FASB Proposal to Account for Litigation Would Invite Litigation

The Financial Accounting Standards Board (FASB) has revived its ill-conceived proposal to require corporations to report possible financial losses from ongoing litigation. If enacted, this new standard would force companies to reveal critical information about their potential liabilities, legal strategies, and insurance coverage. While the reporting would be speculative and of minimal value to shareholders, it would still provide important information to trial lawyers — especially of the class-action ilk –and encourage more litigation against business.

FASB made its initial proposal in June 2008 but pulled back after a flood of opposition from companies, business groups and others. (Shopfloor.org’s coverage of the 2008 consideration.)

The board sought more comment, did some field testing, made some modest but still welcome adjustments, and on July 20 issued a new proposal, “Disclosure of Certain Loss Contingencies.” It’s better, but still not good. As The Wall Street Journal editorialized Thursday in “FASB’s Tort Bar Gift“:

Take the provision requiring companies to disclose their liability insurance coverage. Lawyers would be able to target their damage requests to the coverage maximum, or launch new lawsuits in the knowledge that more insurance dollars remain. This is why judges typically insist that coverage only be divulged under a secrecy order.

Another provision proposes that companies disclose the “average settlement amount” in various categories of litigation. This is another bull’s-eye for the trial bar, which will seek to meet or exceed that figure in each of its demands. It also sets a prejudicial standard for all companies in similar litigation to meet.

Oh, and don’t forget proposed disclosure of “the existence of studies in reputable scientific journals . . . that indicate potential significant hazards related to the entity’s products or operations.” So corporate America would be obliged to do the trial bar’s research.

The costs of U.S. hyperlitigiousness are already a major competitive disadvantage for companies operating in the United States. Why would anyone want to increase those costs?

On Thursday, FASB extended the comment deadline for another 30 days, setting the new deadline on September 20. (News release.) The National Association of Manufacturers is developing its comments.

As the proposal is now structured, the benefits in transparency for shareholder are minimal, the potential for expanded anti-competitive litigation is great.

And isn’t funny how two of the biggest potential boons for the U.S. trial lawyers are being considered largely out of the public eye in recondite areas of accounting standards and tax law? There’s the FASB proposal and also the attempt by the American Association for Justice to win a $1.6 billion tax break through the U.S. Treasury since the AAJ’s efforts have been thwarted in Congress.

Walter Olson at Overlawyered.com provides links to reaction here.

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