Management Rights owners, Real Estate Agents and Letting Agents must hold a current licence issued by the Office of Fair Trading (OFT) and ensure that their business complies with the relevant legislation. The OFT oversees the compliance of business operators with the legislation and can inspect agents’ trust account records at any time. Failure to adhere to requirements can lead to licence holders being issued with official warnings or infringement notices.
The OFT, however, recognises that most licence holders want to comply with the law and in most cases only issue educational advice and guidance for minor or first-time offences.
The regulatory priorities for 2024-25, issued by the OFT state that an area of focus for regulatory efforts this financial year will be in protecting monies held in trust by real estate agents and motor dealers. It is therefore important for operators to ensure that they are following correct procedures and maintaining accurate records.
The Property Occupations Act 2014 and Agents Financial Administration Act 2014 exists to ensure trust money held by agents is properly dealt with and can be accurately accounted for at all times. Under the legislation operators are required to have their trust accounts audited twice per year, with auditors required by law to notify the OFT of any issues identified.
Common mistakes identified in Trust Account audits
We have highlighted some of the common mistakes we come across when completing trust account audits, helping to ensure similar issues don’t arise for your business and to keep you compliant with the legislation.
Not having a checklist in place for End-of-Month Processes
It may seem like an obvious tool to utilise a checklist when completing the end of month process in your trust account software to mitigate the occurrence of minor errors, however surprisingly many Management Rights businesses don’t have one in effect.
What are the advantages of using a checklist in my business?
By having a checklist you can refer back to and update as procedures change, you ensure the business remains compliant with regulations, avoid common mistakes and mistakes made in prior months. You will also have all the necessary information available to an external advisor throughout an audit.
If you have purchased a Management Rights business, it is likely the previous manager will provide an audit checklist during the handover period, however, if not an accountant such as Archer Gowland Redshaw can work with you to prepare one for future use.
End of Month Reconciliations
One of the most common mistakes which arises during an audit are issues surrounding end of month reconciliations – specifically confusion involving dates, bank balances, and banking transaction history reports.
According to the Agents Financial Administration Regulation 2014 – Division 4, your end of month reconciliation must be completed within five business days following the end of the month. Where the last day of the calendar month falls on a weekend or public holiday, you have five days from the next business day to complete the reconciliation.
What day of the month should I complete the end of month reconciliation?
A common mistake among many owners is to complete the reconciliation on the last day of the month, rather than waiting until the month finishes. This can inadvertently lead to the incorrect end of month bank account balance being used for the reconciliation due to funds clearing the trust account at the end of the day after the reconciliation has been finalised.
Another issue is end of month reconciliations completed after the five business day timeframe due to licence holders being away from work over the end of month period. Fortunately, given that the majority of trust account software providers now have cloud-based options available, reconciliations can be completed at anytime away from the office.
Why do the end of month bank account balances on bank transaction listing reports change?
Reconciliations are usually completed using transaction listing reports from internet banking rather than bank statements since these are not commonly received before end of month reconciliations are required to be completed. Transactions on this report which are marked as “pending” after the end of the month are sometimes included in the current month reconciliation resulting in the incorrect end of month balance being used for the reconciliation.
The layout of the transaction listing reports differs between banks with some more clear in showing which transactions have cleared and which transactions are pending. If you find your banks reports are not user friendly, then you do have the option to open a statutory trust account with another bank.
We recommend for end of month reconciliations to be scheduled to be completed after one full business day after the end of the month to allow for all pending transactions to clear the bank account to ensure the correct end of month bank balance is used. For example, if the last day of the month was on a business day, the reconciliation can be completed the next day. However, if the end of month falls on a weekend or public holiday, it is best to complete the reconciliation on the Tuesday or on the second business day after the public holiday.
Are your end of month reconciliation reports showing the correct date?
Additionally, it is important to check that you are using the end of month date (rather than the bank statement date or the actual date the reconciliation is being completed) to ensure the correct bank account balance is being reported. Commonly the bank account figures used for the end of month reconciliations are correct, however the reconciliation reports show the wrong date. Care needs to be given when reviewing the reconciliations prior to end of month rollover to ensure accuracy and compliance with the legislation.
Although the above mistakes are administrative in nature, they are still required to be reported to the OFT in the final audit report. However, it is important to note that reoccurring issues can result in formal warnings from the OFT in the future.
Failing to correctly notify the Office of Fair Trading on trust account changes
Licensees are required to notify the OFT when there has been a change regarding a trust account. When a change has occurred, the agent must complete the Agents financial administration Form 5 and provide a copy to the OFT. Notifiable changes include the following:
- Opening of a trust account
- Closure of a trust account
- Change of name to a trust account
- Notify of the appointment of an auditor
- Notify of a change of auditor
- Ending of an auditor’s appointment
Not maintaining digital records – alongside hard-copies
Whilst some governing bodies still require hard-copy of any reports, in recent years, the Management Rights industry has seen a transition to more digital reporting and the introduction of various cloud-based platforms.
As such, it is important you save required reports as digital files alongside keeping hard-copies of the final end of month reconciliation and supporting documents. A lack of a digital backup saved each month is a common issue which can occur, therefore being mindful to keep digital records is important. We recommend saving copies of all files to different locations (ie. USB hard-drive, another computer, cloud based storage etc).
To assist in this, transitioning to an online/cloud-based platform could be worthwhile investment. Whilst it can be a daunting process, a digital platform & workflow can have tremendous benefit – helping to support day-to-day operations and creating a well-systemised and documented business. Furthermore, whilst some cloud-based software providers allow for historical viewing of records/reports, it is recommend to save electronically all reports, as required by the OFT for a minimum of five years'.
If you are unsure about how to transition to a digital/cloud-based platform, we can help assist you in selecting the right Management Rights software tool appropriate to your business needs.
For More Information
For more information on Management Rights trust account audits, please contact Greg Rankin – Manager on (07) 3002 2699 or via email info@agredshaw.com.au.
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