In July 2012, the Financial Accounting Standards Board (FASB) voted to drop a controversial project that would have required companies to disclose more about contingent losses, including most notably those arising from litigation.
The now-withdrawn proposal would have required significant additional disclosure of litigation. The vast majority of those commenting on the proposal opposed it, many with strenuous objection. The primary concerns from those opposed to the proposal were:
The proposed additional disclosure would jeopardize the attorney-client privilege and work product rights.
The proposed additional disclosure would describe defendants’ vulnerabilities and defense strategies, which would hamper successful defenses and unfairly improve plaintiffs’ positions.
The proposed additional disclosure requires speculative, forward-looking statements, some of which will ultimately be incorrect. This will expose companies to claims that they made misleading disclosures and/or violated securities laws.
The proposal died a slow death. Changes were discussed in earnest starting in 2007, with a specific proposal made in the summer of 2008. The negative outcry started immediately, causing the FASB to conclude that the proposal needed amendment in September 2008. In April 2010, revised proposed principles and specific requirements were passed. However, the revised additional disclosures remained substantial, so the protests continued, leading to the killing the proposal this month.
There is mixed case law about whether providing information to a client’s auditor is a waiver of attorney-client privilege and work product rights. The better view is that there is a “common interest” waiver protection (see for example this tax case), but there are contrary cases. Since the underlying estimates and evaluations for the proposed additional disclosures would be obtained from counsel, waiver will also be claimed for the financial statements disclosures themselves.