Controversial Proposal Regarding Litigation Disclosures is Tabled, but Still Alive
The legal community objected strongly to the FASB’s proposal to significantly increase litigation disclosures contained in financial statements. The proposed changes that were scheduled to start in just a few months will be delayed for a year. The FASB will create an alternative proposal for consideration, but the original proposal for has not been withdrawn.
In September 2008, the Financial Accounting Standards Board (FASB) agreed to rethink its proposal to amend disclosures required under SFAS 5, Accounting for Contingencies and SFAS 141(R), Business Combinations. The Contingency accounting proposal from this past summer received over 235 comments, the vast majority of which were not supportive. The opposition largely came from lawyers and preparers of financial statements, while users (i.e., investors and financial analysts) were generally supportive.
The primary concerns from those opposed to the proposal were:
1. The proposed additional disclosure would jeopardize the attorney-client privilege and work product rights.
2. The proposed additional disclosure would describe defendants’ vulnerabilities and defense strategies, which would hamper successful defenses and unfairly improve plaintiffs’ positions.
3. The proposed additional disclosure requires speculative, forward-looking statements, some of which will ultimately be incorrect. This will expose companies to claims that they made misleading disclosures and/or violated securities laws.
In light of this opposition, the FASB directed its staff to prepare an alternative disclosure model that will attempt to address the above concerns. This alternative model and the existing proposal will be “field tested” by creating sample disclosures based on real but now-resolved cases.
The alternative disclosure model was not yet developed, but will likely involve more disclosure than current requirements, but less disclosure than called for in the current Exposure Draft. For example, the alternative model might describe the allegations raised, the defenses expected to be presented, the litigation’s procedural status, and other significant facts, but might not require a quantitative assessment of the maximum or likely loss exposure.
The FASB attempted to implement their now-tabled proposal with atypical speed that would have required the new rules for all interim and year-end 2009 financial statements. This timetable has been pushed back a year, so that the new rules would not be effective for any period earlier than December 15, 2009. Field testing will take place during November and December 2008, and a roundtable discussion will be held in the first quarter of 2009. Formal FASB reconsideration of the Exposure Draft is expected to take place in late March or April 2009. In short, the FASB continues to push this project with an unusual sense of urgency.
There is mixed case law about whether providing information to a client's auditor is a waiver of attorney-client privilege and work product rights. The better view is that there is a "common interest" waiver protection (see for example this tax case), but there are contrary cases. Since the underlying estimates and evaluations for the proposed additional disclosures would be obtained from counsel, waiver will also be claimed for the financial statements disclosures themselves.
ABOUT THE AUTHOR: David Nolte
Mr. Nolte has 30 years experience in financial and economic consulting. He has served as an expert witness in over 100 trials. He has also regularly served as an arbitrator. Mr. Nolte has achieved the following credentials, CPA, MBA, CMA and ASA.
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