By: Joe Fitzgerald, Senior Vice President of Lease Market Strategy
Spreadsheet applications are easily the most important and universal accounting tools used today—so much so that you’d never guess the first version was actually developed as a school project.
As the story goes, in 1978, computer programmer Dan Bricklin was pursuing an MBA at Harvard Business School. His finance class was tasked with an assignment to make financial projections for a hypothetical corporate merger using ledger sheets, the painstaking way that accountants manually tallied numbers in the bygone analog era.
Bricklin, apparently intent on getting an A while also eluding the heavy workload, developed a spreadsheet on a personal computer to electronically process the calculations. The idea was completely novel and would prove to be revolutionary. In less than a decade, spreadsheet programs like Lotus 1-2-3 and Microsoft Excel were dominating the market. Nearly 40 years later, not much has changed. Excel and (now) Google Spreadsheets are still widely used applications in accounting – a fact that astounded Bricklin himself. “It’s like whoa, we haven’t thought of something better yet,” he said in a 2015 interview with Quartz.
It is surprising that Excel continues to be the prevailing accounting practice because it is limited in addressing today’s sophisticated accounting practices and standards, and for that reason, it has become notoriously error-prone.
Here are some of the ways that spreadsheets are falling short for businesses.
Managing Stakeholders and Line Items
Accounting requires managing a lot of moving parts. Many businesses have several – and sometimes, even hundreds of assets and multiple stakeholders (Real Estate, Finance, Legal and HR, among others), which each translate into different line items on a balance sheet.
When it comes to spreadsheets, this ever-growing list of assets and stakeholders is a hotbed for errors. Research has repeatedly shown that 90% of spreadsheets contain errors and 50% of spreadsheet systems have “material defects.” Not only can these errors be destructive to business fundamentals and operations, but poor accounting practices can lead to failed audits, internal control deficiencies, fines, blown debt covenants and reduced credit ratings.
Some companies have been transitioning to sophisticated and targeted software programs to help mitigate errors in bookkeeping, while also giving financial professionals time to perform higher-level tasks. In lease accounting, for example, specialized software is designed to address the critical and often nuanced needs of managing real estate leases, creating space for collaboration across different departments and stakeholders. These types of systems can track lease details both at the property level and throughout a portfolio, resulting in accurate financial reporting, efficient auditing and also, guaranteeing that critical deadlines are met.
This has become a common trend throughout the business sector. There is a widespread exodus to more targeted accounting solutions. Mark Garrett, the former CFO at Adobe Inc., summed up the problem with spreadsheet applications back in 2017 when he told the Wall Street Journal, “I don’t want financial planning people spending their time importing, exporting and manipulating data, I want them to focus on what the data is telling us.” Adobe transitioned away from Excel last year.
New lease accounting standards are also minimizing the effectiveness of spreadsheet applications like Excel. The Financial Accounting Standards Board (FASB) issued accounting guideline ASC 840 in 1976, two years before Bricklin first dreamed of a spreadsheet. ASC 840 has been the practicing standard until 2019, when FASB’s ASC 842 went into effect for public companies, requiring these enterprises to record leased assets on the balance sheet. And this year, the ASC 842 standard goes into effect for all private companies, as well. These regulations are a shake-up to the standard accounting practice, requiring more sophisticated financial calculations and involved accounting practices—and spreadsheets just aren’t designed for this level of complexity.
The business community at large is recognizing the limitations of spreadsheet applications as a result, and many companies—Levi’s, P.F. Chang’s and Coca-Cola, to name a few—are transitioning to tailored accounting solutions that better address modern practices. “Excel just wasn’t designed to do some of the heavy lifting that companies need to do in finance,” said Paul Hammerman, a business applications analyst at Forrester Research Inc., in an interview with the Wall Street Journal.
The pandemic has also ushered in changes in business strategy that is leading to the need for more sophisticated technology. Real estate has been central to these changes because for many businesses, real estate costs became a major liability during the pandemic. In the Commercial Real Estate in 2022: Outlook for an Industry in Recovery survey from Visual Lease, 100% of real estate professionals reported their tenants had requested changes to a commercial property lease in response to the pandemic, and in a separate survey conducted by Deloitte, 67% of respondents said they are executing a real estate rationalization program to either reduce, rightsize, expand or reduce ownership responsibilities. Under new lease accounting standard ASC 842, accountants are required to record these modifications.
Bricklin was right; it is time to find something better. As accounting standards and business practices evolve, business organizations need to upgrade their technology, as well—and the toolkit should include a dedicated accounting software program that is designed to accommodate accounting complexities and modifications while empowering companies to maintain compliance with the new accounting standards.
That is certainly true when it comes to proper lease management and accounting. We are seeing more and more organizations recognize the need for dedicated technology solutions to not only achieve, but maintain compliance with new standards and regulations. These solutions are bringing the industry into a new age, and it’s about time.