Getting a “Passing Grade” on the Broker Audit by Ed Ricketts

Property Management | 1 comment

The Broker Audit is a hot topic, especially among property managers. Not surprisingly, the North Carolina Department of Real Estate (“ADRE”) prioritizes its audit focus on property management brokerages. Why? That’s because property management brokerages hold other people’s money. Yes, it’s the trust account that gets the most attention.

  1. There are five kinds of ADRE broker audits:
        1. The Regular Field Audit – This audit is the mainstay of ADRE’s audit efforts. In years past, ADRE’s routine has been to give a courtesy advance notice to DBs of a “random” audit, typically two weeks. However, recently, audit notice has sometimes been as little as 24 hours. In years past, this sort of short notice was limited to the investigative audit (see below).

     

        1. Desk Audit – the electronic broker audit review (“EBAR”) – This broker audit review is what I call a “desk audit.” In this property management audit, detail of property management activity is requested via, email, CD or paper documentation. Typically, the document request is a random request of the leases and property management agreements and trust account bank reconciliations of the brokerage. This is a real timesaver for both the property management company and the ADRE. It is also a good indication ADRE has not scheduled the audit based on complaints.

     

        1. Investigative Audit – Oh, my gosh, this is the audit from Hell. If there has been a serious complaint or more about an issue that ADRE takes seriously (like conversion of trust account funds), ADRE may give as little as 24 hours notice of the audit, and sometimes the ADRE auditor and investigator may show up with no notice at all. In any event, the purpose of the investigative audit is to check specific issues previously reported to ADRE. This is about the least fun kind of audit that you can imagine.

     

        1. Courtesy Audit – Also called an “educational audit,” ADRE does not advertise the availability of a courtesy audit. However, ADRE may conduct a courtesy audit of a brokerage if the designated broker (“DB”) requests it. Usually, this audit would be requested for a new brokerage or for a new DB in an existing brokerage. Just makes sense, huh? Most DBs want to comply with what the broker auditors suggest. This is a great way to get off on the right foot with ADRE.

     

      1. Self-Audit – The so-called Self-Audit is the Broker Supervision & Control Audit Declaration. This is required to be completed by every DB upon license renewal. The Self-Audit is a great guide to preparing for the audit, because the actual Audit Management Letter is based on the Self-Audit. Thus, generally speaking, if your brokerage is in compliance with the Self-Audit, you are going to be just fine in the audit. Sidebar: I am the author of the Self-Audit form.
  2. Preparing for an Audit

The Self-Audit and any Audit Management Letters will be kept by ADRE for at least five years. These documents will be referred to when the brokerage is audited to ensure there are no inconsistencies between the Self-Audit and actual practice, and that actual brokerage practice does not reflect violations in contrast with previous Audit Management Letters.

ADRE also provides some good resource materials for managing a brokerage and for preparing for an audit. See: https://www.re.state.az.us/Aud/AudForms.aspx. In particular. The following two documents are also very useful:

  1. ADRE’s Property Management Audit Package may be obtained at: https://www.re.state.az.us/Aud/Forms/Property_Management_Audit_Package.pdf This document includes detailed information relevant to preparation for an audit, including: an audit checklist; the EBAR process; trust account reconciliation; and an FAQ.
  2. The Broker Supervision & Control Audit Declaration (Self-Audit) may be downloaded here: https://www.re.state.az.us/Aud/Forms/Broker_Supervision_Control_Audit_Form.pdf See the above discussion of the Self-Audit.

3. QUIZ – Audits A.R.S. §§32-2108(A) and 32-2175(H)

1. __ Yes   __ No  Will a “no” response on the Self-Audit trigger an audit?

NO: However, a “no” response to a question about compliance may generate a letter, email or phone call from an auditor asking why you answered no. As a rule of thumb, the ideal answer to a compliance question on the Self-Audit is “yes.” If you feel compelled to answer “no” or “NA,” you should explain the answer in the remarks section.

2. __Yes  __No  If ADRE’s auditor calls and requests that I send all of my records for the past 6 months, must I must do so?

NO: Section 32-2175(H) requires: “The broker shall make available within a reasonable amount of time all records relative to property management accounts….” Thus, the broker may opt to have the audit completed onsite.

3. __Yes  __No I previously agreed to permit ADRE to “snoop” in my transaction management system (“TM”). May I contest the violation the investigator discovered?

YES: Though you may contest a finding of an auditor or investigator, probably not too successfully, the more seminal question is whether you should have permitted ADRE to have your password to investigate matters behind your back and outside of your control. You should ask your legal counsel if you should permit ADRE to have access to your TM. If you already gave permission, after consulting legal counsel, you may wish to withdraw your permission. My opinion? It’s just dumb to give ADRE the permission to snoop in your TM.

4. __Yes  __No If I have misrepresented something on the Self-Audit, can I straighten out the misstatement with ADRE?

YES: How successful your attempt to “walk back” the answer may depend on the circumstances. However, you should make any clarifications prior to an investigation or audit. If this is a very serious issue, you may wish to engage the services of an attorney.

5. __Yes  __No I was audited and the auditor was offensive and rude. He wrote me up for a dozen violations, all of them untrue. Should I appeal the bogus audit findings?

YES: This is an example where legal counsel ought to be engaged. It is not uncommon that findings can be reversed with appropriate response. I have successfully consulted in many cases where a broker auditor has alleged unsupported violations. Remember that the broker auditors or investigators are inclined to go after you even if a matter is minor.

6. __Yes  __No If a sole proprietor broker personally manages her own property, is the Department entitled to audit those records along with the records of the properties managed by the brokerage?

NO: ADRE has no audit authority for properties you own and personally manage. However, if the properties are managed by your brokerage, ADRE will have audit authority. How you wish to manage your properties might be a good question to review with legal counsel.

7. __Yes  __No Must a property management firm, that also handles the books and does grounds keeping and maintenance for several HOAs, allow the Department access to audit the HOA records?

NO: No state agency, including ADRE, has regulatory jurisdiction over HOAs in North Carolina. But if the HOA management is integrated with property management services, then that may create a link permitting ADRE review.

8. __Yes  __No May the Department auditor demand access to an owner’s account, into which the broker deposits rents pursuant to the terms of the property management agreement?

NO: The brokerage has no legal access to owners’ accounts. Therefore, ADRE cannot require you to provide access to owners’ accounts.

9. __Yes  __No If ADRE suspects a property manager has stolen monies from an HOA she also manages, does ADRE have authority to audit the HOA financial records?

YES: Assuming the integration of the HOA and property management services, then ADRE probably has some regulatory authority to audit or investigate the HOA services.

10. __Yes  __No If a brokerage conducts only HOA management, but represents itself in its advertising and promotes itself as being a licensed real estate brokerage providing HOA services, is the brokerage subject to the requirements of A.R.S. Title 32, Chapter 20?

YES: Section 32-2175(H) reads, in part: “The department is limited to auditing those areas that are related to the business activities of a broker….” Further, section 32-2101(48) reads, in part: “’Real estate broker’ means a person, other than a salesperson, who, for another and for compensation… (h) Advertises or holds himself out as being engaged in the business of [real estate].”

Ed Ricketts is an instructor, consultant, expert witness and DB for Keyrenter Premier Property Management.

Contact information: 602-277-4332 or [email protected]

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