Another Regulator Weighs In On CRE

The Public Company Accounting Oversight Board, or PCAOB, doesn’t tend to come into direct contact with most companies. Instead, since the Sarbanes-Oxley Act of 2002, its remit has been to monitor accounting firms that perform audits on public companies.

However, there can be indirect influences. PCAOB sets standards for auditors, which then require public companies to comply. Those end companies have to comply in financial statements and also internal controls, which can affect how the companies interact with vendors, business partners, and customers.

A new report from PCAOB — Spotlight: Auditing Considerations Related to Commercial Real Estate — touches on multiple aspects of how public companies handle CRE properties. All are guidance for auditors when they review financial statements of client companies.

One that might sound surprising is fraud, which is now part of the mix of what auditors will look for.

The PCAOB’s concern is not that everyone associated with CRE is potentially a crook, but that economic pressures could convince people in companies to indulge in bad behaviors to get through a bad stretch.

“For example, the management of a public company may be motivated to use unrealistic assumptions regarding collateral values, lease renewals, potential new tenants, the ability to refinance a loan, and/or required leasehold improvements necessary to attract or retain tenants,” they wrote.

“The engagement team may consider procedures to obtain and inspect appraisals of collateral and to make direct inquiries, in addition to written confirmation, with major lessees to corroborate assumptions being used by the public company,” the document continued. “Communication among engagement team members about significant matters such as those affecting the risks of material misstatement involving CRE, whether due to error or fraud, should continue throughout the audit, including when conditions change. These factors highlight the importance of exercising professional skepticism when reviewing assumptions.”

But for most companies, commercial real estate isn’t totally contained within the audited company. They might own, but they likely also lease. In that case, there are representations by the property owner that the audited company might rely on. But what if the auditors are pushing back on the claims initially made by the property owner? The public company that is a client of the property owner will in turn want substantiation for everything.

It likely will mean additional work for the landlord, not just in record-keeping and documentation, but broader strategic planning and deal-making.