Today’s posts from our featured Port Elizabeth Blogger:
Is it’s just me or has the EAAB gone crazy?
This post is not so much about client information, rather it’s a post for the benefit of my colleagues and our profession as a whole.
I recognise that there is a definite and vital need for regulation. Regulation, however, is a double sided sword. On one side, which is often the side seen by regulators, is the perception that it keeps everyone on the so call “straight and narrow”.
The question I always have to ask is “Is this proven fat or is it merely a perception?” Very often perception is insidious, in that it convinces us that our subjective interpretation is objective fact and not merely a subjective rationalisation, based on person biases.
The EAAB often lauds the fact hat millions is stolen from attorneys’ trust accounts, whereas that stolen from estate agents’ trust accounts is nominal by comparison. On the face of it, it appears that estate agents are either more honest or better regulated.
What is the reality?
1. WHY ARE TRUST ACCOUNTS EVEN STILL MANDATORY (FOR THE MAJORITY WHO DO NOT USE THEM)?
The fact is the vast majority of estate agents only have a trust account because the Act compels it. Very few agents actually use their trust accounts ever. Why is this firstly, buyers pay all money for the purchase of property, directly to the conveyancers (which is why agents hold so little trust money, compared to attorneys). Rental agents are increasingly using companies like Payprop to manage a trust account in their name, which Payprop audits.
It is, therefore logical that any reasonable person would question why the regulator or industry bodies have not petitioned that the trust account, become optional. If an agent chooses not to have one and touches a cent of a client’s money, its a crime and its a whole lot easier to prove, no unnecessary bank accounts, associated costs, auditing and policing. Most importantly the clients are better protected and administration is cut dramatically.
2. HOW DOES THE EAAB JUSTIFY A 7 PAGE AUDIT REPORT?
Firstly, let us dispel a myth. Auditing is not effective in combatting fraud or theft. There is simply too many ways to commit acts such as fraud and theft.
In the USA the Sarbanes-OxleyAct of 2002 (SOX) imposed tremendous auditing and compliance measures to counter the self-same ills. In retrospect, it has been noted that the costs of complying with the SOX Act, has exceeded the good it has done. This is a case of the cure being more harmful than the affliction.
Having practiced as a conveyancer for over 12 years, I understood the need to audit an active trust account and the benefits of the measures adopted. But in spite of the best efforts audits are cold comfort. For example, I could be audited today and steal trust money tomorrow, it would be a year before the next audit may detect the problem.
in most cases, wrongdoing is detected not by audits but by someone raising a red flag, not by an auditor.
Even amongst the attorneys, there was mention of changing the system because increased regulation was simply not cost effective, rather it became prohibitive, with very little if any benefit increase. Despite this, the EAAB, have gone to the excess of a report which is 3 1/2 times more comprehensive than that required of attorneys, despite that estate agents only hold a fraction of the funds held by attorneys.
3. ARE ESTATE AGENTS BEING CLASSIFIED TOO STRINGENTLY?
When I spoke to various auditors, they all seem to have the same position. An estate agency, whether it’s a 100 agent office (part of an international franchise) or a one agent operation is classified in the same category as a listed company.
Is this justified? The auditors cannot be blamed, they assess an industry based on the regulation in an industry which prescribes their treatment and classification of estate agencies. I can understand a listed company where the audit gives comfort to the external investors. But what about an agent who has decided to be a one person operation and does a few sales a year to keep the would away from the door. The costs of the audit alone proves prohibitive.
4. ARE AUDITORS RUNNING AWAY FROM ESTATE AGENTS?
You would think the auditors would be happy for all the additional work, why then are there increasingly fewer auditors who are willing to audit estate agents accounts? (Mostly it’s because the EAAB’s fondness of technicalities).
At one stage before the EAAB insisted on business account audits, and estate agent could take their bank statements to any auditor and the auditor would for a small fee check that there had been no transactions and that audit was satisfactory.
The new dispensation of auditing business accounts caused havoc and caused many established agencies to be blocked for a time.
Given that agents without a current FFC are barred from earning commission on a sale where they do not hold a valid FFC, means that many auditors potentially faced damages claims, which simply made the risk too great.
5. WHY AUDIT THE BUSINESS ACCOUNTS?
Why do we have to audit our business accounts, when it is a poor defence against fraud or theft? Even in the event of the irrational position be maintained that agents have to maintain trust accounts, depositing trust money into a business account is a serious offence. At this point the advocates of auditing business accounts is illogical.
Take for example the case of agent X, who decides to misappropriate clients funds. He gets a client to agree to pay him R100,000. Firstly, if it’s an EFT the name of the account is irrelevant because the system works on the account number and branch code, so he would stipulate another account other than his business r trust account. If the amount was cash, he would have endless options, even more than with an EFT.
The question which assails me is, what kind of idiot would deposit the funds into either the trust or business account and create a paper trail?
6. WAS THE EAAB’s MANDATE NOT TO FOSTER INCLUSIVITY AND TRANSFORMATION?
Example: Let us for a moment consider the position of agent M. Agent M worked for an established estate agency and qualified as a principal. With dreams of owning his own agency he registers and all is well. Real estate is a deceptively costly business and the costs of compliance are high, principally because of the audit. Agent M now needs an auditor, in addition to a bookkeeper. The annual audit is expensive, which means that the auditor may not release the audit until it is paid. M now is late in submitting and is blocked and cannot legally trade. He has no formal office and very soon the temptation is real to join the ranks of the rogues.
They have no compliance costs and operate freely in the township areas, with little or no fear of being caught. When someone tries to schedule a professional audit they are simply unreachable. If they get reported, they simply go to ground for a while until it blows over. It is not the only factor, but compliance costs are prohibitive fo these entrepreneurs. It may be interesting to see the effect of the new audit on the percentage of legal agents as opposed to the number of unregistered agents, doing agent work.
Will this promote the emergence of those who were previously disadvantaged prior to 1994?
Is this a sustainable model, going forward?
Is the EAAB succeeding in fulfilling its mandate?
7. EDUCATION COSTS
I fully agree with the education requirements, but the costs are high given the subscription numbers and what we receive – who is actually auditing the EAAB? Given the costs being paid and the number involved, who is ensuring that the agents are getting fair value or are we merely happy because we had nothing to compare it will previously?
8. NQF 7 QUALIFICATION
The Chartered Practioner: Real Estate was released on a trial basis, a number of years ago. The persons who received it were selected by the EAAB and it was stated that it was to encourage the professionalism of the industry by getting other to aspire to attain this qualification. a number of years later and the EAAB have maintained the qualification, yet will not allow other agents from attaining it. In the last few year more and more professionals with profession relevant higher qualifications have joined the industry such a conveyancers, MBA’s, MTech’s which are rated as NQF 7 and higher, but the EAAB will not open the door to them. What could the rationale possibly be? Many believe that the recipients were rewarded for service to the industry, but you do not reward with qualifications, you reward with awards, like Life Time Contribution Awards or Fellowships etc
9. PROFESSIONAL DESIGNATION
At a recent CPD event, the EAAB representative mentioned that the EAAB is considering allowing agents who did not write the PDE, to use the professional designation based on RPL alone. This would undo the whole reasoning behind professional designation exams.
The writing of the exam provides objective proof that an agent truly knows their stuff and this gives the public reassurance that they can trust the agent.
Example: What happens if agent A was in the industry for 20 years, attended only rudimentary training and did not even really practice. When the new dispensation came A RPL’ed and because A held a FFC (although did not really practice); was exempted from writing the PDE.
Has she got the right to practice? Yes, but does A, actually have the required up to date knowledge? No
The standard response from many is that we have decades of experience etc. To me it is simple, if you are so knowledgeable, it would be a small matter to write the exam and prove your assertion. I wrote both the PDE 4 & 5 and neither one was difficult, if your knowledge is current.
8. FEES ARE INCREASING AGAIN
We have just been advised that fees are increasing again, what is being done to improve the inefficiency at the EAAB. instead of throwing more money at the problem?
9. PROFESSIONAL AUDITS
Why do only easy to contact agents get audited, what about the rogue agents who even place adverts in the print media?
10. WHY IS THE PERIOD TO SUBMIT AUDITED FINANCIALS SO SHORT?
Why do we as estate agents have 4 months to get our business and trust accounts audits into the EAAB, whereas attorneys have 6 months?
We live in an era of accountability and accountability is a two-way street. We need to see the EAAB’s strategy is, in fact taking the profession where its should be. It’s not a process of simply making the right noises and increasing regulation. More auditing is not the answer.
The profession needs to get back to the basics and we need to sort these problems out because they affect all of us.
As property professionals, we cannot merely say that it’s the EAAB’s duty. Each one of us is a guardian of our profession and as such we all have an individual and joint responsibility to get this right.
Clinton Begley (PPRE MPRE CEA B.PROC (NMMU)) is the co-founder, Principal/Director at BOLD REALTY, in Port Elizabeth, South Africa. In addition, to his passion for people and real estate, he is also an experienced trainer, coach, and mentor. He holds a B.Proc degree through the Nelson Mandela Metropolitan University and is a non-practising Attorney, Notary, and Conveyancer (with over a decade of experience). His legal and real estate experience is augmented by studies towards an MBA degree through the Nelson Mandela Metropolitan University Business School, which he is scheduled to complete soon. This article reflects the personal opinion of the author only, it is NOT intended as legal advice nor may any reliance be placed upon it. The article is purely for information purposes and you are advised to consult an expert before making any decision.
Source: The Port Elizabeth Property Blog.
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