Last week I suggested you take a look at how lawyers view accounting, courtesy of the popular and thoughtful legal blog, The Volokh Conspiracy.  This week, I am glad to report that conspirator (and American University law professor) Kenneth Anderson has given me the opportunity to write a guest post getting lawyers insights into a topic from several posts and Round Tables earlier this summer:  accounting for contingent losses due to litigation (a FAS 5 issue for those of you not yet thinking in terms of the new Codification).

From the post, entitled When Should a Firm Recognize a Possible Litigation Liability?

The FASB received a number of comment letters from lawyers, arguing that “loss contingencies created by litigation are unique in several respects.” This comment letter from an organization called Lawyers for Civil Justice is typical (full letter at the link). In summary, Lawyers for Civil Justice argues, first, that losses due to litigation are unusually hard to predict. This strikes me as unlikely; many losses are hard to predict, and juries aren’t the only fickle parties in the world. But the letter’s second argument seems more plausible: that the “adversarial nature requires that internal evaluations of the claim be kept confidential.”

There thus seems to be a real tension between good lawyering and transparent accounting. Reporting internal assessments about a judgment or settlement in financial statements may be detrimental to the firm-as-defendant. On the other hand, not providing that information to investors leaves financial reports far short of the transparency investors would like ….

(snip)

So, against that backdrop, here are my questions to the Volokh Conspiracy community:

First, does Lawyers for Civil Justice overstate its case, or does the FASB’s exemption for prejudicial information seem adequate?

Second, leaving accounting standards to one side and focusing on legal ethics, would a requirement to disclose internal estimates of liability violate other laws, or lawyers’ professional standards?

Finally, any suggestions or ideas how the FASB might address this basic tension between good legal practice and transparent reporting?

The post has been up about an hour, and already has 11 comments.  (Checked again 1 min later, now it is 13.)  No one has noticed, though, that the title really should have been “When Should a Firm Disclose a Possible Litigation Liability.  I guess it takes an accountant….