What would happen if one of your customer ledgers had a negative balance that went undetected for several months or if a mortgage payoff never cleared the bank? Or maybe one of your closers forgot to issue a check for taxes or a receipt that you were supposed to collect was never received?
These are just a few of the examples of where a regular reconciliation of your trust accounts can help identify problems, enabling you to take the appropriate corrective actions. However, completing a reconciliation is only the first step. Because reconciliation reports contain a large amount of valuable and important information, it is recommended that managers of settlement service companies review and analyze reconciliation reports, at minimum, on a monthly basis, regardless of whether these reports are prepared internally or by a third-party service.
The best way to identify any potential issues with your trust account is to perform a 3-way reconciliation, where you need to reconcile trial balance, book and escrow bank balances to make sure they all agree. In addition, you will need to look at each supporting report, that comes with a 3-way reconciliation report, to see any details behind the numbers. My former boss always used to say, "You gotta get happy with the numbers!" If you don't understand what the numbers are telling you, you can't be happy with the numbers.
In addition to reviewing an escrow reconciliation report, you should also review the following supporting reports for even greater insight and peace of mind:
- Trial Balance that provides the balance of every file with both positive and negative balances
- Outstanding Receipts and Disbursements which you have booked, but have not yet cleared the bank
- Book Balance Report, containing the details of the receipts and disbursements that have been posted to the book during the period
- Statement Proofing Register, providing the list of all receipts and disbursements that have cleared the bank during the period. In most cases, they should agree with your bank statement.
Having been an Auditor for a National Underwriter at one point in my career, I can tell you, without a doubt, that these reports will disclose some potential red flags, such as:
- Files with negative balances
- File balances of $10,000 or more that are over 10 days old
- File balances of any amount over 120 days
- Outstanding checks over 180 days old
- Outstanding mortgage payoffs over 10 days old
- Deposits in transit over 90 days old
Each of these situations is a potential indicator of an even bigger problem. The good news is that a regular review of your 3-way reconciliation reports will disclose all of these issues and even more. My recommendation is spend at least half an hour each month to "get happy with the numbers" and involve a third-party reconciliation service to provide better segregation of duties and extra set of eyes on your customers' accounts.
Want to learn more about ways to get happy with your numbers and keep your accounts in balance?