• Review a sampling of your files, both open and closed. Are they orderly with bound sections, or are papers loosely piled inside? Imagine that you are the auditor.
• On closed files, see that all closing documentation is easy to find; check copies, receipt copies and computer-generated registers should be either clamped together or affixed to the inside back cover.
• Review your trial balance. There should be no debit balances/overdrafts, no matter how small. This is something you should be doing anyway. Clean up files with tiny—likely erroneous—balances. A trial balance with twenty or more files showing deposit amounts of less than $10.00 tells the examiner that your file balancing is sloppy. Likewise, clear out old, zero-balance entries. Ask your software provider how to accomplish this if you don’t know how.
• Review your outstanding check list for stale-dated items. Make certain your escheatable funds are up-to-date.
• Review your latest bank reconciliation. All exception items should be cleared monthly. Any open items will have to be corrected during the audit, a costly prospect when you consider that the meter is running on your audit bill. Consult with your third-party reconciler for assistance if necessary.
• Be careful not to send items to storage that might be requested by the examiner. This includes all trust accounting records for the time period dating back to your last audit. Remember, the quicker you are able to respond and supply audit materials, the quicker your examination will conclude, resulting in a cost savings to you (not to mention a favorable impression on the auditor!)
• Of course, your audit will also include the review of general account items such as payroll, accounts payable, insurance policies, leases, bonds, and loan documents. Always alert your bank as soon as you know you are under audit, and request cut-off bank statements on all accounts immediately.

Audits can be taxing, but you can mitigate the anguish with forethought and preparation. A little proactive effort today will save you time, money and stress when the auditor walks into your office.

Department of Real Estate

Escrow Activity Report – Frequently Asked Questions

Q.  What is the Escrow Activity Report?

A.  The Escrow Activity Report is a report of broker-controlled escrow activities filed every calendar year a broker meets the escrow threshold.

Q.  What is the escrow threshold?

A.  Brokers who are exempt from the Escrow Law (California Financial Code Section 17006) and who engage in broker-controlled escrow activities for five or more transactions in a calendar year or whose escrow activities equal or exceed $1,000,000 in a calendar year will meet the escrow threshold and will, therefore, have to submit an Escrow Activity Report (Business and Professions Code Section 10141.6).

Q.  What information will be required in the Escrow Activity Report?

A.  The Escrow Activity Report will require: the locations at which broker-controlled escrow activities occurred; escrow officer information; information regarding the trust accounts held by the broker for escrow activities, including trust account numbers, financial institution names, and signatory information; the number of escrows conducted by the broker; and the dollar volume of escrowed transactions. The report should cover the calendar year in which the escrow threshold was met.

Q.  When will the Escrow Activity Report be available?

A.  The Escrow Activity Report will be available on the DRE’s web site in 2013.

Q.  When will the Escrow Activity Report be due?

A.  The Escrow Activity Report will be due within 60 days after the end of the calendar year in which the broker met the escrow threshold.

Q.  What form will be used to submit the Escrow Activity Report?

A.  An online completion form will be used to report the escrow activities. The form will be on the DRE website.

Q.  What if I have trouble submitting the Escrow Activity Report?

A.  You may contact the DRE Mortgage Loan Activities section for assistance at (916) 227-0770.

Q.  What happens if I was supposed to file the Escrow Activity Report and did not?

A.  You may be subject to penalties and disciplinary action against your license(s).

From:  http://www.dre.ca.gov/files/pdf/faqs/FAQ_EscrowActivityReport.pdf

See sample report form here:  http://www.dre.ca.gov/files/pdf/forms/re890_preview.pdf

Too Busy to Fix – A Dangerous (and Expensive) Prospect

The next level involves offices that are lagging in corrections. While regulations and just plain good bookkeeping habits call for immediate research and disposition of all mistakes, often times the person in charge is just “too busy” to sit down with their reconciliation and fix the problems in a timely manner. This calls for a gentle nudging from us, reminding them that the next audit is right around the corner. Not only will the regulatory body write the escrow entity up for the offenses, they will stare over their shoulders while corrections are made and bill them for their time while they watch. Not a happy scenario. If shortages are involved, penalties can be stiff and can even prompt the revocation of the escrow license.

Procrastination and Loss - Big time!

What of companies that simply do not, or cannot, reconcile their books? Valdata Services is no stranger to this particularly difficult setting. Occasionally, we’ve been called in after the damage is done—the state examiner is already in house, frowning and shaking his head while the escrow manager sweats. The pressure is on; the clock is ticking. If the auditor suspects a significant loss or criminal activity, keys may be asked for as the “men in black” turn the window sign from “open” to “closed.”

A while back, I was asked by a representative from an escrow software company to call on one of their clients, a company who had never reconciled their trust account. Fortunately, after balancing their thirty months of banking, no serious losses were revealed; mostly small posting errors and errant wire transfers. The company, in this case, was lucky. As a real-estate office escrow department, no regulatory body had examined them—ever.

This same scenario later repeated itself, when we were called upon as forensic reconcilers to perform an official “look-back” for an attorney representing a real estate company-owned escrow. Here, again, the trust account had not been reconciled for a great many months. There was suspicion of co-mingled funds (hence the attorney’s involvement) and we were able to verify same. A substantial amount of trust money had been stolen from the account. The funds were immediately restored and proceedings were initiated against the alleged thief.

What is most important to note about these cases is the fact that the escrows—again, broker-owned entities—had put not only their clients at risk for loss, but their broker’s real estate licenses as well.

There is Hope

Companies who delay the reconciliation of their books should understand the importance of keeping their trust funds safe. Procrastination will only make an already bad situation worse. Valdata Services, Inc., makes no judgment in these cases and can quickly bring everything up to date, then follow up with explanation and instruction on how to cure most exception items. Knowing your escrow accounts are current and free of costly mistakes will bring peace of mind and the freedom to focus on other important aspects of your business.

There really isn’t much to say about the recent rash of fraudulent check activity. I used to believe that with diligence and watchful eyes, most fraud could be prevented. Locking up your checks at night and limiting access to banking materials was advised to keep criminals from stealing and forging your checks. Now, issued checks are altered and blank checks are duplicated. These counterfeit copies are sometimes so good that it takes an expert to spot them.

The bottom line is, you can’t always prevent it from happening. What you can do is minimize losses and trouble by watching your account on a daily basis. Yes, the bank is watching, too, but they clearly cannot catch everything. Services like Positive Pay and On-Line Cash Management are tools you may have access to that can help protect your accounts from illegal activity. If you do not already use one of these or other great programs, perhaps it’s time to talk to your banker about what you can do to help.

Problem is, it’s been three or more years since the escrow company has had any contact with this party. Not only is the file in storage, but the payee has probably moved twice since the check was issued. Or maybe it’s a termite company check, a termite company who’s now out of business (probably because he lost your check!)

What to do? Don’t wait three years! As painful as it may be to put an employee on a non-income producing task, you should be monitoring your outstanding check list monthly; when October comes and you are charged with the obligation of dealing with those unclaimed monies, you should not have more than a few items to disburse. Better still, keep your outstanding check list pared down to just the previous year’s checks. Catching these items sooner greatly improves the chances of finding the payees and re-issuing their lost funds. And you can sleep better at night, knowing the State isn’t the happy recipient your clients’ money!

What is the chief cause of this error, and how do you prevent this occurrence and minimize your losses?  Surprisingly, we find time and again that escrow personnel believe that calling the bank and asking if the check has been paid is good enough. Not so! When you call your bank to inquire about a check you’ve been asked to cancel, the bank can only tell you if the check has been cashed since the last bank statement was issued!  For example, if you call the bank on March 15, they will only confirm if the check has been paid between March 1st and March 15. It is your responsibility to consult your own previous outstanding check list and bank statements. If the check paid on February 28th, you may be out of luck.

Therefore, the first place to look is your most recent outstanding check list. If the check is listed, then you should call the bank. If not, do not cancel the check and instead, begin research on why it is not outstanding by reviewing bank statements and canceled check listings beginning with the date the check was issued.

Confused? Just call us!