How Should Auditors Get Ready for the New Lease Accounting Rules?--Get Sufficient Documentation; Question the Assumptions Used


While companies are implementing the new lease accounting standards, auditors are getting ready to conduct audits under the new rules. Bloomberg BNA interviewed Paul Becht, partner of Margolin, Winer & Evens LLP, who explained some of the challenges auditors will face and what they need to look out for under the new leasing rules. Paul has over 20 years of experience in public accounting and is the vice president of the New York State Society of Certified Public Accountants’ Board of Directors. 

Bloomberg BNA: What do auditors need to focus on when conducting audits under the new lease accounting rules?

Becht: Once the new lease standard is effective, auditors will need to obtain the clients’ inventory and analysis of leases. Depending on the quantity and variety of leases, providing a full inventory and analysis of all leases could be a major undertaking for many companies.

Auditors will need to consider whether their clients have properly included all contracts that fall under the scope of the guidance, correctly separated lease and nonlease components, and accurately recorded the leases on the general ledger. The challenge for auditors will be obtaining sufficient documentation from the client to support the lease accounting.

Bloomberg BNA: Are there any challenges that auditors will face in particular to auditing real estate companies under the new lease accounting rules?  

Becht: With regard to audits of real estate companies, once the lease accounting guidance is effective auditors are not expected to encounter too many challenges. Most of the auditing challenges will reside with audits of lessees. Audits of companies that lease numerous properties or other assets will become more complicated as there will be increased risk that companies don’t adequately analyze their contracts to properly identify lease components and correctly apply the new guidance. 

Bloomberg BNA: What do auditors need to do differently under ASC 842 vs ASC 840?

Becht: Under the new standard [ASC 842], auditors will need to consider the substance of lease agreements and delve into the details of various contracts rather than simply follow the bright-line rules which are stated in the existing standard under ASC 840. Auditors will need to question whether clients properly recorded the present value of lease payments and in doing so question the assumptions used. The more lease agreements a company has and the more complicated the provisions of the agreements, the more room there is for errors in applying the new standard.

Bloomberg BNA: What do companies need to do in preparing for an audit?

Becht: For those companies who are fortunate enough to only have a few lease agreements, they will likely be fine analyzing their leases and summarizing the information using excel spreadsheets. However, companies with multiple lease agreements should look to use sophisticated software that will help them analyze and properly account for their leases under ASC 842. Before they can begin to use the software, companies need to assess their various contracts, determine where lease components may exist and decide whether they have the necessary in-house expertise to handle the accounting. There may be a need for additional training on the topic and companies should consider seeking the help of a consultant. Enough time should be set aside for planning, training, consultation, analysis, and financial reporting before the auditors arrive to audit the accounting under the new lease standard.

Bloomberg BNA: Do you think technologies, such as Artificial Intelligence(AI), will change the audit profession? What is the future of auditing?  

Becht: Yes, I think Artificial intelligence will change the profession. AI is being discussed more often these days in accounting firms, software vendors, regulators, and professional accounting societies. There is uncertainty as to when the change will occur. Firms are increasingly using technology to assist with audit procedures. AI will certainly help accountants in dealing with ASC 842. There is software currently on the market that purports to use algorithms to quickly extract lease components from contracts and help companies use the data to efficiently apply the new lease accounting guidance. How quickly will the audit industry also adopt AI on a wide scale for its purposes? Who will be at the forefront in using AI and who may be left behind? These are questions that will become increasingly important in the audit world. The future of auditing will be moving at a much faster pace, though with more advanced technology that will allow us to gather and analyze data in a more productive fashion to all for financial reporting that is closer to real time.  

Rely on expert practitioners for practical guidance and real-world approaches to complex accounting issues with Bloomberg BNA’s Financial Accounting Resource CenterTake a free trial today.

Continue the discussion at  Bloomberg BNA Accounting LinkedIn.