IT IS as if every homeowner were obliged to publish a map showing burglars the easiest way into his house and where his valuables are stored. That is how American businesses view a proposal that the Financial Accounting Standards Board (FASB) floated in July. The FASB wants to force firms to publish detailed information about what they might get sued for and how much it might cost them. This would provide a how-to guide for lawyers looking for targets. The FASB gave companies until September 20th to respond. They have done so, angrily.
Companies being sued already have to say so in financial statements. The new standards go much further. Firms would have to disclose any money set aside for potential settlements; not for each case, but for each type of case. This would reveal to tort lawyers the general area where the richest pickings might be. Such disclosures would have to be updated regularly, thus advertising any changes in a firm’s sense of its own vulnerabilities.
Worse, companies would have to keep an eye out even for the “remote” possibility of expensive litigation: for example, by watching scientific journals for findings that could later result in lawsuits. Then, once a proceeding has begun, the FASB rules would have companies reporting expert testimony on the potential liabilities they face. It would also force them to reveal, in certain circumstances, the amount of insurance they have bought to cover potential damages.
An even harsher set of rules was originally floated in 2008, but met a storm of resistance. Businesses thought the FASB had quietly dropped the matter, but it had not. The new rules are scheduled to go into effect on December 15th.
The FASB has received a tiny number of letters supporting its proposals. Some people who are keen on “corporate social responsibility”—green investors, Catholic hospitals and the like—think the new rules will promote transparency. CalPERS, California’s enormous public-sector pension fund, is also keen.
But supporters are vastly outnumbered by opponents. Lawyer-wary firms from Chevron to Dr Pepper Snapple Group are aghast. Umbrella groups such as the Business Roundtable, the National Association of Manufacturers and the US Chamber of Commerce are incensed. Lawyers who defend corporations tremble to think how the new rules will tilt the playing field in their disfavour.
Susan Hackett of the Association for Corporate Counsel, who gathered dozens of corporate lawyers’ signatures to oppose the new rules, says that while everyone is for transparency, the new rules would require firms to publish what will often be no better than “guesstimates” of future liabilities. Such bad information is worse than none, reckons Ms Hackett. If a firm publishes a high estimate of what a particular type of lawsuit might cost it, no opposing lawyer will settle for less. If it guesses too low, it could be sued for misleading investors. Lawsuits already cost America nearly 2% of GDP, according to Towers Perrin (now Towers Watson), a consultancy. Others put the tort tax even higher. Why would the FASB want to raise it?
By “The Economist”
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