Losing control of client money poses serious risks fo...

Most letting agents don’t set up a business to become accountants but losing control of client money poses serious risks for letting agents.

Imagine running a letting agency and discovering that custodial deposits destined for the Deposit Protection Scheme were accidentally paid into a member of staff’s bank account, totalling £78,000 over a two-year period.

This is exactly the kind of mistake that we have come across when we are brought in to help letting agents to protect their client money.

It’s true that most letting agents don’t set out to be accountants. When it comes to the front line of their business, they will know what to look for when employing negotiators, valuers and property management personnel and will be crystal clear on who their best performers are.

They will also be able to recall at the drop of a hat, how many active tenancies are in their portfolio at any one time, any viewings or valuations booked and carried out, agency agreements sent to landlords and new tenancies due to start. They have a forensic eye for detail.

When it comes to client accounting, it can be a different story. Client accounting tends to be left to ‘others.’ Owner managers in the lettings industry often have their roots in sales and we would be the first to admit that the client money side of the business isn’t the most glamourous. However, it is a cornerstone for any lettings business.

The harder they fall

If a letting agent makes a mistake with client money, the consequences for the business could be severe. If an agent continually pays landlord rents late, they will move to another agency.

Register protected deposits late and this will incur hefty fines. What happens if client money goes missing? The agent could end up losing the business and even face serving a prison sentence.

As an agency grows, we often see that the client accounting processes and practices fail to evolve with the business. Perhaps there is no-one who has the time, or the specific knowledge required to review them.

As a result, the potential for mistakes, innocent or otherwise, in the ways that client money is handled and processed increases exponentially.

Dig deeper

We often see client accounting handed to a member of the team without previous experience and who receives no training. And if the letting agency boss has little or no knowledge of client accounting, they won’t know whether or not the task has been carried out properly.

It’s also important to understand that client accounting is not bookkeeping. The accounting functionality on many letting software systems has also been ‘over engineered’ and features accounting language used by developers which is inconsistent.

There is also frequently a lack of understanding from staff or owners on reconciling client accounting records. If the person processing your client accounts makes a mistake, you may have a potential problem brewing.

Another risk is that, on the surface at least, client accounts where there is a sizeable portfolio will appear in order as there will always be money sitting in a client account from landlord floats, commissions and rents. But dip your toe into the water and you might just stub it on a jagged rock.

Take the driver’s seat

To mitigate against these risks, agents must know the basics of what to look out for. They need to spot check client accounting records on a weekly basis using software, bank accounts and deposit provider records.

Key points to check:

• Take the current number of managed lets, multiply by the average rent per month and add any move in monies received. Using online banking, download the client account statement in Excel or csv for the last month, total up the payments in and the two figures ought to be relatively close.

• Run the trial balance report from the software. This should reconcile with the bank statement, so if the balance report shows £60,000 in the bank, the bank statement should show the same amount.

• Download a detailed report from your deposit protection provider and compare the number of deposits registered with the number of AST tenancies you are currently managing. If you collect and protect tenant deposits on behalf of ‘let only’ landlords, the number of deposits protected should be proportionally more than the rents collected for managed properties.

Over the years, we have come across multiple examples of innocent mistakes which could have cost the letting agent dearly. From registering custodial deposits late and incurring a potential fine of up to £345,000, to staff directly paying themselves the commissions on rents collected when the agent thought tenancies were ‘let only’, the potential to lose money and even lose the business is huge.

Sometimes the mistakes are not so innocent. We uncovered one instance where a trusted employee in charge of client accounting had set themselves up as a dummy contractor, earning them £60,000 over a period of three years.

The letting agents which ensure they keep their client money under strict control, understand the basics of what to look out for and make the time to carry out weekly spot checks, are the businesses which stand the best chance of survival.

During these unprecedented times of the coronavirus pandemic, it’s more important than ever that we keep this part of our business on a tight leash.