Assume you are Chief Financial Officer of Camp Industries. Camp is the defendant in a $44 million class action suit. The companys legal counsel informally advises you that chances are remote that the company will emerge victorious in the lawsuit. Counsel feels the company will probably lose $30 million.
You recall the provisions of Accounting for Contingencies, Statement of Financial Accounting Standards No. 5, that a loss contingency should be accrued if a loss is probable and the amount can reasonably be estimated. A colleague points out that, in practice, accrual of a loss contingency for unsettled litigation is rare. After all, disclosure that management feels it is probable that the company will lose a specified dollar amount would be welcome ammunition for the opposing legal counsel. He suggests that a loss not be recorded until after the ultimate settlement has been reached. What do you think? Consider the following when formulating your answer:
1. What is the ethical issue?
2. Who are the Stakeholders?
3. What values are implicated in the decision?
4. Identify two alternatives for recording the probable loss. Evaluate each alternative in terms of values, positive consequences, and negative consequences.
5. Decide your course of action.
The main issue is that we have to follow the letter of the law, and that includes the FASB provisions for loss contingencies.
The ethical issue for you to consider is that the financial statements will be misstated (and fraudulent) if the loss contingency is not accrued. The reason for the requirements for loss contingencies is to ensure loss contingencies are properly accounted for, so bypassing this would misstate our ...
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