Three Way Escrow Account Reconciliation An escrow is a transaction in which an impartial third party acts in a fiduciary capacity as an agent for the seller, buyer, borrower and lender. The escrow agent is responsible for processing, safeguarding, and accounting for funds entrusted to them by their escrow customers. This responsibility may result in significant exposure to losses for inadvertently or intentional failure to follow proper procedures. As escrow agents, closers, managers and owners of title agencies, we all know the importance of maintaining a complete and accurate account of all closing files. So what does this process entail? Simply put, as escrow agents, you must perform, on a monthly basis, a three-way reconciliation of book balance, bank balance and escrow trial balance. Book Balance This is a summary of what is going on in the "checkbook". Just like your personal checking account, the escrow or trust account should have a register listing the transactions. When you write a check, you enter the date, the payee and the amount into your register. You subtract that amount from your current balance and that gives you a new balance. Likewise, when you make a deposit, you enter the amount and add it to the previous balance to arrive at the new balance. The same thing happens in your escrow account. Your bookkeeper (or computer) should keep a checkbook register of all deposits and disbursements for the month. Bank Balance As we know from our personal checking account, the balance on the bank statement is never the same as what our checkbook says it should be. The reconciliation of book balance to bank balance will prove the accuracy of our records. Escrow Trial Balance The trial balance is a list of files and their balances. When we reconcile our personal account, we know the ending balance is our money. Whereas, in escrow accounting any money "left over" belongs to someone else. The trial balance tells us which file(s) the money belongs to. The important thing to remember here is all three balances must be the same in order to balance. The purpose of this requirement is to locate any errors and to discover any shortages. So how do we do this? The attached Exhibit A is a book to bank reconciliation for June 2000. Review the details. Book Balance: This is the amount shown as the balance in the "checkbook" on June 1, 2000. 1. Add Current Period Deposits and Wire Transfers: You are adding to the beginning checkbook balance all of your deposits for the month. Some people like to segregate wires from other deposits, but it is not mandatory to do so. 2. Subtract Current Period Checks: You are subtracting all the checks and wires that have been written for the month. Book Balance as of 6/30/2000: $_________________ This is your total. Note: If your bank account is maintained on the computer, this information is automatically retained in your program. All you need to do is print your deposit register and the disbursement register. You should also be able to print a summary report similar to the attached Exhibit A. Bank Balance: Ending Bank Statement Balance as of 6/30/2000 This number is found on your bank statement. The statement should say beginning balance, total of deposits, total of disbursements and ending balance.  1. Add Deposits in Transit: Deposits in Transit are any deposits your checkbook says you have made, but do not show on the bank statement. A common mistake made on most bank reconciliations is to label file shortages as deposits in transit. A true deposit in transit will clear the bank in the first few days of the following month. Anything that stays as a deposit in transit for more than a few days is then a true file shortage and must be funded immediately. 2. Subtract Outstanding Checks: Outstanding checks are checks you have written, but have not cleared the bank. You arrive at this number the same way as with your personal account. Put the canceled checks that you received with your bank statement in numerical order. Then mark them off the register if they have cleared the bank. Those that have not cleared become part of the outstanding checklist. Note: You should always review the actual check against the bank statement and the check register. Bank Balance as of 6/30/2000 $____________ This is your total. Unless you have made a mistake, your book balance should be the same figure as your checkbook balance. One more step. Remember, in escrow account management, we must know what file(s) constitute the ending balance. That is where the trial balance comes in. Exhibit B is a copy of the trial balance for June 2000. Trail Balance: The trial balance is one of the most important reports required to reconcile your escrow account. A trail balance is a listing of all files with positive and negative balances. Our exhibit shows positive and negative balances and both are important to proper escrow account management. Positive balances reflect files that haven't been fully disbursed. - Recording fees for release of liens - Checks were voided and a replacement check has not been issued - Funds being held for post closing contingencies - Mistakes in check writing Negative balances will also be shown on your trial balance as the examples set out below: - Checks deposited with the bank but not posted to the file on the computer - Deposits posted to the wrong file - File was double disbursed - A check was not voided in the system - The file was purposely overdrawn A common mistake is to allow these file shortages to remain on the trial balance. Each of these items should be researched immediately. Acceptable accounting practices require file shortages to be reimbursed by the appropriate parties or from the agent's operating account immediately upon discovery. Simply put, if the file is short, you must place money from your operating account into the escrow account to cover the shortage. When you receive recovery of the funds, you must place these funds into the escrow account, prior to reimbursing your operating account. This provides a complete and accurate accounting trail that would make any auditor proud. This reconciliation for June 2000 is in balance, but needs some help. In this particular instance, the agent needs to place operating funds in file 2000-097. Do they need to reimburse 2000-252? What about file number 2000-299? What should be done with file 2000-289? These are the types of questions you, as a fiduciary agent, should be asking. Your escrow account is a dynamic entity, constantly in motion. Think of the reconciliation as a snap-shot of the escrow account on any given day. It tells you if the world could stand still and all things were equal, you would have X amount of money (or in our example - need) in the account and most importantly, which file(s) needs or has money. The total listed on this trial balance equals the book balance and the bank balance. We have now successfully completed a three-way reconciliation. This process must be completed monthly. We recommend it be performed within 10 days after receipt of your bank statement. Someone not responsible for escrow disbursement should prepare the reconciliation. This person should not be an authorized signatory on the escrow account. Since the owner or manager of the agency will be ultimately responsible for any improprieties, it is strongly recommended that someone in authority critically reviews and formally approves the reconciliation. Accepted accounting procedures suggest the person preparing the reconciliation should have the reviewer sign and date the bank statement and reconciliation summary report. Exhibit A Bank Reconciliation Statement For the period beginning 6/1/2000 and ending 6/30/2000   Bank Account Number 1234567 Book Balance Computation: Beginning Book Balance 6/1/200 $ 56,656.93 Add Current period deposits 93,752.84 Wire transfer deposits 318,709.52 Less current period checks 476,599.67 Book Balance as of 6/30/2000 $ - 6,480.38 Bank Statement Reconciliation: $261,468.91 Ending Bank Statement Balance 6/30/2000 Add outstanding deposits -0- Less outstanding checks $267,949.29 Bank Balance as of 6/30/2000 $ - 6,480.38 This reconciliation statement is only valid if the Trial Balance for the period ending 6/30/2000 matches the Book Balance and the Bank Balance shown above.   Exhibit B Escrow Account Management  Trial Balance as of 6/30/2000   File Borrower Last Activity Balance 2000-097 Claire Andrews 4/15/2000 $ - 3,027.79 2000-102 Dean Weeks 4/31/2000 25.00 2000-136 Rick Matta 4/19/2000 25.00 2000-143 Kim Francis 5/01/2000 75.00 2000-209 V.J. Parkee 5/23/2000 125.00 2000-252 Nick Scott 6/19/2000 -75.00 2000-268 Suzanne Ramey 6/23/2000 330.00 2000-289 Charles Sanchez 6/23/2000 .27 2000-299 John Bellows 6/30/2000 -3957.86 $-6,480.38   Notes on the Trial Balance File #2000-097 Claire Andrews This file closed on April 15, 2000 and as of the end of June 2000, the file is still short. It is immaterial if this shortage was caused by a closing error or failure to receive a deposit from one of the parties involved in the transaction. As mentioned previously, all file shortages must be funded immediately upon discovery. In this instance, $3,027.79 in operating funds should have been deposited into the escrow account when the shortage was discovered. The agent should then determine which party owes the monies that caused the shortage and then try to effect collection from the responsible party. Should the agent receive the funds, he they then be deposited into the operating account to replace those funds advanced to balance the escrow. File #2000-289 Charles Sanchez This file contains an overage of $0.27. Although the natural inclination would be to deposit this small sum into the operating account to offset funds advanced for file shortages, federal statues dictate that this overage must be returned to the rightful party. File #2000-299 John Bellows Since the date of this file is the last day of the accounting period for this trial balance, it is highly likely that this closing did not actually happen until the day following the end of the month. While checks have been written in preparation of the closing, the actual closing has not occurred as of the date of this trial balance. Assuming this to be the case, this shortage will be received at closing and the escrow will balance. The subsequent bank statement should show a deposit in the amount of this file shortage within the first two days of the month. Copyright (c) 1999 - 2010 Attorneys Title Guaranty Fund, Inc. All rights reserved.