What to know about AI guardrails, leasehold improvements, and the latest ASB developments

The March A&A Focus webcast delivered another practical mix of emerging technology, technical accounting, and standard-setting developments for practitioners. Hosted by Bob Durak, CPA, and Andrew Merryman, CPA, the March 4 program featured the return of Danielle Supkis Cheek, CPA, senior vice president over AI, analytics, and assurance at Caseware; Mike Cheng, CPA, national professional practice partner at Frazier & Deeter and member of the Private Company Council; and Halie Creps, CPA, partner at KPMG LLP and chair of the AICPA Auditing Standards Board (ASB).

This month’s program focused on areas that are increasingly relevant for firms in early 2026, including how to encourage AI experimentation without creating unmanaged quality risks under a firm’s newly implemented system of quality as a result of Statement on Quality Management Standards No. 1, additional practical application tips regarding leases, and what practitioners should know about the ASB’s recent meetings and newly exposed proposed attestation standards.

Balancing AI experimentation with quality management safeguards

Supkis Cheek continued the webcast’s ongoing series of AI discussions by focusing on what she described as the “spectrum of control versus creativity” in AI adoption. The headline of the segment was that firms do not need to choose between innovation and governance, but they do need intentional processes that allow experimentation without bypassing safeguards.

Supkis Cheek stressed that firms should avoid viewing AI governance as a binary “approved or prohibited” decision and adopt a more flexible stance. She encouraged firms to think in terms of progressive approvals or gating functions, where tools can move through stages of experimentation, pilot testing, and eventual production use. She noted that this approach is consistent with the principles-based nature of the firm’s quality controls, established by the recently implemented suite of quality management standards, and can help firms foster innovation while protecting quality.

Supkis Cheek used the term “non-negotiables,” explaining that for many firms, client confidential information will be the clearest example of a red-line. She suggested firms establish explicit rules about what is allowed during experimentation, providing examples such as rules about the use of client data in unapproved tools, when to notify internal security teams, and limiting what hardware may be used for testing. By creating such policies, firms can create an environment for responsible exploration.

Supkis Cheek also addressed vendor due diligence, acknowledging that there is no one-size-fits-all threshold for what is “sufficient.” She explained that the level of diligence depends on a firm’s risk appetite, industry specialization, client expectations, and intended use cases. She pointed to a whitepaper, “AI solution due diligence guide for accounting firms”, developed by CPA.com, that organizes vendor evaluation considerations into five categories, which she described as a practical starting point for firms that need a structured way to evaluate AI tools.

Supkis Cheek also referenced a valuable framework provided by the International Ethics Standards Board for Accountants, which she said can help firms evaluate whether they can rely on technology outputs.

Finally, Supkis Cheek cautioned that some emerging tools, especially outside the accounting profession, may require much stronger controls than firms are accustomed to applying. Her broader point was not that firms should ban tools outright, but that they should understand the permissions, access levels, and security implications before use, particularly when staff personal devices may intersect with firm systems.

Leasehold improvements: Why ‘accounting owner’ matters under ASC 842

Cheng returned to continue his lease accounting series with a discussion of determining the accounting owner of leasehold improvements, an area often requiring additional practitioner judgment. He explained that this issue is common in real estate leases because tenants frequently need to make improvements before they can begin operations, and landlords often fund part of those costs through tenant improvement allowances.

Cheng emphasized that practitioners should not automatically follow the labels used in the lease agreement. Even if a contract refers to a “tenant improvement allowance,” the accounting treatment depends first on who is the accounting owner of the improvement. That determination can change whether amounts are recorded as leasehold improvements, prepaid rent, or adjustments to the right-of-use (ROU) asset, as well as when lease accounting begins.

Cheng provided an example to the audience, detailed as:

• a five-year office lease involving $1 million of generic upgrades expected to last 20 years,
• the lessor funding $750,000 and the lessee paying $250,000.

As the upgrades described in this example were generic and would retain substantial value after the five-year lease ended, Cheng concluded that the lessor was the accounting owner. As a result, the lessee’s $250,000 payment was not a leasehold improvement. Instead, it was more akin to prepaid rent or an adjustment to the initial ROU asset.

Cheng explained that while ASC 842 does not provide direct bright-line guidance, practice often focuses on whether the lessee consumes substantially all of the economic value of the improvement during the lease term. Cheng asked the audience to consider if the landlord keeps the asset at the end of the lease, how much value is left? If little or no value remains, that suggests the lessee may be the accounting owner. If significant value remains for the landlord or a future tenant, the lessor is more likely the accounting owner.

Cheng’s second fact pattern, a contrasting example in which the upgrades were specific to the lessee, had no alternative use after the lease, and were expected to last at least 20 years. In that scenario, Cheng said the lessee would generally be viewed as the accounting owner because the improvements would be fully consumed economically by the lessee. In that case, the lessee would record the full $1 million as leasehold improvements, not just the $250,000 paid directly. The $750,000 funded by the lessor would also be included in the asset’s cost basis, with the offset recorded as a lease incentive that ultimately reduces the ROU asset and rent expense.

Another key takeaway involved commencement timing. In the first example, although the contract said payments began May 1, the lessor completed the upgrades and granted access on April 1. Cheng explained that lease accounting should begin when the lessee obtains access or control of the upgraded space, not necessarily when contractual rent payments start. That means the lessee would begin recording the lease on April 1.

To review all of the examples discussed during Cheng’s segment, AICPA members can access a replay of the event.

Cheng closed by urging practitioners to be especially careful whenever significant tenant improvement allowances are involved. His advice was to start with the ownership analysis first, because that determination can materially affect rent expense, leasehold improvement accounting, and commencement conclusions.

ASB update: Attestation exposure draft, fraud, confirmations, and strategy

During the final segment, Creps provided a broad update on the ASB’s recent activities, beginning with the board’s updated Strategic Plan 2026-2030. She explained that while the plan remains largely consistent with the prior version, it was refreshed to reflect the changing business and auditing environment, including the growing importance of technology and shifts in the regulatory landscape. Creps noted that the strategic plan outlines five core initiatives, including developing high-quality standards, enhancing stakeholder outreach, operating strategically in a changing environment, and supporting practitioners with implementation. She described the plan as an important framework for how the board evaluates its agenda and standard-setting priorities over the coming years.

Turning to the board’s recent meetings, Creps said the January meeting focused heavily on the attestation standards project. The board reviewed full drafts of proposed changes to the baseline attestation standards, including AT-C sections 105, 205, and 210, as well as two new proposed subject-matter sections for sustainability reporting: AT-C 325 for examinations and AT-C 330 for reviews of sustainability information. That work culminated in the approval of an ED, Proposed Statement on Standards for Attestation Engagement, Common Concepts, Examination Engagements, Review Engagements, and Engagements to Report on Sustainability Information.

Creps said the goal of the proposed changes is make these foundational standards more responsive not only to sustainability reporting, but also to emerging subject matters such as AI, digital assets, and other evolving assurance needs.

The comment period ends June 30. The ASB requests that respondents submit their comments to commentletters@aicpa-cima.com using the submission form available with the proposed standard.

Also during the January meeting, Creps said the board continued to re-deliberate issues related to external confirmations, based on feedback from the previously released ED issued last year. She said the board hopes to vote on a final standard in late spring or early summer.

The February meeting’s discussions focused primarily on fraud. Creps said the board reviewed feedback from 33 comment letters on the proposed fraud standard. She noted that there was broad support overall, but also significant feedback on specific requirements and application guidance. A final vote on the fraud related standard is expected later in 2026.

Interested parties are encouraged to review all of the recent EDs, supplementary materials, and comment letters, which are available to download.

Looking ahead

Durak closed by thanking viewers for their participation in this month’s A&A Focus webcast and reminded them that the next broadcast is scheduled for April 1. Scheduled guests include Steve Dawson, president of DFG Forensic Accounting Services, who will return for more discussion on practical fraud consideration; Maria Manasses, CPA, deputy chief auditor at Grant Thornton LLP, who will discuss the changes to group audit considerations; and Pete Ugo, CPA, chair of the AICPA’s Not-for-Profit Entities Expert Panel, who will provide an update on the not-for-profit space.

AICPA members are encouraged to attend these monthly events and review the accompanying newsletters for more in-depth coverage of these critical topics. Members can access archives of past sessions at the A&A Focus Series webpage.

— Dave Arman, CPA, MBA, is senior manager–Audit Quality at 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.