On June 16, 2009, the Investor Environmental Health Network (IEHN) released a report entitled Bridging the Credibility Gap: Eight Corporate Liability Accounting Loopholes that Regulators Must Close, which discusses the effect of undisclosed potential and pending liabilities on investors. The report identifies eight regulatory loopholes that businesses could use to hide future liabilities from an investor’s risk assessment. Two case studies for asbestos and nanomaterials are used to assess the effectiveness of current disclosure requirements and recommend improvements.
The report calls for clearer standards of disclosure from the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) to allow investors to make informed decisions. The report identifies the following eight loopholes that the SEC and FASB need to address:
- Concealed science;
- Disclosing the known minimum;
- Privileging secrecy;
- Inconsistent estimates;
- Hidden assumptions;
- Missing benchmarks; and
- Risk-free proxies.
According to the report, closing these loopholes will be difficult because investors are currently in a very weak position, managers have no incentive to disclose potential liabilities, and the regulatory changes must walk a fine line between giving investors sufficient information and not seriously harming the value of the companies.