Title: Financial Statement Reporting of Pending Litigation: Attorneys, Auditors, and Difference of Opinions
Abstract: What we've got here is failure communicate.1 I. INTRODUCTION Pending litigation can be significant source of potential liability for companies. The lack of adequate disclosure of this potential liability has caused confusion for investors, lenders, and other financial statement users. Auditors are required assess the appropriateness of financial statement disclosures regarding pending litigation. However, the auditor's ability do so depends upon receiving information from the company's attorneys. Obtaining this information, however, is problematic because the accounting and auditing standards that guide auditors and the professional standards that guide attorneys have been at odds for the past thirty years. Recent scandals2 have resulted in legislation3 and increased scrutiny of the disclosure of contingent liabilities from pending litigation, thus magnifying this conflict between auditors and attorneys. Parts II and III of this Article discuss the U.S. accounting standards and auditing standards applicable pending litigation. Part IV identifies the issues raised by communications between attorneys and auditors, including the attorney-client privilege, the work product doctrine, and the American Bar Association guidelines4 on communications with client's auditor. Part V describes three possible solutions offered by previous commentators the conflict between attorneys and auditors and an assessment of the viability of these solutions. Finally, Part VI provides our conclusions and recommendation for addressing this conflict. II. U.S. ACCOUNTING STANDARDS REGARDING PENDING LITIGATION Certified Public Accountants (CPAs)5 play critical role in the U.S. financial markets. Investors and lenders rely heavily on the information provided in company's financial statements in making investment, lending, and other decisions regarding business with particular company. As independent auditors, CPAs express their opinion regarding the reliability and integrity of publicly traded company's financial statements based upon their examination and testing of the company's books and records.6 The U.S. Supreme Court has recognized the important role auditor's play, as discussed in the following statement: The independent accountant performing this special function [the audit] owes ultimate allegiance the corporation's creditors and stockholders, as well as the investing public. This public watchdog function demands that the accountant maintain total independence from the client at all times and requires complete fidelity the trust. As one commentator describes it, the auditor's duty is to the reader of the client's financial reports and is in nature.8 To form their opinion as the fairness of the company's financial statements, the auditors must determine which items are material the financial condition of the company, and this determination is a matter of professional judgment made in light of surrounding circumstances, and necessarily involves both quantitative and qualitative considerations.9 Since 1973, the financial accounting principles that govern the preparation of financial statements for companies have been the Generally Accepted Accounting Principles (GAAP), issued by the Financial Accounting Standards Board (FASB).10 GAAP is a technical accounting term that encompasses the conventions, rules, and procedures necessary define accepted accounting practice . . . and . . . provide standard by which measure financial presentations.11 Thus, the FASB is the organization recognized as setting accounting and reporting standards in the United States.12 With regard pending litigation, the relevant accounting standard is Statement of Financial Accounting Standard (SFAS) No. 5 - Accounting for Contingencies,13 which provides the criteria for determining whether company must accrue or disclose loss contingencies. …
Publication Year: 2010
Publication Date: 2010-01-01
Language: en
Type: article
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Cited By Count: 6
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