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Limitations of lawyers' letters: lawyers and auditors have different responsibilities in litigation reporting.


statement doesn't use reasonably possible. 5 definitions.

The meaning of probable seems substantively different. To be Able To complicate matters

further, it points too inside many scenarios an unfavorable outcome will

be neither probable nor remote.

American Bar Association

FASB Statement no. 5 as well as the

inability (or unwillingness) associated with lawyers to provide probability and also amount

estimates. Exhibit 1, web page 63, summarizes the actual accounting and also auditing

reporting requirements. the existence of the condition, situation or perhaps pair of circumstances that signifies uncertainty concerning regardless associated with whether a achievable loss to an entity

could arise via litigation.

Note disclosure is actually necessary.

Exhibit 2, web page 64, lists audit procedures from SAS no. The Particular usefulness with the lawyers' responses

as audit evidence could be limited. Your degree of probability (likelihood) of an unfavorable outcome.

Exhibit 4, above, compares the terms simply by putting these on the continuum.

While your ABA doesn't use reasonably possible, 1 view is always that the

term may be put on the ABA continuum among remote and probable within the

same method as the Statement no. Thus, even when both agree the actual likelihood is 85%, the

auditor is not really heading to be informed the particular chance of loss will be probable and also the

amount, when it may be reasonably estimated, won't be recorded throughout the

financial statements in accordance along with Statement no. The

ABA definition adds the prospects regarding not really succeeding are usually extremely

doubtful. 5 as well as American Bar


Our informal analysis says while financial statements of

small organizations sometimes disclose specifics of outstanding

litigation, those regarding significant corporations consist of really general notes

suggesting absolutely no material loss is actually more most likely to occur. The sample disclosure note

is proven inside the sidebar in left.

b. 5 describes as reasonably achievable situations. 5 definitions provides led to

studies asking CPAs and others to end up being able to interpret your meanings associated with reasonably

possible and probable. When

the lawyer doesn't contain a bid in the probability involving an

unfavorable outcome, the issue is a lot more difficult since accrual involving a

loss could or even is most likely not necessary. The Actual lawyer's definition will be more

stringent--95%. 5 as "more when compared with remote but less than likely"

(probable)--must always be disclosed inside economic statement notes. Accordingly, your statement not only

uses a new various definition of probable but within addition doesn't require use of

either the definition or even the term.


* IN ANSWERING AUDITOR inquiries, lawyers are generally guided by the American

Bar Association [ABA] Statement of Policy Relating To Lawyers'

Responses for you to Auditors' Requests for Information. b.

Amount is not able to reasonable estimation--note disclosure is


* Inquire and also check with management your policies and processes adopted for identifying, evaluating as well as accounting regarding litigation.

Likelihood regarding occurrence of event or even events

* We think the motion could be settled with regard to under the damages


* THE ACCOUNTING REQUIREMENTS with regard to litigation loss contingencies are

outlined throughout financial Accounting Standards Board Statement no. given issues within obtaining the information a person need from

lawyers, how are the Statement no. Such matters arise out with the regular course of

business and also relate to product liability, government regulation

(including environmental issues) and other issues. Proponents regarding this view

emphasize that will the final results regarding litigation against clients usually are

unpredictable until settled (including appeals). 12, Inquiry of your Client's

Lawyer concerning Litigation, Claims, as well as Assessments, and SAS no. 5 (Emphasis added.)

Remote "The potential for the close to future "Prospects pertaining to the

event client not

or perhaps events occurring can be succeeding within its

slight." protection are

judged to be extremely


ful and also the prospects of


cess from the claimant are

judged being slight."

Reasonably Your potential for the actual future

possible event or

events occurring is more


remote but lower than likely.

Probable "The future event or perhaps events "Prospects regarding the

are claimant not

more likely to occur." succeeding are generally judged to


extremely doubtful and


prospects for fulfillment by


client within its defense


judged to be slight."

Reasonably feasible (more when compared with remote, nevertheless less than likely)

2. Average

responses pertaining to reasonably feasible differ by study and therefore are among 15%

and 42%. This belief

probably is incorrect. 5,

Accounting regarding Contingencies, along with FASB Interpretation no. 12, for you to supplement

information obtained through lawyers' letters.

3. Must a lawyer who believes any litigation loss can be probable under the

ABA statement inform the auditor? Since indicated above, the ABA definition

of probable suggests an increased probability compared to will the actual Statement no. Actually in the large event the ABA definition is more stringent, resulting in

fewer remote likelihoods, the particular most likely outcome is additional audit

procedures to determine whether a note disclosure is actually necessary.

Accordingly, differences throughout the way the CPA along with legal professions view

remote could have got limited real-world significance.

* That can be our opinion which the business is going to be capable of assert

meritorious defenses to end up being able to this action.

* Analyze documents with regards to litigation, including correspondence

and invoices coming from lawyers.

Consider the need to possess an explanatory paragraph. 12, for lawyers' letters that don't explicitly use either

remote or perhaps probable.

* Disclose a customer confidence or perhaps secret.

Explanatory paragraph is actually required.

* DIFFERENCES IN LAWYERS' AND auditors' responsibilities in

litigation reporting stem mostly from different definitions with regard to terms

such as remote and also probable. under these circumstances

the lawyer is not likely to consider the big event probable as well as will not report it

to the particular CPA. Your quantity as well as selection of prospective loss. Whenever auditors get lawyers' letters

saying litigation losses are neither probable nor reasonably possible,

is it safe to always be able to conclude monetary statement disclosure isn't required

under accounting standards? Will a new normal unqualified opinion meet

audit requirements?

These concerns are hard to solution simply because lawyers'

interpretations regarding their responsibilities in replying to auditors are

different coming from auditors' expectations. 5

definition. 12, Inquiry of your Client's Lawyer Relating To Litigation, Claims,

and Assessments, and also SAS no. 5.

Effect on audit report. 14, Reasonable

Estimation of the amount of your Loss. 5 along with ABA

Material reasonably possible loss contingencies--defined by Statement

no. 5 accounting specifications are already fulfilled by a note (or by no)

disclosure. 5 and also deciding whether as well as not an explanatory paragraph

should end up being added to the audit report, lawyers are usually responsible for

"winning the actual case." Since info given by lawyers may

affect a new case adversely, these responsibilities might conflict.

1. Indeed, the really first sentence in the ABA statement says,

"The public fascination with protecting your confidentiality of

lawyer-client communications is actually fundamental."

Likelihood regarding occurrence of event or even events

Probable (likely to end up being able to occur)

* Send letter regarding audit inquiry for you to client's lawyer(s) as well as obtain


Proper accounting as well as auditing pertaining to litigation loss contingencies

present numerous practice problems. 5:

* Probable. * Constitute an admission by the client.

No explanatory paragraph is actually necessary.

* The idea can be our opinion that the possible liability to the company in

this proceeding can be nominal within amount.

Likelihood regarding occurrence regarding event or events

* We believe that the plaintiff's case against the business is

without merit.

SAS no. Your company believes there's absolutely no

merit towards the litigation.


The authoritative guidance for lawyers, American Bar Association [ABA] Statement involving Policy Relating To Lawyers' Responses to

Auditors' Requests pertaining to information (reprinted as a possible exhibit in order to SAS

no. Replies confirmed significant variation. 5's likely-to-occur requirement seems less definitive as compared to the

ABA's incredibly doubtful or slight. This kind of will not help make the

results reasonably possible--they simply tend to be unpredictable.

* Study contracts, loan agreements, leases, correspondence as well as similar

documents via tax or other government agencies.

Procedures undertaken for different purposes which may disclose

Given lawyers' hesitancy to offer likelihood and amount

estimates, initially glance it seems another lawyer--another

"expert"--could provide the information. 58 audit reporting needs becoming met? Statement no. 5? because your auditor's inquiry seeks

an appraisal depending on Statement no. Using your SAS no. The Actual auditor can be more

likely to add an explanatory paragraph as the quantity regarding reasonably

possible loss becomes larger and/or your likelihood regarding occurrence involving a

material loss increases.

* Obtain info regarding warranties coming from bank confirmation


Differences inside lawyers' and auditors' responsibilities in

litigation reporting might be better understood by simply considering four


* Obtain via management the description and an evaluation of

litigation and acquire created representation that all FASB Statement no.

5 matters have been disclosed.

Procedures performed primarily regarding litigation, claims along with assessments


Financial statement treatment


* WHEN AUDITORS RECEIVE lawyers' letters declaring litigation

losses are neither probable nor reasonably possible, they possess to decide

whether accounting standards require financial statement disclosure.

The general nature with the Statement no. 12), warns lawyers they will must be careful throughout communications with

auditors. However, the situation can be even more severe if lawyers לינק believe

that degree has been met and do not record it. We believe your plaintiff will

have severe problems establishing the particular company's liability under

this act; nevertheless, in the event the plaintiff will be successful, the award may be


EXHIBIT three Comparison of FASB Statement no. The Actual auditing specifications are generally found

in Statement on Auditing Standards no. both the financial statement therapy along with the

impact on the audit statement are usually affected by whether the chance of

loss is actually remote, reasonably feasible or perhaps probable.

EXHIBIT one Reporting in uncertainties

* We are of the opinion that motion will not bring about any

liability to the company.

d. Your lawyer considers cases inside terms of probabilities and

believes it is 85% likely a loss associated with profits will occur. 5 requires

note disclosure of reasonably feasible material litigation loss

contingencies as well as adjusting entries with regard to material probable estimable ones. This specific article discusses the accounting,

auditing and also legal concerns related in order to reporting litigation loss

contingencies; highlights variations throughout lawyer and also CPA responsibilities

that can easily cause problems; and also indicates procedures in order to overcome these



a. Although certain litigation

is described throughout a lot higher detail throughout SEC filings, companies generally

still do not really offer likelihoods or amounts. [Emphasis added.]

* read minutes regarding conferences regarding stockholders, directors and other


* Based about the facts proven to us, following a full investigation, it is

our opinion in which zero liability is likely to be established contrary to the organization in

these suits.

* We believe the company will be able to defend this action


EXHIBIT 4 Continuum regarding terms based on FASB Statement no. Our analysis regarding Accounting

Trends and Techniques said that annually fewer compared to twenty with the 600

companies in the trial obtain such modifications for

litigation-related matters.

* Prejudice the particular client's protection of a claim.


Remote (slight chance)

4. Statement

no. 12

approach, litigation details are obtained from the client, shown in

a "letter of audit inquiry for the client's lawyer" and

corroborated as well as expanded upon in the reply from your lawyer (who has

devoted "substantive attention" to the matters). The representative of the Securities and Exchange Commission Office

of the actual Chief Accountant stated publicly he believes absolutely no adjustment

currently will be becoming made unless the particular loss is essentially certain to end up being able to occur.

Consistent using this belief, the General Accounting Office, inside its

report Failure associated with CPA Audits in order to Identify as well as Record Significant Savings

and Loan Problems, suggested this furthermore will end up being the case together with various other loss


The ABA statement in addition says lawyers usually must refrain from

expressing judgments upon outcome--either probability or quantity involving loss.

The net effect is actually CPAs usually can easily obtain relatively complete

responses on the existence regarding litigation and in addition the dates when the

underlying cause occurred (parts a new and also b regarding SAS no. In Order To help overcome these difficulties, auditors must use

appropriate procedures, like those whom perform in SAS no. Also, it's doubtful another lawyer could provide additional

insight to the difficulty since of the trouble regarding predicting the

results regarding litigation, specifically without knowing the manner within which

the client's lawyers intend for you to defend against the action.

The definitions associated with remote tend to be similar: each use the term slight. Lawyers' replies clearly refer to the

section in the ABA statement in which uses the actual ABA definitions. When

lawyers do not supply a particular likelihood, auditors must attempt to

determine whether Statement no. Whilst the results of

litigation can't be predicted along with certainty, management believes,

based around the advice associated with organization counsel, the final outcome associated with such

litigation won't have a material adverse effect on XYZ's

consolidated financial position.

Financial statement treatment

The test is actually representative regarding reporting by simply many huge corporations

in that it's relatively brief as well as general. Slightly much less variation exists with regard to probable, using various

studies reporting mean responses involving approximately 60% to 70% likely. Not Really understanding the limitations of

lawyers' letters might lead auditors to always be able to violate professional

standards unwittingly. 5 continuum. Quantity can be effective at reasonable estimation--adjust accounts. The Actual lawyer,

however, won't dietary supplement this list pertaining to omitted unasserted claims

probable involving assertion and frequently will inform the actual client regarding just about any omissions; he or

she could be required to resign if the client will not disclose them to

the auditor. 12) yet less

complete responses on the chance associated with an unfavorable outcome and also the

amount associated with potential loss (parts c and also d).

Thus, any lawyer's letter in which doesn't characterize the likelihood

of loss as probable is not sufficient in order to decide whether as well as certainly not the Statement

no. 58,

Reports upon Audited Monetary Statements.

* We're not able to express an opinion as towards the merits associated with the

litigation at this time. 5 requirements, it may be argued

the definitional issue is unimportant as well as lawyers are likely to use the

statement's definitions when reporting upon litigation. The Particular accounting and also auditing

standards for these contingencies--which result through litigation, claims,

assessments as well as unasserted claims against the client--are general and

require the particular exercise regarding considerable expert judgment.

Financial statement treatment

* This particular action involves unique characteristics wherein authoritative

legal precedents do certainly not manage to exist. Any time CPAs receive lawyers' replies along with insufficient

information, a scope limitation provides occurred that will might result in either a

qualified opinion or a disclaimer regarding opinion.

EXHIBIT 2 Audit treatments regarding litigation, claims as well as assessments

Ambiguous terminology requiring the actual auditor in order to request clarification:

* Throughout our opinion, the organization features a substantial chance of prevailing

in this action.

* Impair the particular client-lawyer confidentiality privilege.

Exhibit 3, web page 64, abstracts the particular FASB and ABA definitions.

* Remote. 12, which in turn deals specifically using lawyers' letters, says

auditors ought to obtain evidential make any difference about litigation by determining


Many lawyers believe that, despite a client's request they

provide the actual auditor with information, that they ought for you to be under candid in

letters to always be able to CPAs since or worry their replies may

In supplement to a implicit hesitancy to provide evidential make the difference on

likelihood along with amount associated with loss, the actual ABA statement provides lawyers

definitions involving probable along with remote in which are different via these in

Statement no. 58, Reviews on Audited Financial

Statements. 5

definitions? If lawyers make use involving the ABA definitions to make their reply,

the issue gets among deciding whether the definitions differ

significantly coming from those in Statement no. Thus, with regard to example, a loss

contingency could satisfy the FASB requirements for loss accrual (likely to

occur) and still not necessarily meet the ABA concept of probable (extremely

doubtful as well as slight possibility of succeeding).

No disclosure is necessary (unless typically accepted accounting

principles call for 1 inside a specified circumstance).

EXHIBIT 5 Alternative and ambiguous terminology utilized by lawyers

c. certain involving these

actions seek damages throughout large amounts. The Particular period associated with time where your underlying trigger pertaining to legal action


Effect on audit report

* Obtain assurance through management, ordinarily throughout writing, that

unasserted claims probable associated with assertion happen to be disclosed.

a. the auditing requirements are

included inside American Institute of CPAs Statement about Auditing Standards

no. Can it make the difference regardless involving whether lawyers use the Statement no. 14, Reasonable

Estimation of the amount of a Loss. Lawyers are usually reluctant to

provide CPAs using estimates in the probability along with corresponding dollar

amounts associated with losses; thus, virtually any info they offer has to be able to be evaluated

carefully prior into it being used. Will an attorney interpret remote, reasonably feasible along with probable

according to always be able to Statement no. Paragraph 5 in the ABA

statement suggests legal counsel "may" elect to document a new probable

outcome. A New conflicting view is that

the ABA's failure for you to acknowledge reasonably feasible is actually deliberate,

making any probabilistic continuum inappropriate. This particular means

CPAs must exercise skilled judgment in deciding if potential

litigation losses needs to become able to be included in the monetary עורך דין המתמחה בהוצאה לפועל statements.


Assume, with regard to example, a new CPA believes a new likelihood regarding 70% as well as greater

should become considered probable. Indeed, an interpretation of SAS no. the ABA says an unfavorable outcome for that client is

probable when the claimant's prospects involving not succeeding are usually judged

to become very doubtful and the client's prospects for fulfillment in

its protection are usually judged to be slight.

Effect on audit report

Auditors must help to make inquiries involving clients' lawyers to aid them

decide if the clients' economic statements must reflect possible

future litigation losses. 12,

consisting primarily of inquiry involving management, reading minutes and

documents along with inquiry of the client's lawyer. 5's meaning of probable (likely

to occur) has been met, making it important your further procedures

outlined within exhibit 2 always be performed as well as documented.


The main accounting requirements regarding litigation loss contingencies

are outlined throughout Monetary Accounting Standards Board Statement no. The Actual AICPA acknowledged the particular difficulty and also provided guidance

for auditors about the terminology often included throughout lawyer's letters.

Exhibit 5, web page 66, summarizes in which guidance, within an interpretation of

SAS no. We

are aware of zero study that questioned lawyers to always be able to respond in order to either



Auditors frequently are classified as on to assess litigation-related

accounting estimates associated with both the actual probability of occurrence along with the

amount. Thus, it is

risky to imagine lawyers are employing the particular Statement no. 12 says the lawyer

"is not necessarily needed to make use of these terms inside communicating his evaluation

to your auditor." Inside paragraph 8, the particular ABA statement says the

suggested approach may be modified. The idea is unlikely the actual letter will include

what Statement no. 5,

Accounting for Contingencies, along with FASB Interpretation no. Lawyers comply with ABA guidelines, while

auditors use FASB and also American Institute regarding CPAs guidance. 5 disclosure requirements as well as the SAS

no. Problems arise

when lawyers believe their own reply letters for you to CPAs could prejudice a

client's defense of a declare and in fact could constitute an admission

by the client.

No explanatory paragraph is necessary.

It appears the lawyer's letter describing a new prospective loss as

probable (and for that the particular most likely loss can be measured) will throughout most

circumstances call for monetary statement adjustment for the loss. 5.

FASB Remote Reasonably achievable Probable

0% 100%

ABA Remote Probable

Alternative terminology indicating an unfavorable outcome is actually remote:

XYZ is a party into a number of lawsuits and also claims, that it is

vigorously defending. This kind of possibly is actually not

feasible since of the confidential relationship between lawyer and

client. Although CPAs are

responsible for figuring out there's "adequate disclosure"

under Statement no. the ABA says an unfavorable outcome is remote if the

prospects for that client not necessarily succeeding inside its defense are usually judged for you to be

extremely doubtful and additionally the prospects regarding good results by the claimant are

judged to be slight.

The lawyer may always be the expert about litigation, yet differences in

lawyers' and also CPAs' responsibilities together with respect for you to common

clients have got resulted inside contentious difficulties. This specific is difficult to accomplish because of definitional differences

between CPAs along with lawyers, the particular generality regarding Statement no
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