Audit Rights: The Gateway to Compliance
Posted by Jarrod M. Patten, President/CEO
This is the first installment of The Art of the Audit Clause™ series which is a four part series dedicated to audit rights. This installment will explore the overall importance of such rights as well as some of the challenges inherent to ensuring portfolio audit rights are optimized. This entire series will also be compiled by RRG into its WhitepaperSeries™.
Lease auditing has never been more relevant with continued, accelerated global adoption of the platform as a mechanism through which to truly enhance portfolio compliance.
With heightened governance demands and cost control objectives, corporations and governments are looking for means through which material, dynamic real estate portfolios can be turned into strategic assets. While lease audit programs provide that solution, it is the audit clauses themselves which make or break the opportunity and success level of such initiatives.
The baseline determinate for gaining access to files and records is driven by the audit clause language within the respective leases. As such, it is critical that the framework dictating the performance of an audit is designed appropriately at the time the leases are structured and/or restructured so that all cost containment objectives are achieved. Otherwise, the most well intentioned programs will be limited, fragmented and negatively impacted.
A less than optimal audit right can prove difficult when taken in isolation. The impact though is contained and there may be workarounds that can minimize the damage in the isolated instance. Although, when audit right limitations and breakdowns are normal trends across a portfolio, restrictions on audit performance, access and timing will severely hamper audit campaign productivity as large tranches of the portfolio will be impacted by the limitations. These effects cannot be contained and will invariably result in material monetary loss.
There will always be challenges associated with audit right optimization. The primary, high level challenge is that most organizations grow both organically and through acquisition. For the former segment, the application of controls and audit right standards is possible and is predicated upon standards development, training and adoption. For the latter, immediate change is not possible as the lease pools are inherited. However, for this segment, while there are some point-of-acquisition techniques, the most critical enhancement measure is through the transaction cycle. During such cycles, legacy weaknesses should be addressed and clauses re-calibrated to strengthen overall framework.
- The audit right is one of the most powerful tools to leverage when driving compliance and cost containment policies. However, if structured incorrectly, will become the greatest limitation in attaining such governance goals.
- Every occasion must be taken to strengthen audit rights portfolio-wide. The basis for this process must be grounded in a deep understanding of the current audit rights present within the existing portfolio.
- Poorly constructed audit rights can be the source of material resource investment, opportunity loss and most importantly economic loss.