July 2001

Lease Compliance Review: Is Your Firm at Risk?

Is Your Firm at Risk?

It has been estimated that more than 500,000 commercial real estate tenants overpay their rent every year. Have you considered the impact these errors can have on your clients’ balance sheets? The compounding effect of years of rent overpayment can wreak havoc on the accuracy of audited statements and can lead to serious understatement in profitability, assets, and business valuations.

Protecting Your Firm

You can protect your firm while offering your clients a valuable service. The same activity can become both a significant source of fee-based revenue and protection against your firm’s potential exposure to liability damage costs resulting from preparation of inaccurate financial reports and/or failure to detect fraud. This practice opportunity comes from an unlikely segment of your clients’ financial structure—commercial real estate leasing expenses—and is known as lease compliance review.

What Is Lease Compliance Review?

In the first two installments of this three-part series, we introduced readers to this emerging client service. Lease compliance review is a straightforward structured advisory service that allows the accounting professional to analyze the lease-defined financial obligations of commercial real estate leases and compare them against actual rental invoices and payments. When discrepancies are discovered, reconciliation is made reflecting actual obligations due under the lease.

Why Do Discrepancies Occur?

Since almost every lease is unique, lease-related invoices should be custom calculated for each tenant. Unfortunately this isn’t always the case. Every time a building is sold or takes on new property managers, inherited billing systems and personnel are often replaced or reformatted with new databases. Given this environment, it is not unusual for even the most honest and diligent landlord to commit billing errors.

Why Aren’t Discrepancies Detected?

In our experience, most tenants (including many large corporations) have a limited (if not nonexistent) ability to determine the accuracy of their rental invoices. This is because many invoices are computed in accordance with complex formulas, the details of which are buried in lease documents, often tied to CPI indices, and/or related to landlord-controlled expenditures. In addition, as noted above, many landlords inherit lease databases containing historic errors.

What Is the Accounting Professional’s Obligation?

As more landlords and tenants become aware of the magnitude of the problem, demands are being made upon the accounting profession to provide a greater oversight role in this area. Failure to do so can make many accounting firms vulnerable to damage claims resulting from their failure to perform more diligent reviews of landlord billings and/or tenant remittances for rental occupancy costs.

Can Accounting Firms Be Held Liable?

As noted in the above sidebar, in a growing number of cases, accounting firms, especially those representing landlords, are at risk from failing to uncover instances where their clients have inappropriately computed and billed tenants for amounts in excess of those mandated by the terms of their leases or, worse, deliberately overstated expenses in a fraudulent manner. Liability for damages resulting from errors and omissions in landlord billing practices and tenant reliance upon the accuracy of those billings is becoming a serious issue.

What Can You Do to Protect Yourself?

In addition to adequate liability insurance coverage, having the skills to offer clients lease compliance review services would be a source of additional revenue while at the same time delivering the type of oversight protection necessary to prevent invoicing discrepancies.

Performing a lease compliance review is a straightforward task, especially after you have reviewed The LeaseCheck® System: The New Profit Center for the Full-Service Accounting Firm, now available from the NYSSCPA.

In Conclusion

We began this series of articles by noting that CPAs everywhere are seeking to expand their practices. We have attempted to demonstrate that the most fundamental practice expansion is into lease compliance review, for both offensive and defensive reasons. CPAs who are not offering lease compliance review services to their clients are at risk and are failing to leverage existing client relationships completely.

For more information on lease compliance review, visit www.leasecheck.com or call (908) 233-5982.