A&A Focus recap: Lease challenges, SAS 145, and fraud

The March 6 installment of the AICPA’s monthly A&A Focus Series webcast updated members on critical accounting, auditing, and assurance issues.

Hosted by Carl Mayes, CPA, vice president–Audit and Accounting Quality at the AICPA, and Bob Durak, CPA, CGMA, director–Audit and Accounting Technical Services at the AICPA, the session, which is free for AICPA members and offers one CPE hour, covered topics ranging from lease implementation to evaluating fraud risks.

FASB ASC 842 and year 2 lease accounting issues

In the webcast’s first segment, Tom Groskopf, CPA, a director at Barnes Dennig and technical director of the AICPA’s Center for Plain English Accounting, addressed what private companies are struggling with in the second year of implementing the new lease accounting standard — FASB ASC Topic 842, Leases. Groskopf said frequently asked questions his firm receives are related to properly maintaining the new lease asset and lease liability account balances, dealing with remeasurement events, and applying straight-line rent requirements.

Companies are grappling with the ongoing costs and complexities of properly accounting for leases on the balance sheet, he said. This includes handling remeasurement scenarios such as lease renewals triggering catch-up and straight-line rent adjustments. He advised attendees to be diligent about identifying embedded leases in information technology and transportation and other service contracts.

Surveys suggest that the increased burden of implementing Topic 842 has led 20% to 25% of private companies to consider taking a GAAP exception or moving to a non-GAAP framework, such as tax basis or cash basis, to avoid the requirements, Groskopf said.

For those staying on GAAP, he covered the proper determination of discount rates using the risk-free or incremental borrowing rate, depending on the entity’s policy election.

Commercial real estate A&A risks — tenant concessions

The broadcast next examined distress signals emerging in the commercial real estate market due to factors like interest rates. Mike Valenza, CPA, senior manager at KPMG, offered landlords options on how to account for various rent concessions for struggling tenants.

For common concessions like free rent periods, Valenza said to still recognize straight-line rent expense from lease commencement despite any delayed cash payments. He covered the balance sheet treatment of tenant improvement allowances landlords provide and how to properly account for tenant opt-out clauses that create uncertainty around the final lease term.

Valenza also contrasted lessor perspectives for real estate companies versus other commercial tenants that are not real estate professionals.

Relevant accounting guidance is spread across Topic 842, the FASB staff Q&A, and accounting firm guidance publications, he said, adding that practitioners should take advantage of available resources when diving into the standard.

Evaluating the design and implementation of controls

Shifting to auditing, the broadcast featured insights from Liz Gantnier, CPA, CGMA, regional accounting and auditing director for FORVIS, on evaluating internal control design and implementation under Statements on Auditing Standards (SAS) No. 145, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement.

While not a major overhaul for seasoned auditors, SAS No. 145 does introduce some new terminology, definitions, and requirements. This includes embedding the COSO internal control framework into the standard, a new “stand back” provision to reevaluate identified risks of material misstatement for material accounts and assertions, and increased scalability options for smaller, less complex audits.

Gantnier encouraged auditors to thoroughly understand the “why” behind new SAS 145 practice aids versus just checking boxes. She predicted auditors may need to bolster documentation around testing of IT general controls going forward to comply with the new standard’s requirements.

Forensic perspectives on fraud risk assessment

Greg Jenkins, CPA, the Ingwersen Professor of Accounting at Auburn University and a member of the AICPA Auditing Standards Board (ASB), summarized key takeaways from the ASB’s recent outreach to forensic accountants to gather fresh perspectives on evaluating fraud risks during audits.

Forensic experts tend to have a heightened “show me” mindset and skepticism compared to auditors, Jenkins said. They consistently probe beyond management’s explanations by demanding proof through documentation review and discussions with additional parties across the organization.

Forensic professionals also operate from the assumption that anyone at any level can potentially commit fraud, as compared to auditors who believe fraud is more common among more experienced and more senior people.

Other highlighted best practices from the outreach included conducting more in-person, operations-level inquiries versus checklists, involving the full audit team in brainstorming sessions, and holding a follow-up brainstorming discussion to reevaluate fraud considerations based on new insights at the end of the audit.

Jenkins noted that the ASB is digesting these forensic perspectives to determine if any changes are warranted to auditing requirements or guidance in AU-C Section 240, Consideration of Fraud in a Financial Statement Audit.

In other matters

The A&A Focus Series webcast also provided updates across several timely emerging issues, including:

• The International Auditing and Assurance Standards Board proposing major revisions to enhance auditing requirements around fraud risk assessment and procedures through an exposure draft of International Standard on Auditing 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements. Comments are due by June 5, 2024.
• The SEC adopting a new climate-related disclosure rule requiring public companies to report Scope 1 and Scope 2 greenhouse gas emissions starting in 2026, but not Scope 3 supply chain emissions.
• Statistics showing 98% of large companies globally now report ESG information and 69% obtain assurance over that information.
• The International Ethics Standards Board for Accountants issuing guidance proposals around ethics requirements for sustainability assurance and use of external experts in such engagements.
• EPA regulations establishing audit requirements for reporting of hydrofluorocarbon emissions, only allowing CPAs to perform these engagements.
• The AICPA expressing serious concerns around implementation of the Corporate Transparency Act’s beneficial ownership reporting mandate for small businesses and asking Congress to suspend the BOI rule.

Looking ahead

The monthly A&A Focus Series will continue April 3. Planned topics include managing risks to audit practices with Sarah Ference, CPA, risk control director at CNA Insurance; implementation of the new quality management standards with Sherry Chesser, CPA, who served on the AICPA task force; a not-for-profit accounting update; and employee retention credit audit considerations.

Throughout 2024, the AICPA plans to leverage the A&A Focus Series as a vital channel to keep members apprised of the steady stream of new accounting, auditing, and reporting developments affecting their work across all industries and domains of practice. Members can access archives of past sessions at aicpa-cima.com/resources/landing/aafocus.

— Dave Arman, CPA, MBA, is senior manager–Audit Quality at AICPA & CIMA, together as the Association of International Certified Professional Accountants. To comment on this article or to suggest an idea for another article, contact Jeff Drew at Jeff.Drew@aicpa-cima.com.

Resources

Articles

“The Auditor’s Approach to Fraud: Enhanced With Forensics,” JofA, March 5, 2024

“A Refresher on Fraud and the Responsibility for Its Detection,” JofA, Sept. 14, 2023

“Inherent Risk and SAS No. 145: New Concepts and Requirements,” JofA, Oct. 13, 2022

“Significant Risk Revised: Concept Changes Under SAS No. 145,” JofA, Sept. 12, 2022

“What’s New in SAS No. 145: Enhanced Definitions Mean Stronger Audits,” JofA, July 29, 2022