Accounting Class Action Settlements Stable But Associated Market Losses Double

May 2, 2014

The number of accounting case settlements in 2013 increased for the second year in a row, but remained low compared with the previous ten years, according to Cornerstone Research’s latest report

According to the report, “Accounting Class Action Filings and Settlements- 2013 Review and Analysis,” while the number of securities class action filings that included accounting allegations (47) remained relatively constant in 2013 compared with 2012, the market capitalization losses associated with these filings more than doubled.

The low number of accounting case filings and absence of a year-over-year change is consistent with trends in overall securities class action filing activity, according to the Los Angeles-based research and consulting firm. The previous two years have been marked by an absence of new types of securities class actions, such as those involving Chinese reverse mergers (CRMs).

The presence of CRM cases contributed to a drop in the total value of accounting case settlements, the report says.

“While there were very few new Chinese reverse merger cases filed in 2013, over 30 percent of accounting case settlements were CRM cases. The presence of these cases, which tend to involve smaller firms and lower shareholder losses, contributed to a drop in the total value of accounting case settlements,” said Dr. Laura Simmons, a senior advisor at Cornerstone Research. “CRM cases are also different in that they more frequently name auditors as defendants.”

The report also discusses a renewed emphasis by the SEC on identifying accounting-related fraud that may have significant consequences for private securities litigation involving accounting issues.

“The SEC has announced efforts to target alleged accounting fraud, including what is commonly referred to as its ‘RoboCop’ software,” said Dr. Elaine Harwood,  a vice president of Cornerstone Research and head of the firm’s accounting practice. “It is conceivable that the SEC’s current focus could provide an opportunity for plaintiff counsel to make accounting-related cases a future wave in securities class actions.”
Cases are considered “accounting cases” if they involve allegations related to Generally Accepted Accounting Principles (GAAP) violations, auditing violations, or internal control weaknesses.

More Findings

  • At 28 percent of all cases, the proportion of accounting cases filed in 2013 reached a 10-year low.
  • Plaintiffs alleged internal control weaknesses in over 70 percent of accounting case filings. When accompanied by company announcements reporting the presence of such weaknesses, these cases settle for substantially higher amounts and higher settlements as a percentage of shareholder losses.
  • In 2013, the DDL Index for accounting case filings reached its highest level since 2008.
  • Accounting case filings in 2013 were nearly evenly distributed over seven industry sectors, but the majority of settlement dollars in accounting cases were in the financial sector.
  • At 40 percent of all accounting cases, the proportion of filings involving financial restatements in 2013 was higher than in any of the previous five years. The number and proportion of settlements involving restatements, however, were lower than in any of the previous five years.
  • In 2013, the proportion of accounting case settlements involving auditor contributions was the highest in several years.
  • In contrast to prior years, in which accounting cases represented as much as 97 percent of the total value of case settlements, accounting cases represented only 25 percent of the total value of cases settled in 2013, primarily due to one large non-accounting case settlement.

Source: Cornerstone Research

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