Finding Text
Finding 2024-002
Significant deficiency in internal controls over financial reporting in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).
Criteria
Internal controls over financial reporting should ensure that leases are identified, evaluated, and recorded in accordance with U.S. GAAP, including the recognition of right-of-use assets and lease liabilities, and appropriate classification and disclosure under ASC 842.
Condition/Context
For the year ended December 31, 2024, the modifications of two leases were incorrectly recorded as if the modifications were present at inception of the leases rather than as of the date of the modification, and one new lease was not recorded as required by ASC 842.
Effect/Potential Effect
As a result, an adjustment of $41,184 was needed to lease expense, a $40,690 adjustment was needed for lease liabilities, and a $494 adjustment was needed for the right-of-use asset to properly state the financial statements in accordance with US. GAAP.
Cause
The lease modifications were recorded incorrectly due to a misunderstanding of how the lease accounting software distinguishes between lease edits and lease modifications. Amendments resulting in term extensions are considered triggering events and are recorded as modifications effective on the amendment date. Instead, the original lease terms were edited directly, which prompted the lease accounting software to produce improper calculations.
Additionally, a new lease signed during the audit year was initially treated as a short-term lease and not capitalized under ASC 842 based on the expectation that it would be canceled partway through its term. However, no formal amendment was executed to document the early termination. As a result, a right-of-use asset and lease liability were not recorded as required by ASC 842.
Repeat Finding
No
Recommendation
We recommend that PDA implement necessary internal controls and review to ensure that lease modifications and new leases are properly recorded in accordance with ASC 842 when executed.
Views of Responsible Officials
Management agrees with the finding and has provided the corrective action plan following the Single Audit Report.