Brattle Principal Adoria Lim and Associate Chi Cheng have authored an article for Law360 on the ongoing changes in the U.S. accounting standards initiated by the Financial Accounting Standards Board (FASB) and their impact on litigation.

A series of changes are designed to bring U.S. Generally Accepted Accounting Principles (GAAP) away from being “rules-based” and closer to the more “principles-based” International Financial Reporting Standards (IFRS). Proponents argue that the principles-based standards force financial statement preparers and auditors to judge the most suitable accounting treatment, while those opposed to the changes fear that the lack of “bright lines” will initiate more aggressive financial reporting.

The authors discuss how subsequent responses by companies, auditors, and prospective plaintiffs may affect the quality of financial reporting, and how the new standards, once adopted, will affect accounting-related litigation.

Ms. Lim and Dr. Cheng outline multiple potential impacts, one being a decrease in accounting litigation if companies report less aggressively and auditors constrain aggressive reporting. Conversely, without bright-line standards, companies may report more aggressively and plaintiffs may find more opportunities to sue. While the net effect on the volume and outcomes of litigation are uncertain, the guidance of accounting experts will be more critical than ever in explaining the possible divergent interpretation and application of the new standards.

The full article, “The Impact of New Principles-Based Accounting Standards on Litigation,” is available for download below.

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