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Victory? Delaware Suggests an End to Contingency Compensation for Unclaimed Property Contract Auditors

For years, Delaware has used contract audit firms to enforce their unclaimed property laws and paid them based, at least partially, on the amount recovered. Motivated by this financial reward and empowered as an agent of the state, the contract-auditing firms with the State’s complicity harass holders, inflate liabilities by deploying aggressive estimation techniques and engage in other questionable practices to maximize their bounty.

Maybe not anymore. In a federal court filing on January 10, Delaware’s brief appended as an exhibit its most recent contract signed December 31, 2019, with Kelmar, one of the more notorious unclaimed property contract audit firms. The new contract states that Kelmar will be paid at set hourly rates for general ledger work, instead of their prior compensation, which was largely seen to be contingent upon recovery. (Securities-related work remains contingency-based.)

It will be welcome news if this heralds an end to the madness of contingency compensation for contract auditors. Holders have voiced complaints for decades, often forced to litigate to prove Kelmar’s method incorrect. The US Chamber has detailed the flaws of using contract auditors and urged a ban to the practice, and judges have tried to rein in their behavior. The National Conference of State Legislatures adopted a resolution disapproving of the practice. After all of these years and horror stories, the message might have finally gotten through.

© 2020 McDermott Will & EmeryNational Law Review, Volume X, Number 17

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About this Author

Stephen P. Kranz Lawyer McDermott Will
Partner

Stephen P. Kranz is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  He engages in all forms of taxpayer advocacy, including audit defense and litigation, legislative monitoring, and the formation and leadership of taxpayer coalitions.  Steve is at the forefront of state and local tax issues, including developments arising in the world of cloud computing and digital goods and services.  He assists clients in understanding planning opportunities and compliance obligations for all states and all tax types. ...

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Counsel

Diann Smith is counsel in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  Diann focuses her practice on state and local taxation with an emphasis on tax challenges relating to compliance, controversy, planning and legislative activity.   

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