Trust Fund Reconciliation — California Broker Requirements

Overview

California brokers who maintain trust accounts must perform a formal three-way reconciliation each month. This reconciliation process is one of the most tested broker-specific topics on the CA DRE broker exam and is also heavily audited during DRE compliance inspections.

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The Three-Way Reconciliation

The monthly reconciliation compares three records that must all agree:

1. Bank Statement Balance — the balance shown on the trust account bank statement as of a specific date. 2. Broker's Trust Account Ledger (Accounting Record) — the running total maintained by the broker tracking all deposits and disbursements. 3. Beneficiary Ledger Totals — the sum of all individual client/transaction ledger balances (one per principal or transaction).

All three must reconcile to the same figure. Any discrepancy must be investigated and resolved immediately — a discrepancy is a red flag for commingling or conversion.

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Reconciliation Timing

• Must be performed at least monthly.
• Must be completed within 25 calendar days of the end of each month (DRE standard for examination purposes).
• A written reconciliation report must be prepared and retained.

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Common Reconciliation Errors (Exam Traps)

| Error Type | Description | |---|---| | Outstanding checks | Checks issued but not yet cleared the bank — reduce bank balance in reconciliation | | Deposits in transit | Funds deposited but not yet shown on bank statement — add to bank balance | | Bank charges | Monthly service fees posted by the bank — must be reflected in broker ledger | | Unearned commissions | Broker commission not yet earned that was incorrectly deposited to operating account |

Outstanding checks and deposits in transit are the most commonly tested items. The exam expects you to know they cause temporary discrepancies that are expected and legitimate — versus unexplained discrepancies that indicate a problem.

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DRE Audit Expectations

During a DRE audit, the examiner will:

• Request all bank statements for the audit period
• Compare statements to the trust ledger line by line
• Review individual beneficiary ledgers for each open transaction
• Verify that no single ledger goes negative (negative balance = conversion)

A negative beneficiary ledger balance — where more was paid out than was ever deposited for that client — is automatic evidence of conversion and grounds for license revocation.

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Exam Focus

• Know the three components of a three-way reconciliation by name
• Know that reconciliation is monthly, not quarterly or annually
• Know that a broker may not use trust funds from one transaction to cover a shortfall in another, even temporarily
• Understand that the broker — not the salesperson — is responsible for maintaining reconciliation records