A recent Cornerstone Research report shows that accounting fraud cases, either alleged in securities class-action lawsuits or in enforcement cases brought by the US Securities and Exchange Commission (SEC), increased sharply over the past year, due in part to the agency's heightened focus on accounting-related fraud.
The report, Accounting Class Action Filings and Settlements—2014 Review and Analysis, shows allegations of accounting fraud surged 47 percent in securities class-action lawsuits last year over 2013. That partly reflects a corresponding 46 percent increase in accounting fraud enforcement cases brought by the SEC for the 2013-14 fiscal year that ended Sept. 30.
The rise follows two years of low activity. In 2014, 69 new cases were filed involving accounting compared to 47 the prior year and 45 in 2012.
Seventy percent of settlements involved accounting cases – the highest in four years. And the share of total settlement dollars in accounting cases rose from 25 percent in 2013 to 85 percent last year, according to the report.
The results were particularly notable because overall securities class-action suits remained almost the same, with 170 new cases filed in 2014 compared to 166 in 2013, according to Elaine Harwood, PhD, a vice president of Cornerstone and head of the firm’s accounting practice.
“The increase appears to be, at least in part, a result of the SEC’s heightened focus on accounting-related fraud as demonstrated by the substantial growth in accounting case filings that refer to inquiries or actions by the SEC,” Harwood said in a prepared statement.
The report also indicates that filings of accounting cases involving restatements of financials was at the highest level in seven years as to the number of (29) and percentage of (42) total accounting cases.
“The increase in filings of cases involving restatements is consistent with our finding of a relative increase in negative stock-price movements surrounding restatement announcements in 2014 as compared to recent years,” Laura Simmons, a senior adviser at Cornerstone, said in a prepared statement. “Overall, the relative increase in stock-price drops surrounding restatement announcements may have encouraged plaintiffs to file these cases.”
Other key report findings showed:
More than one in four accounting case filings referred to an SEC inquiry or action – the highest level since Cornerstone began tracking this variable in 2010.
The Disclosure Dollar Loss Index for accounting case filings with restatements increased to its highest dollar level since 2005. (Disclosure Dollar Loss measures the decline of market capitalization at the end of the class period.)
The energy sector emerged in 2014 as the highest contributor to total settlement value, while accounting case settlements associated with financial firms decreased.
The number of accounting case settlements involving Chinese reverse merger cases also declined in 2014, reflecting a significant decrease in filings of these cases beginning in 2012.
The number of accounting cases involving internal-control weaknesses was higher than in any of the previous five years.
Cornerstone notes that “accounting cases” refers to allegations involving US Generally Accepted Accounting Principles, auditing violations, or weaknesses in internal control over financial reporting.
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.