Private or public. Ready or not. A lease accounting compliance audit may be coming your way.
Right now, you might be one of the 5% of public companies in FASB ASC 842 post-transition mode. Or you might be in the majority of public companies who are somewhere in the grueling depths of compliance.
If you’re a private company, you’re probably feeling a false sense of security created by recent news of a delayed deadline.
Either way, there’s an elephant in the room: Will you be ready for an 842 lease accounting compliance audit?
The Center for Audit Quality (CAQ) released a comprehensive guide for audit committees called Preparing for the New Leasing Standard in April 2019.
It’s a wakeup call for FASB ASC 842 implementers.
With such a detailed questionnaire and last year’s audit experience under their belts, auditors will be especially painstaking and thorough in 2020 and beyond.
And that means you have to be just as meticulous as they are.
To help you prepare and feel confident for a possible audit, we’ve put together a guide about what you can expect, what auditors will be looking for, and how you can avoid risks and make the process as painless as possible.
Make Clarity and Transparency a Priority
It may sound like a vague request.
But putting clarity and transparency first is the most practical step you can take to prepare for a lease accounting compliance audit.
You must compile clear documentation of your policies, internal controls, and processes.
According to a PwC survey, management of lease agreements and related accounting is in a decentralized state for 39% of companies. If your documentation is in a similar state of array, you’re going to be hurting when audit time rolls around.
We recommend that while you’re attacking FASB ASC 842 implementation, you dedicate a team member (or members) to recording processes and controls. They should write and enforce policies, too.
It may seem hard to add one more thing to your checklist during the hairy implementation process. But it will be worth it when you don’t have to scramble to gather information for an audit post-implementation.
Ready the As to their Qs
The hidden benefit of the CAQ’s guide is that it gives companies the upper hand in preparing for an audit. It’s a sneak peek into exactly what you can expect.
With 46 official questions - and quite a few more in the sub-text - the guide will help you prepare to give in-depth answers about disclosures, project plans, and your transition methods.
When you break it down, auditors will essentially try to assess::
- How accounting for leases will change at your company
- If your company is on track for a successful implementation
- How your company is preparing investors and creditors to understand the impact to the company and its financial reporting
- If your company is developing new processes and controls to address the accuracy of the adoption of the standard and the ongoing accounting it requires
- If your company is developing appropriate disclosures
We highly recommend spending time reviewing these questions, preparing answers, and gathering supporting evidence.
This will help avoid a time-consuming, costly and frustrating audit process.
Assemble an Inner-Department Lease Accounting Compliance Team
Perhaps one of the most unforeseen ways to prepare for a lease accounting compliance audit is to get your entire team involved.
Experts have always eschewed the idea that lease compliance should be a cross-departmental effort. After all, leases - and the contracts in which they’re sometimes embedded - can pertain to different functions of a company.
But getting the entire team involved with lease accounting compliance is more than best practice.
Auditors will require it when assessing your company’s implementation.
We recommend assigning one person from each department of your company to comprise a lease compliance committee. These should be individuals with veto power on their respective teams.
This will show your auditor that you take compliance seriously across your organization.
Give Full Access to Your Lease Accounting Software
A top priority for an auditor will be to evaluate your lease accounting software.
It shouldn’t come as much of a surprise. This is where compliance will be executed. The auditors will need to ensure the reporting is accurate.
They’ll look for:
- A complete data set
- Accuracy of data entered
- Correct organization of lease types
- Advanced reporting capabilities
Translation: Do whatever it takes to implement the right software as soon as possible.
Look for a lease accounting and administration software solution that has a robust feature set for compliance. The longer this feature set has been in development (it can vary from months to years), the better.
That means the company has had more time to work out bugs.
Another tip is to evaluate the team itself. You should be partnering with subject matter experts who understand the fluctuations in the industry and the nuances of lease accounting and its standards.
Most companies are finding implementation is harder than they thought. This is especially true as they get into the weeds of entering their data into software.
There’s no question you’re going to appreciate a software company that takes support seriously.
Having a technical expert on your side is invaluable during implementation. It will save you countless hours and headaches.
Conclusion: Avoid the Audit Nightmare
Most people hear the word “audit” and panic. But it doesn’t have to be this way.
When you’ve completed the proper legwork to cross your t’s and dot your i’s, an audit will simply be a way to double check your work. In fact, the CAQ gives you a head start on preparing for a successful audit.
The question is, will you start now or keep pushing it off?
Public companies in post-implementation bliss are tired from the challenges of implementation. And private companies are basking in the knowledge that they have an extra year until compliance takes effect.
Procrastination is a temptation many companies face. But it creates a false sense of security that will only hurt your company in the long run when it comes time for an audit.
Avoid the audit nightmare. Finish implementation and prepare for this important process today!Want to learn more about AMTdirect’s industry-leading lease administration and accounting solution? Book a time to chat with our experts.