How to test litigation contingency disclosures against the legal case file

Testing litigation contingency disclosures means obtaining the underlying legal case file for every matter directly — not management's summary of it — and for each one independently assessing whether an outflow of resources is probable, possible, or remote, whether a reliable estimate can be made, and whether the resulting treatment (provide, disclose, or ignore) is correct, then corroborating management's own assessment with an external confirmation obtained directly from legal counsel.

Why management's own summary is not sufficient evidence on its own

Management has an incentive, not necessarily deliberate, to characterise an unfavourable matter as possible rather than probable, because the accounting consequence differs sharply — a provision versus a disclosure note versus nothing at all. The legal file and an independent view from counsel exist precisely to test that characterisation rather than accept it.

The testing sequence

1. 01Obtain a complete list of litigation and claims from sources beyond management's own registerLegal fee ledger, correspondence files, board minutes, and a direct request to in-house and external counsel for all matters they have handled, cross-checked against management's list for gaps.
2. 02Request a direct confirmation from each external counsel handling a material matterSend the request yourself, addressed to counsel, describing the specific matters and asking for their own assessment of outcome and quantum — not a request routed through management asking counsel to confirm management's figures.
3. 03Classify each matter by likelihood of outflow using counsel's assessment and your own reading of the fileProbable, possible, or remote — and test whether that classification has actually moved appropriately as the matter has progressed through the year, rather than being carried forward unchanged from the prior file.
4. 04For matters assessed as probable, test whether a reliable estimate exists and recompute the provisionWhere counsel has given a range, consider whether the best estimate within that range, or a probability-weighted expected value, is the appropriate measurement basis for the specific facts.
5. 05For matters assessed as possible, test the disclosure wording against the case fileThe nature of the claim, an estimate of financial effect where practicable, and the uncertainties, described specifically enough that a reader could understand the actual exposure rather than a generic disclosure template.
6. 06Reconcile counsel's confirmation to the disclosure note line by lineA matter counsel describes as having deteriorated during the year, with no corresponding change in the client's disclosure, is a specific finding to raise, not a general observation.
7. 07Follow up on any discrepancy between management's assessment and counsel's response directlyWhere management disagrees with its own counsel's assessment, obtain the basis for that disagreement in writing and assess whether it is adequately supported.