Are Off-Balance Sheet Obligations Associated with Audit Fees?

The role of off-balance sheet liabilities and auditors' failure in uncovering them has received much attention in the wake of the recent accounting scandals. This study examines the association between audit fees and two types of off-balance sheet obligations - operating leases and pensions obligations. We find that both pensions and lease obligations are associated with audit fees. We interpret these results as evidence that unrecognized pension and lease obligations represent inherent risk and could potentially increase the risk of misstated financial statements and thus, call for increased attention and effort on the part of the auditor and therefore, audit fees are higher.