The Chairman of the Financial Accounting Standards Board (FASB), Robert Herz, wrote a letter to the Wall Street Journal challenging the editorial published in the paper criticizing the proposed new standard for reporting loss contingencies. This standard largely covers environmental liability disclosure.
Herz rejects the Wall Street Journal editorial in his letter, stating, "Under the proposal, the amount that would be required to be disclosed is the claim amount, or, if there is no claim amount, the company's best estimate of its maximum exposure to loss. The Board attempted to insure the proposal would not require a company to "[show] its hand to plaintiffs' attorneys" as the editorial says. For example, the proposal allows companies to aggregate claim amounts, so that the plaintiffs attorneys would not be able to identify specific cases. We have also proposed an exemption for certain disclosure situations that would be clearly prejudicial to the company."
He goes on to defend the proposal, stating, "It is because of the strong and extensive input we've received from investors who want greater transparency relating to a wide range of contingencies -- including litigation -- that we are proposing these expanded disclosures. The new disclosures are aimed at providing information earlier to existing and potential investors in order to give them a greater understanding of the risks companies are facing. We believe that information would improve their ability to make informed investment decisions."
The truth may lie somewhere between the view of Herz and the Wall Street Journal writer. The changes will likely present risks to public and private companies, but particularly public companies whose financial statements and 10Ks are available on the Internet for all to see, including plaintiff's lawyers. If the changes are adopted, public companies will not only need to revamp how they measure and report loss contingencies, but for those of us who address these issues that arise under environmental statutes or tort suits, we may have to rethink how environmental claims are measured and reported, and consider what internal controls are necessary to ensure these claims are adequately measured.
Stay tuned for further developments in this potentially dramatic change in the reporting of environmental liabilities.