Your First Lease Accounting Audit

first lease accounting audit

What items will external auditors be focused on after the implementation deadline for lease accounting? There has been little guidance published by the big four firms yet. However, one topic that is raised by auditors at almost every lease accounting conference is the importance of completeness. Specifically, how do you know that you have identified a complete population of all the leases across your enterprise?

What items will external auditors be focused on after the implementation deadline for lease accounting? There has been little guidance published by the big four firms yet. However, one topic that is raised by auditors at almost every lease accounting conference is the importance of completeness. Specifically, how do you know that you have identified a complete population of all the leases across your enterprise?

It should not be surprising that auditors will be questioning completeness as it is a well-known area of weakness. The systems, processes, and controls for leasing are relatively immature compared to other financial processes that impact the balance sheet. In fact, many companies do not even have an accurate inventory of what is leased across the business due to the decentralized approach that has been taken to managing the portfolio.

With operating leases moving onto the balance sheet, auditors will want to ensure that the right-of-use assets and lease liabilities reported in your financial statements accurately represent your company’s obligations. While omitting a $500 printer lease may not be material, overlooking a $5M real estate contract embedded in an outsourcing agreement could be.

There are a variety of different strategies that companies can employ to confirm the completeness of their lease population:

1) Vendor Based Validations

Utilize vendor contracts, invoices, or records to validate the completeness of the lease population. For example, if you can identify your company’s community of lessors, you can ask each one to send you a complete list of the assets being financed.

2) Stakeholder Validations

Hold the users of the leased assets accountable for validating the completeness of the lease population. For example, you can periodically survey stakeholders about the lease population and require attestations of the accuracy of records.

3) Systems Validations

Leverage data in the systems of record to validate the completeness of the lease population. For example, if you can identify systems of record, such as an asset management system, for real estate, IT, or fleet, you can then compare records to identify any leases that may have been overlooked.

15 Ways to Assert the Completeness of Your Lease Population

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4) Control Based Validations

Rely on policies and controls to ensure your records of leases are always complete. Effective controls can provide financial incentives (carrots) or present roadblocks (sticks) that motivate employees to keep the leasing database accurate.

5) Change Based Validations

Focus on the areas of change within your organization that are most likely to result in leases not being properly accounted for. Examples might include closer inspection of the lease population following divestitures mergers, and acquisitions.

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