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Auditor’s Corner – Internal Controls Safeguard Trust Account Assets

By Emmet R. Wood, Director, Audits and Investigations

Does your company have adequate internal controls to safeguard your trust account monies?  What are internal controls? This is the first part of a series of Auditor’s Corner articles on internal controls. These articles will be based on actual cases investigated by the Audits & Investigation Division of the Real Estate Commission and include  examples of real estate companies that had deficiencies in their trust account system of internal controls.

Internal control means different things to different people. Pertaining to real estate trust accounts, internal controls are the policies and procedures designed to safeguard the assets of the trust account and provide reasonable assurance of the reliability of the trust account books and records. Their main objective should be to maintain compliance with the Real Estate License Law, Commission Rules and Trust Account Guidelines. Below is an example of a real estate company that had a trust account defalcation mainly because of poor internal controls.

In a real estate sales company with lots of closings, the bookkeeper would get one or more of the four different owners of the firm, to sign blank trust account checks in advance of the closings. The bookkeeper used some of the signed checks to pay personal bills but recorded on the handwritten check stubs that they were written to an attorney for closing.

When the bank statements came in the mail, they were given to the bookkeeper to reconcile. After opening them, the bookkeeper would remove the checks written for the personal expenditures, prepare the bank reconciliation and provide it to the broker-in-charge for review. The embezzlement was not discovered until a trust account check bounced. Who had to repay the monies embezzled? The owners of the real estate company.

A good system of internal controls may have prevented the embezzlement. One simple internal control would have been for someone other than the bookkeeper to have received the trust account bank statements and reconcile them to the trust account check stubs.

If your company does not have the luxury of more than one bookkeeper, the bank statements could be directed to the broker-in-charge to open and examine them. Another obvious internal control deficiency was signing blank trust account checks. Can you find other internal control deficiencies?

Place yourself in the position of those employees within your company who have access to trust account funds, analyze how they might take them, and design your company’s system of internal controls to minimize the opportunity for embezzlement. You may wish to consult a CPA to help you design your system.

This article came from the May 2005-Vol36-1 edition of the bulletin.