If Leases are not Capitalized: The Effects of a Qualified Audit Opinion on Investors’ Judgments and Decisions

Abstract

FASB’s new leases standard ASC 842 requires most leases to capitalize on a balance sheet. If some leases are misclassified and not capitalized, the auditor will issue a qualified audit opinion on financial statements. This study conducts an experiment with 68 MBA students to examine the informative value of a qualified opinion due to lease misclassification. The results reveal that this qualified opinion significantly decreases investors’ willingness to invest in the client. Also, when the qualified opinion is issued, as compared to an unqualified opinion, investors perceive information related to company growth and return on common stock less important.