From the California Dept. of Real Estate website, here are five of the 10 most common violations found in DRE Audits:
B & P Code Section 10148 – Retention of Records
Business and Professions Code Section 10148(a) states that a real estate broker shall retain for three years copies of all listings, deposit slips, canceled checks, trust records, and other documents executed by him or her or obtained by him or her in connection with any transactions for which a real estate license is required. This section requires that, after notice, the books, accounts, and records shall be made available for examination, inspection, and copying by the commissioner or his or her designated representative during regular business hours; and shall, upon the appearance of sufficient cause, be subject to audit without further notice, except that the audit shall not be harassing in nature.
A broker who fails to keep transaction files, canceled checks, deposit slips or other records prepared or obtained for a period of three years may be cited for violation of this section. Some brokers cited for violation of this section have simply failed to provide records after reasonable attempts by the Department to examine them. Other brokers cited have lost control of or destroyed records that should have been maintained. Formal legal action can result from a broker’s failure to provide records. You should review the record retention policies for your office to make sure you are in compliance with this code section.
Regulation 2731 – Use of False or Fictitious Name
Commissioner’s Regulation 2731 states that a licensee shall not use a fictitious name in the conduct of any activity for which a license is required under the Real Estate Law unless the licensee is the holder of a license bearing the fictitious name. Brokers should periodically check their license status with the Department to be sure that their license bears the fictitious name(s) they are using. Many brokers cited for violation of this regulation believed that having the dba registered with the county was sufficient to allow them to use it in their real estate business. Other brokers who are cited for this violation state that they had the fictitious name on their license at one time but may have had their license lapse for a brief period of time and failed to add the dba back on to their license.
Regulation 2831 – Trust Fund Records To Be Maintained
This regulation requires the broker to maintain, in columnar form, a record of all trust funds received and deposited by the broker. At a minimum, the following information must be indicated in columnar form in chronological order: date funds were received; name of payee or payor; amount received; date of deposit; amount paid out; check number and date; and the daily running balance of the trust account. If any of these columns are not present, then there is a violation of Regulation 2831. The accurate use of DRE form RE 4522 fully complies with this regulation.
When we cite this regulation, most of the time it is for one or more of the following reasons:
- The broker did not maintain any trust fund records.
- If trust fund records were maintained, they were either not in columnar form or a column (noted above) was missing. We have seen many brokers utilize a standard checkbook as trust fund records. These records do not comply with Regulation 2831.
- In some instances, columnar records were maintained by a licensee but he/she was still cited because the items posted were not accurate, e.g., when posting a check, it was the wrong amount; or, for a deposit, “the amount” was wrong and/or “the date of deposit” was the wrong date.
- A broker maintaining columnar records can still be cited if a daily running balance is not maintained or is inaccurate. Brokers must always keep a daily running balance of the aggregate amount of trust funds in their bank accounts. (For trust funds not deposited into a trust account, the columnar record should show the date trust funds were received, the form of the trust funds, amount received, description of the property, identity of the person to whom funds were forwarded, and date of disposition. The accurate use of DRE form RE 4524 fully complies with this part of the regulation.)
It should be noted that records maintained under an automated data processing system in accordance with generally accepted accounting principles should be in compliance as long as they contain the elements previously noted.
Regulation 2831.1 – Separate Record for Each Beneficiary or Transaction
This regulation requires the broker to maintain, in columnar form, a separate record of trust funds for each beneficiary or transaction accounting for all funds that have been deposited into a trust account. This record identifies which beneficiary has funds in the trust account. This record must indicate the following in chronological order and in columnar form: date of deposit, amount of deposit, name of payee or payor, check number, date and amount, and running balance of the separate record after each transaction on any date.
This regulation is cited mostly due to one or more of the following reasons:
- The broker did not maintain separate records for each beneficiary.
- Separate records were maintained, but the broker was cited because information was missing.
- Separate records were maintained, but the broker was cited because the items posted were not accurate, e.g., when posting a check, it was the wrong amount; or, for a deposit, “the amount” was wrong and/or “the date of deposit” was the wrong date.
- Separate records were maintained, but a daily running balance for each record was not maintained or it was not accurate. Brokers must always keep a daily balance for each separate record.
It should be noted that records maintained under an automated data processing system in accordance with generally accepted accounting principles should be in compliance as long as they contain the elements previously noted.
Regulation 2831.2 – Trust Account Reconciliation
Regulation 2831.2 requires that the total of all Separate Beneficiary or Transaction Records maintained pursuant to Regulation 2831.1 be reconciled with the balance of the Record of All Trust Funds Received and Paid Out required by Regulation 2831, at least once a month except when the bank account did not have any activities. The requirement is that the accounting records be reconciled to each other. This is not only a legal requirement; this is also part of a sound internal control for trust fund handling.
In order for this procedure to have a reliable result, the Record of All Trust Funds Received and Paid Out must be reconciled first with the bank account statements as of a certain cut-off date. This procedure is commonly known as bank reconciliation and is performed basically to determine the accuracy of the records. A cut-off date is the calendar date (usually end of the month), when no transaction or activity thereafter is considered. This process is completed once all adjustments and corrections of any reconciling items have been made to the ending balance on each record to arrive at an adjusted cash balance. In other words, the balance of the record of all trust funds received and paid out has to equal the adjusted cash balance.
The next step is to compare and reconcile the total of all beneficiary or transaction records with the adjusted cash balance as of the cut-off date of the bank reconciliation. The main objective of this procedure is to determine, based on the records, whether all trust funds held on behalf of others are on deposit in the corresponding trust account. Another purpose of this procedure is to ascertain that there is no unidentified overage or broker’s funds in excess of $200 in the trust account. Any discrepancy must be corrected accordingly. The broker is required to maintain a record of the trust account reconciliation showing the name of the bank account and number, date of the reconciliation, account number or name of the principals, beneficiaries or transactions and the amount of trust funds held by the broker for each of the principals, beneficiaries or transactions. Failure to comply with this Regulation could result in substantial loss of trust funds and disciplinary action against the broker by the Department.
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