A clash is emerging between the needs and duties of directors and investors to manage risks, and attorneys who advise “don’t ask; don’t tell” to minimize corporate liability in any possible future litigation. The task of mitigating this clash falls on the shoulders of regulators at the Securities and Exchange Commission and the Financial Accounting Standards Board.

When the Financial Accounting Standards Board (FASB) took up the issue of contingent liability disclosures on behalf of investors in 2008, it appeared progress would be made. However, under pressure from the corporate legal community, which sought to block any requirements to require disclosure of potentially prejudicial information, the FASB may now be about to take a step backward unless the directors and investors can be mobilized.  The Securities and Exchange Commission is also in a position to act to make vital improvements in disclosure of information relevant to potential liabilities.

Will we have to wait for a flood of lawsuits, or will regulators act to establish clearer reporting rules that encourage better management of risks?

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