A new report from Cornerstone Research indicates that securities class-action filings with accounting allegations rose for the third consecutive year.
According to Accounting Class Action Filings and Settlements – 2015 Review and Analysis, the 71 filings last year exceeded the average over the past decade of 67 filings. There were 69 accounting-related case filings in 2014.
Accounting cases are those involving alleged violations of Generally Accepted Accounting Principles (GAAP) and auditing, or financial reporting weaknesses in internal control, the report states.
“Not only did the number of accounting case filings increase in 2015, the market capitalization losses associated with those filings jumped, as well,” Elaine Harwood, PhD, vice president of Cornerstone Research and head of the firm’s accounting practice, said in a prepared statement.
The filings were split evenly between NYSE and NASDAQ, but the market cap losses associated with cases filed against NYSE firms were more than 4 1/2 times the amount associated with cases filed against NASDAQ firms, the report states.
Accounting case settlement expenditures totaled $2.6 billion last year, almost triple the $906 million in expenditures for 2014.
“Looking at overall settlement dollars for 2015, accounting cases represented 87 percent of the total value,” said Laura Simmons, a senior advisor at Cornerstone.
For settlements of securities class actions, accounting cases comprised the majority of total settlements, the report states.
Other takeaways from the report include the following:
The Disclosure Dollar Loss (DDL) Index for 2015 accounting cases filed was $34.8 billion, the second-largest amount in the past seven years.
More than a third (37 percent) of accounting cases were filed in the 9th Circuit – more than any other circuit. Historically, the highest number has been in the 2nd Circuit and the total DDL of those cases has been the highest of all circuits. The total DDL of cases in the 9th Circuit lagged behind the cases in the 2nd and 3rd circuits in 2015.
Accounting cases against companies headquartered outside the United States increased 43 percent, the second-highest amount in the last decade. Cases against companies based in China rose 75 percent from 2014 to 2015.
In 2015, 86 percent of accounting case settlements alleged internal-control weaknesses, the highest in 10 years.
The DDL Index for filings with alleged accounting restatements was lower than for other types of accounting case filings in 2015.
Accounting cases in 2015 had the shortest median filing lag in 10 years – eight days between the end of the alleged class period and the filing date of the lawsuit.
For settled cases with GAAP allegations, settlement amounts were highest for matters involving writedowns.
The proportion of accounting settlement dollars represented by financial firms led all sectors in 2015, reflecting 11 settlements that averaged more than $133 million.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.