At some point in the next twelve months, an examiner from your underwriter is going to visit your office, sit down across from you, and ask to see your escrow trust account reconciliation records. They will pick dates at random. They will want to see the reconciliation for those specific days. And you will either have it or you won't.
There is no middle ground. You cannot reconstruct a reconciliation after the fact and present it as if it were done contemporaneously. The examiner knows what a real-time reconciliation record looks like and what a retroactive reconstruction looks like. They are not the same document. Attempting to present one as the other is worse than admitting you didn't reconcile — it's a credibility issue.
This article covers what underwriter auditors actually look for, the most common findings, and what your preparation should consist of if you want the audit to be a non-event.
What the examiner is checking
Underwriter examiners aren't looking for perfection. They're looking for controls. The distinction matters. A trust account with a $0.50 rounding variance that was identified, documented, and resolved within 48 hours demonstrates a functioning control system. A trust account with a perfect balance but no documentation of how it got there demonstrates nothing.
The examiner is evaluating three things:
Frequency and consistency. Are you reconciling on the schedule you claim? If you say you reconcile daily, they will pull random days and expect to see a record for each one. If you say monthly, they'll pull random months. Gaps are findings. Under ALTA Best Practices 4.2, the expected frequency is daily — and examiners are increasingly testing against that standard.
Completeness of documentation. For each reconciliation they review, the examiner expects to see the bank balance, the adjusted bank balance calculation, the book balance, the trial balance, any outstanding items, any exceptions identified, the resolution or status of each exception, and the identity of the person who performed the reconciliation. Missing elements are findings.
Segregation of duties. The examiner will verify that the person performing the reconciliation is not the same person with disbursement or signing authority on the account. They may ask to see your user access controls, signatory cards, and reconciliation logs to confirm this separation. If the same name appears on both the reconciliation record and the disbursement log, that's a finding.
The most common findings
After hundreds of audits across the industry, the same findings appear repeatedly:
Reconciliation not performed on the claimed schedule. The agency says they reconcile monthly, but the examiner finds a two-month gap. Or the agency says daily, but there are no records for 17 of the last 30 business days. This is the most common finding and the easiest to prevent — but only if the reconciliation is actually being done and documented every day.
Outstanding items not aged or tracked. The reconciliation shows 14 outstanding checks, but there's no aging analysis. Three of them are over 90 days old and approaching the state's escheatment threshold. The examiner expects to see an outstanding items schedule with dates, amounts, payees, and aging — and evidence that stale items are being actively managed.
Exceptions without resolution documentation. The reconciliation identified a $2,400 variance, but there's no record of what caused it or how it was resolved. The next month's reconciliation shows the variance is gone, but there's no trail connecting the two. What happened to that $2,400? The examiner needs to see the investigation and resolution, not just the outcome.
No segregation of duties. The same person reconciles and disburses. In a two-person office, this can feel unavoidable — but Pillar 2 doesn't make exceptions for agency size. If the same person can write a check and then reconcile the account that check was drawn on, the control doesn't exist. Period.
Negative client ledger balances. A specific escrow file has a negative balance — meaning more was disbursed from that file than was deposited. This is a serious finding because it means one client's funds are being used to cover another client's disbursement, even temporarily. The examiner will check trial balance details specifically for this.
What preparation actually means
If your daily reconciliation process is already running and documented, audit preparation is minimal. You're not preparing records — you're assembling records that already exist. The preparation consists of:
Verify completeness. Confirm that you have a reconciliation record for every business day in the period the examiner is likely to review (typically the last 12 months). Identify any gaps and document the reason.
Review outstanding items. Run your current outstanding items schedule and verify that stale items (90+ days) have been addressed or documented with a disposition plan. If you have checks approaching your state's escheatment threshold, document the plan.
Confirm segregation. Verify that your access controls reflect the current organizational structure. If someone changed roles, confirm that their system access was updated to reflect the new role.
Assemble the bundle. Have the reconciliation records, outstanding items schedules, exception resolution history, and trial balance details ready to produce on request. The examiner should not have to wait while you pull files from a filing cabinet, export from three different systems, or reconstruct anything.
The difference between preparation and reconstruction
Preparation is organizing records that were created at the time of the event. Reconstruction is creating records after the fact to document events that weren't documented when they occurred.
Preparation takes an hour. Reconstruction takes days — and the result is visibly different from a contemporaneous record. Timestamps don't align. Details are missing. The narrative feels retroactive rather than real-time. Examiners see this every week. It does not go well.
The only way to be prepared for an audit is to have been doing the work all along. If you reconcile every day, document every exception, track every outstanding item, and enforce segregation of duties, the audit is a formality. If you don't, no amount of last-minute preparation will make it look like you did.