By Joel Hess on June 8, 2020 at 11:00 AM
If your public company clients are using spreadsheets to maintain their leases, you know what a pain those spreadsheets can be. They are error-prone, difficult to adjust, and can even increase risk. Or, as one audit partner excellently put it to me recently, “Spreadsheets are cumbersome and fragile.”
Many public companies opted for spreadsheets when they first implemented the new lease standard. Some organizations made the deliberate decision to use spreadsheets because they’re “only” leases; they assumed based on old accounting standards that their spreadsheets would still be easy to maintain. Other organizations may not have properly planned for implementing the new lease standard and belatedly assumed that spreadsheets were their only option.
Whether your clients actively chose to use spreadsheets or ended up there by default, CPA firms and public companies are realizing that spreadsheets aren’t a long-term solution for ongoing lease maintenance. Even if the implementation process was manageable with spreadsheets, many are encountering issues with Day 2 accounting.
Most public companies have now completed their first year with the new lease accounting standard and some have already experienced why spreadsheets aren’t effective for ongoing maintenance such as lease modifications—which have been unusually prevalent as a result of the pandemic.
Spreadsheets make audits more painful
As CPA firms now know from experience with their public clients, spreadsheets present major challenges during audits. Even though the first year of audits post-implementation has passed, managing ongoing maintenance in spreadsheets will only make future audits even more painful--and that will drive up costs for both the CPA firm and their clients. In fact, one public company told us recently that their audit fees increased by 25% due to the extra work with their lease accounting spreadsheets.
For you as the auditor to trust that your clients’ numbers are accurate, you need assurance that their controls don’t have any material weaknesses. If there are multiple people working within a spreadsheet and it has no built-in validation and minimal security options, that could cause major problems. If your clients are using a spreadsheet that has even one error, any calculation could be wrong. When they’re relying on an easily breakable spreadsheet, it creates a lot more work and they need much stronger internal controls to prove that the numbers are accurate.
If you do find an issue during the audit then your clients are looking at rework, which means more time spent in the spreadsheet. It’s incredibly frustrating to get deep into an audit and realize there is a material control weakness that could have been addressed earlier. Auditors cannot say that the organization’s finances are in good shape if the spreadsheets are a mess.
Spreadsheets lack data integrity, version control, and security
Spreadsheets require a lot of manual effort to make impairments, modifications, and revisions to leases. When a lease changes, the updates on a spreadsheet are complex and nuanced.
The new lease standard has also added greater complexity to financial disclosures. In addition to the simple maturity schedule that was previously required, there are numerous additional quantitative calculations to include in footnote disclosures. The smallest error can break these formulas.
Further, most organizations have many people who touch leases. One leader at a major public accounting firm learned this lesson during implementation: he’d assumed that only a couple of people were involved with leases at his client organizations when really it was more like four or five.
With that many people working in a spreadsheet, it’s difficult to know who made which changes and whether you’re working in the latest version. Part of that confusion stems from the fact that spreadsheets are so easily compromised. In a spreadsheet, one user can edit, lock, duplicate, cut or otherwise ruin a spreadsheet. The time spent identifying and correcting human errors—which are inevitable—is time wasted unnecessarily.
Spreadsheets waste time
Spreadsheets begin as a blank canvas. That means anyone working in a spreadsheet first needs to add the calculations and processes required to fit their unique situation.
This may not have seemed like a big deal when implementing the new lease accounting standard; any new standard requires some initial heavy lifting. What has been a surprise for many is the ongoing maintenance for tracking leases. Due to those nuanced calculations in the new lease standard, any changes - and there will be changes - after initial setup take hours of work to maintain accuracy.
Multiply that over many leases at a large company and you have a major time suck. When asked about the prospect of using spreadsheets, one Manager of Corporate Reporting for a public company responded, “We only have a couple of dozen leases—I can’t see how an organization can manage their lease portfolio effectively in a spreadsheet.”
In addition to building your spreadsheets, your clients also need to build reports for presenting information to internal and external teams. The team might be well-versed in what the spreadsheet says, but they’ll need to allocate additional time to generating journal entries, amortization schedules, and footnotes, which are standard for most lease accounting software.
Why lease accounting software is better for ongoing lease maintenance
Accountants and finance teams have long relied on spreadsheets for lease accounting, despite the pain points listed above. While that was much more feasible under ASC 840, spreadsheets are simply not feasible long-term for lease accounting under the new standard, ASC 842. Public companies may be reluctant to use lease accounting software because they worry about having to retrain staff on a new system, or that it will cost too much; however, the right solution will ultimately save the organization time and money.
Benefits of lease accounting software include:
- Quick and easy lease modifications. Updating existing lease terms can be done with just a few clicks and no concerns about data integrity or broken calculations.
- Improved workflow. Know exactly what data to enter for the correct calculation. Get things done right the first time, then focus on what really matters.
- Greater security. If someone makes an error or an unauthorized change, version control will help identify the problem. Too many errors? Access control makes it so that only the people who need to update the numbers can do so.
- Calculation accuracy. All the tedious formulas no one wants to build in Excel are done for you. Tip: Look for software that comes with SOC certification and an Agreed-Upon Procedures (AUP) report, to ensure accuracy, security, and privacy.
- Ease of use. LeaseCrunch is designed for anyone to easily use it, with helpful wizards and on-screen tips throughout the software.
- Cost. While many software solutions make sense only for large lease portfolios, LeaseCrunch is affordable and scalable for any size organization, with pricing based on the number of leases.
- Enormous time savings. Easily generate journal entries, quantitative footnote disclosures, a full amortization schedule, financial disclosure statements, and more with the push of a button.
- CPA firm collaboration. Unlike other lease accounting vendors who cut CPA firms out of the equation and sell directly to organizations, LeaseCrunch partners with the CPA firm and offers multiple engagement options. CPA firms can white label the solution and own the value, or let LeaseCrunch interface directly with the end-user organizations.
Want to learn more about LeaseCrunch? Schedule a demo to see the tool in action and ask us about our free trial!