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More on litigation exposure projections

The disturbing proposal before the Financial Accounting Standards Board, much discussed recently in this space, is the topic of an editorial in today's WSJ:

The proposed change is open for comment until tomorrow, and FASB has been getting an earful. Senior litigators from 13 companies, including Pfizer, General Electric, DuPont, Boeing and McDonald's have signed a letter to FASB Chairman Robert Herz, objecting to the plan. "Too often, lawsuits are filed for publicity or to pressure companies, only to be dropped later," they wrote, and trying to estimate the fair value of liabilities at the outset "would be both flawed and misleading."

All of which raises the question, why mess with the current system? Under existing rules, putting a number on the potential cost of a lawsuit is required only when the defendant believes it is "probable" it will lose the case. At that stage of the game, some knowledge and calculation from the trial can actually inform the judgment and provide a reasonable service to investors.

Reader Jeff Holmstrand, of Wheeling, W.V.'s McDermott & Bonenberger, writes to foresee another problem to add to the list catalogued earlier: "Outside counsel giving honest opinions about a company's potential exposure and then having to review the client's financial statements to determine whether that risk was accurately reported -- a problem made even worse when there is potential insurance coverage."

More: Some noteworthy comments filed with the FASB by the business community, along with other links and commentary, at NAM "Shop Floor".

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.