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The case of the leased problem

Ethics

Charles Selcer, CPA, MBA | February/March 2018 Footnote

The CPA firm of Lock, Stock & Barrel (LS&B) left its downtown digs to lease two floors (49,000 square feet) of a four-story building owned by its review client, Abundant Real Stability Enterprises. The client paid $8 million for the building, and it is the largest asset on its balance sheet. The lease is at $21 per square foot, which is market rate.

Q.  Can LS&B lease the space and stay independent on its review engagement?

A:  No. With the enactment of the new lease standard in February 2016, the Professional Ethics Executive Committee established a Lease Task Force whose efforts yielded an exposure draft, dated Oct. 20, 2017, with comments due Jan. 15, 2018.

A threats/safeguards approach will replace the analysis of whether the lease is operating or capital.

If the firm leases space from an attest, the threats would not be at the acceptable level unless:

The lease is entered into on market terms and established at arm's length.

All amounts are paid in accordance with the lease terms or provisions.

The lease is not material to any of the following parties to the lease:

  1. The firm
  2. An individual participating on the attest engagement team
  3. An individual able to influence the attest engagement
  4. The attest client

The lease is material to both LS&B and Abundant Real Stability Enterprises.