Audit reveals violation of trust accounting rules 

The DSPS audited a real estate firm’s trust account. The audit revealed the supervising broker delegated responsibility of documenting trust account transactions to his salesperson but failed to adequately supervise the salesperson’s activities. Monthly trial balances were not prepared, and monthly validations were not performed. The firm had not returned earnest money to four clients after the transactions failed. On multiple occasions, the salesperson either failed to withdraw commission from the trust account within 24 hours after the transactions were consummated or withdrew more commission from the trust account than he should have. 

The DSPS found that the firm failed to safeguard trust funds, which is a violation of Wis. Stat. § 452.133(1)(f), and failed to follow Wis. Admin. Ch. 18 REEB Trust Accounts rules, which require a monthly trial balance of all open items in the real estate trust account and requires the firm to perform a monthly validation of the real estate trust account. Additionally, the firm failed to withdraw commissions earned from the trust account within 24 hours of the transaction closing. 

The supervising broker was ordered to complete six hours of education on trust accounts and six hours of education on supervising licensees associated with the firm. The firm was also ordered to pay costs associated with the investigation and order. 

Wis. Stat. § 452.133 

"Duties of licensees; prohibitions. 
(1) Duties to all parties to a transaction. A firm providing brokerage services to a party to a transaction owes all of the following duties to the party:
(f) The duty to safeguard trust funds and other property held as required by rules promulgated under s. 452.13 (5)."

Wis. Admin. Code § REEB 18.13

"Bookkeeping system. Each firm shall maintain and be responsible for a bookkeeping system in the firm’s office consisting of at least the following:
(3) Account reconciliation. The firm or a person designated by the firm shall reconcile the real estate trust account or accounts in writing each month except in the case where there has been no activity during the month. The written reconciliation shall include at least the ending account statement balance, the date and amounts of the deposits in transit, the number of the check, share draft, or draft, and amount of checks, share drafts, or drafts written but not paid by the depository institution as of the ending date shown on the account statement to be reconciled, and the reconciled account statement ending balance.

(4) Trial balance. The firm shall prepare or have prepared, in conjunction with sub. (3), a written listing of all open items in the real estate trust account. The written listing shall be referred to as the “trial balance”. The listing shall include at least the names of all parties to the transaction and the amount held in trust for the parties at the time corresponding to the account reconciliation. The firm may in lieu of the names of the parties to the transaction substitute the ledger page number or other means of identification from the ledger to label the funds in the trial balance.

(5) Validation. The firm or a person designated by the firm shall review the reconciled account statement balance, the open ledger account listing, and the journal running balance to ensure that all of these records are valid and in agreement as of the date the account statement has been reconciled."

Failure to comply with an audit and trust account violations

A DSPS auditor sent an email to the firm’s email address requesting to perform an audit in a couple of weeks. The following day, the auditor called the firm’s phone number on file to confirm the email address. The person who answered the phone confirmed the email address. The next day, the DSPS auditor sent a notice of audit via certified mail to the firm’s mailing address on file, proposing the date and time for the audit. 

A few days later, the firm called the DSPS to reschedule the audit date. The audit was moved to a couple of days after the initial audit date. The DSPS auditor ran into a scheduling issue and had to cancel the audit. A few months later, the DSPS auditor sent an email to the firm to schedule a new date for the audit. The auditor called the firm and left a voicemail requesting confirmation of the audit. The DSPS auditor called again a few days later and again left a voicemail confirming the date of the audit. On the date of the audit, the auditor arrived at the firm’s address and found the building abandoned. 

While at the building, the auditor left the firm a voicemail stating he would remain in the area and wait for a call. No response was received, so the auditor left another voicemail requesting cooperation and advised a complaint would be opened if no response was received. About two months later, the DSPS opened a case for investigation. The DSPS mailed a letter to the firm to a new address the DSPS located as part of the investigation. The letter requested a response to the complaint and told the firm to update its mailing address. The DSPS investigator sent an email to the firm indicating a response had not been received and asked if the firm had updated its address. 

The firm finally responded by email but did not respond to the complaint and did not provide the requested audit materials. The investigator responded to the firm, indicating a written response to the complaint was required and requested a statement explaining why the firm did not respond to the investigator’s letter. Additionally, the investigator asked whether the firm had updated its address and requested materials for the audit. The DSPS investigator continued to contact the firm asking for the same items requested previously. Finally, the broker of the firm responded, indicating that the firm had moved offices, her father had been ill, and she requested more time to respond to the investigation and provide the audit materials. Finally, after months of the DSPS investigator trying to get a response and the audit materials, the firm responded and provided the requested audit materials.

The audit revealed the following: 

• The firm’s cash journal did not provide a means of identification linking the journal to the ledgers
• The firm’s cash journal did not show a daily running balance.
• The firm’s reconciliation reports were not printed each month upon completion, and no reconciliation reports were prepared for the period January an entire calendar year.
• The firm’s trial balances for a different calendar year lumped all earnest money into a single figure, and did not list the names of the parties to each transaction and the amount held for the parties; and in subsequent periods, the sum of individual liabilities did not equal the reconciled account balance.
• The firm did not validate its trust account.

This conduct violated most if not all of Wis. Admin. Code § 18.13 Bookkeeping System. The firm also violated Wis. Admin. Code § REEB 23.02 Change of Name or Address by, after moving from the last address provided to the DSPS, failing to notify the DSPS in writing of the new address within 30 days of the change.

Finally, the firm violated Wis. Stat. § 440.20 by failing to respond to the DSPS as well as the Real Estate Examining Board (REEB) regarding any request for information within 30 days of the date of the request.

The disciplinary order prohibited the firm from having a trust account and from handling any real estate trust funds or client funds. Within 30 days of the order, the firm was required to submit proof that it closed its trust account. The firm and the supervising broker were both ordered to pay a forfeiture and costs associated with the order and investigation.

Wis. Admin. Code § REEB 23.02

"Change of name or address. Any person licensed under ch. 452, Stats., who changes the name appearing on a current license or moves from the last address provided to the department shall notify the department in writing of the new name or address within 30 days of the change."