Litigation-Disclosure Modifications in the 10-K: Large-Sample Evidence

Abstract

This study is the first to examine the litigation-disclosure modifications of legal proceedings (i.e., Item 103) and contingency-note disclosures (i.e., Accounting Standards Codification [ASC] 450) in the 10-K. Litigation-disclosure modifications are defined as the amount of litigation content disclosed in year t but not in year t– 1. I first confirm the Securities and Exchange Commission’s (SEC) and the Financial Accounting Standards Board’s (FASB) concern that firms are providing less litigation-disclosure modifications. I then find firms with higher proprietary cost, higher litigation risk, and non-Big 4 auditors to be associated with more litigation-disclosure modifications. I also find that although firms are providing less litigation-disclosure modifications in the two litigation sections, such disclosures do predict future occurrence of litigation cases and are complementary in providing litigation information to investors. Results indirectly support the FASB’s 2012 decision to not precede with disclosure policy changes in contingency-note disclosures.