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Title News - November/December, 2006

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November/December, 2006 - Volume 85 Number 6

Inside ALTA®
Today’s Climate Demands Internal Financial Controls

by Lorri Lee Ragan

Accounting and financial scandals are not just limited to the corporate world, they have hit the title world as well. Creating sound financial controls and training your employees are key elements to avoiding problems.

Pick up a newspaper these days and stories on accounting and financial scandals seem to dominate the pages. Large companies such as Enron, Arthur Andersen, and Fannie Mae have all been the subject of investigations for their accounting practices. But accounting and financial problems are not just problems in the corporate world, they have hit the title world as well. Over the past several years it seems that title industry publications have noted an increase in title company defalcations and other financial scams. Title managers need to ensure there are financial controls in place to avoid these types of problems and train employees to notice and report irregularities.

Federal Compliance & Title Companies
Instituting sound financial controls is not just good business practice; in some instances, it is the law. Congress reacted to the large corporate financial scandals by passing the Sarbanes-Oxley Act of 2002 to protect investors by improving the accuracy and reliability of corporate disclosures. The act creates some much needed structure around financial reporting and internal controls. The act only applies to corporations, not to sole proprietors. But how do you define a title company?
Section 404 of the act outlines the rigorous scrutiny that must be imposed on a company’s financial operation both annually and quarterly. Two specific actions are required each and every year: 1) an internal review of all financial controls and 2) an audit on the effectiveness of those financial controls. Throughout the year, progress must be monitored on any changes made as a result of the annual audit findings. Section 404 also provides for the certifications that make the signers of financial statements accountable for the figures. Another section of the act requires the disclosure of the effectiveness of internal control systems so that weaknesses and deficiencies in financial reporting can be identified and corrected.
But these controls are for the corporate world, right? In May of this year a trio of Republican senators introduced a bill to overhaul a controversial portion of the Sarbanes-Oxley Act - Section 404 mentioned above. The bill proposes an exemption for companies with a market value of less than $700 million from having to comply with the law. Surely most title companies will fall substantially under that limit; however financial professionals working for title companies would be wise to incorporate some of the recommendations in Sarbanes-Oxley on a voluntary basis. And even if your company is audited by your underwriter, you may want to have your own outside audit done by a CPA at least every three years to have a broader scope of your operations.
Sarbanes-Oxley is becoming an accounting industry standard even though it is not required by law. ALTA®’s outside auditors are starting to hold us to similar standards, and as a nonprofit, the act does not apply to us. However, it just makes business sense to follow the guidelines outlined in Sarbanes-Oxley.

Establish Escrow Accounting Procedures
To help title company financial professionals set up a control system, the Land Title Institute has developed a self-study employee training CD and materials entitled, “Escrow Accounting Procedures for the Land Title Industry.”
The employee training program comes with the following information:

  • an educational CD-ROM, with self tests after each lesson;
  • *a 67-page reference guide with checklists and a glossary;
  • *ALTA®’s booklet published in 2000, “Supervision and Control Guidelines for Agencies and Approved Attorneys” and “Escrow Internal Control Guidelines for Title Insurance Companies, Agencies and Approved Attorneys.”

In a 2003 Title News article on defalcations, deficient check control was mentioned as the top area of control breakdown in an office where defalcation occurred. This course examines the role and responsibilities of the escrow closer and presents a model system of good managerial practices designed to minimize risk in handling escrows. Viewers will learn:

  • how and why to segregate escrow duties
  • how and why to reconcile accounts
  • how and why to control procedures for receipts, disbursements, and escrow investments and
  • how and why to protect your company, your employees, and your customers by implementing sound business and accounting practices.
The Escrow Accounting Procedures Employee Training Kit is available for purchase on ALTA®’s Web site, under the ALTA® Store. Each kit is $99 for members; $149 for non-members. If you have questions about the training kit or need advice on other training materials available to staff, contact Patricia Berman, director of education, at 800-787-2582 ext. 215 or at

The Bottom Line
Implementing sound controls makes sense for your company, but also for the entire industry as well. As the ALTA® Public Awareness Program tries to spread the message about the value that we bring to the closing process, the less consumers, regulators, and members of Congress read about defalcations in the newspapers, the better it will be for all of us.

Lorri Lee Ragan, APR, is ALTA®’s director of communications. She can be reached at 800-787-2582 ext. 218, or

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