Accounting for Potential Liability

The Economist has a story about a proposal by the Financial Accounting Standards Board in the US to require companies’ financial statements to include information about potential lawsuits against the companies.

The article calls this ‘pointers for predators’ – the predators in question being lawyers who will respond to the companies’ disclosure of their vulnerabilities by bringing lawsuits to exploit the vulnerabilities. It is said that this disclosure is like giving a thief a map to the valuables in your house.

At present companies have to disclose material litigation but not litigation not started or even threatened.

One understands companies’ reluctance to admit their legal insecurities before being sued. On the other hand, investors have an interest in knowing of the risks that the companies’ value will decrease through ligitation.

The first comment on the article says that if companies figure they are going to get sued for the environmental or health damage they cause, they should stop causing the harm. Covering the damage up is socially more harmful.

Where should the line be drawn? Whose interests should prevail: those of companies? investors? the public? Are class-action lawyers equivalent to thieves, as the article suggests?

The article claims in closing (citing business sources) that tort actions “cost America nearly 2% of GDP” (the “tort tax”). Does that sound at all likely to you? Is there a Canadian figure?

Even if it were true, would the amount be equivalent to an insurance premium, i.e. a way of compensating for harms business causes that allows business to carry on to the greater benefit of shareholders/society/the world?

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Comments

  1. The American Bar Association has published a criticism of the new FASB rule, asking that it be withdrawn. “The FASB should acknowledge the unpredictable nature of litigation, rather than a failure of disclosure, as the reason for surprises that users have complained about.”