The first audits completed under the landmark new lease accounting standard are in, and companies say they were challenging.
According to a new survey, half of the public companies that have completed their first post-transition audit under the new lease accounting rules report additional effort was needed for the process.
The Financial Accounting Standard Board (FASB) released a landmark lease accounting standard in early 2016 that overhauled the entire system of financial reporting in the leasing area. “Post-Transition Lease Audit Playbook: What Companies Need to Know to Prepare,” a survey from lease accounting technology provider LeaseQuery, takes a close look at the first audits conducted after the transition and finds that companies had a difficult time complying with the new accounting rules.
Of those who had completed their first post-transition audits, over 50 percent reported that reasonable-to-significant additional effort was needed. LeaseQuery’s “Lease Liability Index Report” found that the average balance sheet liability increased by 1,475 percent since the new accounting standards took effect, requiring auditors to spend more time and resources on their audit.
The survey also found that 44 percent of auditors had no involvement in the lease accounting process leading up to the post-transition audit. Twenty percent of auditors set up planning meetings with the client, and 18 percent of auditors led the teams through the transition process. Only 66 percent of auditors had full read-only access to the client’s lease accounting solution. The survey shows that auditors had limited access and influence in the transition process. Further communication and collaboration with auditors may help the process along and allow the organizations to succeed.
Pandemic Complicates Audits
“Although the extension for lease accounting compliance by the FASB and GASB was welcome news for private and governmental organizations in the wake of the pandemic, deadlines are still on the horizon,” said Jennifer Booth, VP of Accounting at LeaseQuery. “The challenge of a post-transition audit is looming for many private companies and has been vastly underestimated. This massive undertaking coupled with financial pressures due to COVID-19 have created a crucial need for better capital management including transparency into leases to maximize cash flow and liquidity.”
Though the first post-transition audit required extra effort, the preparation for such a comprehensive audit has more than one-time benefits, say the reports authors. Many auditors found new cash flows and better data transparency. The survey also found that 26 percent of company respondents are planning on updating internal control environments for leasing and 58 percent uncovered embedded leases, making the future auditing easier. As auditing departments establish systems, the process will get easier.
The new accounting standards have proved difficult for companies, but increased cooperation with auditors as well as adapting new skills and technologies will make the companies better off in the long run, the report concludes. 
Stephanie Liu is assistant editor of Internal Audit 360°