Entries in audit standards (1)
The problem with escrow accounts
There is no reason to tell you that our industry has changed, since we hear about it everyday through all types of media. The constant steady stream of negative news about the real estate industry has now pressed the Federal Government into action to stop this out of control train heading the US into a recession. On top of that, I am sure you have heard locally of a title agency closing their doors or rumors of a title insurance underwriter shutting an agency down.
The underwriters are fighting an uphill battle due to the overwhelming amount of claims, lack of remittance, fraud, and defalcations. Since the underwriters are now stating significant losses, they have turned their focus to your escrow / trust account in efforts to stop the bleeding.
The fact is that the majority of problems resulting in a loss to the underwriters are generated from the title agencies and law firms escrow / trust accounts.
Almost all of the agency / underwriter contracts require the agent to reconcile their escrow or trust account monthly, in a “3-way” manner. Additionally, most state bars and some state statutes require the same. Therefore, many underwriters are now taking the position of zero tolerance and suspending or canceling a title agent or law firm if their reconciliations do not tie -or- are invalid.
As an auditor for several title insurance underwriters, I can tell you I have seen many good agents suspended and canceled due to their lack of, or, invalid escrow / trust account reconciliations. To make matters worse, these types of situations, for the most part, could have been avoided if the agent knew or contracted with somebody who knew how to properly reconcile their escrow / trust account in a “3-way” manner.
A 3-way reconciliation brings the book balance, adjusted bank balance and trial balance into agreement. This is how we know each penny is accounted for in the escrow / trust account.
Conducting proper monthly 3-way reconciliations is the only way to ensure against possible defalcation, internal fraud, external fraud, negligence, mis-appropriations and bank errors.
Jonathan Yasko
in title company defalcation, jonathan yasko, audit standards, escrow reconciliation
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