Facing a Compliance Audit. Now What?
The Goal of a Compliance Audit
The goal of a routine audit is to examine the sponsoring broker’s operating procedures, make sure they comply with the License Act, Administrative Rules and other regulatory requirements, and should there be any deficiencies, advise of such deficiencies, recommend corrective actions and confirm that the corrective actions have been implemented.
Selection of who is audited
Each sponsoring broker is randomly considered for audit regardless of the size of the brokerage. This includes sole proprietorships regardless of whether they only sponsor themselves or have a multitude of sponsored licensees. Particular attention is given to new offices within their first six months of operation.
Audit vs Investigation
An audit is routine in nature, randomly done of all sponsoring brokers and is meant to be of a corrective nature. An investigation is usually triggered by a consumer complaint or an audit that discovers major impropriates and can result in punitive action.
The initial notice of audit
The initial notice arrives in the form of an e-mail addressed to the Designated Managing Broker and the Sponsoring broker advising the office has been selected for an audit which will either be done via email or in person at the business location. Such determination will be made upon receipt of the Compliance Examination Report which must be returned via email to the examiner by the specified date (usually within 30 Days).
Remote or Onsite Audit
Will be determined by the examiner after reviewing the Compliance Examination Report.
The Audit Questionnaire Topics
A. Office Information
1. Location
2. Signage
3. Use of trade name or franchise affiliation
B. Licensees, Agents & Assistants
1. Employment Agreements
2. Licensed Assistants
3. Unlicensed Assistants
4. Corporation or other entity for indirect payment of compensation
C. Company Licensure and related filings with the Secretary of State
1. Corporation
2. LLC.
3. Partnership
D. Brokerage Agreements & Contracts including listing and selling agreements
1. Brokerage Agreements in writing
2. Disclosure of Designated Agency
3. Disclosure of Contemporaneous Offers
4. Disclosure & Agreement for Compensation
5. Names, addresses of the parties
6. Definite termination date
7. All Required Environmental Disclosures
8. Disclosure of Broker Interest
9. Rental Finding Services
10. Property Management Agreements
E. Advertising
1. Accurate & Truthful
2. Name Ratios
3. Agent Interest
4. Sharing of Consumer Information
F. Guaranteed Sales Plan
G. Dual Agency
1. Disclosure & Consent
2. No Broker Interest
H. Escrow
1. Journal
2. Ledger
3. Bank Reconciliation
4. Names of Institutions
I. Record Keeping
1. Transaction Records
2. Are Records Backed Up
J. Supervision
1. Daily Activities
2. New Licensees prior to completing 45-hour Post Licensing
3. Escrow Accounts
4. Licensed, unlicensed assistants and employees
K. Acknowledgements
Your Responses
Your responses help the examiner determine whether the audit will be by mail or in-person.
Auditor’s additional info requests
As a follow-up, if it is going to be a location audit the examiner will be examining files while on the premises and will ask you to have available the outlined files. If by e-mail, the examiner will most likely request the following information via e-mail.
a. A list of all active, pending and closed (last 2 years) listings, sales, rental contracts and property management agreements.
b. A list of all dual agency transactions (active, pending, & closed in the last 2 years).
c. A list of all Broker interest transactions (active, pending, & closed in the last 2 years).
d. Escrow journals, ledgers and bank reconciliations for the last two years.
e. Randomly select file folders (usually 3 to 5) from each of the above outlined categories and review the transaction paperwork from start to finish to assure that all mandatory support paperwork and disclosures are included.
f. A photo of the signage on the building
g. A copy of the Policy and Procedures Manual (not required of sole proprietors with no sponsored licensees).
h. A copy of the Employment Agreement between the Designated Managing Broker and the Sponsoring Broker. This is required of sole proprietors who have sponsored licensees, but not required of sole proprietors who have no sponsored licensees.
Auditor’s corrective measures request and proof of compliance
If deficiencies are discovered, a follow-up email will outline the deficiencies and make recommendations for corrective measures by a specific date. Proof of implementation must be provided to the examiner by the specified date.
Time Frame of Audit 3 to 6 months
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Possible referral to investigation
If licensee fails to comply with required corrective recommendations or if gross deficiencies injuries to the public are discovered during the examination, the file is referred to investigation and possibly prosecution.
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