Escrow Accounting and Internal Controls

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Escrow Accounting and Internal Controls

Nicole Thomas

Deloitte & Touche, LLP

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Agenda

• Deloitte at a glance

• Importance of internal controls

• Escrow/trust accounting process

• Three-way bank reconciliations

• Components of reconciliation

Risk areas

Specific key internal controls

Management review

• Recent fraud/theft stories

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Deloitte is the largest professional services firm globally

Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients across 150 locations around the world

Globally, Deloitte has over 193,000 employees, with 45,000 concentrated in the US

Deloitte member firm revenue for FY 2012 was $31.3 billion globally, with $10.9 billion in the US Overall, Deloitte member firms serve more than 75% of the Fortune Global 500 companies

Audit

• Accounting Advisory • Assurance Services

• Financial Statement Audit and Integrated Services Enterprise Risk Services

• Business Risk including Internal Audit • Information and Technology Risk

Audit

• Accounting Advisory • Assurance Services

• Financial Statement Audit and Integrated Services

Enterprise Risk Services

• Business Risk including Internal Audit • Information and Technology Risk

• Corporate Finance Advisory • Forensic & Dispute Services • Reorganization Services

• Business Tax

• Customs & Global Trade • Indirect Tax

• International Tax • Legal Services • M&A

• Business Tax

• Customs & Global Trade • Indirect Tax • International Tax • Legal Services • M&A • CFO Programs • Deloitte Analytics

• Governance & Risk Management • M & A

• CFO Programs • Deloitte Analytics

• Governance & Risk Management • M & A

• Human Capital • Strategy & Operations • Technology

Financial Advisory Services

Global Platforms

Consulting

Audit and Enterprise Risk Services

Tax

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Deloitte at a Glance – Our Insurance Practice

Deloitte’s National Insurance Industry Group practice consists of over 2,400 professionals providing services to a multitude of clients ranging in size from global to middle market insurers which include property and casualty insurers, title insurance, reinsurers, life insurers, and brokers.

Deloitte’s Insurance Qualifications

• Serves 50% of the major Title Insurance underwriters in an advisory capacity

• Serves 90% of the top 25 insurance companies and 50% of the top 100 insurance companies • Provides audit and enterprise risk services to 22% of the top 100 insurance companies including

two of the top five

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Stewart Internal Audit Relationship

Category Scope

Independent agent internal audits

Monitor risks and independent agents for compliance with Stewart policies and expectations

Direct Operations internal audits

Monitor risks & direct operations for compliance with Stewart policies

Sarbanes-Oxley Assess controls over financial reporting and coordinate with KPMG

Corporate internal audits Assist management with the evaluation of organizational operations and risk management processes

Information technology internal audits

Provide confirmation for data security and for the alignment of IT resources with organizational needs

Management requests Assist management with special projects, investigations, and other areas where IA may add value

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Tone at the Top

If an office has the greatest system of controls, but management constantly overrides the controls, employees will lose sight of the controls’ importance and necessity.

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Importance of Internal Controls

Internal control is a cost effective first line of defense against loss and makes

GOOD BUSINESS SENSE

•Fulfill fiduciary responsibility

•Improve customer service

•Accurate and timely internal/external reporting

•Protect agency assets and customer funds

•Reduce errors and losses

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Escrow Accounting Process

• Timely reconciliations detect errors and/or fraud

• Three-way reconciliations are key to ensure there are adequate funds to cover all customer liabilities:

Reconciled bank balance (balance per bank statement + deposits in transit - outstanding checks)

Book (ledger, checkbook) balance

Open file listing/trial balance

• Open file listing reviewed monthly, issues resolved quickly

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What is a 3- Way Bank Account Reconciliation?

Bank reconciliation showing that these three things are equal:

Reconciled Bank Balance =

Book Balance =

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Components of a 3-Way Reconciliation

• Reconciliation Summary Report

• Open File Listing (“OFL”) - aka Escrow Trial Balance or Multiple Balances Report

• Outstanding Checks Report

• Deposits in Transit Report

• Outstanding Wires Report (incoming and outgoing)

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Reconciliation Summary Report

Immediate Risk: Three parts of the reconciliation do not agree; detail reports do not agree to the summary balances. This means your escrow account is not properly reconciled

Key internal controls and management review areas:

• Reconciliations are current – prepared within 30 days of bank statement date

• Reconciliations prepared by someone who is not a signer on the escrow account

• Consider signing up for Positive Pay/Reverse Positive Pay or a daily automated reconciliation service

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Open File Listing

Immediate Risk: Files with negative balances (debit files) indicates your escrow account is short

Also look for: Old files with large positive balances. May mean a payoff was not made. In addition, dormant file balances may be tempting when cash is short.

• Debit files are investigated and resolved timely. Shortages should be funded

from operating immediately.

• Dormant balances are refunded to the appropriate parties or escheated in

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Deposits in Transit (DIT) Report

Immediate Risk: Possible shortage in your escrow account because deposit(s) were not received by the bank. Not unusual at month-end; however, they should clear the bank within two business days.

Also look for: When an aged DIT is reversed, did it or will it result in a debit (negative) file?

• Aged DITs listed over two business days need to be researched and resolved

appropriately. Any identified shortages should be funded from the operating account immediately.

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Outstanding Checks Report

Immediate Risk: Disbursements were not properly issued or received and may result in a loss or claim.

Also look for: Old outstanding checks that have not been negotiated. Balances related to old, stale-dated checks may be tempting when cash is short.

• High priority checks such as payoffs, recordings, taxes, insurance payments

should be reviewed and researched immediately.

• Payees related to stale-dated checks should be contacted and checks

re-issued to the appropriate parties or escheated in accordance with applicable state guidelines.

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Unmatched Wires Report

Immediate Risk: Possible shortage in escrow account because an incoming wire wasn’t received. Potential that a payoff was not made because an outgoing wire did not reach its destination. Wires should clear within two business days (more likely within one business day).

Also look for: Wire fees charged to the escrow account.

• Outstanding wires over two business days need to be researched and resolved

appropriately. Any identified shortages should be funded from the operating account immediately.

• Any wire or bank fees should be funded from the operating account

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Adjusting (Bank Not Booked) Items

Immediate Risk: Reconciliation is balanced by use of adjusting items. This may be hiding a shortage depending on the direction of the adjusting item(s).

• Adjusting items should be researched and resolved and not carried over to the

following month’s reconciliation. Any identified shortages should be funded from the operating account immediately.

• Banked not booked items should be identified and coded to a specific escrow

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Other Escrow Accounting Internal Controls

• Escrow/trust and operating funds should not be co-mingled

• Account is styled/titled as an escrow, trust or IOLTA account

• Access to files with balances outstanding more than 6 mos. should be controlled and management’s approval obtained prior to disbursement

• Disbursements should be made only from collected funds related to the same transaction

• With more than one escrow/trust account, ensure receipts and disbursements are made from the same account to avoid interbank issues

• Escrow/trust bank charges should be reimbursed immediately with operating funds

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Recent Fraud/Theft Experiences

Unfortunately, occurrence is on the rise due to the challenging economic environment. Agency controls can prevent or minimize loss.

Long term, trusted employees

•Have access to accounts, records, responsible for reconciling and answering questions

•Increased financial or personal pressures can cause people to act in ways never before

expected

New escrow funds used to payoff prior transactions

•Delaying payoffs on new transactions to cover shortages on prior transactions

•Still one of the most common methods we see

Dormant and current escrow funds used for operating expenses

•Transaction counts down, agencies struggling to get by

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Nicole Thomas

Email: [email protected] Phone: (713) 705-3643

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Appendix A – Positive Pay (Bank Match)

• Check information is transmitted electronically to the bank after checks are prepared and either prior to or on the same day checks are disbursed to customers.

• When checks are presented for bank payment, they are compared to the

check information previously received. A report of any discrepancies is printed and emailed/faxed to the office for review. The office can then make the

decision whether or not to allow payment of the check.

• It is very important that the discrepancy report is not returned to the person preparing or disbursing the check. To keep this process completely

segregated, a person independent of the check preparation function should be in charge of the review.

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Appendix B – Reverse Positive Pay (Customer Match)

• Each morning, the bank provides the office with a listing of all checks presented for payment the previous day.

• It is the office’s responsibility to compare the checks presented for payment at the bank to information maintained at the office. As above, the office decides whether or not something is paid.

• Also as above, it is very important to have the person reviewing this information independent of the person preparing and disbursing checks.

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Appendix C - Sources

• 2000 ALTA Escrow Internal Control Guidelines for Title Insurance Companies, Agencies and Approved Attorneys

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