Fiscal Year 2010-2011 was a busy year for DRE auditors. DRE auditors conducted 683 audits in the fiscal year ending 6/30/11 and found trust fund shortages totaling $10,736,771.13. These shortages were found almost exclusively on audits of brokers involved in property management, broker escrow and private money mortgage loan activities. Some other facts about these 2010-2011 audits:
- Fifty of the audits completed had shortages of $10,000 or more.
- 42% of the property management audits performed had trust fund shortages, with shortages totaling $5,343,398.55. 42% of these audits had major findings.
- 39% of the broker escrow audits performed had trust fund shortages, with shortages totaling $4,162,011.44. 73% of these audits had major findings.
- 27% of private money mortgage loan audits performed had trust fund shortages, with shortages totaling $692,481.63. 67% of these audits had major findings.
A disconcerting fact is that half of these large trust fund shortages had the primary cause of shortage as Commingling/Conversion, meaning that trust funds were used by the licensee for personal/business use. In many cases, this use of trust funds was blatant and intentional. In other cases, the broker in charge simply did not supervise operations, creating an environment where payment and deposit errors or improper disbursements and transfers could take place (nearly 40% of the above cases included citation of a lack of supervision).
As examples of blatant misuse of trust funds this fiscal year, DRE auditors have had recent cases of altered bank statements designed to hide large trust fund shortages from the auditor, use of trust funds to pay company business expenses (including, but not limited to, payroll and tax levies), use of trust funds to purchase properties, cars, and meals, pay for bail, and withdrawal of trust funds as cash. Auditors have also found non-deposit and embezzlements of cash rents.
In other cases, brokers in charge fully relied on others to maintain trust accounts without a system of oversight, including review of transactions and monthly reconciliation of records and bank statements, which resulted in loss of accounting control and substandard recordkeeping, errors, and misuse of funds by others. In the past fiscal year, Audits found many cases where a broker’s failure to maintain proper records and recordkeeping procedures, separation of duties, and oversight resulted in trust fund shortages over $50,000. In other cases, fully relying on others to perform trust fund accounting and handling is found to be just as dangerous. A broker who is not active, competent or proficient in accounting oversight should avoid trust fund handling.
The bottom line of the above statistics: If your business handles trust funds, especially if you are in the property management, broker escrow, or private money mortgage loan business, you need to be extra vigilant! A substantial percentage of our audits find trust fund shortages when brokers are conducting these activities. For additional information, please visit DRE’s Web site at to view the Broker Compliance Evaluation Manual