Broker Financial Audit Process

The Audit Process

When selected for an audit, an initial notification audit letter will be sent by the Division with an affirmation and questionnaire regarding real estate activity, notice of escrow, audit checklist, reconciliation worksheet and a transaction file and retention checklist. The broker or brokerage firm is given 15 days from the date of the letter to respond.

Brokers/Brokerage Firms are expected to respond to all audit notification letters in the requested time frames, provide copies of their office policy manual, signature pages, and copies of E&O certificates of insurance. As well, brokers/brokerage firms performing property management services are expected to provide monthly 3-way reconciliations for all trust/escrow accounts that are maintained. This must include journals, ledgers, reconciled bank statements, all copies of canceled checks. 

Audits take 60 days approximately to complete with brokers/brokerage firms having 15 days to respond to the initial notification of the audit letter, and 10 days to respond to any offsite or onsite audit notification letters. 

Understanding the Components of the Audit

The broker/brokerage firm will be required to fill out an affirmation and questionnaire to provide information including but not limited to:

  • How many sales transactions closed in the past 12 months?
  • How many properties are managed?
  • How many trust accounts are maintained?
  • Provide from the past 12 months, the 3 most recently closed sales transaction files and the 3 most recently opened property management account files.

The broker/brokerage firm and their financial institution will complete the notice of escrow form to attest in writing that the accounts maintained at the financial institution are trust/escrow accounts.

 

The broker/brokerage firm will need to complete an audit checklist, which identifies the specific pages and sections in the office policy manual, property management agreements, and leases. 

 

This document is provided as a resource or tool for brokers/brokerage firms that perform property management and are required to perform monthly 3-way reconciliations. 

The transaction file and retention checklist is provided for brokers/brokerage firms to help ensure that the transaction files contain all of the required documents.

How the Audit Works

After the broker/brokerage firm provides their initial response, the auditor will review the documents and responses provided and send either the notification of offsite or notification of onsite audit letter. This notification letter will request that the broker/brokerage firm provide monthly 3-way reconciliations, additional sales transaction files (if necessary), and additional property management files. 

  • If the response indicates that they do not perform property management, and closed less than 30 sales transactions in the past 12 months, the auditor will review the 3 most recently closed sales transaction files and try to complete the audit in an expedited process.
  • If the response indicates that they closed more than 30 sales transactions in the past 12 months, the auditor will request additional files to equal a 10% sample of the files. 

Audit Determinations

After the Division receives and reviews additional documents that are requested the auditor will take one of the following three routes to complete the audit. 

Audit Completion Letter

If no issues are identified, or if the broker/brokerage firm adequately addresses the items listed in the Audit Correction Letter; generally speaking, the Audit Completion Letter will be prepared and sent, closing out the audit.

Audit Correction Letter

Used to document audit findings and provide an opportunity to correct the deficiencies identified. This document is used when audit deficiencies have been identified, particularly those that the Division is authorized to handle internally.

Investigative/Audit Report

Used to present audit findings, deficiencies, and possible license law violations to the Commission for review. 

Common Violations Found

Trust Accounting 

  • Lack of proper journals.
  • Lack of ledgers.
  • Negative ledger balances.

Brokerage Relationship Disclosures: Lack of Broker Disclosure to Tenants and Brokerage Duties Addendums to Property Management Agreements.

Leases and Property Management Agreements (Attorney-Drafted Forms): Missing required disclosures pertaining to attorney-drafted forms.

Mark-Ups: Failing to properly disclosure any mark-ups earned on services provided to property owners and tenants.

Conflicts of Interest: Failing to properly disclose license status and ownership status of broker-owned properties. 

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