The uncomfortable thing about a trust account examination is that most of the work has to be done before you know it is coming.

An examiner reviews the records available for the period under review. A short preparation window can help you identify and address current problems, but it cannot legitimately recreate a historical reconciliation trail that was never completed or documented.

Terminology varies by jurisdiction. Regulators variously describe the process as an audit, an examination, or a review, and the procedure differs accordingly. What follows uses the terms interchangeably and stays general, because the specifics belong to the state that licenses you.

How do you prepare for a trust account audit? Confirm the current trust account balance, complete the current reconciliation, review every reconciliation within the period under examination, verify that individual owner and tenant ledgers support the control balance, and gather the documentation supporting receipts, disbursements and transfers. Because requirements vary by jurisdiction, the exact records, retention period and procedure should be confirmed with the applicable regulator.

How a Trust Account Examination Can Arise

The trigger depends on the jurisdiction and the regulator. Common possibilities include routine or periodic examination, selection for review, a complaint or enforcement matter, or another regulatory event. Some jurisdictions also permit examinations without advance notice.

Two practical consequences.

1. The scope can change. A review may begin with a specific issue or transaction, but the regulator's authority and the scope of the examination depend on the applicable jurisdiction and circumstances.

2. Only the routine case can be planned for. Building records that stand up to a scheduled review is what makes an unannounced one manageable.

What Gets Requested

The specific list varies by jurisdiction, but the categories are consistent enough to prepare against.

Account records

• Bank statements for the period under review

• Cancelled cheques or payment records

• Deposit records

• Evidence the account is properly designated as a trust account

Reconciliations

• Completed reconciliations for each period

• Supporting reconciling item schedules

• Evidence of who prepared and reviewed each one

Ledgers

• The trust control account

• Individual owner and tenant sub-ledgers

• A sub-ledger listing summing to the control account balance

Supporting documentation

• Management agreements

• Leases

• Receipts for funds taken in

• Invoices and authorisation for disbursements

• Records of fee transfers with their calculation

Policies and controls

• Written trust account procedures

• Signatory authority

• Records of who may authorise withdrawals

One item that is often missing is the middle one. Plenty of operators have bank statements and can produce a ledger. Fewer can produce every completed reconciliation for the period under review, with reconciling items named and a reviewer recorded against each.

A Practical Order for Preparing Your Records

There is no universal examination sequence across jurisdictions. For preparation purposes, though, it helps to organise records in the logical order many trust account reviews follow: account records, reconciliation, ledger accountability, transaction support, and transfers.

1. the account itself. Properly designated, at an appropriate institution, with any required notifications made.

2. bank against books. The adjusted bank balance compared to the trust ledger. Quick, and it establishes whether the records are broadly reliable.

3. ledger against sub-ledgers. The total of all owner and tenant balances compared to the control account. This comparison is particularly important because it tests whether funds are correctly attributed rather than simply present in the account. The mechanics of a three-way reconciliation cover how the three balances relate.

4. transaction support. A sample of receipts and disbursements traced end to end: the money arrived, it was posted to the right person, it was disbursed for an authorised purpose with documentation behind it.

5. the crossings. Transfers between trust and operating are another point examiners may test, including whether each transfer was an earned fee, whether the calculation supports it, and whether anything moved in the other direction. The movements between the two accounts are covered separately.

A material shortage or unexplained misallocation can significantly change the focus of a review, because the issue then concerns accountability for client funds rather than recordkeeping.

Findings That Recur

Not the dramatic ones. The ordinary ones.

• Reconciliations not performed, or not evidenced. The work may have been done. If there is no completed reconciliation on file with a date and a preparer, it did not happen as far as the record is concerned.

• Unidentified differences carried forward. A small unexplained balance sitting in the reconciliation month after month, described as "timing" with no transaction named behind it.

• Stale reconciling items. Outstanding cheques months old, deposits in transit that never arrived. Each one is a question, and a list of them is a pattern.

• Earned fees left in the account. Money belonging to the management company remaining in a client trust account when the applicable requirements call for the fee to be transferred, often because fee transfers were done in batches and the batch slipped.

• Disbursements without documentation. A payment made from the trust account with no invoice, no authorisation and nothing tying it to the beneficiary whose funds were used.

• Adjustments to balances. A sub-ledger balance corrected directly rather than by a posted transaction. Directly changing a balance without a documented transaction can make the underlying correction difficult to trace and may prevent an examiner from establishing how the balance changed.

• Records that cannot be produced. Retention periods vary by jurisdiction and are generally measured in years. A record that exists but cannot be located within a reasonable period is functionally missing.

• Deposit handling that does not match the rule. Where deposits are required in a separately designated account, or subject to their own timing and notification requirements, the accounting around deposits is examined on its own terms rather than as part of general trust activity.

When You Have Notice

If you get a notice period, use it to find problems rather than to tidy.

• Run a current reconciliation first. Before assembling anything else, establish where the account actually stands today. If there is a break, you want to know about it before someone else does.

• Check every period in scope. A gap in the reconciliation history is worse than a difference, because it cannot be explained after the fact.

• Assemble in the order above. Account records, reconciliations, ledgers, supporting documents, policies. Preparing in that sequence makes gaps visible early.

• Identify any known exceptions. A disbursement with incomplete documentation, a stale outstanding item, or a missing review sign-off is easier to investigate internally when you already know it exists.

• Take advice before deciding how to present it. Whether and how to disclose a known issue, and what a correction means at that stage, depends on the jurisdiction and the circumstances. That is a question for an attorney or your compliance adviser rather than a judgement made in the week before a visit.

Do not create retrospective entries simply to make an old reconciliation appear to balance. Where a historical difference is discovered, document the underlying cause, the investigation performed, and any corrective entry in accordance with the applicable requirements.

After a Finding

What follows depends entirely on the jurisdiction, the nature of the finding and the circumstances, and it is not something to work out from a general article.

Broadly, outcomes range from a note on file, through a required corrective action with a deadline, to formal disciplinary proceedings where funds are missing or records were falsified. The distinction that tends to matter most is between a control weakness and a shortfall in client funds.

Two things worth doing regardless.

1. Fix the cause, not the instance. A finding about one undocumented disbursement is about the process that allowed it. Correcting the single transaction and changing nothing else invites the same finding next time.

2. Document the remediation. What changed, when, and who is responsible for it. If there is a follow-up review, that record is what it looks at.

Where a finding involves missing funds or suggests anything beyond administrative error, take legal advice before responding.

The Standing Position

The operators who find examinations uneventful are not better prepared. They are continuously examinable.

That comes down to a short list. Reconciliations completed on the required cycle, evidenced, with a preparer and reviewer recorded. Differences named rather than described. Every disbursement traceable to an authorised purpose and a beneficiary. Fee transfers documented with their calculation. Records retained and retrievable. Written procedures that match what people actually do.

None of that is built in the fortnight before a visit. All of it is built by doing the required reconciliation and recordkeeping properly throughout the year. 

The test worth applying is simple: if a notice arrived tomorrow with a short response window, what would you be scrambling to produce? Whatever the answer is, that is the gap.

Frequently Asked Questions

1. What triggers a trust account audit?
Triggers depend on the jurisdiction and regulator. Common possibilities include routine or periodic examination, selection for review, a complaint or enforcement matter, or another regulatory event. Some jurisdictions permit examinations without advance notice.

2. What records should a property manager have ready for a trust account examination?
Bank statements and payment records for the period, completed reconciliations with supporting schedules and evidence of review, the trust control ledger and individual owner and tenant sub-ledgers, management agreements and leases, documentation supporting receipts and disbursements, records of fee transfers with their calculation, and written procedures covering signatory authority.

3. How should records be organised for a review?
A workable order is account records, then the bank-to-ledger comparison, then the ledger-to-sub-ledger comparison, then transaction support, then transfers between trust and operating. Procedures vary by jurisdiction, but preparing in that sequence makes gaps visible before someone else finds them.

4. What are the most common trust account findings?
Reconciliations not performed or not evidenced, unexplained differences carried forward without an identified cause, stale reconciling items, earned fees left in the trust account, disbursements without supporting documentation, and balance adjustments made directly rather than as posted transactions.

5. How far back does a trust account examination go?
It depends on the jurisdiction and the reason for the review. Record retention requirements are generally measured in years and vary by state and licence type, and records within the retention period may be requested. The applicable requirement should be confirmed locally.

6. What happens if an examination finds a problem?
Outcomes vary by jurisdiction and by the nature of the finding, ranging from a note on file through required corrective action to formal proceedings where client funds are missing. Where a finding involves a shortfall in client funds or anything beyond administrative error, legal advice should be taken before responding.

Build for the Ordinary Day

An examination tests what your records already are. The preparation that matters is the reconciliation you did in March, evidenced properly, with the reviewer recorded.

Everything in the week before a visit is assembly. If the underlying discipline is there, assembly is all it needs to be.

RIOO is a property management platform built on NetSuite, with leasing and property accounting in the same underlying system.

Note: Guidance in this article is general and does not constitute legal advice. Examination procedures, terminology, notice periods, record retention requirements, findings and disciplinary outcomes are set by individual states and vary by jurisdiction and licence type. Where an examination is notified or a finding is made, take advice from an attorney or compliance adviser familiar with the relevant state's requirements.