How do Auditors Perceive Recognized vs. Disclosed Lease and Pension Obligations? Evidence from Fees and Going-Concern Opinions

• Published in: International journal of auditing Vol. 15; no. 2; pp. 127 - 149
• Main Authors: Krishnan, Gopal V., Sengupta, Partha
• Format: Journal Article
• Language: English
• Published: Oxford, UK Blackwell Publishing Ltd 01.07.2011
• Subjects: Accounting; Audit fees; Auditing; Auditors; Balance sheets; Capital leases; Disclosure; Financial research; financial risk; Going concern; Going concern assumption; Leasing; Obligation; Operating leases; Pensions; Studies
• ISSN: 1090-6738; 1099-1123
• DOI: 10.1111/j.1099-1123.2010.00426.x

We examine the auditor perception of recognized vs. disclosed obligations as they relate to two key decisions auditors make: determining audit fees and whether to issue a going‐concern opinion. We study two pairs of obligations – capital leases and operating leases and on‐balance sheet and off‐balance sheet pension obligations. We find that operating leases are positively and significantly associated with audit fees but not capital leases. We also find that on‐balance sheet and off‐balance sheet pension obligations have a similar association with audit fees. For going‐concern decisions, auditors regard off‐balance leases as real liabilities. However, pension obligations (both on‐ and off‐balance sheet) are not associated with going‐concern decisions. Overall, the findings shed light on how auditors regard recognized vs. disclosed obligations in their decisions that are communicated to capital market participants.