Moreover, statements about the firm's internal view of the litigation could be admissible into evidence as admissions, further weakening the firm's position as a defendant or a plaintiff. All of these factors will give companies strong incentives to accrue the lowest possible number, and to support that calculation with extremely guarded and incomplete assessments of their litigation posture. This will result in loss accruals for litigation becoming less reliable. The net effect is that public accounting will be weakened, without any benefit to the Commission's concerns about earnings management. Loss Accruals Related to Tax Matters .
Similar concerns exist regarding loss accruals for tax matters.
By disclosing the amount accrued over a particular tax strategy, a company might feel inhibited from pursuing legal tax minimization strategies if there is any concern at all about its interpretation of ambiguities in the applicable tax code. Companies may also be concerned about disclosing their tax strategies to competitors. Again, shareholders would not be well-served. We wish to emphasize that we are not objecting in any way to inclusion of litigation or tax-related reserves as part of a firm's contingent liabilities, to be reported without identification in its accrued liabilities. Auditors are required to evaluate the adequacy of accruals for contingencies, and to attest that they are in accordance with generally accepted accounting principles, and the Commission can and should investigate any failures in this audit function.