Audits play a pivotal role in ensuring a company’s financial transparency, accuracy, and adherence to accounting regulations such as IFRS 16. Lease accounting undergoes rigorous scrutiny during audits, which puts the pressure on organisations to maintain precise lease data and keep up with regulatory standards to avoid penalties and protect their reputation. To navigate these challenges, lease accounting software has become indispensable. This article will explore how such software helps businesses meet regulatory requirements with greater ease, supports audit readiness, and enhances compliance.
The importance of audits and regulatory compliance
Audits provide assurance to users of annual reports by verifying a business’s financial position, performance, integrity of reported data, and cash flow. They are essential not only for internal validation but also for demonstrating reliability to stakeholders, including investors and regulators. Lease accounting under IFRS 16 requires detailed reporting of lease liabilities and right-of-use (ROU) assets on financial statements, making it subject to close examination during audits. Failing to comply with regulatory standards can result in financial misstatements, penalties, or damaged credibility. Therefore, businesses must be well-prepared for audits, ensuring their financial and legal data is comprehensive, accurate, and aligned with current regulations.
Challenges of auditing lease data
Auditing lease data can be particularly challenging, especially for companies with extensive and complex lease portfolios. Here are some of the common issues businesses encounter during audits:
- Manual data entry errors. When lease data is manually tracked, there is a higher risk of inaccuracies or missing information. Businesses that rely on spreadsheets or manual tracking often face data discrepancies and errors, making audit preparation difficult.
- Data discrepancies. Changes in lease terms or missed updates can lead to inconsistencies between financial records and lease agreements. Lease data must be updated and accurate, including key details such as payment schedules, modifications, and lease renewals. For example, rent review documentation might not easily flow through to the accounting team, or the landlord themselves might not be strict with the formalities. The result is that lease liabilities might not be complete and accurate in the current financial year.
- Lack of audit trails. Without a clear record of lease changes or approvals, it becomes difficult to trace the origin of data during an audit. Ensuring that every lease transaction is properly documented and can be traced back to its origin is essential for audit transparency.
- Regulatory updates. Keeping up with evolving lease accounting standards, such as IFRS 16, can make compliance a moving target, further complicating audits.
- Inaccurate calculations. Contract details might not be reflected in the calculation, due to human error or a lack of review. Assumptions applied in the initial calculation might not be relevant to a specific lease, or particular clauses might not be incorporated.
How lease accounting software supports audits
Lease accounting software offers solutions to these challenges, making audits more efficient and reliable. Its key features include:
Automation
Lease accounting software automates many of the tasks that are prone to human error when done manually, such as data entry and calculations. This reduces the risk of errors and helps ensure that all data is accurate and consistent, which greatly simplifies audit preparation.
Real-time reporting
Lease accounting software provides real-time financial reports, helping ensure that the data used during audits is always accurate. This eliminates the need for auditors to wait for manual adjustments and makes it easier for them to view up-to-date reports.Detailed audit trails
Lease accounting software automatically generates audit trails, recording all changes made to lease agreements, payments, and accounting entries. This makes it easy to trace the history of each transaction and modification during the audit process. Auditors can use this information to verify each transaction, ensuring transparency and accountability.
Centralised lease data
All lease information is stored in one place, which simplifies data retrieval. This makes it easier to provide auditors with comprehensive and well-organised records, including lease agreements, amendments, and supporting documents.
Compliance with accounting standards
Lease accounting software is regularly updated to reflect changes in lease accounting regulations, which helps businesses remain compliant. It performs complex calculations related to lease liabilities, right-of-use assets, and lease modifications automatically according to IFRS 16 rules. The software also generates compliance reports that include all necessary disclosures and adjustments related to leases. This reduces the risk of non-compliance during financial reporting and audits.
In conclusion, lease accounting software has become an essential tool for organisations striving to maintain compliance and be audit ready. By automating calculations, centralising data, and providing real-time reporting, these solutions help businesses navigate the complexities of IFRS 16. Detailed audit trails and seamless access to critical lease information not only simplify audit preparation but also protect a company’s reputation by promoting transparency and accuracy. Lease accounting software like Nomos One equips your business to face audits with confidence, streamline compliance processes, and focus on strategic business growth. Book a demo with us today and see how Nomos One can transform your lease accounting!
