In an eye-opening report card, Cornerstone Research reveals that securities class-action lawsuit filings with accounting allegations – violations of GAAP and auditing or weak internal controls – increased 33 percent in 2016 over the prior year.
What’s more, the study, Accounting Class Action Filings and Statements—2016 Review and Analysis, indicates that an unprecedented number of mergers and acquisitions was behind the accounting-related cases. For the first time, many of the cases alleged problems in reconciling non-GAAP to GAAP measures.
There were 93 accounting-related class-action lawsuits filed last year, up from 70 in 2015 and 69 in 2014. The 93 filings last year is the most since the 97 reported in 2008.
The number of so-called “traditional” accounting case filings – those that involve Rule 10b-5, Section 11, and/or Section 12(a)(2) claims – remained unchanged year-over-year, but market capitalization losses (expressed as the Disclosure Dollar Loss Index, or DDL) to defendants was the highest in eight years at $47.7 billion. (Nonaccounting cases were $59.3 billion.) It should be noted that the index is not an indicator of liability or measurement of possible damages.
Finally, the total value of accounting case settlements was the highest in nine years as a result of the number of approved settlements and a rise in the average settlement amount. Though the number of accounting case settlements fell from 50 in 2015 to 46 in 2016, the total settlement value of $4.8 billion last year was almost 80 percent higher year-over-year and the highest since 2007.
According to the study, nine accounting case “mega settlements” of more than $100 million represented $4.4 billion of the total accounting case settlement value in 2016.
“Accounting cases often represent the majority of the total value of all settlements reached in a given year, typically with just a few settlements contributing much of the value,” said Laura Simmons, a senior advisor at Cornerstone Research. “In 2016, almost 75 percent of the total value of cases settled was associated with a handful of accounting case settlements, including two over $1 billion. The presence or absence of a few settlements of this size can have a dramatic impact on the overall numbers for a given year.”
Industry sector. The majority (71 percent) of accounting case filings in the consumer, non-cyclical sector were against biotechnology, pharmaceutical, and healthcare companies – exceeding the historical level for the third consecutive year. In the financial sector, filings were notably lower than they were from 2007 to 2010, and lower than the overall average from 2007 to 2015.
Restatements. The total restatement case DDL in 2016 grew to 58 percent above the historical average, even though there were fewer case filings. About a third (35 percent) of restatement case filings in 2016 involved companies in the consumer, non-cyclical sector – the highest of any sector. The average DDL for restatement cases was smaller than that for other accounting cases for the fourth consecutive year.
Internal control. Allegations of internal control weaknesses have been a factor in the majority of accounting case filings for the past seven years. In 2016, 59 percent of filings included those allegations – exceeding the historical average for the fourth consecutive year. Of the 14 accounting case filings in 2016 that included allegations and announcements of internal control weaknesses, about 60 percent also included a restatement.
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.