Broker and Property Manager Licensee Advisory:
What to expect when you are audited by the Division of Real Estate.
You’ve closed another transaction, your business is growing and seemingly out of nowhere you receive an audit notification, and it’s at the most inconvenient time. The purpose of this article is to offer tips and suggestions to ensure that your experience with the Division of Real Estate and their auditing staff is a positive one and to assist you in preparing for an audit.
- You will first get an audit notification with a questionnaire to complete and the required documentation to submit.
- Based on the questionnaire answers and supporting documentation, the auditor will either close the audit or request records for an audit by correspondence or by an on-site visit. That decision is based on the size of the organization and the type of activity.
- If a site audit is scheduled, the auditor will work with the broker to set a date for the visit and send, in advance, a request for the documentation that will need to be available. Site audits are nearly always set for two days, but most can be completed within one, if the records requested are made available and are organized.
- If it’s an audit by correspondence, the auditor will request a sample of files to be sent via email or by flash drive.
- Once the audit (site or correspondence) is completed, there could be several outcomes:
- The auditor may find no issues and close the audit;
- Find license law violations that will need to be corrected moving forward;
- Find violations that need to be retroactively corrected; or
- Find violations that are of enough risk to the public that a complaint and review by the Real Estate Commission for potential discipline is merited.
If a complaint is opened, the auditor will send a complaint letter to the broker, to which the broker will need to respond to the alleged license law violations.
Common issues found within an audit
Files not retained:
The auditor may request all documentation for a transaction address, not just those pertaining to the closed file. (If a sale falls through, the documentation must still be retained.) View the Division’s Transaction Files and Retention Records list.
Property managers: 3 way Reconciliations not being done properly or at all:
Many brokers are only doing a 2 way reconciliation (essentially reconciling the bank statement to the journal). However, without reviewing the ledger totals (total liability), the broker will not know of any deficiencies. Take a look at the Division’s 3-Way Reconciliation template to help you understand better.
Disclosures not being made:
Brokers are advised to take the time to review the required forms listed on the Division’s Contracts and Forms webpage. Too frequently, brokers are not obtaining or retaining required disclosures.
Commingling: Broker’s monies cannot be in the trust account:
Monies that are earned by brokers must be transferred out, accounted for on the broker’s ledger, and broker owned properties cannot be maintained in the same trust account. Operation monies cannot be taken directly from the trust account.
Diversion/Conversion: Money belonging to one owner being used to pay for another owner’s expenses.
Practicing law without a license:
Auditors frequently find that brokers themselves are drafting documents, which may constitute practicing law without a license. Chapter 6 of the 2018 Real Estate Manual offers a landmark case that speaks to the topic of brokers practicing law.
Conflicts of Interest/Affiliated Business Arrangements:
Brokers should take the time to review Rule E-25, as auditors often find that conflicts of interest are not being disclosed. In addition, Rule E-46 addresses the disclosure of Affiliated Business Arrangements, which are oftentimes not being disclosed.
Best practices if being audited
Review the available checklists and do a pre-audit of yourself, which will allow you to have a solid and candid interaction with the auditor. Keep in mind, these checklists are a general framework. The auditor may look at more or less information that is referenced on these lists. Chapter 21, entitled Property Management, in the 2018 Colorado Real Estate Manual is good source of information that brokers engaging in property management should review.
There is no positive connotation for the word “audit”, and the auditors understand this. Most audits are routine and random and don’t necessarily mean you’ve done something wrong. Keep in mind that an audit that catches errors, not only protects the public, but protects YOU from potential liability. In many cases, it’s better to catch errors in an audit, rather than learn of violations once an investigation has been opened because a member of the public submits a complaint against you.
Confirm receipt of the audit notification when received.
Good communication between you and the auditor will help ensure an effective and efficient process.
Contact the auditor for any questions.
It’s better to submit the questionnaire with accurate information, so if there is something that is unique to your business, it’s better to reach out to the auditor.
Ask for an extension if it is truly needed.
The auditor won’t continually grant extensions, so don’t overuse a request for one.
Submit documents in time.
Failing to submit documents in the time frame requested is a license law violation (Rule E-21) and creates unnecessary delays. Refusing or delaying the submission of documents may raise suspicion and unnecessarily extend the scope and time frame of the audit. Not providing documents or refusing to provide requested documents may also result in disciplinary action by the Real Estate Commission.
Organize your documents for a faster audit.
The auditor has no desire to unnecessarily drag out an audit, but on occasion a broker will submit documents with no clear organization, which is not efficient. If the auditor requests documents organized in a certain manner, it’s best to follow the auditor’s direction.
Be prepared for the scope of the audit to expand.
The auditor typically narrows the scope of the audit to the areas creating the most risk to the public. If, during the course of the audit, the auditor finds other areas of concern, they can and will widen the audit scope and request more documentation.
Be open and honest.
If you know there is an issue with your files, processes, trust accounts, etc., or you know you are in violation of a license law, it’s better to be forthcoming so the issue can be resolved. Often, if an auditor believes a broker is hiding something, it will extend both the time frame and scope of the audit.
While this should go without saying, cursing, yelling, etc., could give the auditor the impression that you have something to hide.
Even if you delegate some authority to your accountant, you’re still responsible. Be involved and stay involved. The auditor will likely want to ensure that you as the broker know the basics. For example, if you as the broker do not understand the three components of a three-way reconciliation, this leaves both you and the public at risk.
In conclusion, the Division of Real Estate and the auditing staff have no desire to unnecessarily burden you or your business. We do, however, take the business of protecting the public seriously and therefore routinely audit brokers. By reviewing this content, the supporting checklists and performing a self audit, you may minimize your stress if an “Audit Notification Letter” arrives in your inbox.
Division of Real Estate