A Scottsdale property manager had commingled tenant security deposits with operating funds for 22 months. We separated all 84 deposits and passed the state audit with zero findings.
01The Situation
Arizona law requires security deposits held in a trust account separate from operating funds. For 22 months, deposits had been deposited to the operating account and used as working capital. The state audit notice arrived with six weeks to the audit date. The property manager had no idea how to untangle the deposits from 22 months of operating transactions.
Arizona penalizes deposit commingling with fines and license suspension.
02What We Did
We pulled every bank statement for the 22-month period and identified every tenant deposit transaction, inflows, outflows, and forfeitures. A subsidiary ledger was built for each of the 84 tenants. Total deposit liability: $312,000. We opened four segregated trust accounts by property and funded each over three weeks. By week five, all deposits were properly segregated.
The state auditor reviewed the subsidiary ledgers, trust account statements, and reconciliation documentation, and issued a zero-findings report.
03Client Impact
Getting the deposits separated and documented before the audit was the difference between keeping and losing the business. The zero-findings report was one of the best pieces of paper he had ever received.
Breakdown
| Property | Units | Deposit Amount | Commingled Period | Reconciled | Status |
|---|---|---|---|---|---|
| Building A, Downtown | 24 units | $86,400 | 22 months | Full match | |
| Building B, Scottsdale Rd | 18 units | $72,000 | 22 months | Full match | |
| Building C, Camelback | 22 units | $88,000 | 22 months | Full match | |
| Building D, Old Town | 20 units | $65,600 | 22 months | Full match | |
| TOTAL | 84 units | $312,000 | 22 months | All reconciled |
What changed
All 84 Tenant Deposits Separated and Reconciled
Subsidiary ledger built for every tenant. Deposit status tracked from move-in to present.
$312,000 Properly Segregated into Trust Accounts
Four trust accounts opened by property. All funded in three weeks.
State Audit Passed, Zero Findings
Auditor reviewed reconciliation and issued clean report. No penalties.
Ongoing Compliance System Built
All new deposits go directly to trust accounts. Monthly reconciliation in close process.
Getting the deposits separated and documented before the audit was the difference between keeping and losing the business. The zero-findings report was one of the best pieces of paper he had ever received.
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