Buyers, sellers, tenants, and property owners put a great deal of faith in brokers to safeguard their money. Whether it is an earnest money deposit, collection of rent, or a tenant security deposit, brokers have a fiduciary duty to their clients to ensure that the client’s property is not mismanaged or stolen. Under North Carolina General Statute § 93A-6(a)(7), any broker may be disciplined for “failing, within a reasonable time, to account for or to remit any monies coming into his or her possession which belong to others.” Commission rules go on to require brokers to deposit these entrusted funds into trust or escrow accounts within three banking days following receipt. A firm’s broker-in-charge (“BIC”) is tasked with maintaining its trust or escrow account(s) and its records in compliance with Commission rules. Nevertheless, what if a BIC is not good at math, or with money, or both? Could they have someone else be in charge of the account? Must that person be a licensed broker?
No Commission rule requires that the BIC be the only person who carries out the trust accounting function nor does a rule require that this person be a licensed broker. Some BICs have hired a Certified Public Accountant (“CPA”) or a bookkeeper for this task. Some BICs have very competent staff who assist with the management of the firm’s trust or escrow accounts. Regardless of whom the BIC uses, however, the BIC is ultimately responsible if those accounts are not compliant with Commission rules. Lately, there have been a number of incidents involving theft and conversion of entrusted funds for personal use. The people stealing the money have been identified as the accountants/bookkeepers themselves or other current or former employees. These actions are typically discovered during a routine audit or during an investigation by Commission staff where a shortage in the account is discovered. In the end, the majority of BICs have had to replenish the accounts with their own personal funds and face discipline by the Commission. So, how is a BIC to know whom in their office is the most trustworthy? Well, the short answer is, you cannot. But you can protect yourself and your firm by actually overseeing your trust account personnel and your financial records.
You see, embezzlement and theft are typically a crime of opportunity. The more difficult criminals to spot are usually involved in embezzlement cases. These are often smart associates or employees who do a good job of covering their tracks by creating bogus statements or journal entries and making multiple money transfers between accounts. Often, the criminal is the one you would least suspect.
For example, everyone in the office loves “Susie.” Susie has been with XYZ Company for 30 years since its beginning and helped the company grow. Susie makes the best pumpkin pie at holiday parties and even babysits coworkers’ kids on some weekends. Susie does not have a criminal record and has always been a rule follower. Susie has total control over the trust and escrow accounts and no clients have complained. However, what no one realizes is that Susie’s husband had a bad accident last year and has been out of work. Susie’s one income is not enough to cover the cost of their medical bills, mortgage, and car payments. Susie decides that she will “borrow” some money from the trust account with the full intention of paying it back. After she takes some money one month, another medical bill arrives, so she takes some more. She continues to withdraw money each month and now begins to move money between the trust accounts so that there is enough to cover upcoming payments. Finally, a year later, a client complains about not getting their rent proceeds on time and Susie’s scheme is finally discovered. The problem now is that Susie has taken over $50,000 within the past year, creating a major liability on the company.
Although Susie is a made-up person in this article, her story is very real. Susie is out there right now managing an account with little to no oversight. A BIC is simply signing the papers Susie places in front of them and has not looked at any independent documents in years. Rather than trying to predict whom they can trust with this responsibility, BICs should instead approach this problem with the mentality that they cannot trust anyone. Therefore, a BIC should have processes and procedures in place that do not leave one person in the office with sole authority. The BIC must review independent and supporting documentation to verify the trust accounts are properly balanced and reconciled. There should be accountability, checks, and balances in place to ensure that entrusted funds are kept safe.