Omega Corporation is involved in a lawsuit brought by a competitor for patent infringement. The competitor is asking $14 million actual damages for lost profits and unspecified punitive damages. The lawsuit has been in progress for 15 months, and Omega has worked closely with its outside counsel preparing its defense. Omega recently requested its outside lawyers with the firm of Wolfe & Goodwin to provide information to the auditors. The managing partner of Wolfe & Goodwin asked four different lawyers who have worked on the case to prepare a concise response to the auditors. They returned the following:

1 . The action involves unique characteristics wherein authoritative legal precedents bearing directly on the plaintiff’s claims do not seem to exist. We believe the plaintiff will have serious problems establishing Omega’s liability; nevertheless, if the plaintiff is successful, the damage award may be substantial.

2. In our opinion, Omega will be able to defend this action successfully, and, if not, the possible liability to Omega in this proceeding is nominal in amount.

3. We believe the plaintiff’s case against Omega is without merit.

4. In our opinion Omega will be able to assert meritorious defenses and has a reasonable chance of sustaining an adequate defense, with a possible outcome of settling the case for less than the damages claimed.

Required:

a. Interpret each of the four responses separately. Decide whether each is

(1) Adequate to conclude that the likelihood of an adverse outcome is “remote,” requiring no disclosure in financial statements, or

(2) Too vague to serve as adequate information for a decision, requiring more information from the lawyers or from management.

b. What kind of response do you think the auditors would get if they asked the plaintiff’s counsel about the likely outcome of the lawsuit? Discuss.