Mind the GAAP: Moving Beyond the Accountant–Attorney Treaty

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  • August 3, 2015

The current system of litigation contingency reporting does not adequately protect investors—particularly individual and unsophisticated investors—from large, unexpected settlements and judgments. If regulators are to fulfill their mission of providing ample, high-quality information so that investors can make informed decisions, the disclosure of contingent liabilities in the litigation context must be strengthened. Mr. Yarbrough develops the viability of a system of disclosure based on settlement value and its potential to satisfy warring factions of attorneys and accountants. The proposed disclosure system would require dollar amounts offered by disclosing companies in settlement negotiations to form the baseline for quantifying losses that may not otherwise trigger current disclosure requirements because the potential losses cannot be reasonably estimated.

Mr. Yarbrough’s Note begins by examining the existing reporting system for litigation contingencies and noting its shortcomings. He then outlines a proposed reform that focuses on disclosure of the value of settlements offered by the reporting company. Finally, Mr. Yarbrough examines the practical obstacles and objections the proposal would have to overcome. Ultimately, Mr. Yarbrough contends that his proposal does not alleviate the problem completely, but it walks the fine line between greater protection of investors and protecting the reporting companies’ interests in ongoing and future litigation. Though a number of practical obstacles and concerns must be overcome in order for disclosure of settlement offers to function as a viable proxy for subjective valuations by a reporting company, the interests of investors and transparency in the financial system call for a workable compromise on the issue. Disclosure of settlement offer values can be that compromise.