Best Practices for Pre-Need Fund Audits and Reporting

Why Pre-Need Fund Audits Matter

Pre-need fund audits are one of the most important compliance requirements—and one of the most frequently violated. State funeral boards audit pre-need funds specifically to ensure funeral homes aren't misusing family money or operating under-capitalized.

A pre-need fund audit serves two purposes:

1. Consumer protection: Verify that families' pre-need money is safely held in trust and hasn't been misappropriated
2. Regulatory compliance: Ensure the funeral home meets state requirements for fund adequacy, proper accounting, and honest reporting

Failure to conduct, complete, or file required audits can result in fines ($1,000-$10,000+), license suspension, or even criminal charges if fraud is involved.

State-by-State Audit Requirements

Most states require annual pre-need fund audits, but requirements vary. Here's the general framework:

Common Audit Requirements

• Frequency: Annual (every 12 months, typically calendar year)
• Auditor: Independent CPA (not your company accountant; must be external)
• Type: Full audit or compiled review (varies by state)
• Reporting deadline: 60-180 days after year-end (depends on state)
• Filing location: Your state funeral board (or state attorney general's office in some states)

States With Stricter Requirements

Some states have even more detailed audit requirements:

• California: Requires annual audit + specific accounting methods for pre-need contracts
• Florida: Requires audit of preneed trust accounts + specific fund balance requirements
• Texas: Requires annual reconciliation + audit if fund exceeds certain threshold
• New York: Requires detailed audit + submission to both funeral board and attorney general

Finding Your State's Requirements

Contact your state funeral board and ask specifically:

• "Do I need to conduct an annual pre-need fund audit?"
• "By what date must I file the audit report?"
• "What format/template must the audit report follow?"
• "Who do I submit the audit to?"
• "What happens if I miss the deadline or don't file?"

What the CPA Audits: Key Elements

A CPA conducting a pre-need fund audit will examine and verify:

Fund Balance & Existence

Verify that:

• The trust account actually exists and is held separately (not commingled with general business accounts)
• The bank balance matches your trust account ledger
• All deposits and withdrawals are properly recorded

Contracts & Liabilities

Verify that:

• All pre-need contracts are documented and accurate
• Total contracted service obligations are correctly calculated
• Fund adequacy ratio is calculated correctly (fund balance ÷ unfulfilled obligations)
• Fund is adequate to cover obligations (usually 100%+ required)

Interest Calculation

Verify that:

• Interest earned is calculated accurately
• Interest is properly allocated (to families, to funeral home, to services, per state law)
• Interest has been properly accounted for and reported

Distributions & Withdrawals

Verify that:

• All withdrawals from the trust are properly documented
• Withdrawals correspond to actual services delivered
• No unauthorized withdrawals have occurred
• Beneficiaries (families) received refunds as required

Fees & Charges

Verify that:

• Any fees charged against the trust are properly authorized
• Fees comply with state law limits
• Families were notified of fees upfront

The Annual Audit Timeline: When to Do What

To meet your state's filing deadline, follow this timeline throughout the year:

Throughout the Year (Ongoing)

• Monthly: Reconcile bank statements to your trust account ledger. Identify any discrepancies immediately.
• Monthly: Document all transactions (deposits, withdrawals, interest)
• Quarterly: Review fund adequacy ratio. Flag if trending down.
• As they occur: Document new contract sales and service deliveries

October-November (Preparation Phase)

• Compile audit file: Gather all documents the CPA will need (12 months of bank statements, list of contracts, list of distributions, interest calculations)
• Contact CPA: Confirm they have experience with funeral home pre-need audits. Schedule the audit.
• Reconcile everything: Ensure all monthly reconciliations are complete and accurate
• Run year-end reports: Calculate fund balance, fund adequacy ratio, and other key metrics

November-December (Audit Phase)

• CPA performs audit: This typically takes 4-6 weeks depending on complexity
• Respond to CPA questions: The auditor may ask clarifying questions. Respond promptly.
• Review draft audit: Before final submission, review the CPA's draft report for accuracy

December-January (Filing Phase)

• Receive final audit: CPA provides finalized audit report
• File with state: Submit to your state funeral board by the required deadline (typically 30-120 days after year-end)
• Keep copy: Maintain a copy for your records
• Calendar next year: Mark next year's audit deadline so you don't miss it

Documentation Best Practices: What to Keep

Maintain detailed records for a minimum of 7 years (many states require 10 years). Your documentation file should include:

Bank Records

• 12 months of bank statements for each pre-need trust account
• Monthly reconciliation reports (your records vs. bank balance)
• Documentation of any discrepancies and resolution

Contract Records

• Signed copy of every pre-need contract
• Contract pricing and service specifications
• Any amendments or modifications to contracts
• Master list of all active contracts with status

Payment Records

• Record of every payment received (date, amount, contract#)
• Deposit slips showing amounts deposited to trust
• Payment receipts given to families

Distribution Records

• Record of every withdrawal from trust (date, amount, reason)
• Service delivery documentation showing what was provided
• Family sign-offs confirming service delivery
• Any refunds issued and to whom

Interest & Fee Records

• Bank statements showing interest credited
• Interest calculation workings (showing what interest rate was applied, to whom)
• Documentation of how interest was distributed/allocated
• Any fee records (trustee fees, administrative fees, etc.)

Audit Reports

• Copy of submitted audit report (with state-stamped receipt of filing)
• Correspondence with state funeral board regarding audit

Common Audit Findings & How to Avoid Them

Finding: Fund Not Adequately Capitalized

What the auditor finds: Fund balance less than 100% of unfulfilled obligations

Why it happens: Funeral home selling more pre-need contracts than the fund can support, or not collecting enough payment upfront

How to avoid: Calculate fund adequacy monthly. If trending below 100%, reduce new pre-need sales until adequacy improves. Consider increasing prices on new contracts.

Finding: Interest Calculation Errors

What the auditor finds: Interest earned doesn't match bank statements or is incorrectly allocated

Why it happens: Manual interest calculations are error-prone, or interest allocation to families was missed

How to avoid: Use software to automate interest calculations. Reconcile monthly. Have system automatically allocate interest per your state's requirements.

Finding: Missing or Incomplete Documentation

What the auditor finds: Contracts missing, withdrawals without supporting documentation, or unclear transaction trails

Why it happens: Poor record-keeping practices or staff turnover

How to avoid: Implement systematic record-keeping process. Scan contracts into digital system. Require approval for all distributions. Train staff on documentation requirements.

Finding: Commingled Funds

What the auditor finds: Pre-need trust funds mixed with general business accounts

Why it happens: Funeral home uses one account for everything

How to avoid: Maintain completely separate bank account(s) for pre-need trust. Funds go in, only come out for service delivery.

Working with Your CPA

Choose a CPA who has funeral home experience. When selecting:

• Ask: "Have you audited pre-need funeral trust accounts before?"
• Ask: "Are you familiar with [your state's] specific requirements?"
• Ask: "What's your timeline for completing the audit?"
• Ask: "Do you file directly with the state, or do I need to?"
• Request: References from other funeral homes they've audited

A good CPA will guide you on proper accounting practices and flag potential compliance issues before they become audit findings.

Missing Deadline? Here's What Happens

If you miss your state's audit filing deadline:

• First offense: Warning letter + $500-$2,000 fine
• Second offense: $2,000-$5,000 fine + possible license restrictions
• Repeated non-compliance: License suspension or revocation

File on time. If you're going to miss a deadline, contact your state funeral board immediately and request an extension before the deadline passes.

Related Resources on Pre-Need Compliance

• Analyzing Trust Fund Performance: Key Metrics – Calculate the metrics auditors examine
• State Regulations for Pre-Need Trust Funds – State-specific requirements
• Tax Implications of Pre-Need Interest – How interest is taxed

Bottom Line

⚠️ FOUNDER NOTE: Annual pre-need fund audits are required in most states. Missing the deadline = fines + license restrictions. Set up the process NOW:

1. Contact your state funeral board and confirm YOUR state's exact audit requirements and deadline
2. Find a CPA with funeral home pre-need experience
3. Implement monthly bank reconciliation and documentation processes
4. Calendar the audit deadline 90 days out so you have time to prepare
5. File audit reports on time, every year