Accounting Class Action Settlements Stable But Associated Market Losses Double

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.

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Source: Cornerstone Research