Response to the following problem:
Microsoft Corporation is the defendant in numerous lawsuits claiming unfair trade practices. Microsoft has strong incentives not to disclose these contingent liabilities. However, GAAP requires that companies report their contingent liabilities.
Required:
1. Why would a company prefer not to disclose its contingent liabilities?
2. Describe how a bank could be harmed if a company seeking a loan did not disclose its contingent liabilities.
3. What ethical tightrope must companies walk when they report contingent liabilities?