Matt Fahy remembers a vivid case study from business school, a scandal involving a man who had convinced savvy Wall Street investors that he owned a portfolio of buildings under construction in New York City. Somehow, the con man finagled a way to get onto the construction sites and show people around as if they were his buildings. Appearances were deceiving: The man owned nothing but people thought he was worth millions.

Today, says Fahy, the scandal is quite the opposite: Many companies own genuine title to office buildings. But, again, appearances are deceiving: Executives think the buildings are worth millions but they aren’t. In many cases, he argues, the buildings are impaired from an accounting perspective, and their values should be written down.

As Chief Financial Officer of AgilQuest Corporation, Fahy has spent his career presenting financial data and studying accounting issues, and he’s amazed that more attention isn’t paid to real estate utilization. After payroll, real estate is the largest cost component of most service companies. Large corporations have hundreds of millions of dollars in assets tied up in real estate. Remarkably, very few make an effort to maximize the return on those assets.

If CFOs, accountants and financial analysts monitored the utilization of office buildings with the same keen eye with which they track the utilization of manufacturing plant capacity, they would be shocked, Fahy argues. As the relationship between workers and the workplace continues to evolve, an increasing number of service employees are conducting business outside the office – leaving their desks empty. AgilQuest has found repeatedly that office buildings occupied by service-sector companies are less than 50 percent occupied.

“If corporate America has these facilities, and the market tracks return on assets, what’s your return on a bunch of empty or underutilized facilities?” Fahy asks rhetorically. “Nobody’s isolating this huge asset and cost center. Nobody really understands this fundamental financial item.”

The disinclination to run Return on Asset analyses of commercial real estate soon may change, however. Fahy expects two forces to drive a reappraisal of the way corporate buildings are accounted for.

First, is force of example. Once a market leader in one industry figures out how to save millions of dollars by managing its real estate assets more effectively, its competitors will have little choice but do the same, Fahy suggests. For example, HP CEO Mark Hurd has vowed to slash $1 billion from the company’s cost structure. One area he’s focusing on is the excess capacity in the company’s real estate holdings. HP has taken hundreds of millions of dollars in write-offs in recognition that it has way more office space than it needs. As the financial analysts get wind of what HP is doing, Fahy argues, they’ll start wondering why its competitors aren’t doing the same thing. Why isn’t EDS, for example, rationalizing its real estate portfolio?

“The analysts don’t have that metric right now, Fahy says. “But once they start demanding it, corporate management will have no choice but to get it.”

The second driver is the Sarbanes Oxley Act of 2002, which brought a new level of accountability to corporate America. The greatest overhaul in corporate governance law and regulations since the 1930s, SarBox did more than crack down on executive conflicts of interest, passive boards of directors and derelict outside auditors. It imposed tough new standards for internal financial controls. The purpose wasn’t just to catch fraud but to create transparency and restore investor confidence after the mega-scandals of the early 2000s.

The Financial Accounting Standards Board laid the groundwork for rethinking real estate utilization when it issued Statement 121. That ruling requires long-lived assets to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Few corporate offices are fully impaired, notes Fahy, but what if a long-term asset such as an office building is being utilized at only 50 percent and there is no prospect of that number getting any higher? Maybe the asset is not fully impaired, in the sense that it needs to be completely written off the books, but a proper accounting should have a way to show a loss in value.

Corporate managers are partial to taking one-time “restructuring charges,” Fahy says, instead of charging lost value against earnings. That’s what HP did – it wrote off hundreds of millions of dollars all at once. In reality, though, companies don’t lose the value all in one quarter. Value erodes over time. Companies should track utilization, he says, and amortize significant losses loss in their profit-and-loss statement over the lifetime of the asset.

“Companies are not likely going to want to do this,” Fahy acknowledges. “They have been getting away with ignoring the problem for so long.” But the logic of accounting suggests that they should. “It is a basic principle called the ‘matching principle.’ You match the expense to the period that you are achieving the benefit. So, if you say an asset is going to last for a period of time, and you’re going to get this much benefit out of it, you amortize it over that same period.” Likewise, if a building has lost value, that lost value should be amortized over the remaining life of the asset.

The practical objection to accounting for real estate this way is that it is very difficult to measure office utilization. No one has developed an inexpensive technique or a commonly accepted methodology for doing it. That’s something that AgilQuest is working on.

“We’re figuring out how to make it easy for people to stick technology in an office. That’s what we’re investigating with our Actual Use lab: What is the actual human presence in the office?”

The idea is to find an automated way to collect data unobtrusively – no time cards, please – such as tracking telephone usage, PC usage and whether the lights are off or on. AgilQuest is even exploring the possibility of installing a discrete motion detector – if there’s no motion over extended periods, presumably no one is using the office.

Once the practical problems are solved, Fahy expects accountants and financial analysts to perk up and pay closer attention – especially if FASB or the Securities Exchange Commission gives a little push. “How long can companies ignore the fact that their real estate assets are being only 50-percent utilized?” he asks. “There’s just too much money being wasted.”