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CPPDSM4006A Trust Accounting

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CPPDSM4006A Trust Accounting

CPPDSM4006A Trust Accounting

Trust Accounts are specific forms of bank accounts that must be used by professionals who are required to hold money in ‘trust’ for their clients. Accountants, Real Estate Agents, and Solicitors are examples of professionals that may be required to operate a Trust Account in order to facilitate transactions on behalf of their clients.

  • Clients, whose money is held by these types of businesses, have their interests protected against fraud and mismanagement by regulatory bodies. Therefore, there are very strict rules and regulations relating to who can open and operate a trust account and how it is managed, controlled, monitored, and reviewed to ensure accountability and the protection of clientmoney.

  • For Real Estate Agents in NSW, the Property Stock and Business Agents (PSBA) Act 2002 (the Act) and Regulations 2014 stipulate the ‘who, what, how and when’ of trust account management, as wellas the penalties for offences. Penalties include fines and can be as severe as loss of licence or even jail. Individual smaller parts of the Act are referred to as Sections, and of the Regulations, as Clauses, denoted as “S”, and “C” followed by a number of the section or clause.

  • The Office of Fair Trading (OFT) is the regulatory body that ensures the legislation is adhered to. An agent cannot open a Trust Account without being licensed, and, in order to gain a licence, the agent needs to demonstrate that they not only understand the legislation, but that they are able to apply it to their day to day operations.

  • This unit will provide you with explanations of the legislative requirements and the mechanics involved in operating a trust account to meet the legislativerequirements.

  • Additionally, it will enable you to demonstrate your knowledge of the legislation by applying the information provided to create the systems and procedures for ensuring requirements are met in a timely fashion. You will also be required to demonstrate your ability to implement methods for record keeping and effecting accurate reports as well as monitoring, reviewing and the security measures and procedures to protect, update, and verify trust accounts on an on-going basis.

  • In this unit we will first be examining the rules, regulations, and legislative requirements surrounding trust accounts to establish systems and procedures that ensure compliance with the legislation. Then, we will be applying our knowledge of the legislation to the mechanics involved in operating and maintaining trust accounts, including cashbook entries, ledgers, trial balance, and end of month reconciliations.

  • Trust accounting in general terms is all about ensuring an agent properly cares for the funds entrusted to him/her by the agent’s clients.

  • At the outset it is important to recognise that an agency office acts for its principal first and foremost. An agent cannot commence to sell property, obtain tenants and manage a property, or strata manage a property without an agency agreement. The agreement is between the agent and his principal, that is, the owner of the property.

  • The agreement sets out the terms under which the agent is authorised to act for the principal to sell or to manage, including the rate at which commission can be charged, whether any other fees can be claimed and under what circumstances, and when the fees can be claimed by the agent, and when money owing to the principal and others can be paid.

Clients of the agent include the principal, purchasers, tenants, tradespeople and the like.

“Clients” may also request information about their account and money transacted on their behalf by an agent. The legislation (S101) states that a person directly concerned in any transaction by or with a licensee may request the licensee in writing to render an itemised account of the transaction. The request can’t be for a transaction more than six months old. The request must be in writing and the licensee has fourteen days to comply.

THE LICENSEE AND LICENSEE IN CHARGE

All real estate agencies are either under a company structure or run by a sole trader or partnership. If the agency is run by a company, it will usually operate as a corporation such as ABC Pty Ltd trading as 123 Real Estate. The company must have a corporation licence, at least one director, and it must have a licensee in charge who holds relevant licences to oversee the business being run. It may also employ other licence and certificate of registration holders in the office. In this case, the trust account is to be in the name of the licensee corporation, the name under which it conducts business, for example ABC Pty Ltd trading as 123 Real Estate Trust Account.

In the case of a sole trader such as Fred Smith trading as 123 Real Estate, Fred must have the necessary licence and the trust account will be in his name as licensee in charge, Fred Smith trading as 123 Real Estate Trust Account.

Licensees are responsible for supervising their staff, and ensuring that they utilise the office systems and procedures developed to reflect the legislative requirements. In other words, the licensee in charge is held totally accountable for any breaches of the legislation that occur in their office.

WHAT ARE TRUST FUNDS?

The NSW Property Stock and Business Agents Act 2002 (the Act), says at Section 85, that trust money is money received for, or on behalf of any person, by a licensee in connection with the licensee’s business as a licensee. This includes sales deposits, advertising, rent, rental bonds etc.

What is said in Section 86 of the Act is some of the most important things you will have to remember when dealing with principals and clients of the business. The section says that when an agent receives trust money, it is to be held by the licensee, exclusively for that person, and is to be paid to the person or disbursed as the person directs, and until the money is paid or disbursed as directed, it is to be paid into and held in a trust account, at an authorised deposit taking institution inNSW.

Trust money cannot be mingled with the agents’ funds, and is not available to pay agents’ debts tocreditors.

TRUST INTERNAL AUDIT CONTROLS

A major component of the operation of the Trust Account is the control process that works to minimise and eliminate errors and fraud. Control mechanisms fulfil a major part of the risk management policy and procedure of any agency.

The Key Principles of Internal Audit Control are:

  1. Policies and procedures for the employees to follow, particularly in terms of recordingprocedures,

  2. Reliable reporting systems to measure efficiency and effectiveness, this includes clearly delineated lines of authority and responsibility,

  3. The measures should be preventative,

  4. The financial management system needs to be designed so that management can easily monitor the input and output,

  5. The procedures and policies should be consistently followed by all staff, including management,

  6. Organisational charts allow for clear lines of authority and responsibility so that any gaps in procedure can be clearly identified,

  7. Performance standards and benchmarking that align with the set procedures to ensure that the system is being utilised appropriately and fulfilling requirements,

  8. Careful employee selection. Staff experience must match their responsibilities. Personnel responsible for the financial management of the business must be competent and well trained. It is imperative that they are suitably qualified, have appropriate experience in the relevant software and that they undertake continuing education. Most importantly, background checks will assist in judging integrity,

  9. Job rotation reduces the incidence of fraud,

  10. Maintenance of accurate and adequate records,

  11. Divide responsibilities for related transactions so that verification of tasks can be achieved. Responsibilities where possible should be separated between operations and recording and accounting for transactions,

  12. Separate record keeping and asset control,

  13. Mandatory vacations help to ensure that long term fraud and theft are minimised,

  14.  External audits that test the system,

  15. Create and utilise an audit trail using source documents, and ensure that all employees are informed and educated about the audit trail.

These are just some of the principles and mechanisms that can be used to minimise errors and fraud.

In addition, the agency’s financial management systems need to reflect the outcome of trust account transactions so that an audit is easily able to track the payment of funds from the trust to the general account and create a paper trail.

Effective internal control systems require first and foremost a commitment from the agency’s management to protecting the assets and communicating, implementing and preserving the integrity of the controls.

It is not just about good practice, the OFT Commissioner’s Guidelines require certain procedures to be in place, and an agent can be prosecuted for failing to do so(S32).

GENERAL ACCOUNT

Agency funds, as distinct from client’s funds, are held in the General Account, or sometimes called the Operating Account. At the end of each month agent commissions for managing rental properties, and when the sale of properties are settled, sales commissions, are paid into the general account from the trust account. Other transactions such as payment of office rent, wages, car leases, office supplies etc. are paid from this account.

It must not be confused with the trust account and under no circumstances can trust funds be used to pay into this account unless authorised, or be used to pay bills owing from this account (see S88).

SETTING UP A TRUST ACCOUNT

You’ll notice from the above that trust funds have to be paid into an authorised deposit taking institution approved by the Office of Fair Trading (OFT) and the trust account must be in the name of the licensee, be it a corporation or sole trader.

The OFT website contains a list of authorised deposit taking institutions and includes certain banks, building societies and credit unions. For the sake of convenience here, we’ll refer to them as banks.

The trust account must be in the name of the licensee, the bank must be told the account is a trust account, the bank account name which is usually in the name of the licensee or corporation must include the words “Trust Account”. Also, all books and records including the cheque book, receipt book, deposit book etc must include the name of the licensee or corporation and the words “Trust Account”.

An online registration system for general trust accounts now operates through NSW OneGov (previously called the NSW Government Licensing Service). From 1 January 2015, this supersedes the previous standard forms for opening a trust account (the ‘blue form’) and for closing a trust account (the ‘green form’).

Complete the online process by entering your licence number and email address. NSW OneGov will send you a confirmation email with a notification form attached. Print the attached form and lodge it with your financial institution.

The authorised deposit-taking institution is required to report monthly to the OFT and lodges its monthly returns using this unique identifying number.

Each general trust account needs a unique identifying number. You will need to register each account separately (if you maintain multiple general trust accounts). Nominate which unique identifying number is associated with each account with your bank. If the trust account is held by a corporation, the trust account must be registered using the corporation’s licence number.

Section 86 of the Act states you should send a copy of the notice of the opening of or closing a trust account within 14 days to the OFT.

NSW OneGov will provide licensees with the necessary form(s) to notify the authorised deposit-taking institution in writing that a new or existing general trust account has been registered, and a unique indentifying number issued. NSW OneGov will also notify NSW Fair Trading when a general trust account has been closed and provide the licensee with the form to record the account closure details. The form should be kept by the licensee.

The name of the account would look something like, “ABC Pty Ltd Trading as 123 Real Estate Sales Trust Account”, or for a sole trader, “Fred Smith Trading as 123 Real Estate Sales Trust Account”.

In real estate offices, an agent can have one trust account to cater for all sales and property management transactions. As this can become difficult to manage where there are large numbers of transactions, the agent can have a separate Sales trust account and a Property Management trust account.

In the case of sales transactions, sometimes the purchaser requests the sales deposit to be invested. In this case the agent deposits the whole of the sale deposit into a special purpose trust account at the bank, known as an IBD or interest bearing deposit account. This account is in the names of the licensee and the vendor and purchaser. Interest is earned on the deposit and shared by the purchaser and vendor on settlement of the sale of the property.

 

 



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