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A THEORETICAL AND EMPIRICAL INVESTIGATION OF THE RELEVANCE AND RELIABILITY OF CERTAIN OPINIONS CONCERNING PENDING LITIGATION
Abstract
This study gathered theoretical and empirical evidence about the relevance and reliability of opinions presented in notes to annual reports in which either (or both) management or the company's legal counsel indicates that the conclusion of a lawsuit will not result in a material loss to the reporting company. Doubts had been raised about the reliability of these opinions by the apparent contradiction between the presentation of an opinion indicating that the likelihood of loss from litigation is remote and the fact that accounting standards do not require the disclosure of pending litigation when the likelihood of such a loss is judged remote. An analysis, based on the descriptions of relevance and reliability in Statement of Financial Accounting Standards No. 2 and on evidence in the accounting literature, was made of whether such opinions appear to be relevant and reliable, the prerequisities of useful financial information. Tests were conducted of the predictive ability--an indicator of accuracy--of such opinions presented with litigation in the 1978 annual reports of Fortune 500 companies. The analysis suggested that such opinions are relevant, but left doubts about the accuracy and the verifiability of these opinions and, therefore, about their reliability. The test results indicated that such opinions accurately predict that litigation will not result in material losses. The results also implied that auditors find such opinions sufficiently verifiable to prevent their blatant misuse. The study concluded that such opinions are useful to decision makers and that, despite doubts about their reliability, many decision makers may be willing to accept them as such. Since the Financial Accounting Standards Board considers usefulness to decision makers as the most important determinant of appropriate financial information, most likely it would find the current system of voluntary use of such opinions acceptable.
Subject Area
Accounting
Recommended Citation
SKARO, MATTHEW MARTIN, "A THEORETICAL AND EMPIRICAL INVESTIGATION OF THE RELEVANCE AND RELIABILITY OF CERTAIN OPINIONS CONCERNING PENDING LITIGATION" (1987). ETD collection for University of Nebraska-Lincoln. AAI8715856.
https://digitalcommons.unl.edu/dissertations/AAI8715856