Litigation contingency disclosures by Canadian public companies

Abstract

Litigation-type contingencies represent one of the most frequent and most important uncertainties faced in business. Inspired by the Entwistle et al. (1994) study, this study focuses on two aspects of litigation contingencies: the current status of disclosure practices by public firms, and the relationship between various environmental factors and litigation disclosure patterns.

Using the 1994 financial statements of public companies, this study examines 44 firms' specific note disclosures of both litigation gains and losses. Disclosure scores are analyzed and compared to Entwistle et al. (1994) based on the information across nine aspects of the disclosures. In addition, seven disclosure environment characteristics, including size, capital structure, ownership structure, profitability, industry, SEC listing and nature of the lawsuit, are examined for their relationship with firms' litigation disclosure practices.

The findings indicate that despite the repeated expressed dissatisfaction with litigation disclosures made by public firms, no significant improvements have been made in public companies' financial statement litigation disclosures over the three-year time frame from 1991 to 1994. Further, and interestingly, the findings also fail to identify any statistically significant associations between the seven environmental factors explored and firms' disclosure patterns.

The results of this study should be of interest to both accounting standard setters, and to future researchers in their efforts to better understand the possible causes of firms' litigation disclosure decisions.