Following a spate of accounting scandals in the early 2000s – most notably Enron – the Sarbanes-Oxley Act was passed by Congress in 2002, resulting in the creation of the Public Company Accounting Oversight Board. This led to an increased auditor focus on internal controls, particularly the accuracy of companies’ financial statements and fixed asset management processes.
So what does this mean for your company? Simply put, auditors may be looking to review your business’ property records to locate and inspect fixed assets, then determine the fair value. Rather than using book or tax depreciation, valuation specialists will use their professional valuation experience to determine fair value based on a physical observation of a newly acquired asset.
Fixed assets that cannot be located despite being on the books are known as ghost assets. These can sometimes comprise as much as 15 percent of a company’s total property, plant and equipment, and can lead to your organization appearing older on paper than it really is. Additionally, you may be paying inflated insurance and property taxes on assets that have been lost, stolen, retired or otherwise taken out of use.
Assets can most easily turn into ghosts as a result of unrecorded equipment trade-ins, factory rearrangement, taking parts from one machine to repair others and remodeling or expanding buildings owned by the company without acknowledging partial losses of old structures.
Conversely, assets that are owned by the company and presently in use without being recorded on the books may be referred to as zombie assets. This is due to the fact that they are physically present without having their existence, value or life span included in the company’s records.
Self-constructed assets and fully depreciated assets that have been written off but are still in use are common examples of zombie assets.
Due to the fact that having fixed assets as an area of expertise is not conducive to professional growth, it’s rare to find a company’s high-potential accountant handling them. Additionally, many companies believe that any mistakes made in the fixed asset accounting process will be self-correcting, and undepreciated costs will ultimately be written down to zero.
However, Generally Accepted Accounting Principles require the write-down of unreconciled ghost assets that are unlikely to be offset by a write-up of zombie assets. Inventory tracking software can help companies keep better tabs on their fixed assets, hopefully exorcising ghosts and zombies from the books.