Tammy Whitehouse at Compliance Week.com reported earlier this week on a speech at a New York Bar Association Conference by Wayne Carnall, chief accountant for the SEC’s Division of Corporation Finance.
[Carnall] told an audience at a that they should be careful not to lean too heavily on a long-standing treaty between lawyers and auditors when deciding what to report about litigation contingencies in financial statements. Carnall was referring to the 1975 “Statement of Policy Regarding Lawyers’ Responses to Auditors’ Requests for Information,” commonly known as the “treaty” between the American Bar Association and the American Institute of Certified Public Accountants.
I’ve written extensively on the subject of disclosure of litigation contingencies. My most recent article in Forbes is a reaction to listening, with Matt Kelly of Compliance Week, to a panel discuss it last November at the Financial Executives International Current Financial Reporting Issues Conference.
Auditors currently have a free pass when it comes to obtaining, assessing, and evaluating any information from the lawyers that lawyers consider privileged. The AICPA signed a Treaty with the ABA in 1975 that allows auditors to abdicate their duty to shareholders. Charles Nathan of Latham & Watkins, writing in August of this year for the Harvard Law School Forum on Corporate Governance:
“…the new ASC 450 could destabilize the 1975 “Treaty” between the legal and accounting professions over lawyers’ responses to auditors’ inquiries regarding certain loss contingencies, as memorialized in the ABA’s “Statement of Policy Regarding Lawyers’ Responses to Auditors’ Requests for Information.” The Treaty aims to protect against the waiver of the attorney-client privilege in communications by the company’s attorney to the outside auditors regarding litigations and claims, by setting forth guidelines as to what information, confirmations and opinions the lawyer may provide and the auditor may expect.”
Yesterday, I attended an update on these proposals at the Financial Executives International Current Financial Reporting Issues Conference in New York.
Alan Beller of Cleary Gottlieb stated it plainly:
“If the Exposure Draft is adopted, there will be a big, serious tug of war between preparers, their lawyers and the auditors.”
Those comments were published in Forbes on November 16, 2010.
I also repeated in that piece a comment I gave to BNA back in 2008:
“Existing disclosures under FAS 5 downright hide, obfuscate, and thumb their noses at the need for investors to know what’s going to happen to their investment.’’
My feelings about any clashes between auditors and accountants over disclosures for contingencies were outlined, with no subtlety, when the idea of tightening the requirements was first proposed in 2008:
Edith Orenstein has a very extensive summary on the FEI Blog of the latest in potential changes to FAS 5 disclosures. The proposal is causing a significant amount of consternation and wrinkled brows for the corporate lawyers.
But in this case, the corporate lawyers are going all out to defend their corporate clients and their bias shows like a tattered slip under a cheap floozy’s summer wrapper.
Consider one of the most vocal ones. Mike Young is always good for a good quote about how any and all disclosure is bad for his clients’ (company management, certainly he’s not thinking about shareholders) position vis a vis their defense and negotiation with those that sue them.
He’s a (big) talking head for the audit firms, too. But he’s also afraid of the auditors.
Which side are you on, Mike?
…It is to the Board’s credit that it seeks to mitigate these concerns through the possibility of aggregation. While that attempt is commendable, however, it doesn’t really solve the problem. The prominence of large litigation often cannot be disguised by aggregation, and both large and small litigation would presumably be the subject of robust discussion with the outside auditor in disaggregated form, thereby making highly prejudicial information potentially available to adversaries through loss of the attorney-client privilege…
Yeah. He makes a great case for me to agree with squelching disclosure.
My writing on the initial proposals can be found in the following posts:
August 27, 2008 FAS 5 (and Francine) Featured In BNA
August 18, 2008 Big 4 and FAS 5 – What We Don’t Know Can’t Hurt Us
August 12, 2008 Improving Contingency Disclosure? Just Keep Doing The Shuffle
August 11, 2008 Update (2) – More FAS 5 – More Transparency or More Shilling