Due Diligence for a New Broker-in-Charge

By Marcia M. Waldron, Auditor �~

We are often approached by licensees who have ‘acquired’ trust accounts by either becoming a Broker-in-Charge (BIC) of a firm with a trust account or by acquiring client accounts through the purchase of a company with trust account(s). Their question is “…who is responsible for any issues with the trust accounts that happened prior to me becoming the BIC?” Here is our simple but extremely important answer: You should assume that you will be held responsible. 

In prior cases, both the new and former BICs have faced disciplinary action for trust account issues that remained in existence through a transition. The next question starts with “But what if…” and generally that sentence does not need to be completed. If you acquire trust accounts, once the transfer of funds occurs, YOU are responsible for both accounting and funding of the accounts. If the records are a disaster, then you will have a disaster in your name once the deal is completed. So, what is a Broker to do?

When contemplating the addition of trust accounts, first check with the Commission to see if there is a pending investigation involving the current firm or BIC. We have had situations where the current BIC attempts to divest himself/herself of trust money to avoid disciplinary action. The Broker acquiring these accounts may find themselves inadvertently a party to our investigation.  

Next, do your homework: verify that the accounts are fully funded and that the records are compliant. Unless you are an accounting wizard, we recommend hiring an accountant or CPA who understands our rules, specifically those rules governing trust accounts. A business valuation process should always include a thorough due diligence review of accounts and contracts, but since trust funds are included, a specific examination of the trust account and related records is essential.

Knowledge of the monthly reconciliation process is a prerequisite to checking the accuracy of the trust account records. The bank account must be reconciled monthly; with a trust account there is an additional essential step to this monthly reconciliation. A determination needs to be made to see what balance should be held in the trust account.

The Commission calls this report a Ledger Trial Balance. The total on the Ledger Trial Balance should be equal to the reconciled bank balance, and the detail of this report must be verified through an examination of the individual ledgers that constitute the line items on the Ledger Trial Balance.  If this information appears inaccurate or contains negative balances, this is a red flag that further investigation is warranted.

In addition to confirming that the trust account is properly funded, the Broker-in-Charge should assure that the accounting records are otherwise compliant with Commission rules NCAC 58A .0108, .0116, .0117, and .0118.  Management and lease agreements and/or open sales transactions and agency agreements should be reviewed; cash receipting (if cash is still allowed) should be immediately evaluated. Look at office procedures surrounding all accounting functions and record retention, including keeping copies of security deposit, earnest money, and due diligence checks. Another prime area to review is the vendor list: be sure the records support disbursements, and verify that the vendors are legitimate.

If you become the Broker-in-Charge of a firm with inadequate trust account records or shortages or overages of trust money, you are immediately responsible for making certain those records and the funds are in order. Do your homework in advance; don’t put your license in jeopardy by taking on someone else’s mess.