Donald Chapin is key FASAB member behind the decision to use more likely than not in place of likely to occur. Mr. Chapin had done considerable analysis of the collapse of the savings and loan industry during his last few years at the General Accounting Office (GAO). He believed that if ailing S&Ls had been required by accounting standards to disclose more about their contingent liabilities during the 1980s, the industry’s fragile financial condition would have become evident sooner than it was, and the industry collapse might have been averted or, at least, its cost would not have been as great. Clearly, Mr. Chapin and a majority of the other board members at the time were trying to make federal accounting standards better, more exacting, more stringent, more revealing than their non-federal counterparts. It seemed like a great idea at the time. Many still think it is.

Three years later, however, an unintended consequence surfaced. A cabinet-level agency’s general counsel was asked to provide the routine “lawyer’s letter” communication to his agency’s auditors required by Statement on Auditing Standards (SAS) Number 12, Inquiry of a Client’s Lawyer Concerning Litigation, Claims, and Assessments. (Under SAS 12, an auditor’s inability to obtain the required lawyer’s letter is a scope limitation sufficient to preclude an unqualified opinion.) The auditors informed the general counsel that, under federal accounting standards, he was obliged to inform them of existing or pending litigation that was more likely than not to result in a loss to the agency. The general counsel pondered this briefly and said: “No way.” He pointed out that such disclosures would (a) have significant detrimental impacts on pending litigation (plaintiffs could simply look to published financial statements to see how strong the agency thought its position was); (b) probably invite litigation (an entity considering litigation against the agency would certainly proceed if the agency’s general counsel disclosed that he or she thought it more likely than not that the agency would lose); and (c) be deemed a waiver of attorney-client privilege. The general counsel also pointed out that, as an attorney, he was bound by neither the accounting standard nor the auditing standard. He also pointed out that the American Bar Association (ABA) adopted a delicate policy in 1976 concerning such disclosures based on the likely to occur meaning of probable.

FASAB faced an important test: Would it retreat from its noble attempt to make federal standards a higher bar to reach or stay the course and risk qualified opinions as far as the eye could see? (After all, it took the Auditing Standards Board years to work out the understanding with the ABA on likely to occur.)

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