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14-38 (Cont'd.)

Many companies argue that uncertainties related to (a), (b), and (c) make the inclusion of "hard-dollar estimates meaningless."  However, at a minimum, a contingent liability should be recognized and included in the internal customer-profitability reports.

2.Papandopolis' controller may believe that if estimates of future possible legal exposure are sufficiently uncertain, then they should not be recorded.  His concern about "smoking guns" may have a very genuine basis––that is, if litigation arises, third parties may misrepresent Papandopolis' concerns to the detriment of IF.  Any written comments that she makes may surface 5 or 10 years later and be interpreted as "widespread knowledge" within IF that they have responsibility for large amounts of environmental clean-up.

Given this background, Papandopolis still has the responsibility to prepare a report in an objective and competent way.  Moreover, she has visited 10 customer sites and has details as to their toxic-waste handling procedures.  If Acme goes bankrupt and has no liability insurance, one of the "deep pockets" available to meet toxic waste handling costs is likely to be IF.  At a minimum, she should report the likely bankruptcy and the existence of IF's contingent liability for toxic-waste clean-up in her report.  Whether she quantifies this contingent liability is a more difficult question.  Papandopolis has limited information available to make a meaningful quantification.  She is not an employee of Acme Metal and has no information about Acme's liability insurance.  Moreover, she does not know what other parties (such as other suppliers) are also jointly liable to pay Acme's clean-up costs.

The appropriate course appears to highlight the contingent liability but to not attempt to quantify it.

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