INVESTORS: STRONGER “LONG-TERM SEVERE RISK” CORPORATE DISCLOSURE REQUIREMENT NEEDED IN PROPOSED FASB ACCOUNTING STATEMENT
As Comment Period Nears End, Investors See FASB Support for More Disclosure as Good Step, But Seek Investor Comments Warning that 1-Year Horizon for Severe Risk Reporting is Too Short.
IEHN Counsel's Comments - Submitted August 8, 2008
WASHINGTON, D.C. — August 4, 2008
The Financial Accounting Standards Board (FASB) is on the right track in seeking more risk disclosure by corporations, but needs to amend a proposed accounting statement to expand disclosure of severe longer-term risks, according to the Investor Environmental Health Network (IEHN). The investor organization is urging concerned parties to write to FASB in support of a stronger disclosure rule in the final days before an August 8, 2008 comment period deadline.
IEHN is a collaborative partnership of investment managers who manage more than $41 billion in assets and are concerned about the financial and public health risks associated with corporate toxic chemicals policies.
The Federal Accounting Standards Board (FASB) has concluded that its current disclosure standards do not provide investors and analysts with all of the needed information regarding liabilities. The FASB proposal would implement changes to “FAS 5,” an accounting statement on “loss contingencies” that has not been amended since its adoption in 1975.
Some of the proposed changes will, according to IEHN attorney Sanford Lewis, improve existing disclosure standards. “The newly proposed accounting standard would require corporations to disclose more to investors regarding their potential losses due to product toxicity, environmental remediation and other liabilities. This is an important step forward in improving corporate disclosure.”
However, he says, the FASB proposal stops short. “Most notably, under the proposed standard, companies are allowed to avoid disclosing severe threats in their financial statements if they believe that a loss is only remotely likely, and that the issue would not be resolved during the coming year.”
Attorney Lewis said, “Investors have seen a long history of companies underestimating the likelihood of severe financial threats - Enron, subprime lending, and asbestos liabilities are all examples of this trend. These large issues developed for many years, with eventual catastrophic consequences for investors. FASB should recognize the importance of long term risk disclosure and require companies to disclose all severe impact threats, even if the management believes they are only remotely probable.”
In addition to improving the disclosure of long term risks, IEHN wants to ensure that FASB does not open up new legal loopholes for disclosure. IEHN attorney Lewis points out, “the proposal may allow corporate lawyers to routinely block disclosure of almost any information that they designate as [potentially damaging to the company], or prejudicial. This discretionary withholding of information will surely impact investors.”
As the IEHN Web site explains: “When investors are unaware of impending financial pain at companies in which they hold stock, they often face expensive surprises. Securities laws and related financial accounting principles are supposed to arm investors with information to avoid these shocks, but these safeguards are proving inadequate to the task.” Earlier this year IEHN published a report on corporate disclosure related to product toxicity, The Toxic Stock Syndrome, available on its website, http://iehn.org.
IEHN further explains: “The FASB proposal fails to require reporting companies to disclose all loss contingencies that could pose a ‘severe’ threat to the company. A key pitfall for investors is the tendency of companies to underestimate the likelihood of severe financial threats and thereby conceal the risks.”
Richard Liroff, executive director of IEHN, encourages other investors to contact FASB about this proposal. “Investor input is critical on these issues, as business organizations can be expected to turn out in force to oppose expanded disclosure. Concerned investors need to speak out and be heard.”
Cheryl Smith, chair of the board of the Social Investment Forum and executive vice president of Trillium Asset Management (a member of the Investor Environmental Health Network) has already commented to FASB on these disclosure standards. She said that the opportunity to comment to FASB provides “an unusual opportunity to bring off-balance sheet environmental and social liabilities to light. Improved disclosure of these liabilities will significantly improve our ability to analyze companies and thus to act as long term investors.”
Attorney Lewis speaks out on the FASB rule proposal in a video, and more information on the proposed rule is available on the IEHN website at http://www.iehn.org/news.alerts.php (Web editor's note: original material removed 8/10, replaced by updated material on new FASB proposal.)
How to Comment
The public can still submit FAS 5 exposure draft comment letters this week to FASB by August 8, 2008 by email to firstname.lastname@example.org, File Reference No. 1600-100.
The Investor Environmental Health Network is a collaborative partnership of investment managers, advised by nongovernmental organizations, concerned about the financial and public health risks associated with corporate toxic chemicals policies. IEHN, through dialogue and shareholder resolutions, encourages companies to adopt policies to continually and systematically reduce and eliminate the toxic chemicals in their products. As of early 2008, IEHN members managed more than $41 billion in assets.
Patrick Mitchell, (703) 276-3265 or email@example.com.