Corporate governance: Pointers for predators

Economist
September 23, 2010

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.

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