The Financial Accounting Standards Board has certainly been hearing an earful in recent days from a variety of organizations warning that the amendments it is proposing to two of its accounting statements could lead to a spate of lawsuits.

The rules involve accounting for loss contingencies. FASB has proposed that companies begin disclosing more information about pending or threatened litigation, even about litigation that has only a remote likelihood of causing financial losses at a company. Among the organizations that have weighed in so far with comments are the American Bar Association, the U.S. Chamber of Commerce, the American Institute of CPAs and Financial Executives International (see FASB Litigation Proposals Under Fire). Most recently, the New York State Society of CPAs contributed its own reactions. As of today, there are over 200 comments on FASB's Web site, many of them criticizing the proposals.

Trying to predict the outcome of litigation is often a guessing game at best, especially when so many lawsuits can drag on for years before leading to a settlement, arbitration, a trial or further appeals. Some have argued that even requiring such disclosures could encourage more frivolous lawsuits to be filed against companies, or lead to violations of the attorney-client privilege or work products privilege.

Undoubtedly there will be repercussions from any rule change, no matter what FASB does, though the full extent is debatable. Still, FASB may find itself backing down under pressure, as it did recently with accounting for special-purpose entities that banks wanted to postpone moving onto their balance sheets in today's troubled economic environment (see FASB Delays Off-Balance-Sheet Accounting Rule).

Even as accounting rules increasingly move toward international standards, the board still finds itself with multiple varieties of constituents it needs to please. And as the American Bar Association pointed out in its comments, the proposed rules would not be in sync with international accounting standards, which only require the disclosure of loss contingencies that are more than remote.

As convergence with international standards takes hold, the danger is that FASB may find itself bowing to pressure from not only interests at home but from abroad to keep disclosures to the lowest common denominator.


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