It takes a lot to get buttoned-down corporate counselors up in arms. But Susan Hackett, general counsel for the Association of Corporate Counsel (ACC), says the Financial Accounting Standards Board (FASB) managed to do just that with its revised proposal on disclosing legal contingencies. Back in 2008, FASB issued an initial proposal that would have required public companies to report dollar amounts for all pending lawsuits. Concerned such disclosures would telegraph a company's strategy on lawsuits, corporate counsels and lobbyists convinced FASB to revise the proposal.
What came back was not much better, critics say. The rule still requires companies to assign a dollar value to outstanding legal claims, but it allows them to aggregate those amounts into various categories.
Within a week of the proposed rule's publication, corporate counsel from 100 Fortune 1000 companies had signed a letter of objection drawn up by the ACC, Hackett says. "That's amazing, especially for a group of people who generally like to keep their heads down and their companies' names out of the limelight."
Most agree, Hackett concedes, that by allowing companies to aggregate liability contingencies, the revised proposal improves on the original. But for many companies, aggregation doesn't solve the problem. "Some companies may have only one big pending lawsuit," she says.
"Even if there are several, if they have to be assigned to categories, it wouldn't be hard for a plaintiff to guess how much the company was accruing as a contingency in a particular case," she adds. "And guess where a plaintiff's starting point would be in any settlement offer!"
"I think the plaintiffs' bar is drooling over the possibility of this rule being adopted," says Leslie Silverman, a partner with Cleary Gottlieb. "Companies are already required to report any accrual in anticipation of a settlement, but if you're still in court negotiating the amount of a settlement, you tell me what the right amount to report would be."
As Salome Tinker, director of accounting policy and financial reporting at the Association for Financial Professionals, puts it, "They're asking companies to disclose premature and unsubstantiated estimates that could mislead users of financial statements and cause unwarranted market actions."
The rule would discourage company lawyers from discussing liabilities with executives, Hackett says. "Meanwhile, those executives, like CEOs and CFOs who have to certify corporate filings without knowing what the contingent liabilities are, would be left wondering, 'Which direction will my pinstripes be running next year?'"