The term āfinancial transaction auditā might sound like a daunting phrase, particularly to those without a background in finance.Ā Trust me, I understand.
I am not a CPA, nor do I hold a finance degree. However, through my experiences and research, I have come to realize that delving into financial transaction audits is not reserved solely for the financially savvy. In fact, non-financial individuals like me can navigate these audits with confidence and proficiency. In this blog, I aim to demystify the process and empower individuals from various backgrounds to conduct financial transaction audits like seasoned professionals.
Tip of the IcebergĀ
The examples provided in this blog are just the tip of the iceberg.Ā When you start doing audits of financial transactions, things can get more complicated.Ā Each Collection Agency has its own rules for how they handle payments, like posting them, depositing into specific bank accounts, and sending them to you.Ā The important thing is to track where the money goes from the moment the Collection Agency gets it until it is sent to you.Ā
Financial Terms Made SimpleĀ
There are several types of accounts that you may see at a Collection Agency. A trust account is like a safe for someone elseās money.Ā For instance, a Collection Agency establishes such an account to safeguard your payments until they are prepared for remittance to you.Ā The Collection Agencyās money would be in an operational account, not a client trust account. When the money a Collection Agency uses for everyday operations gets mixed up with the money they are supposed to hold in trust for clients, it is called comingling funds.Ā It is important to make sure your money is never mixed with the agencyās everyday funds.Ā You will typically find four kinds of accounts in your financial audit:Ā Ā Ā
- Operational Account: An operational account is like a piggy bank for running things smoothly.Ā For example, a Collection Agency establishes this account to manage routine expenditures such as rent or utilities.Ā
- General Trust Account: These accounts are for client funds, but they need to make that clear in the title.Ā For example, a Collection Agency might have one for ACH payments and another for debit card payments, with titles like āACH Client Payments.āĀ Initially, with some agencies, money goes into this account before being moved to specific client accounts.Ā
- Client Trust Account: This account can be used for multiple clients. The name should indicate that the account is for client funds.Ā Sometimes all client payments go into this account before being moved to individual client accounts.Ā
- Individual Client Trust Account: This is a secure vault just for you.Ā It is dedicated solely to holding your payments safely until they are remitted to you.Ā The title should specifically identify that they are your funds, like āABC Client Fundsā.Ā
Number One Rule:
Operational expenses and Client Funds must always remain separate.Ā
(It is also required by many states).Ā
Review Your Contract with the Collection AgencyĀ
Before you begin, look at your contract with the Collection Agency.Ā Make sure to check for:Ā
- Ā If you want them to keep a separate account just for your money. Ā
- Ā Details about how they will send you your money (like net or gross amounts, how often, and what happens if a payment is returned). Ā
- Ā Payment fees (like convenience fees, returned check fees) and commission rates.Ā
These types of contractual requirements should be included in the audit.Ā
Collection Agencyās Policies and ProceduresĀ
State Requirements:Ā Ā In many states, such as Hawaii and Massachusetts, Collection Agencies are required to have a separate trust account for clientsā funds.Ā Be sure to ask the Collection Agency for their policies and procedures regarding state requirements.Ā This will help you understand how they comply with state trust account regulations.Ā Ā
Accounts Where Your Money is Posted:Ā Ā Request that the Collection Agency provides a list of all bank accounts where your funds may be deposited.Ā Even if you have a dedicated trust account requirement, it is important to know if other accounts are involved.Ā For instance, debit card payments might initially go into a general trust account before being transferred to your designated account.Ā This helps you track the flow of your funds accurately.Ā
Payment Posting Policies and Procedures:Ā Ā Make sure to ask the Collection Agency about their payment posting procedures, including how they handle payments, deposit them, and remit them to you.Ā It is also important to understand the procedures after payments have been posted, such as returned payments (NSF), correcting payment errors, and overpayments.Ā Understanding these procedures will give you insight into how well they follow their documented policies and procedures.Ā
Financial Transactions to ReviewĀ
One effective method is to select a specific period for review, such as a particular week, or several non-consecutive days.Ā This focused approach allows for a detailed examination of transactions within a defined period, making it easier to identify any discrepancies or irregularities.Ā During this period:Ā
- Compare the payments posted, typically found in a batch report, to the actual deposits made into the bank account.Ā
- Check the deposits made to the bank against the remittance reports provided by the Collection Agency.Ā
The Final StepĀ
Work together with the Collection Agency to tackle any issues uncovered.Ā Set up a meeting to review the findings and seek their input on potential improvements.Ā Remember, audits should not be about catching mistakes, but about improving processes.Ā By collaborating, you ensure mutual understanding, effective problem-solving, and strengthen your partnership with the agency.Ā
Author:Ā Bev Evancic
Bev.Evancic@ResourceManagement.com
As a consultant for Resource Management Services, Bev provides consulting, training and mentoring in all phases of collection and recovery, in addition to auditing third party vendors (financial reviews,Ā collections, repo and more).
Bev Evancic is a Senior Vice President at Resource Management Services, Inc.Ā Prior to employment at RMS, Bev worked as the Collection and Recovery Manager at AT&T Universal Card,Ā Citi, and Federated Department Stores.Ā
She has managed all phases of collection and recovery operations, including automatedĀ dialer units,Ā bankruptcy,Ā and legal units, skip tracing units, internal collections, outside collection agency networks, and Consumer Credit Counseling. As a Consultant for ResourceĀ Management Services, Inc., Bev has spearheaded collection and recovery best practices reviews for many top credit grantors. Her articles on dialer operations, agency management and bankruptcy best practices have been widely publicized.Ā
She is well known and regarded as a specialty expert in the areas of: Repossession, Bankruptcy, Estate, Litigation, as well as Pre- and Post- Charge-off.Ā Prior to joining Resource Management Services, Inc. in 1995, Bev managed the Recovery Department for AT&T Universal Card Services where she developed the bankruptcy, probate, internal and litigation processes.Ā
She is the author of āRecovery Management: Collecting the Uncollectible Account.āĀ
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