Every brokerage is required by section 7-7 of the Rules to file with RECBC, in respect of their prior fiscal year:
- financial statements
- an Accountant’s Report or, in some specific cases, a statutory declaration when the brokerage does not hold or receive any public trust funds ; and
- a Brokerage Activity Report.
The filing must be made within 120 days after the end of the fiscal year.
If the brokerage is a public company as defined in the Business Corporations Act — will open in a new tab, the financial statements must be audited by an accountant.
Brokerages that are not public companies must engage an accountant as defined in the Rules to conduct a review engagement or, in some cases, a notice to reader of the financial statements.
In all cases, the accountant performing the audit, review, or notice to reader review must be independent of the brokerage and of any director, officer or partner of the brokerage or a related licensee of the brokerage.
RECBC mails to each brokerage an Accountant’s Report form, together with a Brokerage Activity Report form, in advance of the brokerage’s fiscal year end. The brokerage must complete Part A of the Accountant’s Report, which requires the name of the brokerage, the beginning and end dates of the brokerage’s fiscal year, and a listing of all savings institutions and accounts that the brokerage opened, maintained or closed during the fiscal year. This requirement includes the brokerage’s general operating account.
In order to prepare the Accountant’s Report, the accountant must be provided with all monthly reconciliations for each trust account and all monthly trust liability and asset reconciliations for all pooled trust accounts. The brokerage must also provide the financial statements for the fiscal year and any subordination agreements.
Additionally, the brokerage must disclose to the accountant every savings institution account opened, maintained or closed during the fiscal year. The brokerage must provide access to all financial and other records of the brokerage and any other information that the accountant considers necessary.
The accountant will determine the scope of the specific procedures to be undertaken in order to accurately report on the matters as noted above.
After the accountant prepares Part B of the Accountant’s Report, the managing broker and an officer, director, partner or the sole proprietor should review the report with the accountant. The brokerage may wish to submit a letter to RECBC indicating sections of the report they disagree with, or providing an explanation, if they feel an explanation is necessary.
The Brokerage Activity Report provides information to RECBC respecting the type of business carried out by the brokerage, the approximate number of trades in real estate and/or number of units managed, and the average monthly trust balance relating to trades in real estate, the average monthly total of rents and the average monthly total of strata fees received or held on behalf of landlords or strata corporations.A copy of the Brokerage Activity Report form is available on RECBC’s website at www.recbc.ca.
Under section 7-7(2.1) of the Rules, RECBC may authorize a brokerage to file financial statements that have been subject to a notice to reader prepared by an accountant if all of the following conditions are met:
- for a minimum of 3 consecutive fiscal years immediately preceding the date of authorization, the brokerage has satisfied RECBC with respect to its annual financial filings, and
- during those 3 fiscal years there have been no significant trust account or general books and records exceptions
- reported in relation to the brokerage in its annual Accountant’s Report, or
- discovered in any review by RECBC of the brokerage’s accounts and other records;
- RECBC is satisfied that, at the end of each of those 3 fiscal years, the brokerage’s current assets exceeded its current liabilities.
The RECBC may withdraw an authorization to file a Notice to Reader report if:
- the brokerage does not file financial statements that comply,
- a trust account or general books and records exception has been reported or discovered in relation to the brokerage, or
- RECBC is not satisfied that the brokerage’s current assets exceed its current liabilities at the end of any fiscal year.
Before withdrawing an authorization to file a Notice to Reader report, RECBC must give the brokerage notice of its intention to do so and the reasons.
As an alternative to filing an Accountant’s Report, a brokerage that did not hold or receive any public trust money during the fiscal year to which the financial statements relate may file with RECBC a solemn declaration, completed in accordance with section 4-9.1 of the Council Bylaws, respecting
(a) that fiscal year, or
(b) if the brokerage did not carry on business for the entire fiscal year, that part of the fiscal year for which the brokerage did carry on business.
The Rules define “public trust money” as all money held or received by a brokerage and to which section 27(1), (2) or (3) of RESA applies, except remuneration that has already been earned, as determined in accordance with the Rules, by the brokerage at the time it is held or received by the brokerage.A Trust Account Declaration form to be used for making a solemn declaration in this regard is available on the RECBC’s website at www.recbc.ca.
Under section 7-6 of the Rules, RECBC regularly conducts inspections of brokerages throughout British Columbia. The purpose of these inspections is to ensure that brokerages have proper controls in place to protect trust monies. Additionally, the inspection tests for compliance with the other requirements of RESA, the Regulation, the Rules and Bylaws. The inspection includes, for example, a review of:
- the brokerage’s books and records
- written disclosures that are required to be made; and
- service agreements entered into by the brokerage.
RECBC’s intention is to examine all new brokerages in the province within 12 months of the brokerage obtaining licensing under RESA. Random inspections are also undertaken. Further, some inspections are the result of a complaint, exceptions on an Accountant’s Report or deficiencies identified in a previous inspection.
In advance of an inspection, RECBC will, in most circumstances, notify the brokerage setting out the books and records that may be required to be reviewed by RECBC’s Audit Department.
When RECBC’s auditor arrives at the brokerage’s office, he/she will want to have a brief discussion with the managing broker of the brokerage with the focus on gaining some knowledge about the brokerage, the level of activity during the year, determining what additional documents will be required to perform the examination and having the managing broker introduce any key staff members to the auditor.
During the inspection, the auditor is normally looking to ensure that:
- the brokerage maintains a proper place of business (section 2-5 of the Rules);
- the brokerage has the brokerage licence displayed prominently in the reception area and the licences of all related licensees available for inspection (section 4-1 of the Rules);
- a sign indicating the licensed name of the brokerage at the entrance to the office, and in the building directory, if applicable (section 4-2 of the Rules);
- the brokerage has a managing broker in active charge of the business (section 6 of RESA);
- the brokerage maintains proper books and records (part 8 of the Rules), including:
- monthly trust reconciliations for each trust account;
- monthly trust liability reconciliations listing every client the brokerage holds trust funds for and the amount of funds being held for each client;
- trust bank statements, cancelled cheques and deposit books;
- trust journal and ledger for each trust account;
- a list of all trades in real estate,rental properties, and strata corporations managed by the brokerage;
- trade record sheets and copies of contracts in all real estate sales files;
- rental property management files containing copies of tenancy agreements, accounting statements sent to owners, invoices and service agreements;
- strata management files containing accounting statements sent to strata corporations, invoices, monthly statements provided by financial institutions, service agreements;
- general account bank statements, cancelled cheque reconciliations and journals;
- trust accounts have been designated as such by including the words “trust account” on the trust cheques and bank statements;
- trust accounts have no overdrafts or debit balances, and funds held in trust by the brokerage have been deposited;
- disclosures that have been made in personal real estate acquisitions; and
- trust or general accounts have no unusual items flowing through them.
All licensees should keep in mind that the items being reviewed are expected to be in a current state as they are considered to be crucial to the brokerage’s business.
In order to ensure that brokerages in BC are conducting their business in compliance with the applicable rules and legislation, RECBC staff auditors travel to brokerages throughout the province to carry out Office and Records Inspections (the “O&RI”).
Before a RECBC auditor visits each brokerage, they send the managing broker a letter advising them of the records and documents that will be required at the inspection. While other records may be requested at the time of the inspection, the letter identifies the key documents that are needed to confirm whether the brokerage is in compliance with the applicable rules and legislation.
The list below reproduces the list of documents that are itemized in the letter. Strata managing brokers may wish to use the list to confirm to their own satisfaction that their brokerage is meeting all required procedures and policies.
Brokerage and Commission Trust Funds
- deposit slips and cheque stubs for all trust accounts for a stated period of time;
- all trust account bank statements and cancelled cheques for a stated period of time;
- trust journal and individual client ledgers showing deposits and withdrawals for each trust account and individual client trust ledger, respectively; and,
- monthly trust account bank reconciliations and trust liability reconciliations (i.e. month-end listing of individual client trust ledgers).
- bank statements and cancelled cheques; deposit slips and cheque stubs;
- monthly bank reconciliation reconciling the bank balances to the cash journal month end balances; and,
- a cash journal or synoptic, which consists of a listing of all deposits and withdrawals for general business purposes.
- general ledger, trial balances, and internal financial statements.
Strata Property Management Services
- a listing of all properties managed by the brokerage from (date), including sufficient information to identify the property;
- strata property management files containing: strata property management services contracts, financial statements and bank statements sent to owners, strata council meeting minutes (regular, special and AGM), expenditure invoices, and any other correspondence relating to the management of strata; and,
- bank statements, cancelled cheques, deposit books and monthly bank reconciliation for all operating, contingency, special levy, builder’s lien and other strata related accounts.
Other information that may be reviewed and collected by the auditor includes:
- a summary of the brokerage’s profile and activities, including:
- branch offices
- managing broker responsibilities,
- a summary of licensee’s activities, including:
- personal acquisition and disposal of real estate
- associated licensee or employment agreements
- subordination agreements,
- any other relevant documentation
RECBC requires licensees to complete educational requirements every licensing cycle as a condition of continued licensing. The auditor may require the brokerage to have available proof of licensees’ completion of the required REP courses.
The laws and rules affecting real estate are subject to constant and continuing change. Managing brokers have a duty to keep themselves up-to-date on such important changes. The best means of keeping up-to-date is by reading the Report from Council newsletter. Published six times a year, it includes reports on any major changes in regulations or policies. Licensees may also wish to refer to the PSM, now available online and fully searchable.
Once all testing has been completed, the results of the inspection are discussed with the managing broker. At this time, the managing broker should ask the auditor any questions regarding any deficiencies discovered. The managing broker should clearly understand the problems and, if requested, the auditor will go over his/her findings. The auditor then informs the managing broker that a report outlining the findings already discussed will be forthcoming. Despite any discussion that occurs in the exit interview, the managing broker will be required to respond, in writing, to any deficiencies noted and to advise what steps will be taken to ensure that the deficiencies will not recur in the future.
When deficiencies are discovered during the inspection, a copy of the inspection report may be forwarded to RECBC’s Compliance Department to determine whether disciplinary action is necessary. RECBC has the authority to issue a letter of warning, impose an administrative penalty, order a hearing, charge the brokerage for the cost of the inspection, and/or order a follow-up inspection. If, after a hearing, the Hearing Committee finds that there has been a breach of RESA, the Regulation, the Rules or Bylaws on the part of the brokerage, the managing broker or of a licensee, the Hearing Committee may disicpline the licensees involved.