Department of Real Estate

Introduction to Audits

Cecilia Yan
Supervising Auditor
Northern California
 DRE - Our Mission
• The mission of the DRE is
to safeguard and promote
the public interests in
REAL ESTATE MATTERS
through licensure,
regulation, education and
enforcement.
 Audits Mission Statement
• To protect the
consumer
through financial
compliance audits
of real estate
licensees and
subdivision
developments.
 DRE’s District Offices
• Northern Region (NRA)
• Sacramento
• Oakland
• Fresno
 DRE’s District Offices
• Southern Region (SRA)
• Los Angeles
• San Diego
 Major Sections Within DRE

• Licensing
• Enforcement (Oakland)
• Audits (Oakland)
• Legal
• Subdivisions
 Types of Business Activities
Audited
• Sales
• Property Management
• Mortgage Loans- Packaged, Private
Money
• Non-independent Broker Escrows
• Business Opportunity
• Subdivisions
 Types of Audits Closed
Statewide – 6/1/18 to 5/31/19

Investigative
52%
Proactive
48%

495 Audits
Completed
 Audits Closed by Activities
Statewide – 6/1/18 to 5/31/19
Getting that call from DRE

Business & Professions Code §10148

 Business & Professions Code Section 10148(a)

• “...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….”
 Audit Procedures
• Contact and confirm audit date follow by
issuance of an appointment letter
• Entrance conference – briefing of audit
process, establish an understanding of
general business operations
• Review of records and performance of
compliance testing of audit program
• Exit conference
 Records To Be Reviewed
Depending on the type of licensed real
estate activities performed:
• Loan files- loan applications, settlement
statements, promissory notes, servicing
agreements
• Property management files- property
management agreements
• Sales transaction files- purchase
agreements, settlement statements
Records To Be Reviewed (con’t)
Other records:
• Broker/Salesman Agreements
• Statistics of Loan Transactions- Volume and
Amount
• Statistics of Sales Transactions-Volume and
Amount
• Numbers of Properties Managed
• Annual Trust Funds Collected
• Log of Trust Funds Collected Not Deposited into
a Trust Account
 Remember the Basics

• Agents could be holding either salesperson or

broker licenses.
• Broker-salesperson relationship agreements
maintained for both
• Salespeople employed must be registered under
the responsible broker’s license
• Broker- Associates employed required to file
notification to the DRE (RE 215)- B&P Code
Section 10161.8
 Remember the Basics

• Each business location is licensed (RE 204, RE

204A)
• Main office and branch locations
• Broker’s license is displayed at each business
location
• Fictitious business name is licensed (RE 204,
RE 204A)
• All real estate records are maintained for at
least 3 years
 Fictitious Business Name
• To register a fictitious business name under a
broker license – file a fictitious business name
form (RE 204, RE 204A)
• A certified copy of the fictitious business name
statement filed with the county clerk is required
to be submitted with the application
• Salesperson owned fictitious business name
used for solicitation needs to be registered under
the responsible broker’s license
• B & P Code Section 10159.5 and Reg. 2731
Fictitious Business Name (con’t)
Must not be:
• Misleading
• Implies a partnership or corporation when
a partnership or corporation does not exist
in fact
• Includes the name of a salesperson
• Is the name of a revoked licensee
 Team Name
• The use of team name does not require a
separate license to be issued
• Name is used by two or more agents who
work together to provide licensed real
estate services or who represent
themselves to the public as being part of a
team.
• Team name include surname of at least
one licensed member in conjunction with
“group” or “team”
 Team Name
• Example of team name: Smith Team, King
Real Estate Group, etc
• Advertising and solicitation materials that
uses a team name must also display the
license number of at least one of the team
members as well as the identity of the
responsible broker
• B&P Code Section 10159.6 and 10159.7
(a)(5)
Trust Funds Records To Be Reviewed

• Trust Fund Records for Each

Bank Account Maintained to
Hold Trust Funds:
• Control Records, Beneficiary
Records, Reconciliation Reports
• Bank Statements, Deposit Slips,
Canceled Checks
• Bank Signature Cards, Bank
Letters
Common Trust Funds Violations

• Business & Professions Code Section 10145

and Commissioner’s Regulations:

• 2832
• 2832.1
• 2831.1
• 2831.2
Common Trust Funds Violations

Business & Professions Code §10145:

Handling of Trust Funds
• Trust funds must be placed into one of 3
places: a neutral escrow depository; or into the
hands of the principal; or into a proper trust
fund account
• Not an interest-bearing account, with
exception at the request of the principal
and funds were kept distinct and separate
Common Trust Funds Violations

Commissioner’s Regulation 2832:

Trust Fund Handling
• Trust funds must be
delivered/deposited into one of
three places mentioned above
within 3 business days.
• Account designation - bank
signature card.
Common Trust Funds Violations
Commissioner’s Regulation 2832.1:
Trust Fund Handling For Multiple
Beneficiaries

• Trust Fund Shortage

• If using a trust account for more than one
beneficiary, you must obtain all owners’ written
permission PRIOR TO each disbursement that
results in the use of their funds to cover the
expenses of someone else.
 Trust Fund Shortages
6/1/18 to 5/31/19
$8,644,482.69 in total trust fund shortages

Breakdown by real estate activity:

$5,596,149.38 – Property Management
$11,364.72 – Mortgage Loans
$2,619,727.30 – Broker Escrow
$9,500.00 – Business Opportunity
$407,741.29 – Sales
Common Trust Funds Violations
Commissioner’s Reg. 2831.1:
Separate Record for Each Beneficiary or
Transaction

• Usually related to incomplete or inaccurate

Separate Records
• Must have the detail referenced in Reg.
2831.1(a) and maintain in chronological
sequence
• Must account for Unidentified Funds
 Regulation 2831.1 (a)
• Date of Deposit/ Disbursement
• Amount of Deposits/ Disbursements
• Date of Deposits/ Disbursements
• Check numbers
• Deposit Reference numbers
• Date and Amounts of Interests Credited to
the Account
• Running Balance
Common Trust Funds Violations
Commissioner’s Reg. 2831.2:
Trust Account Reconciliation

• This is a monthly reconciliation of Control

Record (Reg. 2831) to Separate Records.
• Do your monthly reconciliation between
books and bank, THEN perform this
REQUIRED reconciliation.
• Power point on website under “Licensee
Resources”
 What Happens After The Audit?
Proactive Audits:
• Closing letter
• Corrective Action Letter
• Communications from Other DRE
Sections
Investigative Audits:
• Closing Letter from Enforcement
• Communications from Other DRE
Sections
 Ways to Avoid Violations

• Have adequate separation of duties between

money handlers and accounting function.
• Be actively involved in accounting function.
• Establish written policies and procedures
regarding supervision and practice monitoring
compliance.
• Be up to date with any real estate law changes
• Ask Us!
 Department of Real Estate
Audit Section
Contact:
Cecilia Yan
Supervising Auditor
Northern Region
(510) 622-2537
Cecilia.Yan@dre.ca.gov