further, the bureau should
ensure that it bills and collects the applicable interest penalties
based upon the results of the audit bureau’s examination.
AGENCY COMMENTS
The controller generally agreed with our recommendations
and plans to take specific actions to address areas of concern
identified in the report. The controller also states that it has
begun to implement some of our recommendations. However,
the controller believes that we have in some cases overstated
the significance of our findings. For example, the controller
contends that its failure to pursue $6.7 million of estimated
escheatable property was an isolated incident. We provide
comments to clarify and add perspective to the controller’s
response to the audit in the final pages of this report. n
44 California State Auditor Report 2002-122 California State Auditor Report 2002-122 55
Blank page inserted for reproduction purposes only.
66 California State Auditor Report 2002-122 California State Auditor Report 2002-122 77
INTRODUCTION
BACKGROUND
The primary purpose of the Bureau of Unclaimed Property
(bureau) is to reunite owners with their lost or forgotten
property. The bureau is part of the Division of Collections
within the State Controller’s Offi ce (controller). The following
are the most common types of unclaimed property:
• Checking and savings accounts
Terms Related to Unclaimed Property
• Contents of safe deposit boxes
Claimant—A person or group of persons who
fi les a claim with the controller to obtain property
• Securities such as stocks, mutual funds, bonds,
in the bureau’s or the holder’s possession.
and dividends
Escheat—The transfer of unclaimed property
from the holder to the bureau for safekeeping
• Uncashed cashier’s checks and money orders
until claimed by owners or their heirs.
Holder—A person or a business that holds
• Certifi cates of deposit
unclaimed property, such as business
associations, banking and fi nancial
organizations, and life insurance corporations. • Matured or terminated insurance policies
Owner—A person or persons, or a business that
• Estates
owns the unclaimed property and is entitled
to the property or the proceeds from its sale.
• Mineral interests and royalty payments
Securities—Assets such as stocks, bonds, and
mutual funds.
• Escrow accounts
Unclaimed property—Any fi nancial asset left
inactive by the owner for a specifi ed period
of time.
THE UNCLAIMED PROPERTY LAW
Source: Unclaimed Property Law and the Bureau of
Unclaimed Property’s Web site. GOVERNS THE BUREAU’S OPERATION
The Unclaimed Property Law (law) governs
the bureau’s and the controller’s handling
of unclaimed property. The law requires holders to review
their records each year to determine whether they hold any
unclaimed property. Further, the law generally requires every
holder of unclaimed property worth at least $50 to report to the
bureau the owner’s name, last known address, and the date of
the last transaction with the owner. The amount of time that
the holder can hold unclaimed property before reporting it to
66 California State Auditor Report 2002-122 California State Auditor Report 2002-122 77
the bureau, known as the escheat period, varies
by property type.2 The escheat period usually
Escheat Periods By Property Type
begins on the holder’s date of last contact with the
Escheat owner and, as shown in the textbox, ranges from
Property Type Periods
six months to 15 years, with most property types
Assets from voluntary or escheating after three years.
involuntary dissolutions 6 months
Court-ordered refunds 1 year
Property escheats to the State if the last known
Savings, matured time deposits, address of the apparent owner is in this State or if
demand deposits, negotiable
the holder is domiciled in this State and the owner
orders of withdrawal, plus
interest or dividends 3 years has not indicated an interest in the deposit within
IRAs, Keogh plans 3 years the escheat period. Further, property received by
the State under the law never permanently escheats
Safe deposit boxes,
safekeeping repositories 3 years to the State; however, the property may remain in
Funds held by life the State’s custody indefi nitely.
insurance companies 3 years
Stocks, dividends, profi t The law requires that both the holders and the
distributions, interest 3 years
bureau attempt to notify the owners that the
Funds held by fi duciaries, agents 3 years property will escheat, or has escheated, to the State.
Funds held by government or Specifi cally, every banking or fi nancial organization
governmental agencies 3 years
is required to make reasonable efforts to notify any
Miscellaneous property held customer, by mail if the holder’s records include an
in the normal course of business 3 years
address, that the customer’s property will escheat
Employee benefi t
to the State. If the property escheats to the State,
trust distributions 3 years
the bureau must, within one year of the remittance
Other written instruments
or delivery of escheated property, publish a notice
(banking and fi nancial associations) 5 years
in a newspaper of general circulation that the
Money orders 7 years
bureau determines is most likely to give notice to
Travelers checks 15 years
the apparent owner of the property. In addition, if
the holder’s data include a Social Security number,
Source: Code of Civil Procedure, sections 1513
the bureau must request the Franchise Tax Board
through 1521.
(tax board) to provide a current address, and the
bureau must mail a notice to the owner if the
address in the tax board’s records is different from
the address that the holder reported to the bureau. The law does
not specify a time frame in which this notice must occur.
As shown in Figure 1, the bureau relies on the holders to report
unclaimed property to it. To persuade holders to report, the law
allows the controller to examine holders’ records if it has reason
to believe they have failed to report property that is legally
reportable. The audits of holders of unclaimed property intend
to uncover all property that is legally reportable to the bureau.
2As used here, escheat is the transfer of unclaimed property from the holder to the
bureau for safekeeping until claimed by the owner or the owner’s heir.
88 California State Auditor Report 2002-122 California State Auditor Report 2002-122 99
FIGURE 1
The Flow of Information From the Holder to the Bureau of Unclaimed Property
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THE UNCLAIMED PROPERTY FUND HAS
INCREASED SIGNIFICANTLY
Since 1959, the Unclaimed Property Fund (fund) has accumulated
more than $3.4 billion of unclaimed property in more than
5 million accounts. As shown in Figure 2 on the following page,
the majority of the individual properties remitted to the bureau
are in the form of cash. Cash accounts include insurance claim
checks, checking accounts and demand deposits, insurance
premiums, refunds, court settlements, savings accounts, and
credit union share accounts. The bureau uses aggregate cash
accounts for accounts valued at less than $50 each and for which
owner information is not available.
88 California State Auditor Report 2002-122 California State Auditor Report 2002-122 99
FIGURE 2
Types of Unclaimed Property
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Source: Unaudited data from the Unclaimed Property System of the Bureau of Unclaimed
Property, as of February 14, 2003.
Further, as shown in Figure 3, since fiscal year 1997–98, the fund’s
receipts have exceeded its disbursements. As discussed below,
this results in increased transfers to the State’s General Fund. The
fund’s receipts have grown significantly, from $304 million in fiscal
year 1997–98 to $457 million in fiscal year 2001–02, a 50 percent
increase. In addition, the fund’s disbursements have grown from
$124 million in fiscal year 1997–98 to $190 million in fiscal year
2001–02, a 53 percent increase. As shown in Figure 4 on page 12,
during this period the number of claims paid increased from
115,236 in fiscal year 1997–98 to 204,621 in fiscal year 2001–02.
The increase in the receipts of unclaimed property has also
allowed for increased transfers to the General Fund. According
to the law, the bureau must transfer amounts in the Abandoned
Property Account in excess of $50,000 to the General Fund
at the end of each month. These transfers allow the General
Fund to use the receipts of the Abandoned Property Account
until the rightful owners claim the property. Transfers to the
General Fund, in accordance with the law, account for most of
1100 California State Auditor Report 2002-122 California State Auditor Report 2002-122 1111
FIGURE 3
Unclaimed Property Receipts and Disbursements
Source: Unaudited data from the monthly administrative reports of the Bureau of
Unclaimed Property and General Fund transfer analyses.
Note: The information for fiscal year 2002–03 is based on actual amounts received and
disbursed between July 1, 2002, and April 30, 2003, and projected amounts for May 1
through June 30, 2003.
the $3.4 billion that the bureau has accumulated. As shown in
Figure 5 on page 13, transfers to the General Fund increased
substantially between fiscal years 1998–99 and 2002–03. During
that time, the bureau transferred almost $1.06 billion to the
General Fund.
SCOPE AND METHODOLOGY
The Joint Legislative Audit Committee (audit committee)
asked the Bureau of State Audits to evaluate the process
used by the controller’s bureau for identifying unclaimed
property from corporations, business associations, financial
institutions, insurance companies, and other holders. Further, the
1100 California State Auditor Report 2002-122 California State Auditor Report 2002-122 1111
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FIGURE 4
The Number of Claims Paid Between
Fiscal Years 1997–98 and 2002–03
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Source: Unaudited data from the monthly activity reports of the Bureau of
Unclaimed Property.
Note: The information for fiscal year 2002–03 is based on the actual number of claims
paid between July 1, 2002, and June 4, 2003, and the projected number of claims paid
between June 5 and June 30, 2003.
audit committee asked us to determine whether the bureau
distributes unclaimed property to eligible recipients accurately
and in a timely manner. We were also asked to evaluate the
bureau’s process of safeguarding unclaimed property in its custody.
Lastly, we were to determine whether the bureau evaluates
claimant satisfaction, is responsive to complaints, and has a process
in place to identify and implement corrective action.
To evaluate the bureau’s process for identifying unclaimed
property, we reviewed information on the audits that the
controller conducts of potential holders of unclaimed
property. We interviewed staff regarding the process for
selecting industries and companies for audit and reviewed a
sample of audits conducted by the controller to determine
whether the audits conformed to the planned procedures.
1122 California State Auditor Report 2002-122 California State Auditor Report 2002-122 1133
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FIGURE 5
Transfers to the General Fund Between
Fiscal Years 1998–99 and 2002–03
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Source: Unaudited data from the monthly administrative reports of the Bureau of
Unclaimed Property and General Fund transfer analyses.
Note: At the time of our audit, the fiscal year 2002–03 transfer amounts were only
available for the months of July 2002 through March 2003.
To determine whether the bureau distributes unclaimed property
to eligible recipients accurately and in a timely manner, we
reviewed data contained in the bureau’s Unclaimed Property
System and related documents for a sample of 45 randomly
selected claims paid between July 1, 2001, and March 5, 2003;
the bureau was unable to locate the documentation for one
claim that we requested, reducing our sample size to 44. We
reviewed applicable laws, supporting documentation, and
bureau procedures, and we interviewed bureau staff to assess
whether the bureau verified the identity of the person claiming
the property; the bureau provided evidence that it verified the
identity of the person claiming the property for all but one
claim. Further, we reviewed documentation to determine the
timeliness with which the bureau approved and distributed the
property to the claimant.
1122 California State Auditor Report 2002-122 California State Auditor Report 2002-122 1133
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To evaluate the processes for safeguarding unclaimed property
in its custody, we reviewed the bureau’s policies and procedures
for the safekeeping of securities and the contents of safe deposit
boxes remitted to it. Additionally, we interviewed the bureau’s
staff directly responsible for the safekeeping of 32 randomly
selected securities and 32 judgmentally selected safe deposit boxes.
Lastly, we reviewed documentation supporting the inventory and
valuation of those properties. In view of pending litigation against
the controller regarding the distribution of unclaimed securities, we
intentionally excluded the securities of nine companies specifically
named in the litigation; however, only one of these companies
appeared in our original sample selection, and we replaced it with
another company selected at random.
To determine whether the bureau evaluates claimant satisfaction,
is responsive to complaints, and has a process in place to
identify and implement corrective action, we reviewed claimant
surveys conducted by the bureau between November 2002 and
March 2003. We also talked with the bureau’s management
regarding its process to identify and implement corrective actions.
Although the bureau recently began analyzing the results of the
claimant surveys and has implemented policies and procedures
to address problem areas the surveys identify, it is too soon to
determine the effect of these efforts. n
1144 California State Auditor Report 2002-122 California State Auditor Report 2002-122 1155
CHAPTER 1
Controls Over the Bureau’s Unclaimed
Property System Are Insufficient to
Ensure the Proper Safekeeping of
Property in Its Custody
CHAPTER SUMMARY
The Bureau of Unclaimed Property (bureau) relies on its
computerized Unclaimed Property System (property
system) to track unclaimed property escheated to the
State by persons and businesses holding unclaimed property
(holders) and to disclose that the State Controller’s Office
(controller) has the unclaimed property.3 However, the property
system is not sufficiently reliable. Our primary concern is that
the controller has not implemented controls to prevent bureau
employees from making unauthorized changes to the system,
despite knowing about this problem for eight months. Further,
the property system does not generate reports that would reveal
when unauthorized changes are made and by whom. These
flaws allowed two student assistants to conspire to modify owner
names in the data and allowed their accomplices to fraudulently
claim some of the property.
Prior to 2002, the property system lacked effective controls to
prevent duplicate data from being loaded into the property
system. Although the controller took action to correct this
weakness, as of May 6, 2003, the bureau had not yet removed
all of the duplicate data from its property system. For example,
we identified 16 holder reports totaling more than $535,000
that were duplicates of other reports in the property system.
While the Information Systems Division reports it has taken
action to prevent payments on properties listed on the duplicate
reports, some of the properties are still on the bureau’s Web
site. Individuals using the Web site to determine whether the
controller has their property may inadvertently conclude that
they are owed more than the actual amount.
The bureau does not reconcile the total amount remitted for each
holder report to the total of all the individual accounts loaded
into the property system by that report. Our analysis of the data
3As used here, escheat is the transfer of unclaimed property from the holder to the
bureau for safekeeping until claimed by the owner or the owner’s heir.
1144 California State Auditor Report 2002-122 California State Auditor Report 2002-122 1155
for the 2000 reporting period determined that the amounts
reported for individual accounts were less than the amounts
remitted by the holders by more than $75,000, indicating three
possibilities: the holders overpaid the amount due, they failed to
include some individual accounts on their reports, or not all of
the properties for which funds were remitted were uploaded to
the property system. This may result in claimants not receiving
funds to which they are legally entitled.
Furthermore, the bureau’s staff manually entered nearly 6,700
holder reports directly into the property system due to problems
with a holder’s electronically submitted reports. In doing so,
the bureau bypassed most of the automatic system checks that
could have identified errors in the data, such as verifying data
formats and checking for duplicate information. The bureau
has established a procedure to verify the data in these records as
claims come in, but it does not intend to verify all of the data
entered directly into the property system.
Although the bureau relies on its property system to account
for and disclose that it has unclaimed property, the bureau’s
report tracking system indicates that as of June 5, 2003, it had
not loaded more than 8,500 holder reports into its property
system. About 4,500 of these reports are less than one year old
and are not considered a backlog. The backlog consists primarily
of reports submitted in electronic formats for which it no
longer has equipment to read the data. The bureau is currently
reviewing all holder reports submitted for prior report years and
attempting to either upload the data into the property system or
contact the holders to request that they resubmit the data in the
current reporting format. The backlog prevents the bureau from
notifying owners that it has their property.
INACCURATE DATA CONTAINED IN THE BUREAU’S
PROPERTY SYSTEM HAS RESULTED IN THE PAYMENT
OF FRAUDULENT AND DUPLICATE CLAIMS
The controller has known for more than eight months that
bureau employees have the ability to make unauthorized
changes to data in its property system. The controller’s
Information Systems Division began to prepare programming
changes to correct this control weakness eight months ago.
However, as of May 8, 2003, the programming changes to
correct the problem had not been installed, because of a
reprioritization of the workload. As a result, the bureau’s staff
1166 California State Auditor Report 2002-122 California State Auditor Report 2002-122 1177
could still add, modify, or delete critical data contained in the
property system, such as a property owner’s name, the date the
property was remitted to the controller, or the remitted dollar
amount. In addition, because the property system does not
produce management reports that specifically identify when
or by whom additions, modifications, or deletions of data are
made, unapproved changes may occur and go undiscovered.
In fact, the bureau found that in 1999 two student assistants
Two student assistants conspired to modify owner names in the data and had
conspired to modify accomplices fraudulently claim property. One accomplice
owner names in the claimed and was paid $58,667. The controller investigated,
property system and had sought prosecution, and ultimately obtained $41,667 in
accomplices fraudulently restitution from the two former student assistants as part of their
claim property. sentences. The controller did not pay two other claims—one
for $14,454 and another for $17,223—because it identified the
claims as being fraudulent before paying them.
On May 16, 2003, the bureau notified us that the Information
Systems Division had installed programming changes to
prevent unauthorized changes to the property system that
could result in fraudulent payments to bureau staff and others.
However, as of May 22, 2003, bureau staff could still modify
some information. For example, staff could still add an owner’s
name to an existing record.
In addition, before 2002, the property system did not have an
effective control in place that prevented unclaimed property
data from being uploaded more than once. To determine
whether the property system contains duplicate data, we
reviewed data from nearly 9,000 holder reports loaded into
the property system during the 2000 reporting period.4 We
identified 16 holder reports totaling more than $535,000 that
duplicated other reports in the property system. The number
of individual accounts turned over to the State in each holder
report varies; in some cases, a holder will escheat a single
account, and in others it will escheat many accounts. In 2002,
the bureau added additional program code to detect potential
duplicate reports and prevent them from being loaded. However,
our analysis showed that the bureau did not remove all of the
duplicates that already exist in the property system.
4Holders must report property that was unclaimed as of June 30 or the end of their fiscal
year to the bureau by November 1 of each year. The exception is insurance companies,
which must report property that was unclaimed as of December 31 or the end of their
fiscal year by May 1 of each year.
1166 California State Auditor Report 2002-122 California State Auditor Report 2002-122 1177
Although the Information Systems Division reports it has taken
action to prevent payments on properties listed on the duplicate
reports, some of the properties are still on the bureau’s Web site.
Of the $535,000 in duplicate records, the Information Systems
Division reported that it had identified and zeroed out the total
balance available for payments totaling $269,000. Presumably
zeroing out the balance available for payment for the duplicate
reports would prevent payment on any of the properties included
in these reports. However, doing so did not always result in the
property records being removed from the bureau’s Web site.
For example, we tested two holder reports that were previously
identified as duplicates and for which the bureau had reportedly
zeroed out the total balance available for payment. Two of the
six owners we randomly selected had duplicate information
reported on the bureau’s Web site, resulting in an overstatement
of $29,000. For example, one property owned by a business
appeared three times on the bureau’s Web site, resulting in a
$24,000 overstatement of value. Additionally, the remaining
$266,000 in duplicated records, which the controller had not yet
identified, was still in its property system as of May 6, 2003. On
May 19, 2003, the Information Systems Division notified us that
they are taking action to remove the remaining records.
The duplication of unclaimed property data in the property
system has resulted in the payment of duplicate claims. In fact,
The controller overpaid in September 2002, the Information Systems Division identified
more than $60,000 more than $80,000 of potential duplicate payments made to
because of duplicate owners. We randomly selected four payments to owners of four
accounts in its properties to test and found that in all four cases, the controller
property system. had paid the owners double the amount, plus interest, resulting
in overpayments of more than $60,000. To the controller’s credit,
it successfully recovered two duplicate payments totaling more
than $37,000 in November 2002. The controller is currently
attempting to recover the other overpayments. However, in one
instance the controller delayed recovering an overpayment of
$9,700 made in September 2000 for nearly two years because the
duplication was not identified until September 2002.
Further, our analysis showed that the property system erroneously
contains multiple records of a single property for the same
owner. Although the manager of the Information Systems
Division claims that the duplication is caused by holders
submitting the owner data more than once for the same
property in the same report, the property system’s failure to
detect this duplication impairs its reliability. We found that
in some cases in which an owner record was duplicated in the
1188 California State Auditor Report 2002-122 California State Auditor Report 2002-122 1199
property system, the duplication also appeared on the bureau’s
The property system Web site. We researched a total of 17 apparent duplicate owner
erroneously contains records for businesses and individuals and found that 12 had
multiple listings for the duplicate owner records on both the property system and the
same owner, for the bureau’s Web site, resulting in an overstatement of $150,000
same property. in owners’ assets in the bureau’s custody. For example, we
found a business that had two owner records for a single bank
account, both in the property system and on the bureau’s Web
site, showing that the bureau had $63,500 more of the business’
money than it actually had. In another example, the property
system and the bureau’s Web site overstated one individual’s
mutual fund earnings by $6,700 because of duplicate owner
records. Individuals using the Web site to determine whether the
controller has their property may inadvertently conclude that
they are owed twice the actual amount.
The bureau does not reconcile the total amount remitted for each
holder report to the total of all the individual accounts loaded into
the property system by that report. As a result, the property system
may contain incomplete property information. Our analysis of the
2000 reporting period data identified 10 holder reports, out of a
total of nearly 9,000, in which the total amount of the individual
accounts entered into the property system is less than the total
amount remitted by the holders. The bureau confirmed that all
of the 10 reports were out of balance. Although nearly $648,000
was reported for the individual accounts, the 10 holders remitted a
total of nearly $723,000, a difference of $75,000, indicating three
possibilities: the holders overpaid the amount due, they failed to
include some individual accounts on their reports, or not all of the
properties for which funds were remitted were uploaded into the
property system. This may result in claimants not receiving funds
to which they are legally entitled.
Further, the bureau’s staff manually entered nearly 6,700 reports
from one holder directly into the property system, circumventing
most of the automatic system checks, such as verifying data
formats and checking for duplicate information. Problems
with the electronically formatted reports submitted by the
holder led the bureau to have student assistants enter these
reports directly into the property system, bypassing most of the
system safeguards. The Information Systems Division manager
also informed us that no one verified the accuracy of the data
entered by the students. This practice, along with the control
weaknesses noted earlier, reduces the bureau’s ability to ensure
that the data contained in the property system are reliable
and complete and that the bureau is adequately safeguarding
1188 California State Auditor Report 2002-122 California State Auditor Report 2002-122 1199
assets placed in the controller’s trust. According to the bureau, it
The bureau’s staff reconciled 219 of the reports. It also told us that it reviewed all of
manually entered nearly the hard-copy reports for alterations to the data, and verified the
6,700 holder reports accuracy of over 16,000 individual properties as claims for those
from one holder directly properties were processed. Although the bureau has established a
into the property system, procedure to verify the data in these records as claims are filed, it
circumventing most of the has not gone back to verify that all the data for the 6,700 holder
automatic system checks. reports discussed above was entered correctly.
THE BUREAU MAY INCORRECTLY BILL HOLDERS FOR
INTEREST PENALTIES
We found that the bureau may incorrectly bill holders for
interest penalties even though the controller has ostensibly
granted amnesty to those holders from such penalties.
The amnesty program, which began in 2000, was available
to holders that met certain requirements outlined in the
Unclaimed Property Law (law). The amnesty program was
limited to unclaimed property legally escheatable on or before
November 1, 1999. The controller told holders that they would
be exempt from the 12 percent annual penalty on the value of
the unclaimed property they reported, which it normally applies
from the date the holder should have remitted the property to
the bureau. The amnesty program ended on December 31, 2002,
and resulted in the receipt of 4,901 holder reports. Although the
bureau’s report tracking system indicates that it uploaded more
than 4,500 amnesty reports, its property system reflects fewer than
3,000 amnesty reports because the bureau did not mark all of
the reports with an amnesty indicator in the property system.
Moreover, the controller has not modified its program that
generates bills for interest penalties to exclude reports submitted
under the amnesty program. Assuming that it in fact received
and uploaded 4,500 amnesty reports, the controller will have to
correct both problems to avoid inappropriately billing holders
for penalties on reports submitted under the amnesty program.
ALTHOUGH HOLDER REPORTS MUST BE PROCESSED
IN ORDER TO ACCOUNT FOR PROPERTY ESCHEATED
TO THE STATE, THOUSANDS OF HOLDER REPORTS
AWAIT PROCESSING
To allow for the tracking and eventual disbursement of
unclaimed property, the bureau must process the holder reports
by loading the detailed owner data into the property system.
2200 California State Auditor Report 2002-122 California State Auditor Report 2002-122 2211
Although the bureau must complete this process to be able to
disclose on its Web site that it has the owner’s property, to pay
claims, to bill holders for interest due on late filings, and to
reconcile the amounts reported by the holders to the amounts
actually remitted by the holders, it told us that, as of June 5, 2003,
it had not uploaded more than 8,500 holder reports. More than
4,500 of these reports are less than one year old and are not
considered a backlog. As shown in Figure 6, the bureau has not
yet uploaded some reports from as far back as 1996.
FIGURE 6
Unprocessed Holder Reports Received by
the Bureau of Unclaimed Property
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Source: Unaudited data provided by the Bureau of Unclaimed Property.
Note: As of June 5, 2003; the above figure excludes reports received under the
controller’s amnesty program.
During discussions with the bureau, we learned that two
conditions contribute to its backlog of holder reports:
• Electronic reports in unreadable formats.
• Large increases in the number of holder reports submitted.
2200 California State Auditor Report 2002-122 California State Auditor Report 2002-122 2211
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Some of the holder reports in the bureau’s backlog are in
electronic formats that are no longer readable because the
bureau does not have equipment to read the data.5 For example,
21 of the reports awaiting upload are on magnetic tape reels,
which the bureau can no longer access. The bureau’s manager
informed us that the backlog of holder reports may be overstated
because some of the reports actually have been uploaded to its
property system. It continues to review the remaining holder
reports submitted for prior report years and is attempting to
upload the data. The bureau reports that over the past six months,
it sent 275 letters to holders requesting corrected reports,
and has received 67 replacement reports. It plans to continue
sending letters requesting old reports be submitted in current
reporting formats as these unreadable reports surface. If holders
fail to cooperate in resolving the report problems, the bureau
plans to send the information to the controller’s legal office for
possible action.
Adding to the backlog is the growth in the number of holder
reports submitted, from nearly 8,600 for report year 1996 to a
The bureau’s backlog in high of 11,075 in report year 2001. Additionally, the controller’s
uploading holder reports amnesty program resulted in the receipt of an additional
prevents them from 4,901 holder reports between 2000 and 2003. To accommodate
notifying owners that the the workload increase, the bureau received additional limited-
State has their property. term staff in its reporting unit, which is responsible for preparing
the holder reports for uploading into the property system.
Because of the backlog in uploading holder reports, the bureau
is unable to notify owners that the State has their property. If
holder reports are not included in the property system, those
assets will not appear on the bureau’s Web site. Owners who
are unaware that their property escheated to the bureau cannot
claim their property. Also, owners who are informed by the
holder that their property was remitted to the bureau may
experience delays in receiving their property from the bureau
due to the additional research necessary to validate the claim
prior to the upload of the holder’s report. Further, failure to
upload the holder reports in a timely manner delays the bureau’s
ability to bill holders applicable interest of 12 percent per year
if they remitted property later than they should have. Cash
received from the billing of interest penalties is eventually
transferred to the State’s General Fund; thus, delays in billing
holders results in delays in receipt of such funds by the State.
5We were unable to determine why the bureau did not deal with the reports while the
formats were still readable.
2222 California State Auditor Report 2002-122 California State Auditor Report 2002-122 2233
RECOMMENDATIONS
To increase the reliability of the data in the property system, the
bureau should do the following:
• Implement the programming changes necessary to ensure
that employees cannot make unauthorized and unmonitored
changes to the property system.
• Remove all duplicate account data from the property system.
• Ensure that both current and newly hired staff review unclaimed
property accounts entered manually when claims are filed
against the property to determine the accuracy of the data.
To ensure the accuracy of the data loaded into the property
system, the bureau should require its staff to reconcile the total
amount remitted by each holder to the total of all the individual
records in the property system for that report.
To prevent the billing of penalties for late reporting to holders
granted amnesty, the controller should do the following:
• Identify reports covered by the amnesty program that do not
currently have an amnesty indicator and add it.
• Modify its program that generates bills for interest penalties to
exclude those reports with an amnesty indicator.
To enable the bureau to upload data reported in formats that it
cannot access, it should do the following:
• Continue its efforts to contact the holders and request that
they resubmit the owner data in the current reporting format.
• Consider contracting with an outside entity to read the
remaining reports or to convert them into a usable format.
To allow for the timely notification to owners that the State
has their property and the prompt billing of interest penalties,
the bureau should ensure that it uploads holder reports within
12 months of receipt. n
2222 California State Auditor Report 2002-122 California State Auditor Report 2002-122 2233
Blank page inserted for reproduction purposes only.
2244 California State Auditor Report 2002-122 California State Auditor Report 2002-122 2255
CHAPTER 2
The Bureau of Unclaimed Property’s
Processes Do Not Sufficiently Ensure
the Proper and Timely Distribution of
Assets to the Rightful Owner
CHAPTER SUMMARY
The Bureau of Unclaimed Property (bureau) cannot use
its computerized Unclaimed Property System (property
system) to track changes to account data related to the
shares of stock in its custody or the sale of safe deposit box
contents. Changes in the number of shares of stock can result from
corporate actions, such as dividends, stock splits, and mergers.
The bureau must record these actions manually, resulting in a
complicated, lengthy, and error-prone reconciliation process
and delays in distributing assets when the owner eventually
claims the property. Further, because the bureau is inconsistent
in how quickly it sells securities, it risks allegations that it has
mismanaged owners’ assets.
We also found that the bureau excludes a large amount of
unclaimed property reported to it for federal and state departments,
local governments, schools and school districts, other states, and
some private entities from its Web site. As of April 30, 2003, the
bureau held more than $7.1 million in unclaimed property for
various entities that it has not posted on its Web site. Even if the
entities check the Web site to see if the State has some of their
property, they will erroneously conclude that it does not.
The Unclaimed Property Law (law) requires the bureau to
consider each claim for the return of property within 90 days
after it is filed and to provide written notice to the person
claiming the property (claimant) if the claim is denied.
Although the law does not specifically require the bureau to
approve or deny claims within 90 days, we believe that once
the claimant has provided all required documentation, 90 days
is a reasonable amount of time for the bureau to either approve
or deny the claim. However, the bureau does not consistently
do so. Claims for securities generally take longer to review and
to distribute to the claimant than claims for most other types
2244 California State Auditor Report 2002-122 California State Auditor Report 2002-122 2255
of property. Lastly, although the bureau has received numerous
complaints regarding the timely distribution of claims, it has not
streamlined the claim distribution process.
Additionally, the law requires that the contents of safe deposit
boxes be delivered to the bureau either when the bureau asks
businesses holding unclaimed property (holders) to do so or
within one year of the final date for filing the report of unclaimed
property, whichever is earlier. Once a holder delivers the contents
of a safe deposit box, the bureau does not reconcile the holder’s
inventory of the contents to its own inventory to ensure that it
receives all of the reported contents. Although the bureau may
sell the contents of safe deposit boxes in its custody, no time
period for doing so is specified in the law, and the bureau has
not established a time frame within which to sell the contents.
Further, the bureau does not consistently take measures to ensure
that it receives all of the proceeds from the sale of these assets.
Instead, it relies on what the auctioneer reports.
THE BUREAU’S TRACKING OF SECURITIES IN ITS
CUSTODY NEEDS IMPROVEMENT
The bureau’s method for tracking securities in its custody
does not adequately safeguard the securities on behalf of
the property owners and is prone to error. For example, the
The bureau’s manual bureau’s accounting unit does not promptly reconcile the shares
tracking of securities reported by the holder to the shares actually received from
results in lengthy the holder. In addition, because the property system cannot
reconciliation, inaccurate accommodate subsequent changes in property resulting from
recording of the effects of corporate actions, such as company name changes and stock
corporate actions, and splits, the bureau tracks these actions manually. We found that
inconsistencies in the the bureau’s manual process does not consistently record the
length of time between effects of corporate actions, and those that are recorded are often
the bureau’s receipt and difficult to interpret. To complicate matters further, if an owner
sale of securities. files a claim for a security that has been involved in a merger
or acquisition, because securities are tracked by company, the
bureau must review its ledgers for all involved companies,
resulting in a lengthy and time-consuming process to determine
the correct amount to distribute to claimants and delays in the
distribution of assets. Moreover, when corporate actions such
as stock splits result in the issuance of additional securities, the
bureau does not associate the new securities with the original
securities, or owners, until the owners submit claims. This results
in securities for the same owner being sold at different dates for
different prices, further complicating the bureau’s reconciliation
process and increasing the potential for errors.
2266 California State Auditor Report 2002-122 California State Auditor Report 2002-122 2277
When a holder reports securities as unclaimed property, the law
requires the holder to transfer the securities into the controller’s
name and to deliver duplicates of the securities to the bureau.
After the bureau uploads the holder’s data into the property
system, it reconciles the shares received to the shares reported
by the holder. Figure 7 demonstrates the bureau’s process for the
reporting, remittance, safekeeping, and distribution of securities.
FIGURE 7
The Flow of Securities From Holders to the Bureau of Unclaimed Property
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When holders report and remit securities to the bureau, it
records the initial receipt of the securities in approximately
60 handwritten ledgers, separated alphabetically by the issuing
company’s name. These ledgers contain records of the receipt,
sales, and corporate actions associated with securities in the
bureau’s custody.
2266 California State Auditor Report 2002-122 California State Auditor Report 2002-122 2277
The Bureau of Unclaimed Property maintains numerous manual ledgers to track securities
in its custody.
Currently, the bureau’s accounting unit waits until the holder
reports are uploaded into the property system to complete its
reconciliation between the number of shares reported and the
number of shares actually received. However, it could complete
this reconciliation using the holders’ summary sheets, which
report the total number of shares transferred to the bureau, thus
allowing the bureau to determine whether it received all of the
shares and take prompt action if it has not.
Only 27 of the 32 securities we tested were reconciled, and the
bureau took an average of more than 16 months to complete
these reconciliations. The swiftest reconciliation we found
was three months after the receipt of the securities from the
holder. Of the 32 securities we reviewed, 10 still were not
reconciled two years after the holder remitted them, making
it diffi cult to mark the securities for sale. For example, one
holder remitted securities in May 1995, and the bureau did
not reconcile the holder’s report with an entry in one of the
60 handwritten ledgers until January 2001, 68 months later.
Unreconciled securities had been in the bureau’s custody for an
average of 97.5 months. During this extended period of time,
more corporate actions may occur, further complicating the
reconciliation of the number of shares reported and remitted
2288 California State Auditor Report 2002-122 California State Auditor Report 2002-122 2299
by the holder, taking up more staff time and increasing the
likelihood of error. If the bureau fails to reconcile the shares
received to the shares reported by the holder, it cannot ensure
that it has all of the securities for which it is responsible, thus
impairing its ability to properly account for and distribute them.
Of additional concern is that the bureau did not track shares in
book entry form until August 2002. A book entry is a paperless
recording of securities in an owner’s name; no physical certificate
is issued. For example, if an owner had requested that a
company’s dividends be reinvested in the related stock, the holder
would not issue new certificates but would list the additional
The bureau’s 60 ledgers book entry shares in its periodic statements mailed to the owner.
only reflect a portion of Generally, the bureau records book entries in a separate Excel
the securities maintained spreadsheet as it becomes aware of them through the companies’
by holders in the periodic statements. Thus, the 60 ledgers only reflect a portion
controller’s name. of the securities maintained by holders in the controller’s name
in book entry form, and staff must research multiple sources
to determine the securities for which the bureau is responsible.
Because the bureau’s manual tracking is triggered by the receipt
of security certificates, if a certificate is not received the bureau
may not be aware of these securities. Although the bureau often
asks companies to issue physical certificates for the securities,
the companies do not always comply with this request because
they may not offer paper certificates. By reconciling the shares
reported and received, the bureau could immediately request
additional information on securities it did not receive, such as
those recorded as book entries.
Until the mid-1990s, the bureau’s staff tracked the inventory of
securities and was aware of the total number it should have on
hand. However, due to the increase in the number of securities,
the increase in the number of book entries, and its manual
tracking process, the bureau would need weeks to determine
this total, if the task is indeed possible. For example, bureau staff
told us that it took nine staff days to track one particular issue
through various corporate changes. Without knowing what
securities it should have, the bureau cannot ensure that it has
received all of the securities it should.
Additionally, the bureau’s entries for corporate actions are often
difficult to locate because they are handwritten, inconsistent,
and not in chronological order. Because securities are tracked
by company, if a merger or acquisition occurs, the bureau must
review the ledgers for all involved companies to complete the
tracking of the security. For example, to research the number
2288 California State Auditor Report 2002-122 California State Auditor Report 2002-122 2299
of shares owed for property submitted as Tandem Computers,
bureau staff must review the ledgers for Tandem Computers.
From these ledgers, bureau staff can determine that Tandem
Computers merged with Compaq. In reviewing the ledgers
for Compaq, staff can determine that Compaq merged with
Hewlett-Packard. This review involves researching dozens of
handwritten pages. Further, the ledgers are disorderly and subject
to signifi cant use, resulting in pages that are fragile and torn.
The Bureau of Unclaimed Property’s manual ledgers are diffi cult to decipher.
Until August 2002, the bureau relied on correspondence from
companies and research in paper-based formats to alert them to
corporate actions. In August 2002, the bureau contracted with
an on-line securities valuation company that tracks corporate
actions on securities. However, because the bureau continues
to track corporate actions manually, the process continues to
be prone to errors. To determine the impact of the bureau’s
manual process on the owners of the securities, we reviewed a
sample of 11 securities that had corporate actions. For six of the
11 securities, the bureau either did not record, or incorrectly
recorded, information concerning corporate actions.
Further, the bureau’s failure to reconcile the shares it receives
to the shares reported by the holder means that it is sometimes
unaware that it has securities that need to be sold. For example,
3300 California State Auditor Report 2002-122 California State Auditor Report 2002-122 3311
because the bureau does not receive a physical certificate for
book entry shares, it does not record those securities in its
ledgers unless, after receiving periodic statements, it learns that
some shares are in book entry form. If it does not reconcile the
shares reported by the holder to the shares it received, it may
not be aware that it has book entry shares that need to be sold; a
similar situation could occur if the holder fails to remit all of the
shares that it should.
When a claim for securities is approved, the bureau must review
the property system to determine what securities the holder
reported for the owner. The bureau must then review the
handwritten ledgers to determine the effect of corporate actions,
such as cash dividends and stock splits, on that owner’s securities.
It must also determine whether any of the securities were
sold and, if so, the applicable per-share price of the securities.
Moreover, because additional securities resulting from stock splits
are not consistently sold with the securities from which they were
earned, shares of a security may have been sold on different dates
at different per-share prices, further complicating the research. In
addition, the securities sold on a particular date may belong to
several owners, and because the ledgers do not link securities with
their owners, the bureau must allocate the number of shares sold
between the various owners to determine how many of the shares
belong to the owner claiming the property.
Further, we found that the bureau is inconsistent in how
quickly it sells securities. For example, the bureau took as
little as five months and as long as 44 months to sell shares
The bureau took as little related to 14 of the 32 securities in our sample. The bureau
as five months and as had at least part of the shares for six of the securities for more
long as 44 months to than four years. Delays in selling shares of securities cause
sell shares for 14 of the unnecessary additional work for the bureau when the shares are
32 securities we reviewed. eventually claimed. For example, in January 1999, two months
after a holder remitted 4,401 shares of stock in SunAmerica Inc.
(SunAmerica), the corporation merged with American
International Group, Inc. (AIG). In July 1999, AIG’s stock split
5:4 and in August 2000, AIG’s stock again split 3:2. Thus, the
one property experienced three corporate actions in two years.
The bureau discovered the merger late, and 16 months after it
occurred, it exchanged the SunAmerica securities for the new
shares. By August 2000, the original 4,401 SunAmerica shares
had become 7,053 AIG shares. At that time, nearly four years
after the original shares were sent to the bureau, the bureau
sold 2,351, or 33 percent, of the total shares. When the owners
of these shares file their claims, the bureau will have to review
3300 California State Auditor Report 2002-122 California State Auditor Report 2002-122 3311
the many pages of its journals related to these transactions to
re-create and confirm exactly how much it owes to the owners, a
time-consuming and error-prone process.
In addition, when the bureau is inconsistent in how long it takes
to sell securities, it makes itself vulnerable to allegations that
it has mismanaged owners’ assets because prices of securities
change rapidly. In addition, the bureau creates a higher risk for
Inconsistencies in the time error and delays distributions to owners. If the bureau were to
between the receipt and sell securities within a consistent time frame, it clearly would
sale of securities make not be assuming responsibility for judging when is the best time
the bureau vulnerable to sell the securities.
to allegations that it
has mismanaged One possible method for selling securities immediately upon
owners’ assets. receipt would be for the holder to transfer securities into the
controller’s name and then deliver duplicates of the securities
to a specified broker authorized to accept them on the State’s
behalf. The specified broker would have instructions and
authorization to sell the securities immediately upon receipt.
This may require legislation since current statutes require the
holder to deliver duplicates of the securities to the bureau. In
addition, legislation may be beneficial since it would clarify
legislative intent for the immediate conversion of these
securities into cash.
PROPERTY BELONGING TO GOVERNMENTAL AGENCIES
AND SOME PRIVATE ENTITIES ARE EXCLUDED FROM
THE BUREAU’S WEB SITE
The bureau excludes most property of governmental agencies
(agencies) from its Web site. These agencies include federal
and state departments, local governments, schools and school
districts, other states, and some private entities. The information
for these entities is not lost; it is merely suppressed from
appearing on the bureau’s Web site.
According to the chief of the Division of Collections, of which the
bureau is a part, the bureau decided to suppress the information
for agencies from its Web site because the mixture of ownership
between agencies and employee groups from those same agencies
was difficult to determine. He also said that the payment of claims
to state agencies would generally involve moving claimed funds
from the State’s General Fund and back to it and would result in
spending resources on workloads that have no benefit.
3322 California State Auditor Report 2002-122 California State Auditor Report 2002-122 3333
The bureau has a procedure that is intended to ensure it is
suppressing only agencies’ information from its Web site.
According to the procedure, the controller’s Information Systems
Division generates a weekly report titled Names Not Excluded That
Have a Data String to Be Checked. The bureau’s staff is supposed
to review the report to flag those that should be excluded and to
ensure that organizations, clubs, or individuals, whose names
include words that generally represent a governmental agency,
such as “City,” are not excluded. However, we found that the
bureau has excluded many nongovernmental entities, including
ones whose names contain the words “City,” “County,” or “State”
and some private universities.
The chief of the Division of Collections told us that the bureau
intends to find ways to identify state agency funds and ways
to facilitate the payment or transfer of the agencies’ funds.
The bureau will also look for ways to notify nonstate entities.
However, he also told us that notifying agencies was not a
priority for the bureau because available resources are focused on
higher priority workloads.
As shown in the Appendix, as of April 30, 2003, the bureau held
The bureau has excluded more than $7.1 million in unclaimed property for various entities
more than $7.1 million that it has not posted on its Web site. As a result, even if the
in unclaimed property for entities check the Web site to see if the State has some of their
various entities from its property, they would erroneously conclude that it does not.
Web site.
THE BUREAU DOES NOT APPROVE AND DISTRIBUTE
CLAIMS IN A TIMELY MANNER
Although the law states that the bureau shall consider each
claim for property within 90 days after it is filed, we found that
the bureau does not consistently do so. Specifically, we found
that claims for securities generally take longer to review and
to distribute to the claimant than most other property types.
Although the law does not specify a time frame in which to pay
approved claims, we believe the length of time between approval
and payment is often unreasonable. Lastly, although the bureau
has received numerous complaints regarding the time it takes to
distribute claims, it has not streamlined the distribution process.
Figure 8 on the following page shows the steps involved in the
submission, approval or denial, and payment of a claim.
3322 California State Auditor Report 2002-122 California State Auditor Report 2002-122 3333
FIGURE 8
The Claim Approval Process at
the Bureau of Unclaimed Property
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To meet the requirement to consider each claim for property within
90 days after it is filed, we expected that the bureau would either
approve or deny all claims within 90 days of receiving all required
documentation from the claimant. However, we found that this
was not always the case. Specifically, our review of 44 claims found
that 16 were not approved or denied within 90 days. Of these
16 claims, seven were for securities and averaged 190 days between
receipt and approval. The period between receipt and approval
for securities ranged from one being approved within 40 days to
365 days for another, with the average approval taking 151 days.
However, the period between receipt and approval for other
property types ranged from one being approved on the same day
to 358 days for another, with the average approval for claims not
involving securities taking 70 days.
Although there is no requirement for the length of time between
claim approval and payment, we expected that the bureau would
distribute payments for approved claims within a reasonable
3344 California State Auditor Report 2002-122 California State Auditor Report 2002-122 3355
time after approval. Based on the bureau’s current processes,
we determined that a reasonable time frame between claim
approval and distribution is 30 days. As shown in Figure 9,
of the 44 claims we reviewed, only 68.2 percent, or 30, were
distributed within 30 days of approval. Further, only two of
the 10 claims for securities were distributed within 30 days
of approval. Although the bureau has received numerous
complaints regarding the timely distribution of claims, it has not
taken steps to ensure a faster turnaround.
FIGURE 9
Length of Time the Bureau of Unclaimed Property
Takes to Distribute Assets
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Source: Sample of 44 paid claims from the Bureau of Unclaimed Property.
THE BUREAU DOES NOT CONFIRM THAT IT RECEIVES
ALL OF THE CONTENTS OF SAFE DEPOSIT BOXES AND
DOES NOT AUCTION THE CONTENTS AS ALLOWED
We found that the bureau does not review the holder inventories
of the contents of safe deposit boxes and does not confirm that
it receives all of the contents on behalf of the property owners.
As a result, the bureau cannot take prompt action to request that
the holder either explain any differences or remit the missing
property. We also found that although the bureau may legally
auction the contents of safe deposit boxes on the owners’ behalf,
it has not conducted auctions on a frequent basis.
3344 California State Auditor Report 2002-122 California State Auditor Report 2002-122 3355
When a holder reports a safe deposit box as unclaimed property,
the law requires the holder to deliver the contents to the bureau
when requested to do so by the bureau or within one year
after the final date for filing the holder report, whichever is
earlier. For example, the final filing date for the 2002 reporting
cycle was November 1, 2002; therefore, the bureau should
receive the contents of all of the reported safe deposit boxes by
October 31, 2003. Although we found that the bureau and the
holders do not consistently comply with this requirement, the
owner can claim the contents of a safe deposit box directly from
the holder as long as it has not been delivered to the bureau,
and thus the owner is unaffected by the delay. Once the bureau
receives the contents of a safe deposit box from the holder, the
bureau is responsible for ensuring the contents’ safekeeping until
the owner claims them. The law also allows the bureau to sell the
contents of safe deposit boxes on behalf of the owners and return
the net proceeds from the sale to the owners, upon receiving
and verifying a claim. Figure 10 demonstrates the process the
bureau follows for the reporting, remittance, safekeeping, and
distribution of the contents of safe deposit boxes.
The Bureau Does Not Compare the Contents of Safe Deposit
Boxes It Receives to the Holder-Prepared Inventories
To determine the adequacy of the bureau’s safekeeping of the
contents of safe deposit boxes, we reviewed a sample of 32 safe
deposit boxes. We expected that the bureau’s inventories
If the bureau compared would conform materially to the holders’ inventories; however,
the contents received to we found that the bureau does not reconcile the holders’
the contents reported inventories to its own inventories or to the boxes’ contents to
by the holder, it would ensure that it has received all of the property listed. Instead,
be able to identify any the bureau creates its own inventories from the contents
missing property and take actually received and usually disregards the holder inventories.
prompt action to address The bureau’s process of creating its own inventories results in
the difference. unnecessary work and does not ensure that it has received all
of the reported contents of the safe deposit boxes. If the bureau
compared the contents received to the contents reported by the
holder, it would be able to identify any missing property and
take prompt action to request that the holder either explain the
difference or remit the missing property. Doing so would reduce
its liability for items that were not remitted by the holder.
3366 California State Auditor Report 2002-122 California State Auditor Report 2002-122 3377
FIGURE 10
The Process of Transferring Safe Deposit Boxes to
the Bureau of Unclaimed Property
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3366 California State Auditor Report 2002-122 California State Auditor Report 2002-122 3377
We reviewed the bureau inventories for a sample of 32 safe
deposit boxes to determine whether its inventories agreed with
the holder inventories. We found that for six of the safe deposit
boxes, the bureau inventories do not conform to the holder
inventories. In two of these six cases, the bureau inventories
conform to the boxes’ contents but do not reflect all of the
items listed in the holder inventories. For example, in one case,
the bureau inventory lists 17 U.S. coin sets, but the holder
inventory lists 18 sets. We counted 17 coin sets among the box’s
contents. If bureau staff had reconciled its inventory to the
holder inventory, its staff could have contacted the holder to
determine the disposition of the 18th coin set. If the bureau does
not promptly identify and seek resolution of differences between
what holders claim they have turned over and what the bureau
actually received, it could be leaving itself open to accusations
that it did not properly safeguard owners’ properties.
Of the 32 safe deposit boxes we selected, the contents of 24
remain unsold, and of those, 20 contain items other than
deposited cash. We inventoried the physical contents of the
20 safe deposit boxes that contain items other than cash.
Although we expected that the bureau inventories would
accurately reflect the contents of the 20 safe deposit boxes, we
found that one of them contains five items that are not on the
bureau inventory, although they are on the holder inventory.
Had the bureau used the holder inventory to confirm that it had
received the property and then used that inventory as its own,
it could have eliminated unnecessary work and had an accurate
record of the contents.
Although State Law Allows the Bureau to Auction the Contents
of Safe Deposit Boxes, It Did Not Auction Property for Almost
Two Years
The law allows the bureau to sell the contents of safe deposit
boxes in its custody to the highest bidder at public sale, including
sales via the Internet. Although the bureau is not required to
sell the contents of safe deposit boxes, failure to do so results in
higher costs to the State to store and safeguard those contents.
The floor of the bureau’s vault is crowded with the safe deposit
box contents it has received from holders but has not sent to
storage, and its shelves are overflowing with binders and the
bagged contents of safe deposit boxes. We found that the bureau
had not conducted an auction for almost two years, resulting in
the overcrowding of its safe deposit box vault with the contents
of safe deposit boxes that it has received from holders.
3388 California State Auditor Report 2002-122 California State Auditor Report 2002-122 3399
The Bureau of Unclaimed Property’s safe deposit vault is overcrowded with boxes and
bagged contents.
We found two signifi cant problems with the manner in which
the bureau processed the proceeds from the sale of safe deposit
box contents at auctions. First, the bureau cannot post the
proceeds from auctions to each owner’s account in its property
system, though we believe it is reasonable to expect the bureau
to do so. Staff must manually compute the net proceeds that
the controller owes to a claimant, which may result in delays in
paying the claimant and errors in the amount.
Second, the bureau does not have a procedure in place to verify
the proceeds from the sale of a sample of items or groups of
items, referred to as lots, which the auctioneer reports to it. We
expected the bureau to do this. Failure to verify the proceeds
from the sale of a sample of lots may result in the bureau not
receiving all of the proceeds due and paying the claimant less
than the amount to which the claimant is entitled. The manager
of the safe deposit unit told us that the bureau had not verifi ed
the proceeds from each lot’s sale because the auctions were
videotaped and bureau staff in attendance at the time of the
auction sporadically recorded the fi nal sale prices. Although
the auctioneer videotaped the most recent public auction, the
bureau did not confi rm that the auctioneer correctly reported
the sales amount for a sample of lots.
3388 California State Auditor Report 2002-122 California State Auditor Report 2002-122 3399
To determine the accuracy of the lot prices the auctioneer
reported to the bureau after an auction held May 29, 2001,
we reviewed the auctioneer’s videotapes of that auction. The
auctioneer correctly reported the prices for all 40 of the sample
of lots we tested. To ensure that the bureau deposited the correct
amount of auction proceeds, we reconciled the auctioneer’s
itemized worksheet of proceeds from the most recent auction to
the bureau’s deposit record. We found that the bureau correctly
reconciled the worksheet to its deposit sheet.
From September to December 2002, the bureau began efforts
to conduct an Internet auction pilot project as a means of
auctioning the contents of safe deposit boxes. The pilot planned
to use the Yahoo! Shopping Auctions (Yahoo) Web site. The
purpose of the pilot was to determine the cost-effectiveness of
auctioning the contents of safe deposit boxes through an Internet
auction vendor. According to the manager of the safe deposit
unit, the controller’s executive office decided to eliminate eBay
from consideration for the pilot, and after checking out other
on-line auction vendors, the bureau chose to use Yahoo because
it was the best of the remaining vendors. In fact, the pilot project
manager told us that the project team would have preferred to
use eBay instead of Yahoo. The team believed that eBay has more
Internet traffic and it is easier to use than Yahoo, it includes a test
environment, and the Department of General Services and the
states of Texas and Pennsylvania had good experiences using eBay
for their own on-line auctions. During the project the bureau
found that items on Yahoo similar to those it would offer for sale
had received few, if any, bids. The bureau canceled the project in
December 2002, before it posted items for sale, because the price
range of the test items did not include items with higher dollar
values; the bureau concluded that these items would not give an
accurate assessment of the pilot’s viability.
The bureau is now conducting another Internet auction pilot
project to determine the cost-effectiveness of using an auction
Web site for the sale of safe deposit box contents, this time
using eBay. The bureau expects to conduct five on-line auctions
as part of the pilot project. The first auction in early May 2003
listed 10 items for sale, but only sold nine items, for a total sale
price of $2,811.40. The Table shows the listings for the items
auctioned. The bureau plans to complete the four additional
auctions by June 16, 2003, expecting to sell 20 items at each
auction. The bureau will issue a final report on June 30, 2003,
with conclusions on the project’s cost-effectiveness and viability,
and with recommendations for future use.
4400 California State Auditor Report 2002-122 California State Auditor Report 2002-122 4411
TABLE
Items Auctioned On-line by the Bureau of Unclaimed Property
Item Sale Amount
Louis XIV Sterling Silver Flatware $ 897.62
Uncirculated St. Gaudens $20 503.26
National Currency $10 Bill 488.00
Nugget Gold Tie Tack & Ring 290.48
U.S. and Ancient Coins 168.10
Men’s Retro Diamond Ring 165.50
Hamilton Pocket Watch 151.74
Men’s Mystery Dial Wristwatch 74.40
U.S. Coins, 2 Proof Sets, 2 Silver Dollars 72.30
14K Eversharp Pen Did not sell
Total $2,811.40
RECOMMENDATIONS
To eliminate the bureau’s manual tracking of securities and dispel
any impressions that it exercises judgment in deciding when is
the best time to sell securities, thereby reducing the potential for
errors, eliminating unnecessary work, and reducing the potential
for litigation against the State, the controller should seek
legislation to require it to sell securities immediately upon receipt.
To ensure that the holders remit all of the reported securities, the
bureau should compare the shares received to the shares reported
by the holders, using the holder report summary sheets.
Alternatively, the controller should consider having holders
deliver duplicates of the securities they have transferred into the
controller’s name to a specified broker authorized to accept them
on the State’s behalf. The controller should instruct and give
the broker authorization to sell the securities immediately upon
receipt. This may also require legislation. Additionally, the bureau
should immediately sell all securities already in its custody.
If the bureau is unable to sell securities immediately upon
receipt, it should do the following:
• Reconcile the securities remitted to the securities reported
within one month of the receipt of the securities, for securities
not already in its custody.
4400 California State Auditor Report 2002-122 California State Auditor Report 2002-122 4411
• Modify the property system to allow it to track all changes to
securities, including the effective dates, receipts, sales, disburse-
ments, and corporate actions, on an owner-by-owner basis. The
bureau should ensure that it updates the property system to
account for securities currently tracked in its manual ledgers.
This process should be automated to allocate changes in the
number of securities to the affected accounts with minimal
human intervention.
• Sell all securities related to a particular account within two
years of the initial receipt, regardless of corporate actions.
Additionally, the property system should be modified to
generate a monthly report to alert the bureau to securities
approaching the two-year deadline for sale, regardless of the
timing of corporate actions.
In either case, the bureau should do the following:
• Review all of its manual ledgers to ensure that it has accu-
rately recorded all corporate actions, receipts, sales, and
disbursements of securities. Once this review is complete, the
bureau should discontinue the use of its manual ledgers.
• Complete its reconciliation of the securities remitted to the
securities reported for all securities not previously reconciled.
To fully inform all entities that it has their unclaimed property
in its possession, the bureau should do the following:
• Discontinue excluding any properties from its Web site.
• When it receives unclaimed property belonging to any
governmental entity, notify that entity. If it does not receive
sufficient information to determine which governmental
entity the property belongs to, it should seek additional
information from the holder.
To ensure that it distributes assets to bona fide claimants in a
timely manner, the bureau should do the following:
• Review all claims and either approve or deny them within
90 days of receipt.
• Distribute assets on approved claims within 30 days of approval.
4422 California State Auditor Report 2002-122 California State Auditor Report 2002-122 4433
To ensure that it has properly accounted for all of the owners’
properties, the bureau should develop a standard inventory form
for holders to use to report the contents of safe deposit boxes
and for the bureau to use to verify that it has received all of the
reported contents from the holders. This standard form should
include a section for the bureau to indicate its receipt of all of the
reported contents, the date of review, and any follow-up required
for contents that were reported but not remitted by the holder.
To reduce the overcrowding in its safe deposit box vault, the
bureau should conduct an auction of the contents of safe
deposit boxes at least monthly.
If the bureau decides to auction all unclaimed properties from
safe deposit boxes on the Internet, it should establish a method
for ensuring that it receives all of the proceeds that are due.
To ensure that it receives all proceeds from the sale of the
contents of safe deposit boxes and that it can accurately and
promptly distribute these types of assets to their owners, the
bureau should do the following:
• Obtain and review videotapes of auctions and confirm that
the auctioneer has accurately reported the sales amount for a
sample of auctioned lots.
• Develop a system that posts the proceeds from each
auction to the related owners’ accounts immediately
following the auction. n
4422 California State Auditor Report 2002-122 California State Auditor Report 2002-122 4433
Blank page inserted for reproduction purposes only.
4444 California State Auditor Report 2002-122 California State Auditor Report 2002-122 4455
CHAPTER 3
The Controller Does Not Ensure the
Collection of All Unclaimed Property
CHAPTER SUMMARY
In its regular reviews, the State Controller’s Office (controller),
Financial-related Audits Bureau (audit bureau) encounters
significant amounts of unclaimed property that persons
or businesses that are holders of unclaimed property (holders)
should have remitted to it. Its four-year review of the title and
escrow industry completed in 2002 found nearly $31.6 million
in property not remitted to the State. However, our review of
documentation for the examinations of four potential holders of
unclaimed property found that the audit bureau does not always
fully pursue unclaimed property that its auditors have a reasonable
basis for believing should be remitted to the State. Specifically, even
though its auditors estimated that one property holder failed
to remit $6.7 million, audit management did not move forward
to substantiate or invalidate the estimates. If the estimates prove
to be accurate, the bureau could bill the holder for the applicable
interest, a total of more than $8 million, on the unclaimed property
not properly remitted. After we brought this to the controller’s
attention, the audit bureau reopened the examination of the
holder to substantiate the unclaimed property not remitted. By not
exercising due diligence in pursuing the collection of unclaimed
property it has reason to believe should have been remitted, the
controller is not fulfilling its responsibility to promptly reunite
owners with their lost or forgotten property.
THE AUDIT BUREAU’S ROUTINE EXAMINATIONS OF
HOLDERS CAN REVEAL SUBSTANTIAL UNCLAIMED
PROPERTY NOT REMITTED TO THE STATE
The Unclaimed Property Law (law) allows the controller to
review the records of holders if it has reason to believe they
have failed to remit property that is reportable to the Bureau
of Unclaimed Property (bureau). The controller’s audit bureau
conducts examinations of potential holders operating in
California. Generally, holders are responsible for self-reporting,
and the examinations are planned to determine whether the
holders are in compliance with the requirement to remit all
unclaimed property to the State.
4444 California State Auditor Report 2002-122 California State Auditor Report 2002-122 4455
The audit bureau creates work plans to select industries for
examination and then selects major businesses within the
identified industry. Between 1999 and 2002, its examinations of
potential holders of unclaimed property focused on companies
in the title and escrow industry. During this four-year period, it
completed 190 examinations of title and escrow companies and
reported nearly $31.6 million in findings from these examinations.
Between 1999 and The audit bureau chief informed us that the examinations are
2002, the auditor’s intended to test all available information to reveal unclaimed
examinations of title property not previously escheated to the State.6 Statistical sampling
and escrow companies is used only when adequate documentation is unavailable. At the
identified $31.6 million in conclusion of an examination, holders are required to remit the
assets that had not been identified unclaimed property and are later billed a 12 percent
escheated to the State. annual penalty on the value of the identified unclaimed property,
calculated from the date the property should have been remitted.
THE AUDIT BUREAU FAILED TO PURSUE ESTIMATED
UNCLAIMED PROPERTY OF MORE THAN $6.7 MILLION
We reviewed documentation related to the examinations of
four potential holders of unclaimed property. For three of
the examinations, we noted only minor inconsistencies in
methodologies, supporting documentation, and supervisory
review processes. These deficiencies appeared to be restricted to a
former supervisor who is no longer employed by the controller.
Specifically, although the auditors could determine the amounts
of unclaimed property previously remitted to the bureau by
requesting the holder reports from the bureau, the auditors
generally requested the holders to provide the detailed reports,
determined the total amount received from the bureau, and
verified only that the total amounts agreed. Further, when they
did use sampling, the final reports did not clearly identify the
findings as estimates of unclaimed property and did not inform
the holders of their responsibility to determine if other amounts
are escheatable.
Although the audit bureau chief asserted that the holders are
informed that they are expected to review all records available to
determine that all unclaimed property is identified and remitted
to the State, he was unable to provide evidence to support
that these holders were reminded of this responsibility. If the
holders are unaware of their responsibility to determine the total
6As used here, escheat is the transfer of unclaimed property from the holder to the
bureau for safekeeping until claimed by the owner or the owner’s heir.
4466 California State Auditor Report 2002-122 California State Auditor Report 2002-122 4477
amount escheatable, they may remit only the amount in the final
examination report, potentially resulting in a loss of revenue to the
State. In addition, the controller is not fulfilling its responsibility
to reunite owners with their lost or forgotten property. Lastly,
the audit bureau requires that three different management
members review its examination documents. The review of the
examination documents is to be performed by the audit manager,
a consulting manager, and the bureau chief. However, in one of
the examinations we reviewed, the audit manager signed both the
audit manager and consulting manager reviews.
For the fourth examination, we found that the audit bureau
failed to complete its work to substantiate or invalidate an
estimated finding of more than $6.7 million in unclaimed
property. Although its auditors had a reasonable basis for
believing a title company should have remitted to the State title
reconveyance and recording fees, going as far back as 1978, the
audit management did not move forward either to substantiate
or invalidate the estimated findings. At the time the original
examination was released—January 24, 2002—the audit bureau
was waiting on a legal opinion to determine whether the source
Audit management failed of the estimated $6.7 million was in fact legally escheatable.
to follow up on estimated Consequently, audit bureau management did not approve the use
findings of more than of a statistician to help substantiate or invalidate the estimated
$6.7 million in unclaimed findings. The audit bureau management decided to issue the
property. original examination, excluding the $6.7 million, and intended to
pursue the estimated findings later if the legal opinion found that
the source was legally escheatable unclaimed property.
The legal opinion was issued on January 29, 2002, only five days
after the original examination was released, and determined
that the source of the estimated findings was unclaimed
property. However, as of May 9, 2003, more than 15 months
later, the audit bureau had still not taken steps to substantiate
or invalidate the estimated findings. Based on information
obtained from the audit bureau, we believe it is reasonable to
assume that the benefits to either substantiate or invalidate the
estimated $6.7 million in unclaimed property will be greater
than the cost to do so. After we brought this to the controller’s
attention, the audit bureau reopened the examination of the
holder to substantiate the estimated unclaimed property. By
not moving forward to substantiate or invalidate the estimated
findings, the audit bureau failed to exercise due diligence to
ensure that it promptly collected all unclaimed property that
should have been remitted to the State and made these assets
available to their owners.
4466 California State Auditor Report 2002-122 California State Auditor Report 2002-122 4477
Further, the law requires holders to pay interest on the value
of unclaimed property that they fail to remit, at 12 percent
annually from the date the property should have been paid
or delivered to the State. The accrual of interest ends on the
date the unclaimed property is remitted to the bureau. Assuming
the audit bureau substantiates the $6.7 million and the holder
remits the funds on June 30, 2003, the bureau could bill the
holder for nearly $8.2 million in interest that, if received,
would go to the State’s General Fund. At the completion of the
examination, the total of unclaimed property and interest could
result in the potential collection of $14.9 million. However,
in the event that a holder disputes the auditors’ findings, the
controller may, after full examination, enter into a settlement
agreement, reducing the interest due.
RECOMMENDATIONS
To ensure that it collects all unclaimed property, the controller
should complete its examination of estimated unclaimed
property that its auditors have a reasonable basis for believing
should be remitted to the State. Further, the bureau should
ensure that it bills and collects the applicable interest penalties
based upon the results of the audit bureau’s examination.
We conducted this review under the authority vested in the California State Auditor by
Section 8543 et seq. of the California Government Code and according to generally accepted
auditing standards. We limited our review to those areas specified in the audit scope section of
this report.
Respectfully submitted,
ELAINE M. HOWLE
State Auditor
Date: June 19, 2003
Staff: Ann K. Campbell, Audit Principal
Jeana Kenyon, CPA, CMA, CFM
Michelle J. Tabarracci, CISA
John J. Romero
Felicity T. Wood
4488 California State Auditor Report 2002-122 California State Auditor Report 2002-122 4499
APPENDIX
Property Belonging to Governmental
Agencies and Some Private Entities
Are Excluded From the Bureau of
Unclaimed Property’s Web Site
As described in Chapter 2, the Bureau of Unclaimed
Property (bureau) excludes most property of governmental
agencies (agencies) and some private entities from its
Web site. Governmental agencies include federal and state
departments, local governments, schools and school districts, and
other states. Private entities include organizations or businesses
whose names contain the words “City,” “County,” or “State.”
They also include private universities.
In Table A.1 on the following page, we have summarized
information concerning how much property the bureau
holds for the entities its Web site does not currently reflect.
We identified by name all entities whose assets total at least
$5,000. The others we summarized in broader categories such
as “other counties or county entities” or “foreign entities.”
With the exception of private universities, we summarized
assets belonging to private entities under “miscellaneous,
nongovernmental entities.” In some cases, we were unable to
determine whether the entity was a federal, state, or local entity.
For example, the owner was sometimes simply identified as
“Health Department” with no other indication of which health
department it was. For these and similar cases, we summarized
the amounts in the category “unable to determine.”
4488 California State Auditor Report 2002-122 California State Auditor Report 2002-122 4499
TABLE A.1
Unclaimed Property the State Owes to Various Agencies
Property Owner Amount
Alameda County $ 63,925.28
Alhambra, City of 6,652.20
Anaheim, City of 12,817.28
Austin, City of 9,788.00
Bell Gardens, City of 5,000.00
Berkeley, City of 14,605.49
Board of Equalization 404,607.01
Board of Pharmacy 7,649.56
Boca Raton, City of 8,792.28
Brea, City of 6,083.69
Bronx Municipal Court 5,200.00
Burbank, City of 9,567.24
California Community Colleges 25,236.45
California State Lottery 7,818.39
California State University 33,200.85
Chula Vista, City of 18,536.00
Colton, City of 10,786.92
Compton, City of 38,580.19
Contra Costa County 9,211.63
Corpus Christi, City of 6,246.14
Courts 123,121.90
Dana Point, City of 5,722.97
District Attorneys’ offices 8,333.10
Downey, City of 46,885.08
Duarte, City of 65,000.00
El Dorado County 5,134.39
Employment Development Department 66,392.77
Federal government 503,513.23
Folsom, City of 9,820.00
Franchise Tax Board 119,977.10
Fresno County 27,409.93
Fresno, City of 17,284.70
Health Services, Department of 14,017.47
Industry, City of 5,082.73
5500 California State Auditor Report 2002-122 California State Auditor Report 2002-122 5511
Property Owner Amount
Insurance, Department of $156,304.88
Irvine, City of 5,865.77
Kern County 14,337.15
Lakewood, City of 7,901.06
Lawrence, Massachusetts, City of 5,490.00
Loma Linda University 37,597.68
Long Beach, City of 15,831.53
Los Angeles County 381,056.74
Los Angeles, City of 207,279.38
Madera County 9,404.65
Marin County 9,971.23
Mental Health, Department of 12,039.31
Modesto, City of 5,431.32
Monterey County 7,431.94
Motor Vehicles, Department of 85,872.71
Napa County 6,608.95
Oakland, City of 56,459.89
Oceanside, City of 5,239.50
Ontario, City of 9,006.74
Orange County 96,054.43
Orange, City of 10,733.20
Palo Alto, City of 7,385.10
Pasadena, City of 6,161.69
Philadelphia, City of 6,040.44
Richmond, City of 12,724.31
Riverside County 24,723.98
Riverside, City of 24,439.98
Roseville, City of 9,446.93
Sacramento County 27,186.18
Sacramento, City of 6,262.43
San Bernardino County 40,853.86
San Bernardino, City of 7,837.01
San Diego County 46,069.34
San Diego State University 6,316.39
San Diego, City of 46,960.02
San Francisco, City and County of 37,451.26
San Joaquin County 8,083.42
San Jose, City of 31,656.60
continued on next page
5500 California State Auditor Report 2002-122 California State Auditor Report 2002-122 5511
Property Owner Amount
San Mateo County $ 17,346.43
Santa Ana, City of 9,637.77
Santa Barbara County 7,871.46
Santa Clara County 48,842.29
Santa Clara, City of 10,549.30
Santa Monica, City of 11,003.61
Schools and school districts 174,397.99
Simi Valley, City of 33,435.90
Solano County 10,207.28
Sonoma County 16,007.13
Stanford University 148,638.93
State Treasurer 30,505.66
Thousand Oaks, City of 6,153.12
Tracy, City of 23,830.51
Union City 6,859.38
University of California 158,141.56
Vallejo, City of 14,638.00
Ventura County 17,801.93
Visalia, City of 7,246.95
Water Resources Control Board 49,433.58
Foreign entities 7,038.00
Miscellaneous, nongovernmental entities 532,209.79
Other California departments and agencies 1,819,288.53
Other cities and city entities 287,809.66
Other counties and county entities 89,827.20
Other local entities 109,010.12
Other out-of-state entities 91,978.97
Other private colleges and universities in California 22,812.16
Unable to determine 128,800.26
Grand Total $7,108,840.44
Source: Unaudited data from the Unclaimed Property System of the Bureau of Unclaimed
Property.
5522 California State Auditor Report 2002-122 California State Auditor Report 2002-122 5533
Agency’s comments provided as text only.
California State Controller
300 Capitol Mall, Suite 1850
Sacramento, CA 95814
June 6, 2003
Ms. Elaine M. Howle*
State Auditor
Bureau of State Audits
555 Capitol Mall, Suite 300
Sacramento, CA 95814
Dear Ms. Howle:
Thank you for your efforts to evaluate and improve California’s Unclaimed Property Program.
When I took office less than six months ago, the State Controller’s management team made it
clear that this program required immediate attention because of antiquated systems, rapid program
growth, and other operational issues they had identified.
BearingPoint summarized these problems in a recent report, which was given to your auditors when
they began work a few months ago. Your report validated many of the earlier findings and identi-
fied some additional issues. Our response to all of the findings, conclusions and recommendations
summarized in your report is attached.
Since January, my office has taken several actions to address these problems, including:
• Appointing a highly qualified manager to run and improve the program;
• Launching the Feasibility Study Report necessary to replace our outdated systems;
• Testing the sale of tangible property through the Internet; and
• Directing staff to begin selling escheated securities immediately upon receipt.
Your audit report shows that other improvements are still needed, and I am strongly committed
to making those changes as quickly as possible given available State resources and approval
processes.
* California State Auditor’s comments begin on page 67.
5522 California State Auditor Report 2002-122 California State Auditor Report 2002-122 5533
Once again, thank you for your efforts to assist us on improving the Unclaimed Property Program.
Sincerely,
(Signed by: Steve Westly)
Steve Westly
California State Controller
Enclosure
5544 California State Auditor Report 2002-122 California State Auditor Report 2002-122 5555
STATE CONTROLLER’S OFFICE
RESPONSE TO BUREAU OF STATE AUDITS REPORT
OVERVIEW
The State Controller’s Office (SCO) appreciates the assistance of the Bureau of State Audits (BSA) in
reviewing, validating and identifying issues and recommending improvements for the Unclaimed Prop-
erty Program. Many of these issues have been identified in the last two years through independent
reviews conducted by KPMG Consulting and BearingPoint. The BSA findings have reinforced the
need for several of the key initiatives already underway, primarily the development and implementation
of a new unclaimed property system to meet the rising workloads with available staffing.
The primary issue facing the program is that the existing system does not have the capabil-
ity to meet the growing demands and volumes of the program. The system was designed with
older technologies, is difficult to modify and maintain and does not provide the types of system con-
trols and efficiencies needed for the level of program activities now associated with the unclaimed
property program.
The system issues are compounded by the rapid growth in the Unclaimed Property Program over
the last five years. As reported in the audit, revenues have grown from about $300 million a year to
over $450 million in State Fiscal Year 2001-02. The volume of claims has increased from 115,000
a year to over 200,000 per year. And, the volume of reports from holders has increased from less
than 9,000 a year to a peak of over 13,000 in 2001. This represents a growth of approximately 50
percent in all major aspects of the program over the course of those five years.
The SCO has also taken many actions to improve the program and to meet growing workloads.
The BSA audit report reflects some of those actions, but Attachment 1 provides a more compre-
hensive list of the actions taken over the last three years. In addition, our detailed responses to the
recommendations below identify our actions underway this year.
The growth in the program has been fueled by a number of proactive efforts by the SCO and public-
ity on the program in the media. Some of the key changes brought about by the SCO include:
• In 1998, the SCO implemented the publication and sale of unclaimed property owner data on
CD-ROM as a tool for heirfinders and investigators in identifying owners of unclaimed property.
• In 1998, the SCO implemented an unclaimed property search site on the Internet to allow indi-
viduals and businesses to check for unclaimed property. In March of 2000, the SCO enhanced
the search site capabilities to improve the ability to locate an account.
• In June 2000, the SCO implemented an Interactive Voice Response System that enables callers
to search for unclaimed property by touch-tone phone.
• In State Fiscal Year 2000-01, the SCO increased the mailing of notices to owners of unclaimed
property by identifying better addresses through cross matching with Franchise Tax Board tax
records. Approximately 115,000 notices are mailed per year.
1
5544 California State Auditor Report 2002-122 California State Auditor Report 2002-122 5555
• In calendar years 2001 and 2002, the SCO administered an amnesty program that allowed
holders to report delinquent unclaimed properties without incurring the 12% per annum interest
charges that are normally charged. This generated almost 5,000 reports and over $160 million
worth of unclaimed property.
• In 2001 and 2002, the SCO expanded the use of third party audit contractors to audit and
recover unreported unclaimed properties. Revenues brought in by the third party audit contrac-
tors increased dramatically, going from about $4 million in 2000 to over $100 million in both 2001
and 2002.
Clearly, the findings in this audit report validate the need and justification for replacement of the
existing system. The SCO is currently developing a Feasibility Study Report to replace the system.
The study will be completed and submitted for review in July 2003 followed by a budget change pro-
posal in the fall. Given the state’s current administrative requirements and procurement processes,
the earliest that the project could get underway is SFY 2004-05. This assumes that the necessary
approvals and financing are included in the budget for that year.
The SCO feels that there are many actions that can be taken to make incremental improvements
and the SCO is committed to taking those actions as addressed in the responses to the audit rec-
ommendations below. However, the real key to meeting the program challenges in the future will be
the replacement of the system.
COMMENTS REGARDING BSA FINDINGS AND CONCLUSIONS
There are several findings and conclusions in the audit report that the SCO feels are not accurate
or do not provide the proper perspective. The SCO comments on these areas are as follows:
• Chapter 2 - THE BUREAU DOES NOT APPROVE AND DISTRIBUTE CLAIMS IN A
TIMELY MANNER
The audit report found that 64 percent of claims were approved within 90 days, and 70 percent
were paid within 30 days after they were approved. This is based on a sample of 44 claims out
of over 300,000 claims paid during the sample period. The SCO agrees with the results of the
1
sample, but notes that there is no legal requirement to pay claims within 30 days.
The SCO also feels that results were skewed by a period when workloads increased by over 60
percent in one year, starting with claims received from mid 2000 through July 2001. A part of the
sample was taken from this period. The table below shows the difference in results for the two
periods. As you can see, results have significantly improved after the period of the 60 percent
workload increase. We will continue to work on this.
2
5566 California State Auditor Report 2002-122 California State Auditor Report 2002-122 5577
Received Received
July 2000 August 2001 Total Sample
To July 2001 To March 2003
Claims Sampled 11 33 44
Claims Approved in 90 days 2 18% 26 79% 28 64%
2
Claims Paid in 30 Days 6 55% 25 76% 31 70%
• Chapter 3 - The Controller Does Not Ensure the Collection of All Unclaimed Property
The audit report concludes that the SCO is not exercising due diligence in pursuing the col-
lection of unclaimed property that its auditors have a reasonable basis for believing should be
3
remitted to the state. This is based on one unclaimed property audit case out of 190 audits
conducted in the last four years. This case involved a legal issue requiring assistance from the
4
Attorney General’s Office on the interpretation of the law. While the SCO acknowledges that it
should have acted quicker upon receipt of the Legal Opinion, we believe that this was an iso-
lated case and cannot be extrapolated to a conclusion that the SCO is not ensuring collection of
unclaimed property. In addition, the SCO has expanded efforts in other ways beyond the regu-
lar audit program to ensure collection of unclaimed property. Collections of unclaimed property
have increased substantially as a result of these efforts, which include the administration of an
amnesty program and the expansion of third party audit contractors.
RESPONSE TO RECOMMENDATIONS
The SCO generally concurs with the other findings and recommendations of the audit and is com-
mitted to improving the program to the maximum extent possible and has already taken the initia-
tive on many such improvements. There are a number of plans that will be developed to address
the recommendations. The plans and status will be reported to the Bureau of State Audits in our
update which will be due 60 days from issuance of the final report.
Recommendations – Chapter 1
To increase the reliability of the data in the property system, the bureau should
• Implement the programming changes necessary to ensure that employees cannot make
unauthorized and unmonitored changes to the property system.
• Remove all duplicate account data from the property system.
• Ensure that both current and newly hired staff review unclaimed property accounts
entered manually to determine the accuracy of the data, when claims are filed against
the property.
Response: The SCO agrees with the recommendations. Specific actions in response to the above
bullets are as follows:
3
5566 California State Auditor Report 2002-122 California State Auditor Report 2002-122 5577
• By July 15, 2003, the unclaimed property system will be modified to limit authorization for making
online property updates and to generate audit reports that allow supervisory review of any such
online transactions.
• By July 15, 2003, the SCO will develop a plan to delete all the duplicate reports from the system.
Actions previously taken by the SCO included implementation of a system edit to prevent upload-
ing of duplicate reports, identification and initiation of collection efforts to recover any previous
duplicate claim payments made, and modification of duplicate reports to prevent any further
duplicate claim payments. The plan will address additional clean up work and will include modify-
ing the system to prevent the duplicate report properties from appearing on the web site property
search pending the deletion of all duplicate reports from the system. The SCO will transmit the
plan and any progress in implementing the plan to BSA with the 60-day report.
• By June 13, 2003, the SCO will conduct refresher training to ensure that all staff continues
to adhere to current procedures for verification of claims filed for properties on the reports
entered manually.
To ensure the accuracy of the data loaded into the property system, the bureau should
require its staff to reconcile the total amount remitted by each holder to the total of all the
individual accounts in the property system for that report.
Response: The SCO agrees with this recommendation. However, in our review of the 10 out
of balance reports, we found that only $193 of the $75,000 difference was attributable to
5
unclaimed property accounts that were not loaded to the system. The actions taken to date or
planned are as follows:
• Five of the ten out of balance reports were due to procedural errors in handling of holder
overpayments and did not affect unclaimed property owner accounts. Staff has already been
retrained on proper procedures for holder overpayments and all five report balances have been
corrected.
• By June 30, 2003, the SCO will complete its investigation into the causes of the other five out of
balance reports that appeared to be caused by system processing problems. These five reports
will also be corrected by June 30, 2003.
• By July 15, 2003, a plan will be developed to make the necessary programming changes to fix
system problems. In addition, the plan will include the development of a periodic report to be
generated to identify any out of balance reports so that staff can make the necessary corrections.
The SCO will transmit the plan and any progress in implementing the plan to BSA with the 60-
day report.
To prevent the billing of penalties for late reporting to holders granted amnesty, the
controller should
• Identify reports covered by the amnesty program that do not currently have an amnesty
indicator and add the indicator to those reports.
• Modify its program that generates bills for interest penalties to exclude those reports with
an amnesty indicator.
4
5588 California State Auditor Report 2002-122 California State Auditor Report 2002-122 5599
Response: The SCO agrees with the recommendations. The following actions are underway:
• By June 20, 2003, the SCO will reconcile the amnesty reports and ensure that all such reports
include the amnesty indicator in the tracking system and the unclaimed property system.
• By June 20, 2003, the SCO will review Section 1577 billings previously issued against the amnesty
reports to verify that no erroneous billings have been issued for approved amnesty reports. If any
erroneous bills are identified, they will be cancelled and the holders will be notified.
• By June 6, 2003, procedures will be modified to ensure that all Section 1577 interest billings are
reviewed and that no amnesty reports are incorrectly billed for Section 1577 interest.
• By July 15, 2003 a plan will be developed for programming changes to prevent generating Sec-
tion 1577 interest billings for approved amnesty reports. The SCO will transmit the plan and any
progress in implementing the plan to BSA with the 60-day report.
To enable the bureau to upload data reported in formats that it cannot access, it should
• Continue its efforts to contact the holders and request that they resubmit the owner data
in the current reporting format.
• Consider contracting with an outside entity to read the remaining reports or to convert
them into a usable format.
Response: The SCO agrees with this recommendation. There are only 21 remaining reports on
magnetic tape reels. The SCO will take the following actions:
• By June 16, 2003, complete its analysis of these reels and contact the holders as necessary for
any replacement media needed.
• By July 15, 2003, develop alternatives for reading or converting any remaining reports, including
options to contract with an outside firm, if necessary, to read or convert the data. Final details of
this plan and its status will be transmitted to BSA in the 60-day report.
To allow for the timely notification to owners that the State has their property and the
prompt billing of interest penalties, the bureau should ensure that it uploads holder
reports within 12 months of receipt.
Response: The SCO agrees with this recommendation. By July 31, 2003, a plan will be developed
to process reports within a year of receipt. The plan will consider recent reengineering changes
and the possibility of generating savings in other areas of the bureau to redirect to report process-
ing. It should be noted that there will invariably be some reports that cannot meet the one-year time
frame due to reporting errors by holders. However, every attempt will be made to notify the holders
of the problems and to seek quick resolution. The SCO will transmit the plan and any progress in
implementing the plan to BSA in the 60-day report.
Recommendations – Chapter 2
To eliminate the bureau’s manual tracking of securities and dispel any impressions that it
exercises judgment in deciding when it is the best time to sell securities, thereby reducing
the potential for errors, eliminating unnecessary work, and reducing the potential for litigation
5
5588 California State Auditor Report 2002-122 California State Auditor Report 2002-122 5599
against the State, the controller should seek legislation to require it to sell securities immedi-
ately upon receipt. To ensure that the holders remit all of the reported securities, the bureau
should compare the shares received to the shares reported by the holders, using the holders’
report summary sheets. Alternatively, the controller should consider having holders deliver
duplicates of the securities they have transferred into the controller’s name to a specified
broker authorized to accept them on the State’s behalf. The controller should instruct and give
the broker authorization to sell the securities immediately upon receipt. This may also require
legislation. Additionally, the bureau should immediately sell all securities already in its custody.
Response: The SCO concurs with the intent of these recommendations. Current legislation allows
the sale of security at any time up to two years following escheatment. In the past, securities have
6
been held for the full time allowed by law so that unclaimed property owners could be reunited with
their stock as opposed to cash. However, as noted in the report, holding securities creates signifi-
cant maintenance workloads that must be done manually, are error prone, and there are no quick
and easy automated solutions identified as of yet. It is no longer cost effective to maintain our cur-
rent practices.
The SCO will implement the following actions to convert the maximum level of securities to cash in
the shortest time possible after escheatment:
• The Controller is directing staff to initiate the immediate sale of all new securities received with
holder reports to take effect immediately.
• By June 30, 2003, the SCO will develop a plan to accelerate the sale of securities currently in
house. For the SFY 2003-04, the SCO requested additional positions through the budget process
to conduct added security sales. The proposed positions are included in the Governor’s Budget
and have been approved by both the Senate and Assembly budget committees. The SCO will
transmit the plan and any progress in implementing the plan to BSA with the 60-day report.
• By July 31, 2003, the SCO will consider other options to streamline the process of escheating
securities to facilitate more immediate sale of securities. These options may require legislation.
The SCO will provide an update to BSA in the 60-day report.
• The RFP to select new third party contractors will include a requirement that securities be deliv-
ered to the SCO contracted broker for immediate sale.
If the bureau is unable to obtain legislation requiring it to sell securities immediately upon
receipt, it should
• Review all of its manual ledgers to ensure that it has accurately recorded all corporate
actions, receipts, sales, and disbursements of securities. Once this review is complete,
the bureau should discontinue the use of its manual ledgers.
• Complete its reconciliation of the securities remitted to the securities reported for all
securities not previously reconciled.
• Reconcile the securities remitted to the securities reported within one month of the
receipt of the securities, for securities not already in its custody.
6
6600 California State Auditor Report 2002-122 California State Auditor Report 2002-122 6611
• Modify the property system to allow it to track all changes to securities, including the effective
dates, receipts, sales, disbursements, and corporate actions, on an owner-by-owner basis.
The bureau should ensure that it updates the property system to account for securities cur-
rently tracked in its manual ledgers. This process should be automated to allocate changes in
the number of securities to the affected accounts with minimal human intervention.
• Sell all securities related to a particular account within two years of the initial receipt,
regardless of corporate actions. Additionally, the property system should be modified to
generate a monthly report to alert the bureau to securities approaching the two-year dead-
line for sale from the original receipt of the securities, regardless of the timing of corpo-
rate actions.
Response: The SCO generally concurs with these recommendations and recognizes the deficien-
cies of the current unclaimed property system in this area. As noted above, the SCO is currently
developing a Feasibility Study Report to justify funding to address the deficiencies in the current
system and to apply newer technologies to the business of unclaimed property. The study will
be completed and submitted for review in the July 2003. In the interim, the SCO is taking several
actions to address the recommendations as follows:
• By June 6, 2003, standardized procedures for making entries into the security ledgers will be imple-
mented to improve consistency of entries in the ledgers. A quality review of entries is included.
• By July 31, 2003, a plan will be developed to improve the timeliness of reconciling the remitted
securities to reported securities. In developing the plan, SCO will consider options to speed up
the process and the possibility of generating savings in other areas and redirecting staff to assist
on this function. The SCO will transmit the plan and any progress in implementing the plan to
BSA in the 60-day report.
• As noted above, the SCO will accelerate the sale of securities currently on hand during SFY
2003-04, which should mitigate the need to modify the current unclaimed property system.
To fully inform all entities that it has their unclaimed property in its possession, the
bureau should:
• Discontinue excluding any properties from its Web site.
• When it receives unclaimed property belonging to any governmental entity, notify that
entity. If it does not receive sufficient information to determine which governmental entity
the property belongs to, it should seek additional information from the holder.
7
Response: Although the SCO generally concurs with the intent of these recommendations, this
problem is caused by holders not meeting their responsibility to properly notify government agen-
cies of their property before escheatment. It should also be noted that the budgetary restrictions
on use of public funds for outreach to members of the public do not apply to outreach to govern-
ment agencies.
The SCO is also concerned that trying to resolve ownership during the processing of reports is
likely to delay the loading of the report and disadvantage other individual owners on the same
report. Therefore, we are recommending the following alternative actions:
7
6600 California State Auditor Report 2002-122 California State Auditor Report 2002-122 6611
• By July 1, 2003, the SCO will issue special instructions to holders in writing and through the SCO
web site of their responsibilities to notify owners (including government agencies) prior to the
escheatment of accounts. This would allow the government agencies to claim their property prior
to escheatment.
• Immediately following, the SCO will discontinue the practice of excluding government properties
from the Web site.
• By August 31, 2003, the SCO will develop a plan for routinely notifying government agencies of
potential unclaimed properties and providing a simple process for transferring such property to
them. An update on the development of the plan will be sent to BSA in the 60-day report.
To ensure that it distributes assets to bona fide claimants in a timely manner, the
bureau should:
• Review all claims and either approve or deny them within 90 days of receipt.
• Distribute assets on approved claims within 30 days of approval.
Response: The SCO concurs with the recommendation to complete review of claims within the
90-day statutory limit. However, the legislature is currently considering legislation that will extend
this limit to 180 days and reduce 16 positions from unclaimed property program staffing. As noted
above, we believe that the SCO has demonstrated significant improvements in meeting this time
frame over the last year and will be taking several actions to improve this process as follows:
• By July 31, 2003, identify further opportunities to streamline claim processing and develop any
necessary implementation plans.
• By August 31, 2003, review manual inventory controls to determine whether improvements can
be made and develop any necessary implementation plans.
1
Also as noted above, there is no statute that defines the timeframe for distributing assets once a
decision has been made. While we agree that a 30-day timeframe is reasonable for payment of
cash claims, a 30-day timeframe will not be attainable for security claims until the conversion to
cash efforts noted above are implemented. Even then, it will be difficult until the new system tied
to the Feasibility Study Report is implemented. In the interim, SCO is taking a number of actions
to convert the maximum level of securities to cash in the shortest time possible after escheatment.
Please refer to the actions above in response to security recommendations.
To ensure that it has properly accounted for all of the owners’ properties, the bureau should
develop a standard inventory form for holders to use to report the contents of safe deposit
boxes and for the bureau to use to verify that it has received all of the reported contents
from the holders. This standard form should include a section for the bureau to indicate its
receipt of all of the reported contents, the date of review, and any follow-up required for
contents that were reported but not remitted by the holder.
Response: The SCO agrees with this recommendation. By August 31, 2003, the SCO will develop
and implement the necessary forms, instructions and procedures.
8
6622 California State Auditor Report 2002-122 California State Auditor Report 2002-122 6633
To reduce the overcrowding of the bureau’s safe deposit box vault, the bureau should con-
duct an auction of the contents of safe deposit boxes at least monthly.
Response: By June 30, 2003, the SCO will complete the pilot project currently underway for con-
ducting online Internet auctions of safe deposit box contents. Currently state law allows use of an
Internet auction only if it is cost-effective in relation to physical auctions. If, as we believe, the pilot
proves that Internet auctions are cost effective, the SCO will develop alternatives for conducting
such auctions on a routine basis. Monthly may not be feasible with anticipated staffing. A status
report on the evaluation of the pilot and our plan for implementing routine auctions will be sent to
BSA in the 60-day report.
The SCO is also in the process of developing a Request for Proposal to secure the services of an
auctioneer for a physical public auction to conduct regular auctions. Our goal is to hold the first
under this contract in the fall of 2003.
The SCO will explore additional space for secured storage of the safe deposit contents to reduce
the overcrowding and will implement any feasible alternatives, if necessary. The status of this item
will be sent to BSA in the 60-day report.
To ensure that it receives all proceeds from the sale of the contents of safe deposit boxes
and that it can accurately and promptly distribute these types of assets to their owners, the
bureau should:
• Obtain and review videotapes of auctions and confirm that the auctioneer has accurately
reported the sales amount for a sample of auctioned lots.
• Develop a system that posts the proceeds from each auction to the related owners’
account immediately following the auction.
Response: The SCO agrees with both of these recommendations and will implement a process to
verify sale amounts with the next auction. By July 15, 2003, a plan will be developed for the pro-
gramming changes to post auction proceeds to the related owner’s account.
If the bureau decides to auction all unclaimed properties from safe deposit boxes on the Internet, it
should establish a method of ensuring that it receives all of the proceeds that are due.
Response: The SCO agrees and was already planning to include the necessary procedures in the
implementation of any ongoing Internet auction process.
RECOMMENDATIONS – CHAPTER 3
To ensure that it collects all unclaimed property that its auditors have a reasonable basis to
believe should be remitted to the State, the controller should complete its examination of the
estimated unclaimed property. Further, the bureau should ensure that it bills, and collects,
the applicable interest penalties based upon the results of the audit bureau’s examination.
9
6622 California State Auditor Report 2002-122 California State Auditor Report 2002-122 6633
Response: The SCO agrees with the recommendation involving the one audit report where a
follow-up examination was not performed. The Audits Division is moving forward to substantiate
or invalidate the estimated unclaimed property referred to in the examination of this holder. The
original examination was appropriately concluded without addressing an issue involving recon-
4
veyance or recording fees. The SCO was waiting for an opinion from the Attorney General’s (AG)
Office to determine if the fees were legally escheatable unclaimed property. The AG opinion
concluded that the fees were escheatable property even though there is still a strong legal argu-
ment being raised by attorneys for the title companies that such fees are not. Inadvertently, the
follow-up audit was not initiated when the AG opinion was received. The examination will address
the sampling methodology used to estimate the escheatable fees and we will proceed with our
completion of the examination.
Once the results of our examination have concluded the Division of Collections will proceed to bill
and collect the property and the applicable interest charges.
10
6644 California State Auditor Report 2002-122 California State Auditor Report 2002-122 6655
Attachment 1
STATE CONTROLLER’S OFFICE
Significant Improvements Implemented In Last Three Years
• December 2000: Established process to evaluate, approve, and pay less complex claims in
30 days. It now approves approximately 34% of claims under this accelerated process.
• July and November 2001: Significantly reduced claim inventories by redirection of internal
resources and the hire of over 20 new staff.
• Established a process to accelerate claims related to property contained in holder reports that it
cannot add to the system due to report errors.
• Redirected internal resources to assist in processing security claims payments and improved
tracking and assignment processes to improve timeliness.
• February through September 2002: Increased customer service and efficiency and better sup-
ported staff by implementing recommendations from KPMG Consulting:
• Established a claim tracking process to ensure that claims can be located during intake,
evaluation, and payment.
• Created Intake Unit to establish claims on the property system as they arrive.
• Established a process to notify claimants of receipt of their claims.
• Developed scripts for telephone operators to ensure accurate and consistent distribution of
information to callers.
• Updated content and navigation within the interactive voice response of the bureau tele-
phone system.
• Established a Claim Resolution Team to resolve claims that could not be resolved under
normal procedures.
• Improved navigation ability and content on the bureau’s Web site.
• Developed a process to automatically route customer email requests for services to subject
matter experts.
• Established an additional reporting option for holders of unclaimed property to submit reports
via CD-ROM.
• Converted almost a million unclaimed property records from a stand-alone system onto the
property system to enable staff to process claims more timely and efficiently.
• Contracted with a securities service to allow staff easier access to information necessary to
process and maintain securities.
• November 2002: Established processes to gather comments from customers.
• December 2002: Reengineered the reporting processing to improve efficiency and provide
clearer guidance to holders to assist them in correcting reporting errors.
11
6644 California State Auditor Report 2002-122 California State Auditor Report 2002-122 6655
Blank page inserted for reproduction purposes only.
6666 California State Auditor Report 2002-122 California State Auditor Report 2002-122 6677
COMMENTS
California State Auditor’s Comments
on the Response From the
State Controller’s Office
To provide clarity and perspective, we are commenting
on the State Controller’s Office (controller) response to
our audit report. The number below corresponds to the
number we placed in the margin of the controller’s response.
1
We clearly state that there is no legal requirement to pay claims
within 30 days of approval. Additionally, we acknowledge
the growth in the number of claims paid by the Bureau of
Unclaimed Property (bureau) over the past five fiscal years. We
believe, however, because the primary purpose of the bureau
is to reunite owners with their lost or forgotten property, it
is unreasonable to delay payment of claims beyond 30 days
from approval.
2
The number of claims received between July 2000 and July 2001
and paid in 30 days is misstated. Only five of the 11 claims,
or 45 percent, received during this time were paid in 30 days
of approval; the difference is based on the method used to
determine the approval date. When the bureau’s analyst
approves a claim, they generally sign and date the claim form.
Upon approval, the bureau’s Unclaimed Property System
(property system) is generally updated to reflect the date on
which the claim was approved, however, in some instances, the
date in the property system does not agree to the date on the
claim form. Our analysis used the analysts’ signature date as the
date of approval, while the controller’s analysis used the date
contained in the property system. In this case, the difference in
methodologies results in a difference of 36 days.
3
The controller’s statement lacks context and minimizes the
importance of its failure to pursue this “one unclaimed property
audit.” We reviewed a sample of four of the Financial-related
Audit Bureau’s (audit bureau) 190 examinations of title and
escrow companies. As we report, we found minor inconsistencies
in methodologies, supporting documentation, and supervisory
review processes for three of the four audits we reviewed. Our
primary concerns were related to management’s failure to follow
up to either substantiate or invalidate its auditors’ estimate that
6666 California State Auditor Report 2002-122 California State Auditor Report 2002-122 6677
one company had not escheated $6.7 million in unclaimed
property. Because we only looked at four of the audit bureau’s
examinations, we cannot comment on whether the audit bureau
appropriately pursued estimated findings in other audits it
either completed or did not complete from 1999 through 2002.
However, we believe that our conclusion is warranted because
of the size of the estimated escheatable property that the audit
bureau did not pursue. The $6.7 million of estimated escheatable
property from this one audit is 21.2 percent of the $31.6 million
found in the 190 completed audits of title and escrow companies.
4
We acknowledge that the controller was waiting for the legal
opinion from the attorney general to determine whether
the source of the estimated $6.7 million was in fact legally
escheatable. We also note that the legal opinion was issued five
days after the original examination. Although the controller
could not predict the timing of the legal opinion, the issuance
of the legal opinion only five days later should have triggered
the controller’s efforts to either substantiate or invalidate the
estimated findings.
5
Our report recognizes that there are three potential causes for
the $75,000 difference between the total amount remitted by
each holder and the total of all the individual accounts: the
holders overpaid the amount due, they failed to include some
individual accounts on their reports, or not all of the properties
for which funds were remitted were uploaded into the property
system. Regardless of the cause, the bureau should ensure that
it reconciles the amount received to the amount reported, and
take appropriate actions to resolve any differences. Without
reconciling the amount received to the amount reported, the
bureau cannot ensure that it is adequately safeguarding the assets
entrusted to it and cannot follow up with the holders to ensure
that it receives all of the assets or owner information it should.
6
The controller implies that it consistently sells securities within
two years. As we report, the bureau took as long as 44 months
to sell some shares of the securities in our sample. At the time of
our review, it also had shares of six securities that it had not sold
in over four years. Regardless of the time frame in which the
bureau may sell securities, it does not sell securities consistently.
Because of the inconsistency in selling securities, the bureau is
making itself vulnerable to litigation based on the appearance
that it is assuming responsibility for determining the best time
to sell securities, which it is not, and should not, be doing.
6688 California State Auditor Report 2002-122 California State Auditor Report 2002-122 6699
7
Holders of unclaimed property are required to make reasonable
efforts to notify owners that their property will escheat to the
State if their records include an address. While we agree that
some holders do not exercise due diligence in this regard,
once the property escheats to the State, the bureau becomes
responsible for efforts to locate the owners. Failure to notify
owners that the bureau has their property in its custody prevents
the bureau from fulfilling its primary purpose of reuniting
owners with their lost or forgotten property.
6688 California State Auditor Report 2002-122 California State Auditor Report 2002-122 6699
cc: Members of the Legislature
Office of the Lieutenant Governor
Milton Marks Commission on California State
Government Organization and Economy
Department of Finance
Attorney General
State Controller
State Treasurer
Legislative Analyst
Senate Office of Research
California Research Bureau
Capitol Press
7700 California State Auditor Report 2002-122