Question

From the SEC's website (www.sec.gov), access any company's 10-K from 2016 and review its footnote disclosures related to pending litigation.

Share the following:

1. Briefly summarize the nature of pending litigation facing the company you selected.

2. From the auditors' perspective, what is the primary concern with respect to the disclosure of pending litigation?

3. From a shareholder's perspective, what is the primary concern with respect to the disclosure of pending litigation?

Answer 1

To understand in a simple way

"Pending litigation" means that a case is in court and has not reached a final result as of yet.

1) Summary of example of pending litigation

A jury awarded $5.2 million to a former employee of the Company for an alleged breach of contract and wrongful termination of employment. The Company has appealed the judgment on the basis of errors in the judge’s instructions to the jury and insufficiency of evidence to support the amount of the jury’s award. The Company is vigorously pursuing the appeal.

Since it presently is not possible to determine the outcome of these matters, no provision has been made in the financial statements for their ultimate resolution. The resolution of the appeal of the jury award could have a significant effect on the Company’s earnings in the year that a determination is made; however, in management’s opinion, the final resolution of all legal matters will not have a material adverse effect on the Company’s financial position.

Since it is not possible to determine the actual result of the outcome company disclosed the same as Pending litigations in foot note.

2) Primary concern from auditors perspective

Pending litigation can be a significant source of potential liability. The lack of adequate disclosure of this potential liability has caused confusion for investors, lenders, and other financial statement users. Auditors are required to assess the appropriateness of financial statement disclosures regarding pending litigation. However, the auditor's ability to do so depends upon receiving information from the company's attorneys. Obtaining this information, however, is problematic because the accounting and auditing standards that guide auditors and the professional standards that guide attorneys have been at odds for the past thirty years. Recent scandals2 have resulted in legislation3 and increased scrutiny of the disclosure of contingent liabilities from pending litigation, thus magnifying this conflict between auditors and attorneys.

Parts II and III of this Article discuss the U.S. accounting standards and auditing standards applicable to pending litigation. Part IV identifies the issues raised by communications between attorneys and auditors, including the client privilege, the work product doctrine, and the American Bar Association guidelines4 on communications with a client's auditor. Part V describes three possible solutions offered by previous commentators to the conflict between attorneys and auditors and an assessment of the viability of these solutions. Finally, Part VI provides our conclusions and a recommendation for addressing this conflict.

so the primary concern from the auditors perspective is to gather the correct information from the company and to assess whether any future liability may be incurred by the company due to the respective pending litigation and the same shall be disclosed in the financial statements.

3) Primary concern from the shareholders perspective

As we all knew that one invests in a company to make profit i.e he wants the company to make good profits; with respect to pending litigations the shareholder will always have the negative view of company is going to lose the case and going to make some loss which makes the other investors also not to invest furthur .