In the last-named respect, a real estate audit resembles that of a bank or a trust company; and it is evident that any bank auditor would be guilty of grave dereliction of duty if he failed to satisfy himself by minute investigation that the securities and other assets (i.e., the inventories of the institution) were as represented.
An important difference exists, however, between the audit of real estate assets and the audit of the assets of a bank. The verification of real estate assets must not only include proof that all the assets claimed are really held, but should also show that no such asset is used illegitimately. Stress is laid upon this latter point for two reasons:
1. The customs prevailing in the handling and recording of real estate render the illegitimate use of assets unusually easy.
2. Past experience has shown that this point has been frequently overlooked by auditors and that such oversight has resulted in grave losses to clients.
The frauds possible under existing conditions may result from carelessness and ignorance, but arise chiefly from dishonesty on the part of those responsible; and, while it is not intended to attempt any catalogue of the frauds common or possible in real estate transactions, the illustrations cited in the present chapter will indicate certain dangers which exist.
In the case of financial securities, any change of ownership, and more especially any hypothecation of such securities, usually requires the documents themselves to be placed in the hands of the lender or of his representative. This condition does not apply to real estate. An owner pledging a piece of property in any way usually retains possession of the documents showing his title to the property. The possession of such papers does not therefore prove a clear title, as does usually the possession of a bond. Again, when mortgages are satisfied, a "satisfaction piece" is usually given, and it is by no means an unknown thing for the mortgagor not to insist upon the return of the original mortgage. For these and similar reasons, it is of the first importance that the auditor satisfy himself that all money received from or on account of real estate is properly shown on the cash book, mortgage books, and on the real estate ledger itself.