How to navigate trust account risks

Trust accounting software – choose wisely

If you are going to be holding funds in your trust account on behalf of more than one party, it is imperative that you use software to manage the account that is trust account compliant. General accounting software packages do not meet this requirement. Not only does the software need to have the built-in controls to segregate each party’s funds and not allow them to be overdrawn, but there are many other legislated compliance obligations that common general accounting software platforms do not conform with, e.g. trust balances report (or trial balance per property) or receipts printing and formatting.

There are several property management software products in Australia but not all of them maintain trust accounts in the same manner. Some maintain separate trial balances for different user groups e.g. creditors and debtors, whereas others hold trust account balances in sub-ledgers for the parties the real estate agent is ultimately holding the funds on behalf of, normally the owners of the property. The licensees need a base level understanding of how the trust accounting software maintains the trust account balances to enable them to carry out their statutory responsibilities.

Licensee responsibility for trust accounts

Responsibility for maintaining the trust account and complying with the legislation ultimately rests with the licensee. This normally involves ensuring the trust account is properly reconciled and balanced within a set number of days of month end and ensuring sufficient controls have been followed in trust accounting compliance during the month. In bigger real estate agencies, it is essential to have good internal controls the licensee can rely on.

Some recent headlines highlight the need for legislative controls to protect consumers

Agent fined for illegal trust account withdrawals
Director found guilty of trust account fraud
Trust account mismanagement can start with software
Principal cops $18k fine, 120 hours community service for trust account breaches
Six agencies closed following trust account fraud

Choosing a bank and what you should consider

Choosing a bank for your trust account sounds like a simple matter but it could have unintended operational issues and be difficult to change. Trust accounts are normally set up with the same bank where the general accounts are held with but this is not always the best choice. There are some other factors which should be considered before heading down this route as it can leave you with some headaches down the line.

It is suggested that you speak to a trust accounting expert that works with all the major Australian banks to get their advice. Not all Australian banks are the same, e.g. some don’t have batch BPAY uploads, some don’t allow for DEFT payments, some require unique ABA numbers, internet banking functionality varies, some don’t provide OFX or BAI statement downloads or for software systems to be integrated for bank feeds. Some of these limitations cause considerable operational inefficiency and cost to the business, which takes time and risk to rectify.

Changing banks – what to consider and navigating the minefield

If you realise it is important to your business (and sanity) to change the bank where you maintain your trust account, it is recommended you consult a trust accounting specialist who has handled this numerous times for advice to help you navigate the process.

Some of the factors to consider include: timing of the change, what to do with uncleared funds, what to do with unpresented payments or deposits or unreconciled items, whether you are splitting into multiple trust accounts, how does your trust accounting software handle the change, what happens to arrears where tenants were previously advised to pay into the ‘old’ trust account, does trust accounting software maintain a link with the old bank account, what settings need to be changed in trust accounting software and the implications of unpaid creditors etc.

Checklist for licensees – bank reconciliation review

Licensees are expected by legislation to ensure compliance is maintained monthly by signing off on a correctly prepared and balances trust account reconciliation. The problem here is that licensees are often expert real estate agents but do not consider accounting as one of their strong suits. They often do not know what to check and place total reliance on their trust accountant when signing off on the report. This overdue reliance on a single trust accountant is a risk in itself and is the subject of another blog in which I lay out the pros and cons of outsourcing to specialist trust accountants. In my experience, having reviewed hundreds of bank reconciliations, I have seen licensees obliviously signing off on incorrect reconciliations so I have designed a checklist to help.

Licensees should be checking - 

1. The reconciliation between the bank statement and the cashbook should balance;
2. The cashbook opening balance for the month should agree with the closing cashbook balance from the previous month that you signed off on;
3. The bank statement balance per the reconciliation should agree with the bank statement balance normally at the end of the calendar month;
4. The reconciling items should be reviewed in detail to ensure their validity, e.g.
   outstanding deposits should not be more than one-day old and should appear on the bank statement of the following month –
   a) Unpresented EFTs or BPAYs should not be more than one-day old; and
   b) Unpresented cheques should not be older than 18 months, although it is best to follow up any than are more than one-month old;
5. There should be a balances report (sometimes called a trial balance) in which the total agrees with the cashbook balance; and
6. None of the individual balances from the balances report should be negative.