Performance audit, Arizona Department of Real Estate: report to the Arizona Legislature

              State of Arizona
Office
of the
Auditor General
PERFORMANCE AUDIT
Report to the Arizona Legislature
By Debra K. Davenport
Auditor General
ARIZONA
DEPARTMENT
OF
REAL ESTATE
August 2001
Report No. 01- 15
The Auditor General is appointed by the Joint Legislative Audit Committee, a bipartisan committee
composed of five senators and five representatives. Her mission is to provide independent and impar-tial
information and specific recommendations to improve the operations of state and local government
entities. To this end, she provides financial audits and accounting services to the state and political
subdivisions and performance audits of state agencies and the programs they administer.
The Joint Legislative Audit Committee
Senator Ken Bennett, Chairman
Representative Roberta L. Voss, Vice- Chairman
Senator Herb Guenther Representative Robert Blendu
Senator Dean Martin Representative Gabrielle Giffords
Senator Peter Rios Representative Barbara Leff
Senator Tom Smith Representative James Sedillo
Senator Randall Gnant ( ex- officio) Representative James Weiers ( ex- officio)
Audit Staff
Dale Chapman— Manager
and Contact Person ( 602) 553- 0333
Ann Orrico— Team Leader
Kristin Borns— Team Member
Joe McKersie— Team Member
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410
Phoenix, AZ 85018
( 602) 553- 0333
Additionally, many of our reports can be found in electronic format at:
www. auditorgen. state. az. us
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • ( 602) 553- 0333 • FAX ( 602) 553- 0051
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
August 2, 2001
Members of the Arizona Legislature
The Honorable Jane Dee Hull, Governor
Mr. Jerry Holt, Commissioner
Department of Real Estate
Transmitted herewith is a report of the Auditor General, A Performance Audit of the
Department of Real Estate. This report is in response to a June 16, 1999, resolution of
the Joint Legislative Audit Committee. The performance audit was conducted as part of
the Sunset review set forth in A. R. S. § 41- 2951 et seq. I am also transmitting with this
report a copy of the Report Highlights for this audit to provide a quick summary for
your convenience.
As outlined in its response, the Department of Real Estate has agreed to implement 17
of the 23 recommendations but does not agree with the remaining 6 recommendations.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on August 3, 2001.
Sincerely,
Debbie Davenport
Auditor General
Enclosure
OFFICE OF THE AUDITOR GENERAL
Program Fact Sheet
Department of Real Estate
General Fund Revenues1: $ 3.2 million
( Estimated for fiscal year 2001)
$ 0
$ 1,000,000
$ 2,000,000
$ 3,000,000
$ 4,000,000
$ 5,000,000
$ 6,000,000
$ 7,000,000
1999 2000 2001 ( Est.)
Fiscal Years
Other
Licenses, fees, and permits
General Fund
1 The Department must deposit most revenues col-lected
through licenses, fees, and permits and other
sources into the State General Fund.
Services: The Department operates as one program offering the following services through
five subprograms: 1) Central Administrative Services— Provides budget, customer, computer
information, and other services; 2) Education and Licensing— Licenses real estate, cemetery,
and membership camping salespersons and brokers, as well as entities, such as corporations
and limited liability companies; and approves schools providing real estate licensure educa-tion,
as well as courses and instructors; 3) Regulation— Conducts investigations in response to
public complaints or on its own initiative, prosecutes licensees to resolve violations of real es-tate
laws, and audits brokers’ business records to ensure that brokers properly handle client
monies; 4) Land Development— Examines and issues subdivision, time- share, unsubdivided
land, and membership camping public reports and cemetery certificates of authority; 5) Re-covery
Assistance— Determines the validity of claims against the Real Estate Recovery Fund
to compensate people who have suffered financial losses due to the illegal acts of licensees.
Personnel: 67 full- time staff
( fiscal year 2001)
Subdivisions
( 9)
Administration
( 13)
Administrative
Actions
( 4)
Investigations
Customer ( 9)
Services
( 6)
Licensing/
Education
( 16)
Tucson
Office
( 5)
Auditing ( 5)
Facilities:
Department employees are located at 2
state- owned facilities. The Department
houses 59 of its 67 employees at 2910 North
44th Street in Phoenix. An additional 8
employees are housed at 400 West
Congress in Tucson, including 3 employees
from Auditing.
OFFICE OF THE AUDITOR GENERAL
Program Goals ( fiscal year 2000- 2001)
Subprogram: Education and Licensing
1. To review and approve new courses quickly
and efficiently.
2. To improve the quality of class offerings and
instructors by monitoring and auditing more
classes.
3. To create and maintain procedures to process
and print a license in an efficient and timely
manner.
4. To provide better customer service to licen-sees.
Subprogram Regulation
1. To audit and document brokers’ compliance
with timely maintenance of legally required
records.
2. To reduce the hearing caseload through vi-able
alternatives to the hearing process.
3. To coordinate and facilitate the Department’s
administrative hearings.
4. To monitor and enforce compliance with or-dered
or stipulated terms or provisions.
5. To maintain a firm but fair enforcement pol-icy.
6. To maintain the timeliness of the investiga-tive
process.
Subprogram: Land Development
1. To issue timely public reports.
Subprogram: Recovery Assistance
1. To efficiently serve the public interest by ad-ministering
the Real Estate Recovery Fund.
Adequacy of Goals and Performance
Measures: The Department could make some
improvements to the goals for its five subpro-grams
and their associated performance meas-ures.
For example:
n   Some of the Department’s goals do not accu-rately
capture the Department’s responsibili-ties
or mission. For example, while the Regu-lation
subprogram has a goal of maintaining
the timeliness of the investigative process,
this goal does not address the quality or
thoroughness of the Department’s complaint
investigations. Similarly, the Land Develop-ment
subprogram has one goal, focusing on
its timeliness in issuing public reports, but
this goal does not address the appropriate-ness
and accuracy of these reports.
n   The Department does not have sufficient
measures to report on the activities and the
outcomes of its subprograms. Most of the
Department’s performance measures are fo-cused
on inputs or timeliness. However, the
Department lacks needed output, outcome,
and efficiency measures that would provide a
more complete picture of Department activi-ties
to oversight bodies and other interested
persons. For example, the Department’s
Regulation subprogram has no outcome
measures that report problems identified in
broker audits or the results of its complaint
investigations; or efficiency measures that re-port
the efficiency with which broker audits
and complaint investigations are conducted.
Additionally, within the Education and Li-censing
subprogram, the Department lacks
outcome measures on the number of real es-tate
courses approved or rejected, the results
of its class monitoring efforts, and the per-centage
of licensees approved, denied, or the
subject of disciplinary action.
i
OFFICE OF THE AUDITOR GENERAL
SUMMARY
The Office of the Auditor General has conducted a performance
audit of the Department of Real Estate pursuant to a June 16,
1999, resolution of the Joint Legislative Audit Committee. This
audit was conducted as part of the Sunset review set forth in
A. R. S. § 41- 2951 et seq.
The Department of Real Estate ( Department) licenses and regu-lates
more than 46,200 real estate salespersons and brokers, in-cluding
salespersons and brokers for cemeteries and member-ship
campgrounds, and more than 9,560 corporations and other
entities engaged in the sale of real property. The Department is
responsible for investigating public complaints against licensees
and taking appropriate disciplinary actions against those who
have violated Arizona’s real estate laws. The Department is also
responsible for providing consumers with public information on
licensees and approving all of the real estate schools and courses
offered in Arizona.
The Department Needs
to Improve Its Complaint-
Handling Practices
( See pages 11 through 22)
The Department has the authority to receive and investigate con-sumer
complaints about fraud, misrepresentation, and negli-gence.
However, the Department has established complaint-handling
policies and procedures that can discourage the filing
of some complaints and do not ensure that all complaints are
thoroughly investigated.
The Department’s practices for receiving complaints include
some barriers that can discourage legitimate complaints. These
practices were established to help manage the Department’s
workload by screening out complaints over which the Depart-ment
has no jurisdiction. However, these practices may also
Summary
ii
OFFICE OF THE AUDITOR GENERAL
screen out valid complaints. For example, the Department,
against the recommendations of its Attorney General representa-tives,
has listed on its complaint form eight broad areas, such as
“ ethical/ performance issues” and “ deposits/ refunds,” in which
the Department claims to have no jurisdiction. However, there
are cases within the Department’s jurisdiction that may fall
within the areas listed.
The Department’s investigative procedures further limit its pub-lic
protection efforts. Auditors were unable to determine the De-partment’s
investigation rate because the Department does not
track or report the number of complaints it receives. However,
auditors’ review of 16 dismissed complaints found 2 that merited
the Department’s further investigation. Further, when the De-partment
does investigate complaints, these investigations are
often inadequate or are not thoroughly documented. A review of
30 complaint investigations from fiscal years 1998 through 2000
showed that most did not contain documentation that complain-ants
were interviewed or that all pertinent documentation was
collected and reviewed. For example, the Department did not
interview the complainant in 16 ( 53 percent) of the cases re-viewed.
Department Inconsistently Disciplines
Real Estate Law Violators
( See pages 23 through 27)
Licensees who violate real estate laws are not treated equitably.
Auditors found that the Department’s actions in 28 cases involv-ing
licensees who breached their fiduciary duties were inconsis-tent.
For example, a licensee who failed to inform his client that
the buyer did not make a $ 5,000 earnest payment received an 18-
month suspension, while a licensee who forged his client’s name
on a contract received a 60- day suspension.
To assist it in making consistent and appropriate disciplinary de-cisions,
the Department should adopt disciplinary guidelines.
Although the Department’s procedure manual states that it
should take aggravating and mitigating circumstances into con-sideration
when determining disciplinary actions, the manual
Summary
iii
OFFICE OF THE AUDITOR GENERAL
does not provide the Department specific guidelines to direct it
in applying these factors. To strengthen its enforcement efforts,
the Department should develop and implement disciplinary
guidelines and adopt these guidelines into a substantive policy
statement.
Recovery Fund Is Costly
and Cumbersome to Administer
( See pages 29 through 36)
Costs to operate the Real Estate Recovery Fund can be reduced.
The Fund pays part or all of a person’s losses when the losses
cannot be recovered from a licensee who has engaged in wrong-doing,
such as fraud or misrepresentation. However, the De-partment’s
costs to administer the Fund in fiscal years 1998- 2000
have been greater than the amount paid out to claimants. In ad-dition,
the Fund’s balance has decreased by over $ 185,000 during
the same period.
The Department incurs high administrative costs mainly because
of the steps it takes to follow potential claims as they move
through the court system and to resolve claims once the courts
authorize them. This includes time spent on cases that never re-sult
in a claim. Administrative costs could be reduced if the De-partment,
rather than the courts, had the responsibility for ap-proving
or denying a claim against the Fund. This change would
reduce both the amount of time the Fund Administrator spends
following cases in process and the amount of legal assistance
needed from the Attorney General’s Office. California has used
this alternative approach for the past several years, thus reducing
its administrative costs.
Another way to decrease these administrative costs is to charge
only Fund- related personnel costs to the Fund. The Fund pays
the cost of a full- time Fund Administrator and a half- time Assis-tant
Attorney General. Although both employees spend part of
their time on other duties, their full costs are charged to the
Fund. Based on the reported time spent on these other duties
and the personnel costs of these positions, in fiscal year 2000, the
costs inappropriately charged to the Fund totaled approximately
$ 31,000.
Summary
iv
OFFICE OF THE AUDITOR GENERAL
Department’s Public
Information Practices Impede
Consumers’ Access to
Licensee Information
( See pages 37 through 41)
The Department does not provide consumers with ready and
sufficient access to information on licensees’ complaint and dis-ciplinary
histories. The Department does not follow its stated
policy for making disciplinary information available over the
telephone. Instead, consumers must make an advance request in
writing and wait several weeks for the Department to prepare
the licensee’s file. They must then travel to the Department’s of-fice
to view the information, and provide picture identification
and log in before the Department will make this information
available for review. Other Arizona regulatory agencies are do-ing
more than the Department to make such information more
readily available, such as requiring staff to provide the public
with information over the telephone regarding the number and
type of both dismissed and pending complaints, and the resolu-tion
of closed complaints.
When consumers do review files, the Department needs to make
certain that files prepared for consumer review contain complete
complaint and disciplinary information and that all confidential
information, such as licensees’ home addresses and social secu-rity
numbers, are removed.
Sunset Factors
( See pages 43 through 51)
As part of the Sunset Review process, this audit recommends
that the Department revise Commissioner’s Rule R4- 28- 1303 to
clarify the rule and make it consistent with public records laws.
Currently, this rule restricts public access to any information or
document obtained in an investigation unless it is made a matter
of public record. However, this rule contradicts public records
laws, which already make Department investigation information
and documents public record.
v
OFFICE OF THE AUDITOR GENERAL
TABLE OF CONTENTS
Page
Introduction and Background ..................... 1
Finding I: Department
Needs to Improve Its
Complain t- Handling Practices ............... 11
Department Responsible
for Protecting Public from
Unscrupulous Licensees........................................... 11
Department Has Some Practices
That Make It Difficult for the Public
to File Complaints..................................................... 12
Department Does Not
Know How Many Complaints
It Receives and Does Not
Conduct Thorough Investigations ........................... 15
Department Can
Strengthen Its Public Protection
Efforts Through Improved
Complaint- Handling Practices................................. 18
Department Should Study Workload
to Determine Future Resource Needs...................... 20
Recommendations .................................................... 22
Finding II: Department Inconsistently
Disciplines Real Estate
Law Violators ........................................... 23
Department Is Responsible for
Disciplining Violators ............................................... 23
Department Inconsistently Applies
Disciplinary Actions.................................................. 24
Table of Contents
vi
OFFICE OF THE AUDITOR GENERAL
TABLE OF CONTENTS ( Cont’d)
Page
Finding II: ( Concl’d)
Department Should Take Steps to
Ensure More Consistent Actions.............................. 25
Recommendations .................................................... 27
Finding III: Recovery Fund Is
Costly and Cumbersome
to Administer ........................................... 29
Recovery Fund Assists People
with Real Estate Losses............................................. 29
Costs of Administering the
Fund Exceed Claims Paid......................................... 30
Several Factors Contribute
to High Costs............................................................. 32
Several Recommendations Can
Simplify Fund Administration and
Decrease Administrative Costs ................................ 34
Recommendations .................................................... 36
Finding IV: Department’s Public
Information Practices Impede
Consumers’ Access to
Licensee Information .............................. 37
Providing Public Information Is
An Important Part of Regulatory
Agency Responsibilities............................................ 37
Department Does Not
Provide Sufficient Access
to Public Information................................................ 37
Table of Contents
vii
OFFICE OF THE AUDITOR GENERAL
TABLE OF CONTENTS ( Cont’d)
Page
Finding IV: ( Concl’d)
Review of Licensee Files Showed Additional
Problems with Information Provided...................... 40
Recommendations .................................................... 41
Sunset Factors ............................................. 43
Agency Response
Tables
Table 1 Department of Real Estate
Number of Licensees, Initial
Licensure Requirements,
and License Fees
As of June 29, 2001................................... 3
Table 2 Department of Real Estate
Statement of Revenues, Expenditures
and Changes in Fund Balance
Years Ended June 30, 1999, 2000,
and 2001 ( Unaudited) ............................. 7
Items
Item 1 Licensee Definitions ................................ 2
Item 2 Department of Real Estate
Notice of Jurisdiction and
Department Requirements ..................... 14
Item 3 Department of Real Estate
Investigative Procedures......................... 17
Table of Contents
viii
OFFICE OF THE AUDITOR GENERAL
TABLE OF CONTENTS ( Concl’d)
Page
Figures
Figure 1 Department of Real Estate
Real Estate Recovery Fund
Administrative Costs and Claims
Years Ended June 30, 1998, 1999,
and 2000 ( Unaudited) ............................. 30
Figure 2 Department of Real Estate
Real Estate Recovery Fund
Revenues and Expenses
Years Ended June 30, 1998, 1999,
and 2000 ................................................... 31
1
OFFICE OF THE AUDITOR GENERAL
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance
audit of the Department of Real Estate pursuant to a June 16,
1999, resolution of the Joint Legislative Audit Committee. This
audit was conducted as part of the Sunset review set forth in
A. R. S. § 41- 2951 et seq.
Mission and Purpose
The Department of Real Estate ( Department) was established in
1921 and administered by the State Land Commission until 1947,
when the Legislature created a seven- member Real Estate Board
with a Real Estate Commissioner as chairman. In 1950, the Board
was given authority to appoint the Real Estate Commissioner,
who was no longer a member of the Board. In 1975, in response
to concerns that the Real Estate Board inadequately regulated
real estate licensees, statutes were changed to reduce the Board’s
role to an advisory capacity. At the same time, the Real Estate
Commissioner became a Governor- appointed position.
The Department’s mission is:
To safeguard and promote the public interest through timely
and capable assistance, fair and balanced regulation, and sound
and effective education.
To accomplish this, the Department is responsible for a number
of functions, including:
n   Licensing and regulating Arizona real estate, cemetery, and
membership camping salespersons and brokers. 1
1 Membership camping refers to campgrounds that solicit paid member-ships
for the purposes of camping or outdoor recreation, including the use
of camping sites primarily by members.
Introduction and Background
2
OFFICE OF THE AUDITOR GENERAL
Item 1: Licensee Definitions
n   Salesperson— Engage in a variety
of activities, including selling, nego-tiating
offers to sell, and listing for
sale real estate, time- share interval,
cemetery, and membership camp-ing
properties.
n   Broker— Employ or supervise
salespersons and can also engage in
the same types of activities as
salespersons.
n   Investigating complaints from the public and licensees re-garding
real estate transactions.
n   Prosecuting licensees to resolve alleged violations of real es-tate
statutes and Commissioner’s rules.
n   Providing information to the public on Department licensees,
including complaints filed and disciplinary history.
In addition, the Department is responsible for the oversight and
regulation of all the real estate schools and instructors in the
State, and the issuance of public reports for subdivisions and un-subdivided
land, which provide buyers with information
needed for purchasing decisions, including information on road
access to the property, water sources, and sewage disposal. The
Department also audits brokers’ records and their handling of
client monies to ensure compliance with statutory requirements.
Licensee Information
and Licensing Requirements
As of June 29, 2001, the Department reports having over 46,200
licensees. Table 1 ( see page 3) depicts the number of individual
real estate professionals by
different license types who
are licensed by the
Department, along with
licensing requirements
and associated licensing
fees.
In addition to individuals,
the Department also
licenses approximately
9,560 entities that are
engaged in selling or
leasing real property, including corporations, limited liability
companies, and partnerships. Finally, the Department is respon-sible
for regulating and approving real estate schools, including
courses and instructors. Currently, there are 96 active real estate
schools in Arizona that are approved by the Department.
The Department has over
46,200 active licensees.
Introduction and Background
3
OFFICE OF THE AUDITOR GENERAL
Table 1
Department of Real Estate
Number of Licensees, Initial Licensure Requirements, and
License Fees
As of June 29, 2001
Type
of License
Number
of
Licensees
Initial
Licensure
Requirements
Fees
Salespersons
Real Estate Salesperson
Cemetery Salesperson1
Membership Camping
Salesperson1
Total salesperson licenses
34,326
429
85
34,840
n   Complete a required 90- hour
salesperson pre- licensure
education program at a real estate
school certified by the
Commissioner.
n   Pass that school’s examination.
n   Pass a two- part examination that
has general questions and state-specific
questions.
n   Initial license— $ 114.
n   Renewal license—$ 60
( must be renewed every
2 years).
Brokers
Real Estate Brokers
Cemetery Brokers1
Membership Camping
Brokers1
Total broker licenses
11,387
41
14
11,442
n   Complete a required 90- hour
broker pre- licensure education
program at a real estate school
certified by the Commissioner.
n   Pass that school’s exam.
n   Demonstrate at least three years’
experience as a licensed real estate
salesperson or broker in the
preceding five years.
n   Pass a two- part examination that
has general questions and state-specific
questions.
n   Initial license ranges
from $ 169 to $ 189.
n   Renewal license—$ 125
( must be renewed every
2 years).
Total licensees
46,282
1 Cemetery and Membership Camping salesperson and broker applicants are not required to have pre- licensure education
or pass a school examination. However, they must pass the state exam.
Source: Auditor General staff analysis and summary of licensure requirements identified in A. R. S. § 32- 2124 and
Department- reported licensure numbers, and current licensure fees.
Introduction and Background
4
OFFICE OF THE AUDITOR GENERAL
Organization
The Department of Real Estate is charged with the regulation of
real estate licensees. To do this, the Department has divided its
responsibilities into the following seven divisions located at its
main office in Phoenix:
n   Administration ( 13 FTEs)— This division sets the Depart-ment’s
overall regulatory and fiscal policies and strategic di-rection.
In addition, it can grant licensing requirement waiv-ers
to current licensees and eligible license applicants, such as
individuals who have been licensed in other states and have
completed that state’s requirements for education and test-ing,
and wish to become licensed in Arizona.
n   Licensing and Education ( 16 FTEs)— This division pro-tects
the public by issuing licenses to qualified persons and
entities and ensures the accuracy of licensing records. The di-vision
also renews licenses in compliance with statutes, rules,
and procedures and oversees the administration of licensing
examinations. The Department reports that it typically issues
licenses within three to five days of receiving applications.
Auditors found that in some instances, if all license applica-tion
information and fees are submitted, the Department is-sues
a license the same day an application is received.
Promptly issuing licenses allows individuals to quickly begin
working in the real estate industry.
n   Investigations ( 9 FTEs)— This division is responsible for
investigating complaints regarding real estate and land de-velopment
transactions. Additionally, this division conducts
investigations of licensure applicants when an applicant’s
background check reveals criminal convictions. During fiscal
year 2000, the Department investigated approximately 500
cases, including investigations arising from consumer com-plaints
and license applicant background checks.
n   Administrative Actions ( 4 FTEs)— Administrative Actions
reviews completed investigations and proposes disciplinary
actions to the Commissioner. This division also monitors li-censees’
compliance with consent orders and Commis-sioner’s
orders and administers the Real Estate Recovery
Introduction and Background
5
OFFICE OF THE AUDITOR GENERAL
Fund, which is designed to cover losses that result from the
wrongdoing of a licensed real estate agent, such as fraud or
misrepresentation. For more information on the Recovery
Fund, see Finding III, pages 29 through 36.
n   Customer Services ( 6 FTEs)— Customer Services provides
a single point of contact for the public and licensees by an-swering
questions; giving instructions on how to file a com-plaint;
and disseminating information, such as laws, rules,
and other real- estate- related topics. In addition, Customer
Services responds to public assistance requests, which are
any type of written communication from a consumer or a li-censee
who has asked for information from the Department.
n   Subdivisions ( 9 FTEs)— This division is responsible for re-viewing
and approving applications for subdivision, time-share,
unsubdivided land, and membership camping public
reports, and cemetery certificates of authority, which serve as
permission to operate a cemetery. 1 Public reports and certifi-cates
of authority are required before developers or cemeter-ies
can begin offering these types of real property for sale or
lease in Arizona.
n   Auditing ( 5 FTEs)— This division audits brokers’ records to
ensure that brokers are in compliance with the law and are
properly handling client monies.
In addition, the Department has a branch office in Tucson where
eight staff persons work. Three of these staff are part of the Au-diting
Division. The other five staff provide licensing, investiga-tion,
subdivision, and customer services to Southern Arizona li-censees
and residents.
Real Estate Advisory Board
The Real Estate Advisory Board comprises nine volunteer mem-bers
who are appointed by the Governor and serve six- year
terms. The Board is charged with providing the Real Estate
1 Land is considered subdivided when it has been divided into six or more
parcels that are less than 36 acres each in size. Unsubdivided land contains
parcels that are 36 acres or larger in size.
Introduction and Background
6
OFFICE OF THE AUDITOR GENERAL
Commissioner with such recommendations as it deems neces-sary
and beneficial to the best interests of the public. According
to statute, the Board shall meet at least four times each year.
Department Budget
As illustrated in Table 2 ( see page 7), during fiscal year 2001, the
Department was appropriated $ 3,218,700 in General Fund mon-ies
for Department operations. Although it receives these monies
for its operations, the Department also generates revenues, pri-marily
through the collection of licensing fees and charges for the
sale of goods and services. In fiscal year 2001, the Department
estimated it would generate approximately $ 3,458,000 in reve-nue.
However, according to statute, the Department is required
to deposit most of the revenues it generates into the General
Fund. In addition, statute requires that the revenue generated by
the Department be at least 95 percent but not more than 110 per-cent
of the succeeding year’s anticipated General Fund appro-priation.
If revenues fall outside this range, the Department must
examine its fees and determine if they should be lowered or
raised in order to bring revenues back in line with the 95 to 110
percent requirement. The Department estimates it will remit
$ 3,281,400 to the General Fund in fiscal year 2001.
Audit Scope
and Methodology
This performance audit and Sunset review includes findings and
recommendations in the following four areas:
n   The need for the Department to improve its complaint-handling
practices by implementing procedures that facilitate
the filing of complaints, investigating all complaints that war-rant
investigation, and developing and implementing poli-cies
for more effective and consistent investigations;
n   The need for the Department to provide consistent enforce-ment
of real estate laws by developing and implementing
disciplinary guidelines;
Introduction and Background
7
OFFICE OF THE AUDITOR GENERAL
Table 2
Department of Real Estate
Statement of Revenues, Expenditures, and Changes in Fund Balance
Years Ended June 30, 1999, 2000, and 2001
( Unaudited)
1999 2000 2001
( Actual) ( Actual) ( Estimated)
Revenues:
State General Fund appropriation $ 3,074,600 $ 3,136,200 $ 3,218,700
Licenses, fees, and permits 2,220,962 2,303,487 2,313,000
Sales and charges for goods and services:
Filing fees 605,767 591,577 605,900
Examination fees 200,279 233,308 234,000
Other 29,397 64,475 57,600
Fines and forfeits 48,697 114,062 110,000
Earnings on investments 71,900 70,384 70,700
Other 60,644 82,747 67,600
Total revenues 6,312,246 6,596,240 6,677,500
Expenditures:
Personal services 1,990,883 2,045,757 2,162,400
Employee- related 432,840 443,833 478,900
Professional and outside services 75,710 80,488 81,600
Travel, in- state 52,249 47,059 58,900
Travel, out- of- state 3,773 2,289 5,000
Other operating 648,975 544,216 573,000
Equipment 165,538 147,294 77,100
Total expenditures 3,369,968 3,310,936 3,436,900
Excess of revenues over expenditures 2,942,278 3,285,304 3,240,600
Other financial uses:
Remittances to the State General Fund 1 3,081,810 3,272,289 3,281,400
Reversions to the State General Fund 1,979 11,449      
Total other financing uses 3,083,789 3,283,738 3,281,400
Excess of revenues over ( under) expenditures
and other financing uses ( 141,511) 1,566 ( 40,800)
Fund balance, beginning of year 1,406,486 1,264,975 1,266,541
Fund balance, end of year 2 $ 1,264,975 $ 1,266,541 $ 1,225,741
1 The Department is required to remit most revenues collected into the State General Fund. These collections are required to
be between 95 and 110 percent of the Department’s General Fund appropriation.
2 The Real Estate Recovery Fund accounts for approximately $ 1,262,400, $ 1,242,700, and $ 1,193,700 of the 1999, 2000, and 2001
ending fund balance, respectively. This portion of the fund balance is reserved for liabilities resulting from court- ordered
damage settlements relating to real estate and cemetery transactions and other allowed expenditures in accordance with
A. R. S. § 32- 2186.
Source: Auditor General staff analysis of the Arizona Financial Information System Revenues and Expenditures by Fund, Program, Organi-zation,
and Object and Trial Balance by Fund reports for the years ended June 30, 1999 and 2000; the State of Arizona Appropriations
Report for the year ended June 30, 2000; and Department revenue and expenditure estimates for the year ending June 30, 2001.
Introduction and Background
8
OFFICE OF THE AUDITOR GENERAL
n   The need for the Legislature to consider providing the De-partment
with the authority to accept or deny Recovery Fund
claims in order to address the cumbersome and inefficient
claims process; and
n   The need for the Department to implement policies and
procedures to provide complete and accurate information to
the public over the phone.
This audit used a variety of methods to study the issues ad-dressed
in this report. These methods included interviewing
Advisory Board members, representatives of the Arizona Asso-ciation
of Realtors, the Phoenix Association of Realtors, and the
Tucson Association of Realtors, as well as the Department’s At-torney
General representatives; attending Real Estate Advisory
Board meetings; and contacting 12 different states regarding Re-covery
Fund issues. 1 In addition, the following specific methods
were used:
n   Auditors reviewed a randomly selected sample of 38 investi-gative
cases from fiscal years 1998, 1999, and 2000. In addi-tion,
auditors reviewed 16 randomly selected public com-plaints
from fiscal year 2000 that the Department deemed
were outside its jurisdiction.
n   To estimate the number of telephone calls the Department
receives annually from consumers wishing to file complaints
against Department licensees, auditors reviewed a random
sample of 1,362 calls received and logged by the Department
between October 16 through December 15, 2000. To develop
this sample, auditors randomly pre- selected two to three
half- days each week during the time period reviewed and
randomly requested one of the Department’s three customer
services representatives to log all of the calls he/ she received
for each of the selected half- days.
1 The following 12 states were contacted to gain more information on their
Recovery Funds because their claim payment limits were equal to or
greater than Arizona’s, or because of geographic proximity: Alabama,
California, Colorado, Hawaii, Kansas, New Mexico, Nevada, Pennsyl-vania,
Rhode Island, Tennessee, Texas, and Utah.
Introduction and Background
9
OFFICE OF THE AUDITOR GENERAL
n   To assess the consistency of the Department’s adjudication
process, auditors reviewed the 167 cases containing discipli-nary
actions taken by the Department through consent or-ders
as reported in the February 1998 through February 2001
issues of the Arizona Real Estate Bulletin.
n   Auditors reviewed all 26 Recovery Fund claims from fiscal
years 1998, 1999, and 2000 that resulted in payment to the
claimant, as well as all 72 cases that did not result in pay-ment.
n   Auditors posing as members of the public made five calls to
the Department requesting information on seven licensees
and also visited the Department to view the licensees’ files.
Information supplied to the auditors was compared to in-formation
obtained from the Department’s complaint re-cords.
This audit was conducted in accordance with government audit-ing
standards.
The Auditor General and staff express appreciation to the Com-missioner
and staff of the Department of Real Estate, as well as
the Real Estate Advisory Board, for their cooperation and assis-tance
throughout the audit.
10
OFFICE OF THE AUDITOR GENERAL
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11
OFFICE OF THE AUDITOR GENERAL
FINDING I DEPARTMENT NEEDS
TO IMPROVE ITS COMPLAINT-HANDLING
PRACTICES
Improvements are needed in the ways the Department receives
and investigates complaints. One of the primary roles of a regu-latory
agency is to protect the public through investigating and
adjudicating public complaints. However, the Department’s
practices include a number of barriers to filing a complaint. Simi-larly,
barriers exist for successfully resolving the complaints that
make it into the system. For example, the Department does not
track or report the number of complaints received or percentage
investigated, while investigations that are conducted are often
inadequate.
Department Responsible
for Protecting Public from
Unscrupulous Licensees
The Department is responsible for protecting the public through
the enforcement of real estate statutes and rules, detection of vio-lations,
and the pursuit of administrative sanctions. To fulfill this
responsibility, the Department has the authority to receive and
investigate consumer complaints made against licensees alleging
actions, such as fraud, misrepresentation, incompetence, or neg-ligence.
The following case example illustrates the type of con-sumer
complaints the Department receives:
n   A complainant gave a $ 500 check to a licensed real estate
salesperson as a deposit on a property. Instead of depositing
the check in the appropriate trust account, the licensee cashed
the check for his own personal use. The Department’s inves-tigation
of this complaint confirmed several violations of
state statutes, including unlawful retention of earnest money
for personal use and failure to act as a person of honesty,
truthfulness, and good character.
Finding I
12
OFFICE OF THE AUDITOR GENERAL
If an investigation proves that a licensee committed a violation,
the Department may take disciplinary action, such as issuing
civil penalties or suspending or revoking a license. In addition to
investigating consumer complaints, the Department also has the
authority to conduct background investigations of licensees or
applicants for licensure to assess their suitability to hold a license.
This includes obtaining criminal history reports and court re-cords
to determine whether the licensee or applicant has any
criminal arrests or convictions.
Department Has Some Practices
That Make It Difficult for the
Public to File Complaints
The Department’s practices present barriers that members of the
public must overcome in order to file complaints. These barriers
are the result of the Department’s efforts to manage its workload,
but may have discouraged or prevented consumers from filing
complaints.
Several barriers exist that may discourage or prevent the public
from making complaints— The following practices are obstacles
that members of the public must overcome in order to file a
complaint against a licensee:
n   Screening procedures may exclude legitimate com-plaints—
When the Department’s customer services repre-sentatives
answer consumers’ calls, they use procedures that
may discourage consumers from filing legitimate complaints.
According to the Department’s customer services procedure
manual, staff are required to determine if callers’ complaints
about licensees are within the Department’s jurisdiction.
However, the procedures they apply may discourage con-sumers
from filing complaints that are actually within the
Department’s jurisdiction. For example, the procedure man-ual
lists several broad categories that the Department claims
not to have jurisdiction over, including ethical issues, contract
disputes, and commission disputes. Should a consumer call
wishing to complain about one of these areas, such as an un-ethical
licensee or contract dispute, the customer services
The Department’s public
protection responsibilities
include enforcing real
estate laws.
Finding I
13
OFFICE OF THE AUDITOR GENERAL
representative may inform the consumer that his/ her com-plaint
is outside the Department’s jurisdiction because it in-volves
ethics or contracts. However, without further, in-depth
discussion with the complainant, the Department is
unable to truly determine whether the complaint does in-clude
licensee actions that fall within the Department’s juris-diction
and, therefore, the consumer should file the com-plaint.
n   Complaint form discourages complaint filings— In a simi-lar
way, the Department’s complaint form further discour-ages
the public from filing complaints. The form contains a
disclaimer that lists eight broad areas for which the Depart-ment
claims to have no jurisdiction ( see Item 2, page 14).
However, this disclaimer may be misleading. While the De-partment
does not have jurisdiction in some of the indicated
areas, such as homeowner’s associations and land-lord/
tenant disputes, it may have jurisdiction in others. For
example, the form claims that the Department has no juris-diction
over complaints involving ethical or contractual is-sues.
However, complaints involving either ethical or con-tractual
issues could also include licensee actions, such as
misrepresentation, fraud, or incompetence, all of which fall
within the Department’s jurisdiction.
The Department’s Attorney General representatives raised
this same point in reacting to the disclaimer when it was first
proposed. When the Department redesigned its complaint
form in 2000 to include the disclaimer, the Attorney General
representatives recommended excluding it from the form,
stating that there are cases over which the Department has
jurisdiction that may fit under some of the eight broad cate-gories.
However, the Department chose to retain the dis-claimer.
Finding I
14
OFFICE OF THE AUDITOR GENERAL
n   Department required complaints to be notarized— Finally,
until April 2001, the Department required complaints to be
notarized. Although A. R. S. § 32- 2108( A) states that the De-partment
must investigate complaints that are written and
verified ( notarized), it does not preclude the Department
from accepting and investigating complaints in other forms,
such as written complaints that are not notarized. However,
the Department had interpreted this statute to mean that in
order to make a complaint against a licensee, a person must
complete a Department complaint form and have it nota-rized.
In April 2001, the Department changed its policy and
no longer requires complaints to be notarized.
Complaint barriers result from Department’s efforts to manage
workload— The Department established its current complaint
practices in an effort to manage its workload. The Department
reports that since it changed its complaint form to include areas
where it lacks jurisdiction, the number of frivolous complaints it
receives has decreased significantly. The Department took such
measures because it faced an increase in its investigative work-load,
but a decrease in the number of investigators available to
investigate complaints. In 1995, the Department had a backlog of
500 cases, and in 1997, it assumed responsibility for cases involv-ing
subdivisions. Further, its current investigative staff of six
FTEs is one fewer than in 1990. The Department now has no case
Item 2: Department of Real Estate
Notice of Jurisdiction and
Department Requirements
A. R. S. § 32- 2108( A) requires that all complaints to the Department must be
in writing, signed, and notarized before a notary public. A. R. S. § 32- 2108( B)
provides the Department with jurisdiction to investigate complaints against
all real estate licenses and against all persons engaged in real estate where a
license is required.
The Department does NOT have jurisdiction in the following areas:
Service and Warranty Ethical/ Performance Issues
Contract/ Listing Disputes Landlord/ Tenant Disputes
Commission Disputes Homeowner Association Issues
Deposits/ Refunds Unpaid Bills
Source: Department of Real Estate complaint form.
Finding I
15
OFFICE OF THE AUDITOR GENERAL
investigation backlog, and its workload of cases is much smaller
than in 1995.
Department Does Not Know
How Many Complaints It
Receives and Does Not Conduct
Thorough Investigations
In addition to the complaint- filing barriers, the Department’s in-vestigative
procedures further limit its public protection efforts.
For example, because the Department does not track or report the
number of complaints it receives, it cannot provide complete in-formation
on its complaint- handling activities, such as its investi-gation
rate, to oversight bodies or the public. In addition, the De-partment
screens out some complaints it receives, even though
some appear to warrant further investigation. Even when com-plaints
are investigated, the Department’s investigations are often
inadequate or not thoroughly documented. These problems are
not new. A 1991 Auditor General report pointed out similar con-cerns
with the Department’s investigative practices, but the De-partment
has not taken any action to improve them.
Department cannot determine the number of complaints it re-ceives—
Currently, the Department does not track or record the
number of complaints it receives or the disposition of those
complaints. The Department investigated 297 complaints during
fiscal year 2000. Auditors estimate that the Department receives
as many as 7,300 calls annually from consumers wishing to
complain about licensees. 1 Although all of these callers likely do
not file written complaints, since the Department does not track
the total number of complaints received, auditors were unable to
determine what percentage of received complaints were actually
investigated by the Department. The ability to report the number
and disposition of complaints received, as well as its overall in-
1 This estimate is based on a random sample of 1,362 telephone calls re-ceived
by the Department between October 16 through December 15, 2000.
Of the 1,362 calls in the sample, 82 ( 6 percent) were categorized as con-sumers
wishing to complain about licensees. Therefore, auditors extrapo-lated
that of the approximately 120,000 calls the Department reports re-ceiving
in fiscal year 2000, as many as 7,300 were calls from consumers
wishing to complain about licensees.
Finding I
16
OFFICE OF THE AUDITOR GENERAL
vestigation rate, would assist the Department in providing valu-able
information to oversight bodies and the public regarding its
complaint- handling activities.
Screening procedures eliminate complaints that appear to war-rant
investigation— Currently, one Department employee has
been screening all written complaints the Department receives to
determine whether they will be investigated. Auditors reviewed
a sample of 16 complaints that were screened out of the investi-gation
process. However, two of these complaints should have
been investigated to determine if they involved fraud, misrepre-sentation,
or other statutory violations:
n   A complainant alleged that a licensee refused to provide
agreed- upon services, such as listing the property being of-fered
for sale and placing a “ for sale” sign on the property.
When the complainant requested that the licensee cancel his
agreement due to failing to provide these services, the licen-see
refused. Although the licensee’s failure to provide basic
services could indicate substantial misrepresentation, dis-honest
dealings, or incompetence, all of which are within the
Department’s jurisdiction, the Department chose not to in-vestigate
this complaint because it viewed the complaint as a
contract dispute.
n   A complainant alleged that a licensee altered a legal docu-ment.
Specifically, the licensee offered to purchase the com-plainant’s
property. However, the complainant alleged that
the licensee altered the complainant’s counteroffer on the
property by inappropriately changing a date in order to ex-tend
the deadline for responding to the counteroffer and then
the licensee allegedly filed a lawsuit to enforce the altered
document. While the licensee’s alleged actions in this com-plaint
could constitute fraud, which is within the Depart-ment’s
jurisdiction, the Department did not investigate this
complaint because it classified it as an ethics issue.
Department’s complaint investigations are inadequate—
Although thoroughly investigating public complaints is an im-portant
responsibility, the Department’s complaint investiga-tions
are inadequate. Auditors reviewed a random sample of 30
closed complaint investigation cases to determine the adequacy
Finding I
17
OFFICE OF THE AUDITOR GENERAL
of the Department’s investigations. Although some cases ap-peared
to have been thoroughly investigated and documented,
the Department did not interview the complainant to confirm
the allegations being made in 16 cases. In addition, some of the
case files reviewed did not contain sufficient documentation to
demonstrate the investigator’s efforts or explain their actions or
decisions. For example, in 3 cases, auditors found no evidence
that an investigation was conducted. Specifically, these com-plaint
files indicated that the investigator merely read the com-plaint
and determined that there was no reason to investigate the
case any further. Department officials said that the investigator
performed some investigative work on these complaints, but
there was no evidence to that effect in the files.
The Department’s failure to thoroughly investigate complaints
stems from its lack of sufficient procedures to guide investigators
through the investigative process. While the Department has com-piled
a handbook for investigators, the handbook does not include
all of the procedures on the various activities that must be under-taken
to thoroughly investigate a complaint, such as interviewing
the complainant to ascertain and confirm all allegations and
collecting all necessary documentary evidence. Instead, as depicted
in Item 3, the handbook lists only six procedures that it
characterizes as common to all types of investigations. Without
adequate procedures, investigations and resulting conclusions
may be inconsistent and/ or inappropriate, as the investigator must
determine what steps to take in order to investigate a complaint.
Item 3: Department of Real Estate
Investigative Procedures
n   All respondents must receive correspondence from the investigator
outlining the charges against them.
n   As appropriate, the licensee’s broker should receive copies of com-plaints
and requirements.
n   All oral communications should be followed up with written commu-nications.
n   No investigation should be closed until all parties receive written find-ings.
n   All open investigation files are confidential.
n   Investigators should use the form letter templates contained in the De-partment’s
computer system.
Source: Department of Real Estate, Investigator’s Handbook.
Finding I
18
OFFICE OF THE AUDITOR GENERAL
Department’s complaint- handling problems have persisted since
1991— A 1991 Auditor General report also found that the De-partment
needed to strengthen its handling of consumer com-plaints,
citing many of the same problems that are identified in
the current audit ( see Report No. 91- 8). The report found that the
Department did not investigate all complaints meriting investi-gation
and identified instances in which the Department dis-missed
complaints without an investigation because it inappro-priately
claimed to lack jurisdiction. Additionally, the 1991 report
noted that a system where decisions to investigate complaints
were made solely by one person may have contributed to the
Department’s failure to fully investigate all complaints. The re-port
recommended that the Department establish written criteria
to ensure that complaints are thoroughly investigated, based on
the issues raised in the complaint.
Department Can Strengthen Its
Public Protection Efforts Through
Improved Complaint- Handling Practices
The Department could better protect the public through im-proved
complaint- handling practices. Specifically, the Depart-ment
should remove existing barriers and accept all legitimate
public complaints. Further, the Department should take steps to
improve its investigative practices by strengthening its complaint
screening criteria and its investigative procedures.
Department should ensure that it accepts all legitimate public
complaints— To fulfill its role as a public protection agency, the
Department should ensure that it facilitates the filing of com-plaints
and accepts all legitimate public complaints. To do this,
the Department should take the following steps:
n   Revise customer services procedures— The Department
should adopt procedures that require its customer services
representatives to assist consumers who may wish to file
complaints, and no longer make the determination that a
complaint may or may not be within the Department’s juris-diction.
Additionally, the Department should train its cus-tomer
services representatives on how to assist consumers in
filing a written complaint.
The Department should
revise its customer ser-vices
practices and its
complaint form.
Finding I
19
OFFICE OF THE AUDITOR GENERAL
n   Revise jurisdictional disclaimer on complaint form— The
Department should revise its complaint form disclaimer that
inappropriately lists the eight areas that it believes are out-side
of its jurisdiction. Specifically, the Department should re-tain
the disclaimer only for those areas where in no case it has
jurisdiction, such as complaints involving homeowners’ as-sociations
and landlord/ tenant dispute issues. However, the
Department should exclude from the disclaimer those areas
where, depending on the nature of the complaint, the De-partment
may have jurisdiction, such as complaints involv-ing
contract/ listing disputes or ethical/ performance issues.
n   Track all complaints— The Department should begin track-ing
and reporting the number of complaints it receives and
the disposition of these complaints. This would ensure that
the Department has accurate information on its complaint
processing activities to report to oversight bodies and other
stakeholders.
Department should review and investigate all complaints— The
Department should review and investigate all of the complaints
it receives from the public. Specifically, the Department should
develop appropriate complaint- screening and investigative poli-cies
and procedures and train its investigative staff on the poli-cies
and procedures developed. The policies and procedures
should address the following areas:
n   Complaint screening— The Department’s policies and pro-cedures
should require that the Department conduct suffi-cient
work to fully understand each complaint and enable it
to determine whether the complaint should be investigated.
For example, these procedures should include requirements
that investigative staff contact the complainant to confirm the
nature of the complaint and all of the allegations being made.
n   Investigations— The Department’s policies and procedures
should include the specific steps or tasks investigators should
undertake when investigating a complaint. For example, the
Department should develop procedures to ensure that com-plainants
are always interviewed as part of an investigation
to ascertain and confirm all allegations, that investigators ob-tain
and review all relevant documentary evidence, and that
The Department should
review and investigate all
public complaints.
Finding I
20
OFFICE OF THE AUDITOR GENERAL
each allegation in a complaint is investigated to determine if
a violation was committed. Other regulatory agencies and
boards have developed and implemented investigative poli-cies
and procedures. For example, BOMEX implemented
procedures that require investigators to identify and investi-gate
each allegation made in a complaint and determine
whether statutory violations have been committed. Further,
to ensure complete investigations, the Board’s investigative
staff are required to confirm all allegations with the com-plainant.
The Department Should Study
Workload to Determine Future
Resource Needs
Although the Department currently handles its investigations in
a timely manner, the recommendations made in this report sug-gest
that the Department’s investigative caseload could increase,
as could its need for additional investigative resources. How-ever,
because the Department currently screens out most of the
complaints it receives and does not adequately investigate the
complaints it accepts, auditors could not estimate what the De-partment’s
workload will be once the Department implements
all recommendations. Therefore, once the Department has im-plemented
the recommendations to improve complaint handling
and investigations and assesses the impact of these recommen-dations
on its workload, it should determine if additional re-sources
are needed and request them from the Legislature.
In addition, current real estate activity levels further indicate that
adjustments in investigative resources may be needed. Specifi-cally,
over the past 15 years, the real estate sales activity level in
the Phoenix metropolitan area has risen significantly, while at
the same time, the Department’s investigative resources have
decreased. For example, in 1986, the Department employed 11
investigators, while during 1986, only 59,420 real estate sales
were transacted in the Phoenix metropolitan area. 1 In contrast,
the Department currently employs only 6 investigators; how-
1 Real estate sales activity numbers provided by the Arizona Real Estate
Center, Arizona State University. These figures consist of sales of new and
used single- family homes, townhomes, and condominiums.
The Department may
need additional investiga-tive
resources.
Finding I
21
OFFICE OF THE AUDITOR GENERAL
ever, the number of real estate sales in the Phoenix metropolitan
area during 2000 amounted to 97,620. Industry members have
expressed their concern that the Department lacks sufficient in-vestigative
staff to provide adequate public protection, and indi-cate
that they support an increase in license renewal fees to allow
the Department to obtain additional staff and increase its public
protection efforts.
Finding I
22
OFFICE OF THE AUDITOR GENERAL
Recommendations
1. The Department should:
a. Revise its policies and procedures to require its customer
services representatives to assist consumers who may
wish to file complaints and discontinue making determi-nations
whether complaints may or may not be within
the Department’s jurisdiction; and
b. Train its customer services representatives on how to as-sist
consumers who wish to file written complaints.
2. The Department should revise its complaint form disclaimer
to exclude the broad categories of complaints for which it
may have jurisdiction, including complaints involving con-tract/
listing disputes and ethical/ performance issues.
3. The Department should track and report on the number of
complaints it receives and the disposition of those com-plaints.
4. The Department should review and investigate all of the
complaints it receives from consumers by developing and
implementing policies and procedures that include the
following:
a. Specific criteria and guidelines for the screening of com-plaints
to include requirements, such as contacting the
complainant to confirm the nature of the complaint and
all of the allegations being made; and
b. Specific steps or tasks that comprise a thorough investiga-tion,
such as interviewing the complainant, obtaining and
reviewing all relevant documentary evidence, and inves-tigating
each allegation in a complaint to determine if a
violation was committed.
5. The Department should train the appropriate investigative
staff on how to properly screen and investigate complaints.
6. The Department should assess the impact that implementa-tion
of the recommendations made in this report has on its
workload, determine if additional investigative resources are
needed, and, if so, request them from the Legislature.
23
OFFICE OF THE AUDITOR GENERAL
FINDING II DEPARTMENT INCONSISTENTLY
DISCIPLINES REAL ESTATE
LAW VIOLATORS
The Department of Real Estate inconsistently enforces real estate
laws. One of the Department’s primary responsibilities is to pro-tect
the public through the adjudication of cases involving real
estate law violations. However, the Department inconsistently
disciplines violators of real estate laws, resulting in inequitable
treatment of licensees. To promote consistent enforcement, the
Department should take several steps, including establishing a
substantive policy statement containing guidelines to assist in
disciplinary decision making.
Department Is Responsible
for Disciplining Violators
As a regulatory agency, one of the Department’s main responsi-bilities
is to protect the public by disciplining licensees who have
violated Arizona’s real estate laws. For example, A. R. S. § 32- 2153
provides 35 violations that are grounds for denial, suspension, or
revocation of licenses, such as misrepresentation, negligence, and
incompetence. The Department’s administrative rules further
define actions which could constitute violations, including ac-tions
related to professional conduct and property advertise-ments.
In addition to taking action against a licensee, statute pro-vides
a variety of disciplinary options that the Department can
use to fulfill its public protection mandate, including civil penal-ties
of up to $ 1,000 for each infraction, cease- and- desist orders,
and consent orders.
Statutes give the Real Estate Commissioner authority to make
the final decisions regarding all Department disciplinary actions,
including administrative law judge findings.
Finding II
24
OFFICE OF THE AUDITOR GENERAL
Department Inconsistently
Applies Disciplinary Actions
The Department does not consistently apply disciplinary actions
to violators of the State’s real estate laws. Based on a review of
167 cases with disciplinary actions settled through consent or-ders
between November 1997 and December 2000, the Depart-ment’s
disciplinary actions were fairly consistent for certain
types of violations, but inconsistent for other violations. 1 For ex-ample,
one group of 11 cases involving licensees who failed to
renew their licenses in a timely manner received fairly consistent
disciplinary actions. In 9 of these cases, the Department issued
penalties consisting of $ 500 fines and three to six hours of addi-tional
continuing education. In 1 of the cases, the Department
increased the fine to $ 1,000 because the licensee involved had
committed the same violation previously. Finally, 1 case resulted
in a penalty of $ 1,000 and three hours of additional continuing
education, although the case contained no explanation for the
increased penalty.
Despite the fairly consistent action taken for this group of viola-tions,
many inconsistencies were noted in other groups of cases.
Specifically, the Department has inconsistently taken disciplinary
action against license applicants who filed false applications be-cause
they did not disclose misdemeanor or felony convictions,
such as theft. For example, of the eight licensees who were disci-plined
for false applications because they did not disclose theft
convictions, disciplinary actions ranged from license suspensions
of 20 days to 13 months and civil penalties of $ 100 to $ 4,000.2 Fur-ther,
one licensee was required to complete an additional two
hours of continuing education. The following example illustrates
the Department’s inconsistencies in disciplining license appli-cants
who failed to disclose theft convictions:
1 The Department reported the 167 cases resolved through consent orders in
the 19 issues of its bimonthly newsletter, the Arizona Real Estate Bulletin,
published between February 1998 and February 2001.
2 The Department revoked one license during this same time period for a
similar violation. However, the licensee specifically requested that the li-cense
be revoked.
The Department inconsis-tently
disciplined licensees
or applicants with crimi-nal
convictions.
Finding II
25
OFFICE OF THE AUDITOR GENERAL
n   In 1999, the Department agreed to a $ 500 fine for a licensee
who failed to disclose a simple larceny conviction from 1975.
However, another licensee, who did not disclose a 1969 lar-ceny-
shoplifting conviction, received more severe discipline
in the form of a 30- day license suspension and a $ 200 fine.
Another group of licensees who committed similar violations but
were disciplined in an inconsistent manner were licensees who
breached their fiduciary duties by failing to protect and promote
their clients’ interests. Violations in this group of 28 cases include
failing to properly account for monies in a trust account and fail-ing
to provide clients with all relevant information. However,
Department disciplinary actions for this group ranged from a 10-
day license suspension to revocation. Additionally, civil penalties
ranged from $ 100 to $ 8,000 and continuing education require-ments
ranged from 6 to 12 hours. For example:
n   In 1999, the Department agreed to an 18- month suspension
and $ 500 fine for a licensee who failed to protect his client’s
interest because he did not inform his client, the seller, that-the
buyer failed to make a $ 5,000 earnest payment. However,
one month later, the Department agreed to a lesser action of a
60- day suspension and $ 500 fine for a licensee who failed to
protect his client’s interest by forging the client’s name on a
contract.
Department Should Take
Steps to Ensure More
Consistent Actions
The Department should strengthen its enforcement efforts to en-sure
the consistent and fair treatment of licensees. First, the De-partment
should adopt formal disciplinary guidelines. Second,
the Department should document the factors that influence its
disciplinary actions.
Department should establish formal disciplinary guidelines—
The Department should develop and implement disciplinary
guidelines to assist it in making consistent and appropriate dis-ciplinary
decisions and adopt these guidelines into a substantive
policy statement. According to the Department’s Administrative
The Department lacks
guidelines to help it ren-der
fair and consistent
discipline.
Finding II
26
OFFICE OF THE AUDITOR GENERAL
Actions Division Procedure Manual, the disciplinary action taken
“ is dependent upon the facts and seriousness of the alleged vio-lations,
the potential for harm to the public, and aggravating or
mitigating circumstances, including previous violations by the
parties involved.” However, the manual does not provide spe-cific
guidelines to direct the Department in applying these factors
to its disciplinary decisions. For example, the manual does not
provide specific means, such as a point system or specific disci-plinary
actions, to be considered based on these factors.
The Department’s disciplinary guidelines need to enforce consis-tent
discipline by 1) defining the violation’s severity; 2) consider-ing
the licensee’s history; and 3) offering a range of appropriate
options. Further, the guidelines should require the Department
to also consider any aggravating or mitigating factors, such as
the presence or absence of public harm. Adopting disciplinary
guidelines into a substantive policy statement would inform the
public of the Department’s disciplinary practices, while main-taining
the Department’s ability to base its enforcement actions
on the merits of each case, and allow for less or more severe sanc-tions,
depending on the violation.
Disciplinary guidelines are especially important, given that the
Department settles the majority of its disciplinary cases through
informal means, including consent orders. The lack of discipli-nary
guidelines contributes to inconsistent disciplinary actions in
these cases because it allows the licensee’s negotiating skills to
become the determining factor in the penalty received, rather
than the actions that resulted in the violation. For example, in the
following cases involving two licensees who were disciplined for
failing to disclose prior criminal convictions, both licensees were
able to negotiate lesser disciplinary actions. Specifically:
Ø   One licensee was originally offered disciplinary terms of a 45-
day suspension, $ 750 fine, and 12 hours of continuing educa-tion.
However, through the negotiations process, the licensee
and Department agreed to reduce the length of suspension to
only 10 days by agreeing to pay a higher fine of $ 1,500 and
complete 15 hours of continuing education.
Ø   The other licensee was originally offered a 30- day suspen-sion,
$ 500 fine, and 12 hours of continuing education, but
Finding II
27
OFFICE OF THE AUDITOR GENERAL
was able to reduce this to a 7- day suspension, $ 250 fine, and
15 hours of continuing education.
Other regulatory agencies, such as the Department of Liquor Li-censes
and Control, have established substantive policy state-ments
containing disciplinary guidelines that include such things
as the range of appropriate disciplinary actions for different
types of violations, including minimum and maximum penalties
for various violations, and the consideration of aggravating and
mitigating factors. Further, BOMEX is mandated by statute to
use disciplinary guidelines that consider violation severity and
disciplinary history when imposing discipline.
Department should document reasons for setting penalties— In
addition to developing and implementing formal disciplinary
guidelines, the Department should document in its files the fac-tors
that influence each enforcement action to improve controls
over the penalties it sets. Currently, the Department does not
document reasons why some licensees receive more or less dis-cipline
than other licensees who violate the same or similar real
estate laws.
Recommendations
1. The Department should develop and implement disciplinary
guidelines that include consideration of the violation’s sever-ity,
the licensee’s violation history, any other aggravating or
mitigating factors, and a range of appropriate disciplinary ac-tions.
In addition, the Department should adopt these guide-lines
in a substantive policy statement.
2. The Department should consistently record and document in
its files factors, such as previous violations and other aggra-vating
and mitigating circumstances, that influence a licen-see’s
penalties.
28
OFFICE OF THE AUDITOR GENERAL
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29
OFFICE OF THE AUDITOR GENERAL
FINDING III RECOVERY FUND IS
COSTLY AND CUMBERSOME
TO ADMINISTER
Currently, the costs to administer the Recovery Fund exceed the
payments for claims. However, a change in the Recovery Fund
statutes could reduce administrative costs by simplifying the
steps the Department must take to process claims against the
Fund. The Department could further reduce administrative costs
by ensuring that staff do not charge any of their non- Recovery
Fund activities to the Fund.
Recovery Fund Assists
People with Real Estate Losses
The Real Estate Recovery Fund is designed to cover losses that
result from a licensed real estate agent’s wrongdoing, such as
fraud or misrepresentation. The Fund covers direct out- of- pocket
losses ( that is, the amount of the actual and direct loss arising out
of a transaction), as well as reasonable attorneys’ fees and court
costs. Until recently, the Fund would pay these costs up to
$ 20,000 per real estate transaction or $ 40,000 per licensee. In cases
where an individual licensee has harmed a large number of
claimants, claimants could collectively receive no more than
$ 40,000 from the Fund, regardless of their total loss. However,
during the 2001 legislative session, the Legislature increased the
Fund’s claim limits to $ 30,000 per transaction and $ 90,000 per
licensee. The Fund does not cover punitive damages.
The Fund’s fund balance was $ 1.2 million as of February 28,
2001. The Fund generates its revenue primarily through a $ 10
surcharge on the initial license for real estate salespersons and a
$ 20 surcharge on the initial license for a real estate broker. These
two sources supply approximately $ 142,000 in revenue each
year.
The Recovery Fund com-pensates
consumers who
suffer losses due to a li-censee’s
wrongdoing.
Finding III
30
OFFICE OF THE AUDITOR GENERAL
Costs of Administering the
Fund Exceed Claims Paid
The Department’s administrative costs for fiscal years 1998
through 2000 exceeded claim payments by over $ 126,000, while
the Fund’s balance has declined from $ 1.4 million to $ 1.2 million
during this time.
Administrative costs for Fund exceed claim payments— As illus-trated
in Figure 1, during fiscal years 1998 through 2000, the De-partment
charged approximately $ 369,000 in administrative
costs to the Fund. During this same period, it paid out $ 243,000
in claims. For fiscal year 2001, the Fund had paid one $ 20,000
claim and had accrued over $ 90,000 in administrative costs as of
February 2001.
The Fund’s largest administrative expense is the cost of an inter-governmental
service agreement for a half- time Assistant Attor-ney
General. This agreement, which totals $ 74,600 for fiscal year
2001, includes the salary and employee- related expenses for the
Assistant Attorney General, as well as other charges for items
Fund administrative costs
were $ 126,000 more than
the amount paid to claim-ants.
Figure 1
Department of Real Estate
Real Estate Recovery Fund
Administrative Costs and Claims
Years Ended June 30, 1998, 1999, and 2000
( Unaudited)
$ 123,191
$ 68,506
$ 128,361 $ 131,101
$ 117,507
$ 43,413
$ 0
$ 20,000
$ 40,000
$ 60,000
$ 80,000
$ 100,000
$ 120,000
$ 140,000
1998 1999 2000
Administrative costs Claims paid
Source: Auditor General staff analysis of the Arizona Financial Information System Accounting Event Extract
Files reports for the years ended June 30, 1998, 1999, and 2000.
Finding III
31
OFFICE OF THE AUDITOR GENERAL
such as support staff, office space, and telephone use. In addi-tion,
the Fund also supports the cost of a full- time administrator
as well as miscellaneous costs, such as a portion of the Depart-ment’s
risk management costs and some minor travel costs.
High administrative costs are depleting the Department’s Fund
balance— While all agencies incur administrative costs, the De-partment’s
high administrative costs for the Fund have an even
more significant impact because they are contributing to the de-cline
of the Fund’s fund balance. Figure 2 shows that from the
beginning of fiscal year 1998 to the end of fiscal year 2000, ex-penses
have consistently exceeded revenues. For example, dur-ing
fiscal year 2000, the Fund received only $ 146,122 in revenues
but paid out $ 160,921 in administrative costs and claims. During
this three- year period, the Fund’s fund balance decreased by
more than $ 185,000, from $ 1,428,041 to $ 1,242,679.
Figure 2
Department of Real Estate
Real Estate Recovery Fund
Revenues and Expenses
Years Ended June 30, 1998, 1999, and 2000
$ 149,068
$ 191,696
$ 131,527
$ 259,462
$ 146,122
$ 160,921
$ 0
$ 50,000
$ 100,000
$ 150,000
$ 200,000
$ 250,000
$ 300,000
1998 1999 2000
Revenues Expenses
a Expenses were significantly higher than revenues in fiscal year 1998- 99 because the Department paid the
maximum amount of $ 40,000 per licensee on claims against two licensees.
Source: Auditor General staff analysis of the Arizona Financial Information System Accounting Event Extract Files
reports for the years ended June 30, 1998, 1999, and 2000.
.
a
Finding III
32
OFFICE OF THE AUDITOR GENERAL
Several Factors
Contribute to High Costs
Two main factors contribute to the high costs associated with
administering the Recovery Fund. First, because of statutory and
Department requirements, the process for handling Recovery
Fund claims is cumbersome. Second, the Department is charging
more personnel costs against the Fund than are actually being
spent to administer it.
Statutory requirements and Department practices lead to ineffi-ciencies—
While a review of all cases filed in fiscal years 1998,
1999, and 2000 found that the Department appropriately proc-essed
these cases and ensured that Fund monies were only ex-pended
for qualifying claims, certain statutory requirements and
Department practices create inefficiency in the process for han-dling
claims against the Recovery Fund. Currently, the authority
for approving Fund claims rests with the courts. Specifically,
A. R. S. § § 32- 2186 through 32- 2193.02 requires that all potential
claimants sue the licensee, obtain a judgment, and try to collect
that judgment from the licensee. If the judgment is not recover-able,
the claimant can attempt to obtain payment from the Re-covery
Fund by filing a claim with the court. These requirements
add costs in the following ways:
n   Department spends considerable time on cases that
never result in claims— To ensure it responds to claims
within statutory time frames, the Department becomes in-volved
with cases well before any claims are filed. However,
this is an inefficient use of resources, because many of these
cases will never result in claims against the Fund. Under cur-rent
statutes, a plaintiff must notify the Department immedi-ately
upon filing a lawsuit that may result in a claim against
the Fund. At that time, the Department begins to process the
case. The Fund Administrator reviews the potential claim,
collects needed documents, and works with potential claim-ants.
The Fund Administrator estimates that more than 50
percent of her time is spent on cases that have not yet re-sulted
in a claim against the Fund. Such lawsuits often go on
for several years. In the meantime, many are resolved and
never reach the claims process. For example, in fiscal years
1998- 2000, almost half of the 72 cases closed without payment
Finding III
33
OFFICE OF THE AUDITOR GENERAL
never resulted in a claim, because the claimant and the licen-see
reached a settlement or the court dismissed the lawsuit.
n   Attorney General must be involved with all claims—
Responding to court- ordered decisions requires considerable
services from an Assistant Attorney General. If the Depart-ment
wants to oppose a claim, the Assistant Attorney Gen-eral
must research and review the claim, file legal briefs, ap-pear
in court, and litigate the application. In the last three fis-cal
years, the Department has successfully challenged four
claims. 1 Even if the Department agrees with the court’s direc-tive
to award payment from the Fund, significant legal assis-tance
is needed. The Assistant Attorney General must consult
with the claimant and the claimant’s attorney to settle on the
amount that all parties agree can be paid to the claimant from
the Fund. The settlement paperwork must then be filed with
the court for approval.
Department assesses Fund for personnel costs not related to
Fund activities— Costs are also high because the Department
charges more personnel costs against the Fund than are actually
involved in Fund- related activities. In fiscal year 2000, these ex-cess
costs amounted to about $ 31,000, as follows:
n   Assistant Attorney General’s costs— The Department’s
contract with the Attorney General for legal services totaled
$ 73,700 in fiscal year 2000. The Department charges the full
cost of this agreement to the Fund. However, an Attorney
General official indicated that the Assistant Attorney General
does not spend all of her time on Recovery Fund issues. The
Assistant Attorney General estimates she spends approxi-mately
two- thirds of her time working directly with the Re-covery
Fund. The remainder of her time is spent working on
other cases for the Department. Charging the Fund for two-thirds
of the agreement rather than the full amount would
reduce the amount to approximately $ 50,000, a savings to the
Fund of $ 24,000.
1 The Department challenged these claims for several reasons, including no
proof of out- of- pocket losses, insufficient collection efforts, and lack of all
statutorily required information.
Finding III
34
OFFICE OF THE AUDITOR GENERAL
n   Fund administrator’s costs— Similarly, the Department
charges 100 percent of the costs for the Fund Administrator
to the Fund, although a Department Division Director esti-mates
that 15 percent of the Administrator’s time is spent on
duties unrelated to the Fund’s administration. This includes
responsibilities such as drafting consent orders for licensees
who have been disciplined by the Department. Charging the
Fund for 85 percent of the administrator’s cost would result
in a savings to the Fund of approximately $ 7,000.
While all of the Attorney General and Fund Administrator costs
are charged against the Fund, the Department has identified
Fund- related costs that are not charged to the Fund. Specifically,
the Department developed a memo listing indirect Fund costs,
such as computer- related costs, totaling over $ 16,600 for fiscal
year 2000. However, these costs are allocated to other areas of the
Department’s operations. The Department reports that by not
charging these Fund- related indirect costs to the Fund, it is justi-fied
in charging the full amount of the Fund Administrator costs
to the Fund.
Several Recommendations
Can Simplify Fund Administration
and Decrease Administrative Costs
The Department and the Legislature can take several steps to re-duce
the Fund’s administrative costs. First, to simplify the Fund’s
operations, the Legislature should consider amending statutes to
allow the Department to approve or deny claims against the
Fund. This approach is now being used in California, where it
lowered operating costs. If statutes are amended, the Depart-ment
would need to promulgate rules addressing the needs of
the new process and reexamine its agreement with the Attorney
General’s Office. Finally, the Department should take steps to
decrease the Fund’s administrative costs by ensuring that all
administrative costs charged against it are appropriate.
Moving decision making to Department would simplify Fund
administration— The Legislature should consider amending
statutes to authorize the Department to approve claims made
against the Fund, an approach used in California since 1987. Be-
Finding III
35
OFFICE OF THE AUDITOR GENERAL
cause the California Department of Real Estate has the authority
to approve or deny claims, the agency does not review claim
applications until the claimant has gone through the entire court
process and exhausted all collection efforts. As a result, Califor-nia
now has a more simplified process and has reduced its re-covery
account costs.
Making this change in Arizona would simplify the Recovery
Fund’s operations and benefit the Department in two ways. First,
the Fund Administrator would only review and process actual
claims against the Fund. Second, the need for Attorney General
assistance would be diminished, since the process would no
longer require significant court involvement. As a result, the De-partment
should experience a reduction in costs associated with
administering the Fund.
To make this change, the Legislature would need to amend
A. R. S. § § 32- 2186 through 32- 2193.02 by authorizing the Depart-ment
to approve Fund claims.
Several Department actions needed to implement statutory
change— If the Legislature amends statute, authorizing the De-partment
to approve or deny all claims, the Department would
need to take several steps to implement the change. These steps
should include the following:
n   Promulgating rules— The Department should promulgate
rules to establish timelines for both applicants to follow for
submitting documentation as well as for departmental deci-sion
making. Further, the Department should establish rules
outlining what documentation is required from claimants
when filing a claim with the Fund.
n   Reevaluating the agreement with the Attorney General’s
Office— The Department should reevaluate the intergov-ernmental
service agreement with the Attorney General’s Of-fice
and determine whether changes are necessary. Providing
the Department with the authority to approve Fund claims
would lessen the need for legal assistance, since it would no
longer be a court- driven process. Under a simplified process,
the Department would only need legal advice to assist it in
reviewing the appropriateness of claims.
Moving the Fund deci-sion-
making authority to
the Department would
simplify operations and
lower administrative
costs.
Finding III
36
OFFICE OF THE AUDITOR GENERAL
Department should properly allocate Fund administrative
costs— Regardless of whether the Legislature decides to transfer
approval authority to the Department, the Department can fur-ther
decrease the Fund’s administrative costs through proper al-location
of Fund personnel costs. Specifically, the Department
should ensure that costs associated with the Fund’s operation are
charged to the Fund. This would include charging the Fund only
for the portion of costs arising from its contract with the Attorney
General’s Office and its Fund Administrator that are related to
the Fund. Further, the Department should charge any indirect
costs associated with the Fund’s operation to the Fund.
Recommendations
1. The Legislature should consider revising A. R. S. § § 32- 2186
through 32- 2193.02 to transfer authority for approving Re-covery
Fund claims from the courts to the Real Estate
Commissioner.
2. If statute is amended, the Department should promulgate
rules to establish timelines for applicants to submit documen-tation
as well as timelines for the Department to make deci-sions
on claim applications. Rules should also address what
documentation the Department needs to collect.
3. If statute is amended, the Department should examine its in-tergovernmental
service agreement with the Attorney Gen-eral’s
Office and determine if changes are necessary.
4. The Department should properly allocate the Fund Adminis-trator’s
and Assistant Attorney General’s personnel expenses
so that only the portion of these expenses that are attributable
to the Fund are charged to the Fund.
5. The Department should properly charge indirect costs asso-ciated
with the Fund to the Fund.
37
OFFICE OF THE AUDITOR GENERAL
FINDING IV DEPARTMENT’S PUBLIC
INFORMATION PRACTICES
IMPEDE CONSUMERS’ ACCESS
TO LICENSEE INFORMATION
Currently, to find out about any complaints or disciplinary ac-tions
against a licensee, a consumer must make an advance re-quest
in writing, wait several weeks, and travel to the Depart-ment’s
Phoenix office to view the information. Other Arizona
regulatory agencies are doing more than the Department to
make such information more readily available. The Department
should strengthen its policies to detail what information should
be made available by telephone and provide information in a
more timely manner.
Providing Public Information
Is An Important Part of Regulatory
Agency Responsibilities
One important part of a regulatory agency’s responsibilities is
providing information that allows the public to make informed
decisions about utilizing the services of licensees regulated by
the agency. For example, by informing the public of the discipli-nary
actions taken against licensees, agencies assist consumers in
selecting competent and ethical professional services. Public re-cords
laws were developed in part to help ensure that agencies
make this necessary information available.
Department Does Not
Provide Sufficient Access
to Public Information
The Department’s practices and policies do not provide sufficient
access to public information that helps consumers make in-formed
decisions about real estate licensees. The Department
Finding IV
38
OFFICE OF THE AUDITOR GENERAL
does not follow its stated policy for making disciplinary informa-tion
available over the telephone, requiring consumers to come
to the Department’s office in Phoenix instead. In the test cases
auditors conducted, the Department did not make these files
available for up to six weeks. Finally, the Department will not
release information about pending complaints— a potentially
important component of being able to make an informed deci-sion
about a licensee. To ensure that consumers have sufficient
access to public information, the Department should strengthen
its current public information policies.
Department not following its policy on information released
over the phone— Although the Department’s formal public in-formation
policy states that, if requested to do so, the Department
will provide a telephone caller with information about a licensee’s
disciplinary history, in practice, the Department does not allow
staff to provide disciplinary action information over the phone.
Auditors confirmed this practice through test calls. Five auditors
posing as members of the public phoned the Department and re-quested
information on seven different licensees with complaint
histories and, in some cases, disciplinary actions. None of the five
auditors received any complaint or disciplinary information
about the licensees over the phone. Auditors were told that this
information could be obtained only by coming into the office to
view licensees’ files.
Having to go to the Department’s office is a decided limitation
on consumers’ access to complaint information, especially if they
live outside the Phoenix metropolitan area. Consumers who
cannot or do not make this extra effort are unable to obtain in-formation
about the licensee’s complaint and disciplinary his-tory.
In addition, those consumers who decide to make the effort
to view the records face additional barriers. Under Department
policy, they must submit a written request for the information
and then wait another week before being able to view the infor-mation.
Before being able to view it, they must also provide pic-ture
identification and sign in on a log sheet that also requests
personal information, such as address, phone number, driver’s
license number, and the reason for requesting the files.
Finding IV
39
OFFICE OF THE AUDITOR GENERAL
Files not available for several weeks— Auditors found the proc-ess
further complicated by additional delays in being able to re-view
the information. Despite Department policy that licensee
files will be ready for viewing within five to seven working days
from the date a request is received, auditors had to wait ap-proximately
two to six weeks before their requested files were
ready for review. One licensee’s files were requested on Decem-ber
26. However, despite follow- up calls to the Department, the
files were not ready for review until February 5, almost six weeks
after they were requested.
Information on pending complaints not made available— The
Department’s policies do not permit information regarding
pending complaints against a licensee, such as the nature and
number, to be provided to a consumer, either over the phone or
in person. Therefore, consumers may not be able to get a com-plete
picture of a licensee’s complaint history if they are not able
to obtain information on pending complaints. As recommended
in the Auditor General’s Special Study of Health Regulatory Agen-cies
( Report No. 95- 13), the information that regulatory agencies
should make available to the public includes the number and
nature of dismissed and pending complaints.
Department should strengthen public information policies— The
Department should establish policies to detail the information
that will be made available to the public by telephone and direct
staff to provide this information. To help ensure consumers have
access to all public information by telephone, other state agencies
and boards have developed written policies that specify the in-formation
that should be made available. In so doing, the De-partment
should ensure that the policy includes providing in-formation
about the number and nature of complaints and disci-plinary
actions. This policy should include complaints and ac-tions
that are pending or that have been dismissed, as well as the
resolution of closed complaints. For instance, the Board of Psy-chologist
Examiners has policies requiring staff to provide the
public with information over the telephone regarding the num-ber
and type of both dismissed and pending complaints, and the
resolution of closed complaints. The Department’s computer sys-tem
contains screens that summarize complaint and disciplinary
action information that can be used to fulfill consumers’ tele-phone
information requests.
Consumers are required
to provide picture identifi-cation
to view public re-cords.
The Department should
take steps to facilitate ac-cess
to public information.
Finding IV
40
OFFICE OF THE AUDITOR GENERAL
Review of Licensee Files
Showed Additional Problems
with Information Provided
Review of the files themselves showed several additional prob-lems
with the information the Department actually provided.
The information was sometimes incomplete or inappropriate for
public review, and the files lacked summaries that would make
them easier to review and interpret.
n   Incomplete or inappropriate information released—
Several of the licensee files reviewed by auditors posing as
consumers contained incomplete or inappropriate confiden-tial
information. In one instance, an auditor reviewed a file
that should have contained documentation on a dismissed
complaint. However, this documentation was absent from
the file. When following up with the Department to deter-mine
why the dismissed complaint was missing from the file,
the Department indicated that there was no other informa-tion
available on that particular licensee. In addition, another
licensee’s file did not contain a consent order despite the fact
that the Department’s database showed that one was issued
as a result of a complaint. While some files were incomplete,
others contained confidential information that should have
been removed from the file prior to allowing it to be re-viewed
by members of the public. For example, three licensee
files contained confidential home addresses, even though
business addresses were available in all three cases. Finally,
in one instance, the Department failed to remove a licensee’s
social security number and birth date from the file.
n   Lack of summary information hindered file reviews—
Finally, audit staff had difficulty reviewing complaint infor-mation
because the Department does not maintain summa-ries
of a licensee’s complaint history in the licensee’s files.
Rather, each complaint against an individual licensee is filed
separately, so a consumer must look through each file and at-tempt
to identify the nature and outcome of the complaint
based on the documentation in the file. A number of auditors
noted that files were disorganized and the specific complaint
and disciplinary information on licensees was hard to iden-tify.
Finding IV
41
OFFICE OF THE AUDITOR GENERAL
Recommendations
1. The Department should strengthen its public information
policies to direct staff to provide all public information to
consumers over the telephone, including information on the
number and nature of closed, dismissed, and pending com-plaints
and disciplinary actions.
2. The Department should discontinue its restrictive policies
requiring consumers to request files in writing and provide
photo identification and other personal information when
visiting the office to view licensee files.
3. The Department should make certain that files prepared for
consumers have the licensee’s complete complaint and
disciplinary history information.
4. The Department should ensure that confidential information
on licensees is removed from files before consumers view
them.
5. Department management should ensure staff are properly
trained in procedures for removing confidential information
and periodically monitor files that are scheduled for con-sumer
review.
6. The Department should adhere to the five- to seven- day time
frame it has already established in policy for preparing files
for public review.
7. The Department should provide complaint summaries in li-censee
files to provide consumers with a complete overview
of the licensee’s complaint and disciplinary history.
42
OFFICE OF THE AUDITOR GENERAL
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43
OFFICE OF THE AUDITOR GENERAL
SUNSET FACTORS
In accordance with A. R. S. § 41- 2954, the Legislature should con-sider
the following 12 factors in determining whether the Ari-zona
Department of Real Estate ( Department) should be contin-ued
or terminated.
1. The objective and purpose of establishing the De-partment.
The Department of Real Estate was established in 1921
and its mission is to safeguard and promote the public in-terest
through timely and capable assistance, fair and bal-anced
regulation, and sound and effective education. To
fulfill this mission, the Department has established goals
addressing public protection, increased proficiency and
integrity of licensees, and regulation of the real estate in-dustry
consistent with existing laws.
In support of the Department’s mission and goals, the fol-lowing
essential functions are carried out:
n   Licensing— The Department licenses and regulates
over 46,200 active salespersons and brokers and ap-proximately
9,560 entities that are engaged in selling
or leasing real property, such as corporations and lim-ited
liability companies. In addition, the Department
approves and oversees all real estate schools and in-structors
in the State.
n   Investigation— The Department has the authority to
investigate complaints against licensees from the pub-lic
and on its own initiative. The Department also au-dits
brokers’ accounts to ensure statutory compliance.
n   Adjudication— The Department conducts hearings to
resolve violations of departmental statutes and rules
by licensees.
Sunset Factors
44
OFFICE OF THE AUDITOR GENERAL
n   Public Information— The Department provides in-formation
to the public on licensees.
2. The effectiveness with which the Department has met
its objective and purpose and the efficiency with
which it has operated.
The Department performs some responsibilities in an ef-fective
and efficient manner, but can improve in others.
For example, the Department issues licenses in a timely
manner. If a licensure applicant provides all required ap-plication
materials and fees, the Department can immedi-ately
review the information and issue a receipt for the
fees, which allows the applicant to begin working in real
estate that same day.
However, the audit found that the Department needs to
improve its efficiency and effectiveness in other areas.
Specifically:
n   The Department’s complaint practices contain barriers
that discourage or prevent consumers from filing
complaints, and the Department’s complaint investi-gations
are inadequate. To improve the efficiency and
effectiveness of the Department’s complaint process-ing
practices, the Department should revise its cus-tomer
services procedures and complaint form that
currently discourage some consumers from filing
complaints. Further, the Department should develop
and implement policies and procedures to ensure
thorough, consistent investigations, such as interview-ing
the complainant and obtaining and reviewing all
pertinent documentation, when investigating a com-plaint
( see Finding I, pages 11 through 22).
n   The Department’s process for adjudicating complaints
against licensees who violate statute or rule is incon-sistent
and does not treat licensees fairly. To address
this concern, the Department should develop and im-plement
disciplinary guidelines in a substantive pol-icy
statement to guide Department officials in making
Sunset Factors
45
OFFICE OF THE AUDITOR GENERAL
equitable, consistent disciplinary decisions ( see Finding II,
pages 23 through 27).
n   The process for handling Real Estate Recovery Fund
claims is cumbersome and costly. To improve the
Fund’s operations, the Legislature should consider
amending A. R. S. § § 32- 2186 through 32- 2193.02 to give
the Real Estate Commissioner the authority to deter-mine
payment of Recovery Fund claims. Further, the
Department should examine its current agreement
with the Attorney General’s Office for the Fund’s half-time
Assistant Attorney General and the manner in
which Recovery Fund costs are accounted for ( see
Finding IV, pages 37 through 41).
3. The extent to which the Department has operated
within the public interest.
The Department operates in the public interest in some
ways, but improvements in two areas are necessary. For
example, the Department’s licensing process ensures that
only qualified licensees work in real estate. The Depart-ment
also audits broker records to ensure that brokers are
appropriately handling their clients’ monies. In addition,
the Department’s Web site contains a directory of licen-sees,
which allows members of the public to look up par-ticular
licensees to obtain information on their licensing
status. Finally, the Customer Services Division provides a
central location for all telephone calls to the Department
and answers basic questions on issues such as obtaining
licensure and education requirements.
However, auditors identified areas in which the public in-terest
could be better served. Specifically:
n   The Department employs complaint practices that
discourage or prevent consumers from filing com-plaints.
Specifically, the Department screens out com-plaints
over the phone, inappropriately identifies ar-eas
where it lacks jurisdiction on its complaint form,
and until April 2001, required all complaints to be no-tarized.
Additionally, complaint investigations con-
Sunset Factors
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OFFICE OF THE AUDITOR GENERAL
ducted by the Department are inadequate. To ensure
proper protection of the public, the Department
should remove existing barriers that prevent the filing
of complaints and review and investigate all com-plaints
that warrant investigation ( see Finding I, pages
11 through 22).
n   Auditors tested the Department’s public information
practices and found that the Department does not dis-close
all public information to consumers over the
phone. Specifically, consumers wishing to obtain a li-censee’s
complaint and disciplinary history are re-quired
to visit the Department’s Phoenix office to
view the licensee’s files, and must provide the De-partment
with personal information, such as address
and telephone number, in addition to photo identifi-cation,
before files can be viewed. Further, some licen-see
files reviewed were incomplete, while others in-appropriately
contained confidential information, and
auditors had to wait anywhere from two to six weeks
for the Department to prepare the files for review. To
ensure that it provides complete and accurate public
information, the Department should revise its policies
to provide information on licensees’ complaint and
disciplinary histories over the phone, and remove its
requirements that consumers provide photo identifi-cation
and personal information before being allowed
to view public records ( see Finding IV, pages 37
through 41).
4. The extent to which rules a dopted by the Department
are consistent with the legislative mandate.
The rules adopted by the Department are, for the most
part, consistent with its legislative mandate. According to
the Governor’s Regulatory Review Council ( GRRC), the
Department underwent its last formal rule review in
1996. As a result of this review, the Department revised a
number of its rules in 1999, and further amended rules in
2000.
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OFFICE OF THE AUDITOR GENERAL
However, the Department should revise Commissioner’s
Rule R4- 28- 1303, regarding the confidentiality of records
obtained in an investigation, to clarify the rule and make
it consistent with public records laws. The rule states that
“ the Department shall ensure that any information or
document obtained in an investigation remains confiden-tial,
unless made a matter of public record….” While
GRRC reviewed and approved this rule in 1996, GRRC
now believes that the rule contradicts public records laws.
According to these laws, Department investigation in-formation
and documents are already public records.
Further, the rule contradicts public records laws because
these laws presume that records are public unless disclo-sure
would not be in the State’s best interest. However,
the Department’s rule presumes that its records are con-fidential
unless it makes them a matter of public record.
5. The extent to which the Department has encouraged
input from the public before adopting its rules, and
the extent to which it has informed the public as to its
actions and their expected impact on the public.
According to the Department, it seeks input from stake-holders
on proposed legislation and rules, largely
through its Web site. The most recent proposed changes
to rules were printed in the Arizona Real Estate Bulletin, the
Department’s online newsletter. The Department also
maintains a lengthy list of stakeholders who are notified
by mail regarding proposed rule and statute changes. In
addition, the Department held two public forums in
Phoenix and Tucson during 1999 to obtain public input
regarding its proposed rules revisions.
Additionally, the Department has complied with the
State’s open meeting laws by posting public meeting no-tices
at least 24 hours in advance at the required location,
announcing upcoming Real Estate Advisory Board meet-ings
on its Web site, and posting meeting agendas on the
Web site the day before the meeting is scheduled. The
Department also has the required statement on file with
the Secretary of State that notes where meeting notices
will be posted.
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OFFICE OF THE AUDITOR GENERAL
6. The extent to which the Department has been able to
investigate and resolve complaints that are within its
jurisdiction.
The Department has sufficient authority to investigate
and resolve complaints within its jurisdiction. However,
this audit found that the Department’s complaint prac-tices
discourage or prevent consumers from filing com-plaints.
Further, the Department does not conduct thor-ough
investigations because it lacks adequate policies and
procedures to guide its investigators through the investi-gative
process ( see Finding I, pages 11 through 22).
In addition, the Department’s disciplinary actions against
licensees are inconsistent because the Department lacks
disciplinary guidelines to ensure fairness when disciplin-ing
licensees ( see Finding II, pages 23 through 27).
7. The extent to which the Attorney General or any other
applicable agency of state government has the au-thority
to prosecute actions under the enabling legis-lation.
A. R. S. § 32- 2111 authorizes the Attorney General to act for
the Real Estate Commissioner in all legal actions and pro-ceedings
as well as advise him on all questions of law.
The Department is currently represented by two full- time
Assistant Attorneys General and by one half- time Assis-tant
Attorney General who primarily represents the De-partment
in Real Estate Recovery Fund issues.
8. The extent to which the Department has addressed
deficiencies in its enabling statutes which prevent it
from fulfilling its statutory mandate.
The Department has sought a number of changes to ad-dress
deficiencies in its statutes. In 2000, the Department
sought and received authority to issue a provisional li-cense,
which allows the Department to issue a license to
an individual it wishes to monitor. For example, to ensure
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49
OFFICE OF THE AUDITOR GENERAL
the public is properly protected from licensees with sub-stance
abuse problems, the Department can issue a provi-sional
license to an applicant who was previously con-victed
of a drug- related crime and require the applicant to
submit to drug testing for a specified period. Also in 2000,
legislation was passed which increased the number of
Advisory Board members from seven to nine and re-quired
that two members have at least five years of resi-dential
real estate experience. This change was made in
response to concerns from industry groups that the cur-rent
Board composition was not representative of the in-dustry
as a whole.
In 2001, the Department proposed and the Legislature
passed changes to the Department’s statutes allowing
electronic submission of licensing applications, clarifying
the information required for processing Recovery Fund
claims, and increasing the maximum amounts of Recov-ery
Fund payouts ( see Finding III, pages 29 through 36).
9. The extent to which changes are necessary in the
laws of the Department to adequately comply with
the factors listed in the Sunset law.
Based on audit work, the Legislature should consider
amending A. R. S. § § 32- 2186 through 32- 2193.02 to transfer
authority for approving Recovery Fund claims from the
courts to the Real Estate Commissioner ( see Finding III,
pages 29 through 36).
10. The extent to which termination of the Department
would significantly harm the public health, safety, or
welfare.
Terminating the Department could pose a threat to the
public safety and welfare since real estate purchases are
substantial and involve complex processes and contracts.
For example, in 2000, over 97,620 real estate transactions
involving single- family homes, townhomes, and condo-miniums
occurred in the Phoenix Metropolitan area.
These transactions averaged $ 124,900. The amount of real
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OFFICE OF THE AUDITOR GENERAL
estate activity and the significant amount of transaction
costs increase the need for qualified, regulated licensees.
In addition, there is no other agency that exists to license
real estate professionals. The Department’s process for li-censing
is designed to screen out unknowledgeable and
potentially dangerous licensees. Also, the Department’s
review and approval of subdivision public report applica-tions
helps to protect the public by ensuring that required
information is disclosed on subdivided and unsubdi-vided
property before the consumer purchases that prop-erty.
Finally, all 50 states license and regulate real estate
professionals.
11. The extent to which the level of regulation exercised
by the Department is appropriate and whether less or
more stringent levels of regulation would be appro-priate.
This audit found that licensure is the appropriate level of
regulation for real estate professionals. It helps ensure
that applicants meet education and training requirements
and prevents unqualified or unprofessional licensees
from practicing.
12. The extent to which the Department has used private
contractors in the performance of its duties and how
effective use of private contractors could be accom-plished.
The Department has made use of private contractors to
perform certain services. For example, the Department
contracts with a private company to administer its licen-sure
exams. In addition, as of November of 2000, various
private real estate schools under contract with the De-partment
administer Broker Management Clinics, which
educate brokers on issues such as recordkeeping, trust
fund accounts, fiduciary duties, and employee supervi-sion.
According to statute, all newly licensed brokers
must attend a Broker Management Clinic prior to licen-sure
and all current designated brokers must attend a
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51
OFFICE OF THE AUDITOR GENERAL
Clinic once every two years. Currently, there do not ap-pear
to be any further opportunities to contract out ser-vices.
OFFICE OF THE AUDITOR GENERAL
( This Page Intentionally Left Blank)
OFFICE OF THE AUDITOR GENERAL
AGENCY RESPONSE
OFFICE OF THE AUDITOR GENERAL
( This Page Intentionally Left Blank)
Phoenix, Arizona
July 26, 2001
Ms. Debra K. Davenport, CPA
Arizona Auditor General
2910 North 44 Street, 4th Floor
Phoenix, AZ 85018
Re: Performance Audit of Department of Real Estate
Dear Ms. Davenport:
Enclosed is the Department’s Response to the Auditor General’s Performance Audit of the
Arizona Department of Real Estate for inclusion in the published report. Members of your
staff assigned to this task were very courteous and accommodating throughout the audit
data gathering process including team discussions with my staff and me.
While the Department agrees with many of the audit recommendations, we also disagree
with several. Additionally, we feel that the Report Highlights is a slanted, one- sided publicity
piece that should be discontinued. If a shorter version of the report is desired, then the
summary should be sufficient, rather than the unilateral headlines utilized in the Highlights.
Sincerely,
Jerry A. Holt
Commissioner
enclosure
STATE OF ARIZONA
DEPARTMENT OF REAL ESTATE
JANE DEE HULL
GOVERNOR
JERRY A. HOLT
COMMISSIONER
2910 NORTH 44TH STREET, SUITE 100 PHOENIX, ARIZONA
85018
400 WEST CONGRESS, SUITE 523 TUCSON, ARIZONA 85701
TELEPHONE ( 520) 628- 6940 FACSIMILE ( 520) 628- 6941
1
ARIZONA DEPARTMENT OF REAL ESTATE
RESPONSE TO PERFORMANCE REPORT
BY AUDITOR GENERAL
FINDING I
Audit Recommendation 1
The Department should:
a. Revise its policies and procedures to require its customer services
representatives to assist consumers who may wish to file complaints and
discontinue making determinations whether complaints may or may not be within
the Department’s jurisdiction; and
Department Response
The finding of the auditor general is not agreed to and will not be implemented.
However, the Department will have its customer service representatives listen to
a caller’s entire complaint before concluding and advising that the matter is or is
not within the Department’s jurisdiction.
b. Train its customer services representatives on how to assist
consumers who wish to file written complaints.
Department Response
The finding of the auditor general is agreed to and the audit recommendation will
be implemented.
Audit Recommendation 2
The Department should revise its complaint form disclaimer to exclude the broad
categories of complaints for which it may have jurisdiction ( sic), including
complaints involving contract/ listing disputes and ethical/ performance issues.
Department Response
The finding of the auditor general is agreed to and a different method of dealing
with the finding will be implemented. The form is being revised to clarify that the
Department has jurisdiction in contract disputes, ethical issues, and deposits/
refunds when those issues rise to the level of fraud, misrepresentation or
negligence.
Audit Recommendation 3
The Department should track and report on the number of complaints It receives
and the disposition of those complaints.
Department Response
The finding of the auditor general is agreed to and the audit recommendation will
be implemented.
2
Audit Recommendation 4
The Department should review and investigate all of the complaints it receives
from consumers by developing and implementing policies and procedures that
include the following:
a. Specific criteria and guidelines for the screening of complaints to
include requirements, such as contacting the complainant to confirm the nature
of the complaint and all of the allegations being made; and
b. Specific steps or tasks that comprise a thorough investigation, such
as interviewing the complainant, obtaining and reviewing all relevant
documentary evidence, and investigating each allegation in a complaint to
determine if a violation was committed.
Department Response
The finding of the auditor general is not agreed to and the recommendation will
not be implemented. In many cases, it is not necessary or appropriate to
interview the complainant, such as in advertising complaints ( in most advertising
complaints, only the advertisement needs to be examined).
The Auditor General determined that, of the 16 they examined, 2 cases should
have been investigated further. However the Attorney General’s office
determined that there was no need to investigate these cases further and
concluded the Department had no basis for action. ( See attached Exhibit 1.)
We agree that the investigators will better document the actions taken in
investigating each case, but do not agree to developing specific procedures for
each investigation because even minor departures from a list of specific steps or
tasks could jeopardize an otherwise solid case. An investigator’s failure to strictly
adhere to the written procedures could result in dismissal of a case. We surveyed
five western states’ real estate departments ( investigation divisions); none has a
specific procedure manual. In fact the person from the State of Washington
stated that they were directed by their attorneys specifically to not have such a
manual. ( See Exhibit 2 for the results of this survey.)
Audit Recommendation 5
The Department should train the appropriate investigative staff on how to
properly screen and investigate complaints.
Department Response
The finding of the auditor general is not agreed to and the recommendation will
not be implemented. Department investigators are properly trained but do not
employ the documented procedures that the Auditor General’s office
recommends. Every investigator, in addition to following the Department’s
Investigator Training Manual, is guided by the ARELLO Investigator Training
Manual and the manual published by the Council of Licensure, Enforcement and
3
Regulation ( CLEAR). Each investigator is required to attend the CLEAR
Investigator Training Course. Of the 5 states we called, none has its own written
policy for investigative procedures. Utah relies solely on the ARELLO manual.
Audit Recommendation 6
The Department should assess the impact that implementation of the
recommendations made in this report has on its workload, determine if additional
investigative resources are needed, and, if so, request them from the Legislature.
Department Response
The finding of the auditor general is agreed to and a different method of dealing
with the finding will be implemented. We will make the assessment after
implementing the recommendations.
FINDING II
Audit Recommendation 1
The Department should develop and implement disciplinary guidelines that
include consideration of the violation’s severity, the licensee’s violation history,
any other aggravating or mitigating factors, and a range of appropriate
disciplinary actions. In addition, the Department should adopt these guidelines in
a substantive policy statement.
Department Response
The finding of the auditor general is not agreed to and the recommendation will
not be implemented. The person making the decision considers all of these
factors but the Department objects to having a written policy. If a Respondent
knew the strengths and weaknesses of the Department’s previous cases,
achieving a suitable resolution would be that much more difficult. Reasons for
settling on a specific penalty in any given case typically have a multitude of
elements, all of which are combined to determine the final resolution of each
case. To attempt to standardize discipline to this degree would lead to a slowing
of the process and render each case progressively more difficult to settle.
Audit Recommendation 2
The Department should consistently record and document in its files factors,
such as previous violations and other aggravating and mitigating circumstances,
that influence a licensee’s penalties.
Department Response
The finding of the auditor general is agreed to and the audit recommendation will
be implemented.
4
FINDING III
Audit Recommendation 1
The Legislature should consider revising A. R. S. § § 32- 2186 through 32- 2193.02
to transfer authority for approving Recovery Fund claims from the courts to the
Real Estate Commissioner.
Department Response
The finding of the auditor general is agreed to and the audit recommendation will
be implemented.
Audit Recommendation 2
If statute is amended, the Department should promulgate rules to establish
timelines for applicants to submit documentation as well as timelines for the
Department to make decisions on claim applications. Rules should also address
what documentation the Department needs to collect.
Department Response
The finding of the auditor general is agreed to and the audit recommendation will
be implemented.
Audit Recommendation 3
If statute is amended, the Department should examine its intergovernmental
service agreement with the Attorney General’s Office and determine if changes
are necessary.
Department Response
The finding of the auditor general is agreed to and the audit recommendation will
be implemented.
Audit Recommendation 4
The Department should properly allocate the Fund Administrator’s and Assistant
Attorney General’s personnel expenses so that only the portion of these
expenses that are attributable to the Fund are charged to the Fund.
Department Response
The finding of the auditor general is agreed to and the audit recommendation will
be implemented. We questioned the Attorney General’s expenses last year and
in a letter dated July 12, 2000, the Attorney General’s Office assured us that the
expenses were appropriate. ( See Exhibit 3.) With regard to the Fund
Administrator’s expenses, we reviewed these and gave a copy of our analysis to
the auditor showing that there were offsetting expenses that were not being
allocated to the Fund that could be and therefore the Fund was not being
overcharged.
5
Audit Recommendation 5
The Department should properly charge indirect costs associated with the Fund
to the Fund.
Department Response
The finding of the auditor general is agreed to and a different method of dealing
with the finding will be implemented. This recommendation will be implemented
when the requested statutory changes become effective.
FINDING IV
Audit Recommendation 1
The Department should strengthen its public information policies to direct staff to
provide all public information to consumers over the telephone, including
information on the number and nature of closed, dismissed, and pending
complaints and di