The American Institute of CPAs has written to the Financial Accounting Standards Board requesting a delay in finalizing its proposed standards on disclosing companies’ loss contingencies in the event of litigation until it can work out a “treaty” with the American Bar Association on how accountants and attorneys can share information.

FASB recently extended the comment period for the controversial proposals until Sept. 20 (see FASB Extends Comment Period for Contingencies Standard). Some companies are worried that providing more disclosure of the contingencies they have made for possible lawsuits could actually encourage litigation or reveal their legal strategies in case they are sued.

AICPA Financial Reporting Executive Committee chairman Jay Hanson acknowledged in his letter to FASB that the AICPA generally supports the board’s objective to improve disclosures, but he expressed concern about an auditor’s ability to corroborate information with the client’s legal counsel.

The letter points out that a 1975 agreement between the AICPA and the ABA does not address some of the disclosure items in FASB’s proposed standard. The AICPA believes a revision to the agreement is needed before the standard is finalized.

Hanson noted that without the revision to the AICPA-ABA treaty, the attorneys’ responses would be incomplete with respect to the additional disclosure requirements, making it potentially difficult, if not impossible, for accountants to get the external corroborating information needed to provide an unqualified audit opinion. That concern dates back to an earlier comment letter that the AICPA sent to FASB two years ago.

“As indicated in our 2008 comment letter, sufficient timing for the revision of the ‘treaty’ between the legal and auditing professions is needed before the exposure draft is finalized,” wrote Hanson. “FinREC believes it is unlikely that a revised treaty could be negotiated prior to the proposed adoption date, in addition to the practical issues of communicating the changes to ABA members and educating them on the application.”

Attorneys could well be reluctant to provide this type of information, and they would be the only source. “Auditors may find the language about disclosure of certain information ‘to the extent that it is discoverable by either the plaintiff or a regulatory agency’ particularly troubling since determination of whether something is discoverable is a legal determination,” said Hanson. “We believe it may be unlikely that a lawyer would respond to an auditor about information that is not currently in the public domain that could potentially be discoverable. Further, trying to obtain sufficient evidence from someone other than the entity’s lawyer is a difficult, if not impossible, task.”

He added that a proposed requirement to disclose the reason that an estimate cannot be made is not part of the ABA/AICPA treaty, which could make it difficult for auditors to corroborate the reason.

The letter said the FASB exposure draft on loss contingency disclosures should not be finalized until an agreement is completed with the ABA that would allow entities to comply with the proposed requirements.

In addition, the AICPA recommended that FASB engage companies and their attorneys in field-testing how to provide both the factual information required by the proposals as well as the information that involves management or lawyer judgment, and the related evidence needed to be provided to auditors.

The AICPA also wants additional guidance on disclosing certain remote contingencies to help determine whether a contingency is considered frivolous or meets the threshold for disclosure. It warned that the process could be highly judgmental and would introduce significant complexity and risk into the process of preparing disclosures.

The institute is also concerned about exposing companies’ legal strategies. “Overall, we continue to believe that certain of the proposed disclosures could expose a company’s legal strategy and provide plaintiffs with information that could compromise the company in litigation or negotiation settlements, especially in the situations where the lack of contingent claims would prevent sufficient aggregation,” wrote Hanson.

In addition, the AICPA disagrees with the proposed effective date and recommended that the new guidance should be effective for fiscal years ending after Dec. 15, 2011, and interim and annual periods in subsequent fiscal years for public companies. For nonpublic entities, the AICPA recommends that the new guidance should be effective for the first annual period beginning after Dec. 15, 2011, and for interim periods of fiscal years after the first annual period.

Under the original proposal, the new guidance would be effective a year earlier.
“Entities are experiencing resources constraints and may not have sufficient resources and personnel to implement the standard and change the controls and processes within the proposed timeline,” Hanson noted.

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