Sarbanes-Oxley Changes Way Lease Data is Reported
By: Scott Tibbo, CRE Managing Director, EMS Printed in: Development Magazine
Corporations today face a range of risks in managing their real estate leases, warns a report from Expense Management Solutions (EMS), headquartered in Southborough, Massachusetts. According to Scott S. Tibbo, CFM, the author of the report and managing director of the EMS Real Estate Services Practice, as a result of Sarbanes-Oxley and recent compliance measures, real estate executives are changing their standard modes of operation because inaccurate lease data and its mishandling can result not only in missed payments, but also questionable financial reporting information, operational disruptions and even regulatory penalties.
“Real estate is often one of a company’s top three expenses, and is very visible with the C-suite and the board, given its presence in the financial statements,” said Tibbo. “Lease administration is the function responsible for ensuring the accuracy of that information as well as providing the business leaders foundational information to make key strategic decisions relative to a company’s growth and locations.”
Tibbo said that there are key sections of Sarbanes-Oxley that are relevant to the lease administration function. Section 302, for example, is a quarterly requirement that the officers of the company have reviewed the quarterly financials and that they are basically attesting that the information does not contain misleading information or material omissions.
“They also need to identify any significant deficiencies or weaknesses with their internal controls,” said Tibbo. “When you think of the weight and importance of that, if a corporation is not tracking its data correctly, if the real estate team or organization is not representing accurately those corporate occupancy costs, which will result in misleading or inaccurate information on those quarterly financials.”
Another section, Section 404, is a requirement that the company needs to perform an annual assessment of the effectiveness of those internal controls. “Given the magnitude and importance of reporting the expenses appropriately,” explained Tibbo, “all of these Sarbanes-Oxley requirements weigh heavily.”
The EMSInsight report details four major trends that lease administrators are facing; identifying best practices to address each:
- Increasing technology. Many lease administration tasks are repetitive and data-driven, and are therefore prime candidates for automation. Lease data is critical for many parts of the organization and requires a high level of integration. What should be automated, how and with what solution are critical issues for lease administrators?
- Increasing emphasis on accountability. The current regulatory environment has brought about a need for improved business processes, tighter controls, and more accurate, real-time reporting of corporate real estate liabilities.
- Increasing levels of outsourcing. As real estate and lease administration are typically not defined as “core” by many organizations, corporations are pressured to consider outsourcing this function. There are many issues to consider to ensure this function is outsourced effectively.
- Increasing emphasis on cost management. Given the pressures on real estate executives to cut costs, management of real estate is a prime area to minimize expenses. Effective delivery of lease administration services, focus on desktop and full-scale audits, as well as expansion of the function to include tax administration, are all opportunities to achieve cost reductions.
