Battle looms over disclosure rules

Investors will be up against auditors, companies and lawyers in the US as the
standard considers opinions on changes to accounting disclosure rules.

The Financial Accounting Standards board’s current draft of a paper on
changes disclosure rules require companies to reveal threats that seem remotely
probable if the issue is to be dealt with within a year.

Investors with social responsibility on their agenda believe the rules are
too lax and support the Financial Accounting Standards Board’s draft which
suggests that companies disclose and quantify all potential environmental and
legal risks. Investors however are also of the view that more should be done to
reveal potential risks associated with environmental or social-justice

Activist investors in particular argue that as long-term investors, they are
concerned with threats that may appear remote, until they become realities which
cannot be contained – like the Enron accounting scandal and the subprime crisis.

But companies, audit firms and lawyers believe that while the existing rules
could be improved, broad disclosures could lead companies to overstate
contingent liabilities.

FASB will decide which route to take after reviewing
sent in by the profession and companies, as well as social
responsibility group such as the Social Investment Forum the Investor
Environmental Health Network (IEHN), the Dominican Sisters of Hope, and Trillium
Asset Management – all of whom support improved disclosures.

‘All too often we have seen that these momentous issues were looming for many
years and eventually resulted in catastrophic consequences for investors,’
Trillium’s executive vice president, Cheryl Smith wrote in her comment letter.

‘The [FASB] proposal may allow corporate lawyers to routinely block
disclosure of almost any information that they designate as [potentially
damaging to the company], or prejudicial. When investors are unaware of
impending financial pain at companies in which they hold stock, they often face
expensive surprises,’ IEHN attorney Sanford Lewis told a press conference.

But companies oppose these views.

CFO of U.S. Steel Corp. Gretchen Haggerty argued in her comment letter that
the level of detail about contingencies would be ‘unduly burdensome’,
‘subjective and difficult to estimate with any precision’.

Companies also believe that information disclosed could be used against
companies at a later stage or in pending lawsuits against them.

Further reading:

Read FASB’s
exposure draft here

Related reading

Fiona Westwood of Smith and Williamson.