Best Practices for Leasing 3: Visibility and Transparency
The first two parts of this series on best practices for leasing looked at strategies to ensure proper controls are in place, including defining and documenting a leasing operation strategy and at how simplifying processes and automation can improve compliance and efficiency. The third part of this series looks at best practices for transparency in leasing operations, including extending information to the entire company so that all employees can perform their duties as accurately and efficiently as possible. In upcoming articles, parts 4-5 of the series will also address the following best practices:
Identify the parts of the organization that are material to the business controls and reporting efforts of leasing operations. Most companies have defined the structure or hierarchy of their organization and maintain a central electronic record of this in one core system (a.k.a. the system of record), such as in their ERP system (e.g. PeopleSoft, SAP or Oracle), consolidation and reporting software (e.g. Hyperion), or LDAP server. In this system, the hierarchy of business units and sub-units are mapped to demonstrate the flow of operations, and the ‘owners’ of each business unit are designated.
Whether a company’s lease automation software is proprietary or purchased from an outside vendor, it should allow the approach to internal controls for lease financial reporting to be defined around existing corporate structures. In fact, lease automation software should be easy to integrate with the core reporting platform (e.g. ERP and Hyperion), and automatically update and reconcile changes to the core system that involve reorganizations or acquisitions. If it is not imported from the core system, the lease automation software should in some other way enable the identification of individuals who are assigned ownership of divisions, processes, controls and control evaluations. The lease automation software should aid in the classification of business units considered to be key contributors to the overall assessment of business controls and reporting, and which individuals within those business units are accountable for each component of the assessment. Such classification assists in determining the required resources and skills necessary to properly evaluate underlying business controls.
When starting from scratch, it is important to collect and organize the original lease documentation for lease transactions. Technically, this documentation should go back far enough to include all assets that still have economic value (economic life). In practice, it is generally only necessary to capture transactions from the past five years. Once the documentation is collated, it should be scanned into a central repository and the minimum data elements from each document package required to meet portfolio management and internal and external reporting requirements should be scraped from the documents and inserted into the database.
Once the historical portfolio has been captured, a new process should be created that will electronically secure the remaining data in a single, centralized, up-to-date database that includes all lease transactions and related lease and asset portfolios. In order to build a clear and complete audit trail, make sure to capture all of the documents, data, events, communications, time-stamps, statuses and authority information related to each transaction. With a comprehensive portfolio, managing leasing operations and compliance becomes much simpler.
With the documents and data in one place, each group of stakeholders must have the ability to access the data necessary to make decisions and advance their work. Interviewing and surveying each stakeholder group (such as controllers, treasury, procurement, or IT) will help to identify the most important information that each group needs to use on a daily, weekly, monthly, and quarterly basis. Based on this analysis, a dashboard that updates in real-time can be built for each group, allowing them to track key performance indicators through a high-level report. From their dashboard, stakeholders can then drill down to explore and download more detailed, related data as needed, providing valuable decision-support. Giving each stakeholder group their own dashboard into a centralized, automatically updated repository at once eliminates ad hoc spreadsheets and databases and gives all of the authorized stakeholders easy access to the leasing processes, controls, and portfolios they need to do their job correctly and efficiently.
Improved visibility translates into better and faster budgeting, allocation, reporting, forecasting, profitability analysis, decision-making and business performance. These innovative practices should improve the accuracy of the budgeting process by providing projections of monthly lease payments and buyouts automatically – no spreadsheets are required. It also provides an accurate projection of anticipated lease transactions based on the pipeline of purchase orders and invoices that have not yet been attached to a lease schedule. Finally, data can be used to support key company analysis measures such as unit costs.
Executives who take a strategic view of SOX can use the compliance requirements as an opportunity to improve visibility, transparency and accountability in their leasing operations and lease accounting across the lease lifecycle and to improve business processes along the way.
Great business starts with great people. The equipment financing process should be managed by experienced leasing professionals. While many companies cannot afford to hire a dedicated leasing expert, whoever is involved in the leasing process – experienced or not – should be held accountable for their role and responsibilities in the overall process. The appropriate employees should be held accountable for negotiating lease agreements, analyzing transactions, managing any mid-term events, and managing the health of the portfolio through the end-of-term and end-of-life for every transaction.
Whether a company’s existing team is trained from the inside or hired from outside, a team that is experienced in managing leasing operations makes a significant difference in the effectiveness and efficiency of general leasing operations. Lease agreements should be managed and negotiated by trained financial executives with the appropriate expertise. Key capabilities to seek out are: a strong lease accounting background; working knowledge of how the leasing industry uses credit analysis, pricing, structuring and syndication to manage risks and make money; an understanding of how to use policy, controls and technology to manage financial processes; experience managing lessor relationships; good communications skills; and a positive, service-oriented disposition. Running an effective leasing program requires an understanding of the language, priorities, and motivations of the corporate controller, treasurer, head of procurement/global sourcing and the many stakeholders who will take advantage of the leasing programs.
Ensure that the leasing workflow and the software applications that support it are capable of providing role-based security and reporting. This will guarantee that stakeholders are only allowed access to the workflow and data that corresponds to their level of authority and role in the overall leasing process. This, in turn, establishes a consistent, organized approach to leasing operations that will help a company quickly identify issues, hold individuals accountable for their actions, and mitigate risks. Once role-based security and reporting are in place, key roles and targeted risks for each process in an organization can be established. Processes can be linked to corresponding financial statements and controls can be applied to test cases to gauge the effectiveness of financial reporting. Finally, individuals at each level in the system can be given ownership over delegated areas so that stakeholders are tied to the specific controls and processes for which they are ultimately accountable. In this manner, role-based security and reporting will help companies respond to SOX quickly and efficiently with the benefit of improved productivity across the enterprise through role-based interaction and integrated collaboration