As a CPA, I've used spreadsheets as my go-to resource for work for a long time, whether for performing calculations, reconciling data or one-off project tracking. My family is familiar with my love of spreadsheets as well, from to-do lists to organizing our vacations.
It was a proud moment when my eldest called me from the high school cafeteria for assistance with a Google Sheets formula. As I walked him through the calculation, I could hear others saying, "Wow, your mom really knows this stuff!" Side note: Take praise from high-schoolers when you can get it.
When I heard about the new lease accounting standard, I initially presumed any software solution would be for large lease portfolios. My beloved spreadsheet could handle five to 10 leases, right? The more familiar I became with the intricacies of the standard, however, the more I realized there are many hidden costs of using spreadsheets for lease accounting. Not only are spreadsheets laden with security risks, error-prone, difficult to adjust and arduous to maintain, they are time-consuming to audit.
What are the new standards?
In the U.S., the new lease accounting standards include ASC 842 and GASB 87 & GASB 96, and internationally there is IFRS 16. Under the previous lease standards, committed future payments for operating leases were not reflected on the balance sheet, regardless of the length or dollar value of those committed payments. In other words, a future debt (a liability) was nearly invisible on financial statements. While these payments were mentioned in footnotes, they were not prominently visible like other liabilities.
Even for organizations with just a handful of operating leases, those are often for big-ticket items like office space, warehouses or other real estate. Leaving these committed future payments off the balance sheet can result in a huge gap for anyone trying to understand a particular financial situation via the balance sheet. This is primarily why FASB, GASB and the IASB made the change.
The hidden costs
Getting started in a spreadsheet is tempting because they are so easily accessible and highly customizable with formulas and functions. There's also a feeling of control: I can make this spreadsheet work exactly how I want it to. When there's a question about a calculation, you can easily click in a cell and follow the formula.
These benefits work best when you are creating a one-time spreadsheet for a singular purpose. Over time, however, benefits become burdens when a spreadsheet is employed over months or years — which is what's required for lease accounting.
With a highly customizable spreadsheet, how do you know that your calculations are accurate and compliant for your particular set of leases? There is no guide along the way to help you adjust formulas when needed or offer prompts about how to determine the correct inputs.
Anyone can click in a cell to audit — or change — a formula. This might make for good collaboration, but not for good security. And it's nearly impossible to determine who opened the file and made changes or even whether your spreadsheet is the latest version.
Because it's so easy to manipulate data, it's fair to say that many spreadsheets contain human errors. If you have complex spreadsheets subject to changes in formulas and data over time, mistakes can crop up unless you continually scrutinize them from top to bottom.
So if your clients use spreadsheets to implement the new lease accounting standards, it will add to your costs and introduce significant risks in an audit.
Lease accounting with spreadsheets: Oh my!
From my experience with our clients, CPA firms realize that spreadsheets cause significant challenges during audits. Due to the complexity of auditing spreadsheets, you may find it necessary to raise client fees. If you're unable to increase your prices due to the competitive market, you could see an adverse effect on your realization rates.
I heard from one public company that recently its audit fees had increased by 25% due to the extra work associated with lease accounting spreadsheets. Even though my contact only had a handful of leases, she was eagerly exploring a software solution.
As an auditor, you must verify that your clients' lease accounting calculations and numbers are accurate and ensure their controls do not have any material weaknesses. When several people work in the same spreadsheet with no validation or security options, such as an audit log, there are often calculation issues and version control problems. In addition, a single formula error could carry over to one or more calculations, causing a huge headache for all involved. The absence of strong internal controls to ensure the spreadsheet's accuracy makes for far more work for you during the audit, especially under the new lease accounting standards.
Maintaining lease accounting in a spreadsheet requires significant vigilance with the new lease standard. Businesses have leases that frequently involve real estate and equipment, such as vehicles, all subject to change and modification, especially with all of the workplace shifts we've experienced over the course of the COVID-19 pandemic. Even one lease can require considerable work.
Even your clients that are most adept at spreadsheets will struggle to efficiently and effectively implement the new lease standards this way. When an error or issue is discovered during the audit, there is going to be rework, which means more time in the spreadsheet and perhaps even a latent concern for material weaknesses.
As an auditor, you cannot say an organization's finances are in good shape if you are not confident of its calculations. Using spreadsheets for calculations increases the complexity of audits and can lead to significant risks. To avoid those risks, consider offering your clients lease accounting software.
Lease accounting software
Lease accounting software allows you to standardize your firm's processes around implementing and auditing your clients' lease accounting, saving you time, resources and effort, and positively impacting your bottom line. For the most flexibility, look for lease accounting software that offers multiple engagement options for client collaboration, such as inviting clients into their own secure portal to do their lease accounting or offering the ability to collaborate with your staff on implementation. Collaborative software is a win-win for clients that may not have enough resources or employees to comply with the standard internally.
Another key element in assessing lease accounting software is the support of System and Organization Control Type II reports. Obtaining these reports requires a deep and intensive look inside the software company's operations. These reports provide you with assurances that a solution will be accurate and secure. A SOC 1 Type II report tests the controls in place to protect a customer's internal control over financial reporting, including restricting access to the system to authorized users who perform appropriate actions. A SOC 2 Type II report verifies the availability, confidentiality and integrity of secure data management processes and procedures.
It's important to look for software that is easy to use, scalable and affordable for one or more leases. It should have the ability to quickly generate journal entries, quantitative footnote disclosures and amortization schedules, calculate present value for future payments and offer other features such as a detailed audit trail of who did what and when.
By selecting software your firm and clients can use, you can be confident that your clients' lease accounting is accurate and secure. You can also eliminate confusion, complexity and added costs in audits and provide a tool that increases the success of your staff and improves employee retention.
