FASB Follies: Encouraging Litigation through Financial Reports

By September 20, 2010Briefly Legal, Regulations

The National Association of Manufacturers has submitted its official comments to the Financial Accounting Standards Board (FASB) on the board’s latest proposal to require publicly trade companies to report the potential costs of litigation, the Exposure Draft, Topic 450, “Disclosure of Certain Loss Contingencies.”

This is FASB’s second attempt to improve transparency in reporting of these liabilities, but the board runs afoul of the same problems that stopped the previous proposal (FAS 5) in 2008: In requiring the disclosure of litigation-related expenses and activities, the board would provide strategic information to parties suing the companies as well as violate lawyer-client confidentiality.

From the NAM’ s letter:

Manufacturers support FASB’s efforts to improve financial reporting. In August 2008, the NAM submitted comments expressing our concerns with the June 5, 2008, exposure draft of a proposed Statement of Financial Accounting Standards, Disclosure of Certain Loss Contingencies. While we appreciate that some of these concerns have been addressed in the current Exposure Draft, NAM members continue to believe that the proposed changes to rules on disclosing loss contingencies, if finalized, would have a negative impact on companies and would not improve the quality of financial reporting.

Consequently, NAM urges the FASB not to proceed with its proposed disclosure standard relating to loss contingencies. We are concerned that the proposed standard would lead to misleading and less useful information for investors, threaten the attorney-client privilege and the attorney work product doctrine and unnecessarily expose companies to additional litigation risk. The current ASC 450 and ASC 274 disclosure requirements work well and manufacturers generally do not see the urgency to change them.

Also submitting critical comments was the Association of Corporate Counsel, which today added 40 signatures to its Aug. 18 comment letter.  Law.com has a good overview of the issues, “FASB Proposes Increased Loss Contingency Disclosure Rule.

And The Wall Street Journal has previously identified the flaws in the proposal as outlined in its Aug. 18 editorial, “FASB’s Tort Bar Gift.” Excerpt:

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.

Disclosure about concrete liabilities is helpful to investors, but the new FASB rules would force companies to divulge snapshot details of ongoing litigation that put investors at greater risk of loss.

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