Whether this is the first time your real estate entity has needed a financial statement audit or review, or you have recently changed accounting firms after a long relationship, the thought of working through the audit or review process can create some stress, for sure.
There are, however, certain keys to success we’ve learned over decades of working with clients in the real estate industry. The quality of communication, documentation of financial information and internal controls, and the process for future planning are all critical to producing quality, timely financial statements — and minimizing your stress throughout the process.
First and foremost, you and your accounting firm must have effective, ongoing communication from start to finish of the engagement, and throughout the year. Include your tax team on these calls, when possible, to reduce duplicative information requests for your team as a whole.
There are a variety of updates to have on your radar that will help:
Set a quarterly conference call to update your team of recent transactions or overall activity of your business. This can include recent or future tenant activity, including any significant or unusual lease terms such as tenant improvements or free rent periods. In addition, be sure to discuss any large capital projects scheduled to begin or recently started. The key is to include as much detailed information about the fund or the property upfront so there are no surprises when financial statements are released.
At least yearly, set up a meeting with the assurance partner on your account. It’s helpful if you can have at least a few key members of your executive management team on the call as well, such as the CEO, CFO or CIO (chief investment officer) to discuss your company’s performance and any issues that may have arisen since your last meeting. Topics should remain high level, with the discussion focusing on the performance of the real estate investments, including projected acquisitions or exit strategies for the next year or so.
In addition, have your accounting/financial reporting team talk with your asset management team on a regular basis. This should occur monthly, preferably, but at the least quarterly — or at the very minimum prior to the start of the upcoming audit or review compliance period. This helps ensure your accountants understand and take note of any new transactions. Documents alone do not always tell the entire story of how your accountants should record a specific real estate transaction. Walking through the transaction and getting an idea of what is happening at a particular property will help your assurance team better understand the transaction or activity to ensure the related accounting is handled appropriately. Lack of communication can cause errors in your accounting books and records.
When the audit or review work has begun, it’s important to establish a more frequent cadence of communication, which could mean weekly or more as the deadlines approach. The key is to keep everyone accountable and moving toward the compliance goal. Ensuring your audit firm understands tenant transactions or property operations early in the process will facilitate the timely completion of their work.
Gathering all of your financial information, workpapers, documentation and internal control processes up front, or as transactions occur in real time, is key to a stress-free and successful interaction with your accounting firm.
Accumulate in one place all your company’s most recent documents, such as:
This list is representative, not exhaustive, of the types of documents your accounting service team will accumulate to ease the preparation of the upcoming year’s financial statements and tax returns.
At least quarterly, prepare a trial balance close similar to how you would at year-end. Record all of the adjustments for that quarter, such as accruals, depreciation and amortization. This should include researching the proper treatment of any major transaction during that quarter to ensure you record it properly in the period in which it occurs. Potential adjustments to consider:
Develop a template for schedules, or workpapers, you can follow during each of the ensuing closes, allowing you to quickly send to your accounting firm at year-end. Prepare these analyses for each of the large account balances on your trial balance. Include items such as:
Review the property operating statements from your property manager(s) to ensure you understand what is running through operations and that all major or unique transactions are recorded properly. If a transaction has occurred during the quarter, make sure the property manager is aware so it is properly reflected on the operating statement.
During summer or early fall each year, double check that you’ve documented your internal controls for all transactions, including:
Update the internal control documentation for any changes in controls, systems or control operators as the year progresses. Highlight those changes for your auditors around October or November of the audit year, when they generally are in the planning phase or conducting interim testing.
Planning for next year starts immediately upon release of the previous year’s financial statement reports, generally in the summer of the current year. Below are a few ways to get ahead:
Meet with your assurance and tax team soon after your statements and returns are released to debrief on the past year. Use this time to also create/provide a list of items for both your team and your accounting firm to improve on in the upcoming year. Be proactive; follow up on the suggestions and take action to update the process for next year.
This is a great time to understand any adjustments that were recorded and how to help ensure any potential recurring adjustments are reflected in your process for closing the books and records. Gain an understanding of any added disclosures to the financial statements and how they were originated. Overall, understand the positions the accounting firm has made, whether related to straight line rent or capitalizing interest or anything else, and develop a strategy to identify these items in the future.
If there are any internal control issues, create a game plan to address and alleviate them. This includes addressing any issues identified with property manager’s accounting team and how this will be resolved in the future.
Ensure the deadlines for release of the audit, review or investor reporting have not changed from last year. Remind the team (accounting/asset management/investor relations/accounting firm) of the latest dates.
This might be a longer-term objective of your company but aim to hire employees who have some level of public accounting experience, specifically with real estate companies. Industry experience will facilitate similar thought processes between your employees and your accounting firm, driving the preparation of accurate workpapers and documents/information.
For businesses still building out their internal accounting team, it could be beneficial to consider hiring an outside accounting firm to help your team prepare. The outsourced provider should have experience working with clients in the real estate industry and be able to offer your team suggestions for improving the overall audit experience.
Overall, while an audit or review might not be a day at the beach — in fact, some have compared it to a trip to the dentist — a little strategy, planning and of course finding the right assurance firm can make the process at least more comparable to a regular day at the office.
Contact Nick Antonopoulos or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.