By Emmet R. Wood, Director, Audits and Investigations
A year ago, we introduced an additional way of auditing Trust Accounts – the “Inspections by Letter” Program. Announced in the January 2009 Auditor’s Corner, the program supplemented our ongoing method of “spot” audits, conducted during unannounced, on-site visits.
To review briefly, our letters to brokers-in-charge requested specific types of records:
Once your records were received, a staff auditor examined them and, if any clarification was needed, contacted you. We then mailed a report explaining the compliance (or noncompliance) of your trust account records with the Commission’s rules and Trust Account Guidelines.
After working our way through all the mail it generated, we discovered some interesting things from the “Inspections by Letter” program:
• Merely attending our Basic Trust Account Course does not mean you’re going to get it right!
You have to apply the principles taught in the course. For example, the course teaches BICs that after reconciling the trust account bank statement to the trust account journal, a trial balance of the ledger cards should be prepared. BICs with the most serious violations had not prepared trial balances.
• Merely hiring a bookkeeper is not enough!
This is especially true – and too often the case – when the BIC was not requiring the bookkeeper to prepare a trial balance. If you do not fully understand this process, you may find it helpful to review the Basic Trust Account Course materials and to read the May 2008 Auditor’s Corner on “Examining Your Bookkeeper’s Trust Account Trial Balance”.
• Merely purchasing Commission compliant software and attending a class on how to use it does not guarantee compliance!
Although you buy the software and attend the vendor’s training class, when you return to the office you fail to record the trust account transactions correctly. To make matters worse, no effort is made to contact the computer software support personnel for assistance in using the software. In addition, because you don’t fully understand the software and you distrust the reports it issues, you may waste time maintaining books as you did before acquiring the software – thus developing redundant sets of books.
• Merely do it right the first time!
Generally, if trust account bookkeeping is not done properly and the brokerage firm’s trust account records are audited by the Commission, it will be necessary for the BIC to correct the situation by paying an outside accounting consultant to reconstruct the records. This is usually more expensive than hiring the right bookkeeper from the beginning, plus the BIC could face the embarrassment of disciplinary action. So, you could pay now or pay later.
This article came from the January 2010-Vol40-3 edition of the bulletin.