How to Build a Lease Audit Trail

Last Updated on February 15, 2024 by Morgan Beard

Managing your lease portfolio efficiently and ensuring compliance with legal and accounting requirements is a crucial process for commercial tenants and their accountants. To simplify this process, it is essential to build a lease audit trail.

A lease audit trail documents all financial reporting requirements onto your general ledger. Those regulatory requirements demand documentation of your internal controls, complex calculations, and journal entry creation. As well as all actions throughout the leasing process, from initial negotiations to lease execution and lease accounting compliance assumptions and decisions. In this blog post, we will explore the steps involved in building a lease audit trail that prepares your team for lease accounting audits under FASB ASC 842 and IFRS 16.

Establish Clear Documentation Protocols

The first step in building a lease audit trail is to establish clear documentation protocols. This involves determining what information needs to be recorded and how it should be organized. Important documents to include in the lease audit trail may include:

• Lease agreement: Include the signed lease agreement, any amendments, and addendums.
• Communication records: Document all correspondence related to the lease, such as emails, memos, and meeting minutes.
• Rent payment records: Keep track of rent payment receipts, invoices, and records of any late or missed payments.
• Maintenance and repair records: Document any maintenance or repair requests, work orders, and invoices.
• Insurance records: Keep track of insurance policies related to the leased property.
• Financial statements: Include financial statements that pertain to the leased asset, such as balance sheets, income statements, and cash flow statements.

By establishing clear documentation protocols, you ensure that all relevant information is recorded consistently and accurately. This documentation will serve as evidence of compliance and can be used for reference in the future.

Implement an Easy-to-Use Lease Accounting Tool

To build a user-friendly lease audit trail, it is essential to implement a lease management tool that allows for easy organization and access to lease-related documents. Occupier, for example, is a comprehensive lease management platform that offers features specifically designed to streamline the entire lease lifecycle from lease document execution to lease accounting compliance — building your digital lease audit trail. Some key functionalities to consider when choosing a lease management tool include:

• Centralized document storage: The tool should provide a centralized repository for all lease-related documents, making them easily accessible to authorized users.
• Lease version control: The tool should allow for version control, ensuring that the most up-to-date documents are always available and eliminating the risk of working with outdated information.
• Collaboration capabilities: The tool should enable multiple users to collaborate on lease-related tasks, such as updating documents, adding comments, and sharing important information.
• Search functionality: A robust search functionality will allow users to quickly find specific documents or information within the lease audit trail.
• Customizable workflows: The tool should allow users to create customizable workflows, ensuring that lease-related tasks are completed in a systematic and efficient manner.

Implementing a user-friendly lease management tool will not only make building a lease audit trail easier but also enhance overall lease management processes.

Track Key Milestones and Events

A lease audit trail should include a record of key milestones and events throughout the leasing process. These milestones and events may vary depending on the specific lease agreement, but some common examples include:

• Lease negotiation and execution: Document the negotiation process, including any offers or counteroffers, and the final execution of the lease agreement.
• Rent commencement and payment: Track the date when rent payments are scheduled to begin and ensure that all rent payments are recorded accurately.
• Lease renewals and terminations: Document any lease renewals or terminations, including relevant notices and agreements.
• Lease Modifications: Lease re-measurement due to significant changes (modifications)  in the terms and conditions of the lease agreement should be carefully assessed and documented.
• Lease impairments: Assess and catalog whether there has been any impairment of lease assets or liabilities due to changes in the lessee’s ability to fulfill its obligations under the lease.
• Maintenance and repairs: Keep a record of maintenance and repair requests, work orders, and invoices for any repairs or improvements made to the leased property.
• Insurance coverage: Document the insurance policies in place for the leased property, including the coverage details and expiration dates.

By tracking these key milestones and events, the lease audit trail provides a comprehensive history of the leasing process, making it easier to identify any potential issues or discrepancies.

Regular Updates to Your Lease Audit Trail

Building a lease audit trail is not a one-time task. It requires regular review and updates to ensure that all relevant information is accurately documented. Regularly reviewing the audit trail also allows for identifying any missing or incomplete records and taking necessary actions to address them.

To maintain an accurate and up-to-date lease audit trail, consider the following best practices:

• Conduct periodic internal audits: Schedule regular internal audits to review the lease audit trail and ensure its integrity. This can help identify any gaps or errors in the documentation process.
• Update records in real-time: Encourage all stakeholders involved in the leasing process to update the audit trail in real-time. This will help create a more accurate and comprehensive record of lease-related activities.
• Train and educate stakeholders: Provide training and educational resources for all stakeholders involved in the lease management process. This will help ensure that everyone understands the importance of the audit trail and knows how to contribute to its accuracy and completeness.
• Leverage technology for automation: Consider leveraging technology, such as automated reminders and notifications, to streamline the process of updating and reviewing the audit trail. Check that the software program allows for unlimited users, which can help ensure that no critical deadlines or events are missed.

Regularly reviewing and updating the lease audit trail will not only ensure compliance but also help in effectively managing lease-related risks and obligations.

Lease Audit Trail Summary

Building a lease audit trail is a vital step in effective lease management and accounting. By establishing clear documentation protocols, implementing a user-friendly lease management tool and accounting system, tracking key milestones and events, and regularly reviewing and updating the audit trail, commercial tenants, CPAs, and real estate teams can streamline their lease management processes and ensure compliance with legal and accounting requirements.

Remember, your digital lease audit trail is a living process that requires proactive maintenance and updates. By investing time and resources in building a robust lease audit trail, you can simplify lease management, mitigate risks, and ensure accurate and transparent lease accounting practices.