The Financial Accounting Standards Board (FASB) has again called a halt to its plans to require corporations to disclose “certain loss contingencies” on its book, a proposal that would have increased speculative litigation against companies without adding any information of real value to investors.

A summary of the board’s Oct. 27 meeting reports:

The July 2010 Exposure Draft, Contingencies (Topic 450): Disclosure of Certain Loss Contingencies, had proposed that public entities would begin providing enhanced disclosures in financial statements for fiscal years ending after December 15, 2010. The Board decided that a final standard will not be effective for the 2010 calendar year-end reporting period. It will decide on an effective date at a future meeting, after it has substantially concluded its redeliberations.

This is the second time that an outpouring of commentary (350+ comment letters!) and criticism from companies, the legal profession and investors has forced FASB to re-evaluate its plan. As the comment letter from the National Association of Manufacturers stated:

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 interest of investors are not served by forcing companies to reveal their legal strategies or to introduce misleading, speculative and quite likely wrong information into their corporate disclosures. The only interests served are those of the trial lawyers and activists — environmental groups, Big Labor, and left-leaning “social investors” — who are more concerned with achieving their policy goals through litigation and PR pressure than in the success of the company and stockholders.

Or, as The Wall Street Journal summarized it,  “FASB’s Tort Bar Gift.”

Earlier posts. Hat tip: Cal Biz Lit, via Overlawyered.com

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: (continue reading…)

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.

From the Financial Accounting Standards Board:

Summary of Decisions Reached – FASB Board Meeting 9-24-08

The Board decided on a plan for redeliberations of its Exposure Draft, Disclosure of Certain Loss Contingencies. The Board directed the staff to prepare an alternative model that attempts to address the concerns that certain constituents raised about the Exposure Draft. This alternative model will be field tested along with the model in the Exposure Draft. The staff expects that field testing will take place during November and December 2008, and roundtable meetings will occur in either early January or March 2009. Board redeliberations are expected to begin in late March or April 2009. The Board also decided that any final Statement on this topic will be effective no sooner than for fiscal years ending after December 15, 2009. 

FASB had proposed expanded the reporting of contingent liabilities, drawing extensive opposition from the business community. Corporations, attorneys and trade associations like the NAM protested the possibility that publically traded corporations would have to detail the potential costs of litigation, arguing that  the information could benefit trial lawyers suing the companies, violate attorney-client privilege and in the end would be so speculative as to not serve investors.

The 239 comments submitted to FASB were overwhelmingly negative, with only organized labor and “socially conscious” investors expressing support. The NAM comment letter is available here, in which the association calls on FASB to delay implementation of the new reporting standard and instead work through the issues one more time.

FASB has other issues before it that are more pressing. Since that letter, the financial crisis has exploded, raising the stakes for corporate reporting and audits. This is certainly not the time to be imposing new and potentially damaging reporting requirements.

Apparently the FASB agrees, hence the board’s decision Wednesday. A good decision.

• Earlier posts on the issue can be read here. 
• CFO Magazine has a good piece on FASB’s announcement here, “FASB Delays Lawsuit Disclosures.”
• The American Bar Association last week sent a letter reiterating its call for a delay.
• The U.S. Chamber of Commerce issued a news release applauding FASB’s decision. 

The Financial Standards and Accounting Board has continued to post comments submitted to its proposal, “Disclosure of Certain Loss Contingencies–an amendment of FASB Statements No. 5 and 141(R),” after the August 8 comment deadline. That’s not unusual among regulatory agencies; the comments are still relevant and worth noting, even if they aren’t included in an official record. And the proposal is a significant one that could produce a wave of misleading financial reports and class-action securities lawsuits.

The Business Law Section, Committee on Securities Registration, New York State Bar Association, submitted a letter dated August 15 that nicely captures major problems with the proposals. We appreciate the argument that the proposal would, in fact, reduce transparency.

In our view, the substantial changes proposed to be made regarding financial statement disclosures of certain loss contingencies pursuant to the Exposure Draft would risk significantly misleading users of financial statements. In addition, the disclosures that would be required pursuant to the proposed amendments, and the audit procedures associated with those disclosures, could jeopardize the attorney-client privilege and be deemed to constitute admissions against interest. Further, the disclosure of highly sensitive, proprietary, competitive information could result in substantial harm to companies and their shareholders, and also could impose significant cost burdens on companies.

Were there a showing of compelling need for these changes, we could balance such need against the economic and competitive harm that could arise as a result of these changes, including the possible compromise of the attorney-client privilege. The Exposure Draft does not, however, make any showing of a compelling need for the proposed disclosures. That certain financial statement users may have indicated they would prefer a “highly uncertain estimate supplemented with a qualitative description [rather] than no quantification” provides scant comfort to a company and its representatives, auditors and attorneys, who would be required to prepare, certify, audit and opine on the highly uncertain estimates. The enhanced visibility of such highly uncertain estimates, and the potential for investors and others to rely on such information, increase substantially the risk that plaintiffs will claim that these required disclosures themselves provide a basis for claims against the companies and their representatives if contingencies ultimately turn out to differ from the estimates, as most surely they will do in many cases.

Other commenters, notably the Washington Legal Foundation, have questioned the impetus for FASB’s proposal as well. Given the very small number of supporters for the proposal, we’d say it’s a valid area of inquiry.

The Wall Street Journal’s editorial page demolished arguments for the proposal last week in an August 7 editorial, “FASB’s Lawyer Bonanza.” FASB’s chairman, Robert Herz, responded with a letter to the editor on August 18, “FASB Seeks to Inform Investors, Not to Whack Companies.” Herz asserts:

It is because of the strong and extensive input we’ve received from investors who want greater transparency relating to a wide range of contingencies — including litigation — that we are proposing these expanded disclosures. The new disclosures are aimed at providing information earlier to existing and potential investors in order to give them a greater understanding of the risks companies are facing. We believe that information would improve their ability to make informed investment decisions.

 Well, that belief was mistaken.

Another batch of comment letters came into the Financial Accounting Standards Board about FASB’s proposal, “Disclosure of Certain Loss Contingencies–an amendment of FASB Statements No. 5 and 141(R),” up to 217 as of this afternoon. (Comment deadline was Friday.) This is proposed change to accounting rules that would require companies to report contingent liabilities resulting from litigation. FASB’s intentions are understandable and the goal of increased transparency is certainly not malign: There’s a lot of litigation out there that can affect the bottom line and it’s reasonable for investors to have insight into the possible effects of these lawsuits.

But, really, is the public served by a company’s speculation about what cash-seeking trial lawyers might or might not accomplish with their litigation against the business? The overwhelming majority of the submissions — certainly above 90 percent, we estimate – oppose FASB’s proposal. As the NAM’s comment letter said, “We believe the proposed standard would lead to less accurate and less useful information for investors, threatening the attorney-client privilege and the attorney work product doctrine, unnecessarily provide information to potential claimants, and force corporate defendants to disclose privileged information to plaintiffs thereby jeopardizing their ability to defend the litigation.”

Today’s WSJ Law Blog notes the opposition from the pharmaceutical industry, noting the instructive case of the circuitous, extended, serpantine, confusing, ultimately questionable but still expensive Vioxx litigation. (That’s our description.) The Law Blog uses “torturous,” always a good term when discussing torts:

Remember the long and torturous road of the Vioxx litigation? A $4.85 billion settlement. Then multi-million dollar jury verdicts in Texas and New Jersey, some of which were reduced under state damage caps before being tossed aside completely on appeal in the spring.

The point we’re trying to make here is that, for Merck, the Vioxx litigation took the company down several unpredictable roads. So it’s perhaps somewhat understandable that Merck, along with five of its drug industry competitors, are a bit peeved over a proposed accounting rule that would require companies to disclose estimated costs of all continuing litigation. …[snip]

In a joint letter from Merck, Pfizer, Eli Lilly, J&J, Novartis and Wyeth, the companies told FASB that that estimating the costs of continuing litigation is “highly subjective, subject to huge swings as underlying assumptions change, and unlikely to provide financial statement users with meaningful or reliable information.” Others, including GE, DuPont, Boeing and McDonalds, have also objected to the rule. Click here for a WSJ editorial from last week on the proposed rule.

For more, including the views of the “socially aware” investors who want even MORE speculative reporting, see this Point of Law.com post.

Today’s the deadline for filing comments on the Financial Accounting Standards Board’s proposal to require reporting on contingent legal liabilities in accounting statements. (FASB news release and proposed statement.)

We point again to the NAM’s comment letter to highlight the proposal’s shortcomings: “We believe the proposed standard would lead to less accurate and less useful information for investors, threatening the attorney-client privilege and the attorney work product doctrine, unnecessarily provide information to potential claimants, and force corporate defendants to disclose privileged information to plaintiffs thereby jeopardizing their ability to defend the litigation.”

Along with businesses and stockholders who would be affected by these perhaps well-intentioned but poorly framed requirements, the legal community — and not just corporate lawyers — is critical of the FASB proposal. The FEI Financial Reporting Blog has a good review of the reaction at this post, “Legal Community Raises Alarm On FAS 5, Contingencies: Comment Deadline Aug. 8.”

Financial Week reports the proposed FASB rules would hit some sectors of the economy harder than others — big companies that get sued a lot (no surprise there) — including companies with large intellectual property portfolios.

And it’s worth noting again this good overview from The Recorder, “GCs Bristle at Proposed Disclosure Rules.” GCs being general counsels.

FASB’s online commentary site has added some 30 new comments over the last day, and is up to 69 as of this morning. From the informed sample we’ve taken, looks like the overwhelming majority is critical of the proposal for many of the reasons cited above.

The NAM has submitted a letter and comments to the Financial Accounting Standards Board commenting on a Proposed Statement of Financial Accounting Standards, “Disclosure of Certain Loss Contingencies an amendment of FASB Statements No. 5 and 141(R).” (FASB News release and proposed statement.)

From the NAM’s submission:

NAM members support FASB’s efforts to improve financial reporting and facilitate the convergence of U.S. Generally Accepted Accounting Principles (USGAAP) and International Financing Reporting Standrads (IFRS). At the same time, we are extremely concerned that the proposed changes to Statement 5, if finalized, would have a negative impact on companies and would not improve the quality of financial reporting.)

Specifically, the NAM does not believe that FASB should proceed with its proposed disclosure standard relating to loss contingencies at this time. We believe the proposed standard would lead to less accurate and less useful information for investors, threatening the attorney-client privilege and the attorney work product doctrine, unnecessarily provide information to potential claimants, and force corporate defendants to disclose privileged information to plaintiffs thereby jeopardizing their ability to defend the litigation.

So who’s pushing for these changes? CFO.com summarizes the advocates this way in a good overview piece, “Contingent Liabilities Draft Stirs It Up“:

On one side, investors with a social-responsibility mandate think current accounting disclosure rules are too lax. They support the enhanced disclosure being floated in the Financial Accounting Standards Board’s exposure draft , but think more should be done to reveal potential risks associated with environmental or social-justice violations.

The Wall Street Journal editorialized today on the proposed amendment, “FASB’s Lawyer Bonanza,” citing a comment letter from senior litigators in 13 companies (including NAM members), noting that some lawsuits are filed merely for the purpose of publicity and then dropped. How does one measure that contingent cost?

While neither that letter nor the NAM’s is posted yet at the FASB comments section, there is already a good selection of well-considered critiques of the plan. Among them, we commend the comments from the Association of Corporate Counsels (here) and this one from Tom Duesterberg at the Manufacturers Alliance/MAPI.

Over at Point of Law.com, the Manhattan’s Institute Walter Olson notes the WSJ editorial here and also had a good round-up on the issue last week.

The Wall Street Journal’s opinion staff has been publishing very useful editorials and op-eds lately about the march of the special-interest litigators, the trial lawyers and the groups they fund who seek to expand the opportunity to sue on all fronts.

Today there’s a good piece on the proposed revision by the Financial Accounting Standards Board (FASB) on reporting of continent liabilities. Financial arcana perhaps, but a big deal. From “FASB’s Lawyer Bonanza“:

Under the proposed change, a company facing a lawsuit would have to list on its financial statement its best-guess estimate of what that litigation could end up costing — not just in attorney fees, but in any potential payout. For a company in high-stakes litigation, that means showing its hand to plaintiffs’ attorneys, allowing them to gauge management’s upper estimate of what the case is worth.

The deadline for commenting is Friday, and more on this soon.

The estimable Kimberly Strassel had a good column on the attorney general’s race in West Virginia, Dan Grear challenging incumbent AG Darrell McGraw. From “Challenging Spitzerism at the Polls“:

Mr. Greear is the 40-year-old Republican lawyer working to unseat West Virginia’s entrenched top prosecutor, Darrell McGraw. His quest has become a case study in the opportunities, and pitfalls, of an upstart reformer challenging an incumbent attorney general who, like New York’s Eliot Spitzer, has cemented his position through populism and political patronage.It’s also an insight into a new wave of reformist candidates across the country. As state attorneys general have become more brazen with their power, and as outside groups have started shining a light on their backroom practices, voters have become uneasy.

West Virginia consistently ranks as having a poor business climate (50th in business friendliness, CNBC reports), with the capricious, often abusive legal environment being a big reason. (The American Tort Reform Association’s Darren McKinney comments in a letter today.)

In “Justice and Milberg,” the Journal again questioned the sweetheart deal that the Department of Justice worked out with the law firm of Milberg, allowing convicted conspiring partner Mel Weiss to retain ill-gotten gain.

And last week the Journal editorialized about the just-passed H.R. 4040, the consumer product litigation and regulation act. From “Too Much, Too Late“:

Once President Bush signs the bill into law — which he’s expected to do in short order — state attorneys general will be allowed to sue on their own to enforce safety standards and can call on tort lawyers to help them. The law provides for a publicly available database of unsubstantiated consumer safety complaints — perfect fodder for entrepreneurial litigants.

Product safety then becomes a marginal concern to achieving political and pecuniary goals. But then, EVERYTHING’s a marginal concern to some in the plaintiff’s bar as they work to achieve political and pecuniary goals.