One company I recognized with contingent liabilities was GoPro Inc. GoPro facilitates personal
experiences through production of cameras and the sharing experience on their social app. On
their K-10 of Dec. 31, 2019 there is a section in the contingency notes for legal proceedings. GoPro
was dealing with lawsuits from shareholders over derivatives. These lawsuits were similar to
lawsuits filed in the past that were dismissed by the court. Lawsuits were filed by shareholders
over derivatives in 2016, 2018 and 2019. There are notes in the financial statements mentioning
the lawsuits but they are not in the financial statements. It is possible that GoPro has an
expectation that current lawsuits may also be dismissed and therefore did not have to be accrued
in financial statements.
Some procedures that Auditors can use to identify these types of contingencies are reviewing
contracts for derivatives and obtaining a legal letter. The auditor can obtain contracts for
derivatives by requesting management to request from the legal department. Auditors should
then read through the contracts for derivatives to identify any agreements that violate legal
standards. The Auditor can hire a lawyer with experience in corporate law to assist in the audit.
The auditor can also request of management to obtain the legal letter. In the legal letter the
lawyer will divulge information regarding litigation. Lawyers will learn the details about all the
lawsuits filed by shareholders involving the derivatives.
Walmart for my post (mostly because I was just there and it's fresh on my mind lol!). The biggest
contingency liability they face is the lawsuits they face as well as warranties on products. Those
qualify as contingency liabilities as a contingency liability is a liability that occurs (or may occur) in
the future.
It is hard to plan for a contingency liability such as a lawsuit as it's a waiting for the other shoe to
drop kind of situation, so accruals and plans can be made, but nothing can truly be enacted until
they know what to expect for the actual liability. For warranty contingency liabilities, it is a little
easier to plan as accruals can be made ahead of time for warranty replacement charges the
company plans to have to be responsible for - the only variability with that is how many the
company will be responsible for.
The best way to find this contingency is to do the following:
evaluate current or past costs of legal proceedings
review and analyse memos or meeting minutes from management detailing any lawsuits or
litigation pending or completed against Walmart as a company
review and analyse legal notifications or documents of lawsuits that are pending or completed
Reference:
EDGAR: Walmart, Inc. (WMT). EDGAR. (2022, March 18). Retrieved October 16, 2022, from
https://www.sec.gov/ix?doc=%2FArchives%2Fedgar%2Fdata%2F104169%2F000010416922000012%
2Fwmt-20220131.htm
Messier, W. F., Jr., Glover, S. M., & Prawitt, D. F. (2017). Auditing & assurance services: A
systematic approach (10th ed.). New York, NY: McGraw-Hill Education.
