Let’s assume that a company is being sued. The company’s auditor asks the lawyer who is defending the company what the odds are of losing the case, and what the company is likely to have to pay. The lawyer says:

“I am not going to answer that question. If I tell you the likely settlement is $10 million, you will put that in the financial statements, and then the people who are suing are going to know we think they will win, so they won’t drop the suit.

What is worse, we will have zero chance of settling the lawsuit for a low amount. The other side will take $10 million as a starting point for their negotiations. Your footnote will cost the company, which is my client, money.”

A. Do you think the lawyer has a point?

B. What is the purpose of disclosing contingencies?

C. Do you see any way to resolve the different needs of the outside investors for information with the concerns of the company’s attorney?