The Trust Account That Didn't Balance
Andre is the broker-owner of a 12-agent firm. His bookkeeper, who handles the trust account, resigned abruptly. On review, Andre finds: the trust account ledger shows a balance of $84,300, but the bank statement shows $81,900 - a $2,400 shortfall. He also finds that a $1,500 earnest money deposit from a buyer was deposited into the firm's operating account three weeks ago 'by mistake' and has not been moved. Two security deposits totaling $6,000 are held in the trust account but are not broken out in the ledger. The firm's policy manual says reconciliations are done monthly, but the last reconciliation on file is 14 weeks old. A closing is scheduled Friday that depends on the $1,500 earnest money. Andre is unsure whether to tell anyone.
1. Identify each deficiency and explain why it matters independently of whether anyone lost money.
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Four deficiencies, each a separate problem:
- $2,400 shortfall between ledger and bank statement. Whether it is a bookkeeping error, a bank fee, or a misappropriation, an unreconciled variance means the firm cannot currently prove client funds are intact. That is the deficiency, regardless of cause.
- $1,500 earnest money in the operating account. Client funds must be held in the trust account; commingling with operating funds is prohibited even temporarily. 'By mistake' explains the cause but not the cure.
- $6,000 in unbroken-out deposits. Funds held for specific clients must be identifiable. An undifferentiated lump sum cannot be reconciled to individual obligations.
- 14-week reconciliation gap against a monthly policy. The gap is why the other three problems went undetected. The control failed before the money did.
Each matters on its own because trust-account rules are designed to prevent loss, not merely to remedy it. A firm that cannot reconcile cannot demonstrate compliance even when every dollar is present.
2. What must Andre do about the $1,500 before Friday's closing, and what are his options on the $2,400?
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The $1,500: Move it to the trust account immediately, document the transfer, and record it against the correct buyer and transaction so Friday's closing is supported by properly held funds. Do not simply leave it in operating and 'true up' later. The move should be same-day and reflected in the ledger before the closing disbursement.
The $2,400: Andre must first determine the cause before deciding the remedy. Steps: obtain bank records for the full period, re-perform the reconciliation line by line, and identify whether the variance is a timing item, an unrecorded disbursement, a bank charge, or a missing deposit. If it is a firm error, the firm must restore the funds from its own money promptly. If it appears to be misappropriation, Andre should preserve records, consult counsel, and follow the applicable reporting obligations - he should not attempt to quietly absorb it. The one thing he must not do is wait; an unexplained variance that sits unresolved becomes harder to explain every week.
3. Andre considers telling no one because 'it will probably sort itself out.' Evaluate that choice and describe the reporting and recordkeeping he owes.
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'It will sort itself out' is the failure mode, not a plan. Trust-account variances do not self-correct; they compound, and the 14-week gap shows what happens when no one looks. Silence also exposes Andre personally as the responsible broker: the reconciliation duty and the supervision duty are his, and a known shortfall that he concealed is far worse than one he discovered and addressed.
Reporting and records: Restore the reconciliation immediately and then monthly going forward, signed and dated. Keep bank statements, the ledger, reconciliations, and deposit/disbursement records for the required retention period. Document the corrective steps taken on the $1,500 and the $2,400, including who was notified and when. Notify affected clients whose funds were mishandled to the extent their funds were at risk. If misappropriation is suspected, follow the jurisdiction's reporting requirements and involve counsel before communicating further. The record Andre builds now is the evidence that he detected and corrected the problem rather than ignored it.