Lawyer Bonanza

by Amanda Engstrom

The Wall Street Journal has an editorial today calling a proposed change by Financial Accounting Standards Board (FASB) a potential boon to trial lawyers. The rule change would substantially enhance the disclosure requirements of SFAS 5 – Accounting for Contingencies. Essentially, companies would have to disclose information about almost all litigation and potential litigation and also disclose their assessment of the litigation. This would serve as a roadmap to the plaintiffs’ bar in suing all public companies in the U.S. 

By increasing litigation risk, with little benefit to investors, these proposed changes will merely be yet another factor contributing to the decline of the competitiveness of our capital markets. Basically this is a solution in search of a problem. There is no evidence to suggest that investors are lacking in information about companies’ disclosure of potential losses. There is no research, data or evidence showing widespread problems in this arena. One capital markets expert called the proposed change "A big sloppy wet kiss for the trial bar."

As the article notes, comments are due August 8.  The Chamber will be weighing in.

From the article:

"Under the proposed change, a company facing a lawsuit would have to list on its financial statement its best-guess estimate of what 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 effect will be to force corporate defendants to fight lawsuits with one hand tied behind their backs … Predicting the trajectory of complex, often multiyear litigation is inherently unscientific … Bad guesswork would also put a company at risk of more lawsuits. Estimate the possible liability too high, and the plaintiffs bar may extract more loot. Estimate too low and the company could get hit by shareholder suits questioning whether there was intent to mislead investors … By organizing a wealth transfer from corporations to trial lawyers, FASB is doing no favors to the investors it claims to represent."