What DRE auditors actually check when they audit a property manager's books
What DRE auditors actually check when they audit a property manager's books
Every year the California DRE audits property management brokers for trust fund compliance. As of their 2023-24 report, 57% of those audits found recordkeeping violations and nearly a third found actual shortages in trust accounts. That number moves year to year but the pattern doesn't. Most violations aren't cases of deliberate fraud. They're process failures that accumulated over time because nobody was watching the specifics closely enough.
Here's what auditors check, in the order they typically work through it.
Account titling at the bank. Not in the software, at the bank. The signature card has to reflect the account's fiduciary status, something like "[Broker Name], as Trustee, for the Benefit of Clients." A lot of companies get flagged on this before the auditor looks at a single ledger.
Deposit timing. California requires trust funds deposited within three business days of receipt. Auditors pull deposit dates and match them to receipt dates. Late deposits are a violation even if no money is missing.
The control journal. Every trust fund transaction needs a columnar record showing date, payor or payee, amount in, amount out, and a running daily balance. Missing any one of those columns is a Regulation 2831 violation. A standard checkbook or bank statement does not qualify.
Separate beneficiary ledgers. One ledger per owner, one per tenant. Not a combined report. If you can't trace every dollar in the trust account to a specific person, you're out of compliance even if the total balance is correct.
The three-way reconciliation, done monthly. Bank balance, register balance, and the sum of all individual ledgers have to match exactly, every month. Auditors check whether it was actually performed, not just whether the numbers look clean today. A missed month is its own violation.
Supporting documentation. Deposit slips, invoices, owner instructions. Auditors pull transaction samples and trace them back to source documents. A transaction with no documentation gets flagged even if the math works.
The fee disbursement timeline. Earned fees have to come out of the trust account within 25 days of deposit in California. Leaving them longer is commingling.
Most failed audits aren't one large problem. They're several small ones that built up because nobody was tracking the specifics. A missing column. A reconciliation done but never signed off. Fees sitting in the account a few days too long.
What DRE auditors actually check when they audit a property manager's books
Every year the California DRE audits property management brokers for trust fund compliance. As of their 2023-24 report, 57% of those audits found recordkeeping violations and nearly a third found actual shortages in trust accounts. That number moves year to year but the pattern doesn't. Most violations aren't cases of deliberate fraud. They're process failures that accumulated over time because nobody was watching the specifics closely enough.
Here's what auditors check, in the order they typically work through it.
Account titling at the bank. Not in the software, at the bank. The signature card has to reflect the account's fiduciary status, something like "[Broker Name], as Trustee, for the Benefit of Clients." A lot of companies get flagged on this before the auditor looks at a single ledger.
Deposit timing. California requires trust funds deposited within three business days of receipt. Auditors pull deposit dates and match them to receipt dates. Late deposits are a violation even if no money is missing.
The control journal. Every trust fund transaction needs a columnar record showing date, payor or payee, amount in, amount out, and a running daily balance. Missing any one of those columns is a Regulation 2831 violation. A standard checkbook or bank statement does not qualify.
Separate beneficiary ledgers. One ledger per owner, one per tenant. Not a combined report. If you can't trace every dollar in the trust account to a specific person, you're out of compliance even if the total balance is correct.
The three-way reconciliation, done monthly. Bank balance, register balance, and the sum of all individual ledgers have to match exactly, every month. Auditors check whether it was actually performed, not just whether the numbers look clean today. A missed month is its own violation.
Supporting documentation. Deposit slips, invoices, owner instructions. Auditors pull transaction samples and trace them back to source documents. A transaction with no documentation gets flagged even if the math works.
The fee disbursement timeline. Earned fees have to come out of the trust account within 25 days of deposit in California. Leaving them longer is commingling.
Most failed audits aren't one large problem. They're several small ones that built up because nobody was tracking the specifics. A missing column. A reconciliation done but never signed off. Fees sitting in the account a few days too long.
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