As everyone knows, the California Bureau of Real Estate (CalBRE) periodically conducts financial compliance audits of real estate brokerages. The primary focus of CalBRE audits is the handling of trust funds by licensees and compliance with real estate law. However, audits also look for compliance with financial-related laws and regulations such as:

  • predatory lending;
  • multi-lender law;
  • private money reporting (threshold broker);
  • broker-escrow laws;
  • subdivider assessment payments; and
  • other money-related issues.

When the CalBRE performs an audit, they are either:

  • investigative audits; or
  • routine audits.

Investigative audits are initiated based on:

  • a complaint from the public; or
  • other information received indicating probable violations by the broker or a licensee.

Routine audits are those performed on randomly selected brokerages, especially those engaged in real estate activities where the risk of financial loss to the public is high, such as:

  • mortgage loan brokers;
  • property managers; and
  • broker-owned escrows.

If your brokerage is selected for an audit, you, as the broker, will receive a letter from the CalBRE giving notice you are being audited or investigated. In addition to reviewing your trust fund records, expect the auditor to investigate any number of procedures and documents within your brokerage, including:

  • licensing compliance;
  • transaction files; and
  • recordkeeping.

In addition to audits, the CalBRE also conducts broker office surveys. Broker office surveys involve unannounced visits to brokers’ offices. They are conducted to review specific issues and multiple transaction documentation to evaluate a broker’s business practices and compliance with real estate law.

Surveys generally do not include in-depth examinations of trust fund handling or finance-related compliance issues. However, if trust fund or financial-related noncompliance is suspected by the investigator, an audit is requested for a detailed CalBRE examination.

How an audit works

The audit typically begins with a series of questions by the auditor. The auditor may request documentation for their review. Prior to the audit, you’ll want to locate and gather this documentation and have it ready for review. Typical documentation requested during an audit includes:

  • copies of all salespersons’ licenses and broker-agent employment agreements [See first tuesday Form 505 and 506];
  • bank and reconciliation statements for all trust accounts [See first tuesday Form 544-1];
  • trust fund records including receipts, deposits and disbursements;
  • transaction files; and
  • corporate records.

Common violations found in an audit

The most common violations found during CalBRE audits involve:

  • trust funds;
  • record retention;
  • fictitious name use; and
  • mortgage loan disclosures.

Related article:

CalBRE: Ten Most Common Violations Found in DRE Audits

Trust fund violations

Several trust fund violations are frequently called out during CalBRE audits. These violations include:

  • the maintaining of trust fund records (or lack thereof);
  • reconciliation of trust accounts;
  • trust fund shortages;
  • trust fund handling;
  • trust account withdrawals; and
  • commingling.

A broker maintains a record of all trust funds received and deposited. Trust fund information is entered in columnar form in chronological order. [Calif. Bureau of Real Estate Regulation §2831; see CalBRE Form RE 4522]

A separate record of trust funds is maintained for each beneficiary or transaction to account for all funds deposited into a trust account, identifying the beneficiary who has funds in the account. [CalBRE Reg. §2831.1]

The total of all separate beneficiary or transaction records are reconciled with the balance of all trust funds received and paid out at least once a month, unless no bank account activities occurred. This accounting process, best accomplished by the use of digital accounting programs, confirms the balance of all trust fund records is equal to the bank account’s cash balance. [CalBRE Reg. §2831.2; see first tuesday Form 544-1]

A trust fund shortage occurs when the balance of trust fund bank account is less than the total broker liability to all owners of the funds. Trust fund shortages are often the result of:

  • failing to record a disbursement;
  • understating the amount of a check disbursed; or
  • overstating the amount of a deposit on the beneficiary ledger.

These simple mistakes lead to the broker’s ledger showing more funds available than are actually in the trust fund bank account. When it comes time to pay the beneficiaries, brokers pay out what is shown in their ledgers, instead of reviewing the funds available in the actual trust fund bank account. Thus, the payout is greater than the actual trust fund bank account, causing a trust fund shortage.

When handling trust funds for multiple beneficiaries, the broker is required to obtain written consent from every owner of funds in the account prior to any disbursement that will cause the balance of the account to be less than the trust funds held by all trust fund beneficiaries. [CalBRE Reg. 2832.1]

Within three business days of receiving trust funds on behalf of another, the broker is required to place the funds received:

  • into the hands of the owner of the funds;
  • into a neutral escrow depository; or
  • into a trust fund account. [Bus & P C §10145; CalBRE Reg. §2832]

Withdrawals from a trust fund account may be made only upon the signature of the broker or, if specifically authorized in writing by the broker, by:

  • a salesperson licensed to the broker;
  • a broker-associate under an employment or independent contractor agreement with the broker [See first tuesday Form 505 and 506]; or
  • an unlicensed employee of the broker with fidelity bond coverage equal to or greater than the maximum amount of trust funds the employee has access to at any time. [CalBRE Reg. §2834]

A broker may not commingle their own funds with the funds of others which they receive and hold. However, a broker is allowed to deposit up to $200 of their own funds for account maintenance in the trust account. [Bus & P C §10145; CalBRE Reg. §2835]

A broker who misuses trust funds is subject to penalties, including:

  • civil liability for money wrongfully converted;
  • disciplinary action by the CalBRE;
  • income tax liability; and
  • criminal sanctions for embezzlement.

The penalty depends on the nature of the funds misused by the broker. For example, when a broker misuses advance fees, the owner of the funds may recover treble damages plus attorney fees from the broker. Also, a broker who fails to account for advance fees to the owner is presumed to be guilty of embezzlement. [Bus & P C §10146]

However, the existence of specific statutory provisions relating to the misuse of advance fees does not mean the misuse of other types of trust funds will go unpunished. Penalties for the misuse of trust funds for other purposes fall under more general statutory schemes.


As a real estate broker, you are required to retain records for three years. Records include copies of:

  • listings;
  • deposit slips;
  • canceled checks;
  • trust records; and
  • other documents executed or obtained in connection with any transactions for which a real estate license is required. [Bus & P C §10148(a)]

On notice from CalBRE, you are required to make your books, accounts and records available for examination and copying by the CalBRE’s representative. [Bus & P C §10148(a)]

Fictitious name use

Licensees may not use fictitious names while conducting any activity requiring a license, unless the licensee holds a license bearing the fictitious name. [CalBRE Reg. §2731]

Fictitious name violations commonly occur when:

  • a broker or their agents believe registering their “doing business as” name (DBA) with the county is sufficient to allow them to use it in their real estate business; or
  • a broker fails to add the DBA back on to their license when the fictitious name lapses for a brief period of time.

Related article:

Brokerage Reminder: Is your team playing by the rules?

Written mortgage loan disclosure statements

A broker handling mortgage loan originations is required to prepare and hand the borrower a mortgage loan disclosure statement within the earlier of either:

  • three days after receipt of a completed loan application; or
  • three days before the borrower becomes obligated on the note. [Bus & P C §10240]

Further, the broker is to maintain completed copies of the mortgage loan disclosure in their files.

A broker needs to review office policies and procedures often to keep their activities in compliance. The CalBRE’s regulations outline basic rules and procedures brokers are to follow to maintain compliance and avoid disciplinary action by the CalBRE.

For a more thorough evaluation of your brokerage, perform a self-evaluation of your real estate business activities using CalBRE’s Compliance Checklist. [See CalBRE Form RE 540]