The number of accounting class-action settlements increased for the second straight year in 2013, but remained relatively low compared to the previous decade, according to a new study.
The report, from Cornerstone Research, found that in 2013, a total of 44 accounting class actions—cases involving alleged violations of generally accepted accounting principles and weaknesses in internal control over financial reporting—were settled, with an average settlement amount of $26.6 million.
In contrast, the 23 non-accounting securities class actions that were settled in 2013 had an average settlement amount of $156.7 million. While the number of securities class action filings that included accounting allegations remained relatively constant at 47 in 2013 compared with 2012, the market capitalization losses associated with the filings more than doubled.
At 28 percent of all cases, the proportion of accounting cases filed in 2013 reached a 10-year low, however. Cases are considered “accounting cases” if they involve allegations related to violations of U.S. GAAP, auditing violations or internal control weaknesses.
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.
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, Cornerstone noted. The previous two years have been marked by an absence of new types of securities class actions, such as those involving Chinese reverse mergers, or CRMs.
“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 Cornerstone Research senior advisor Laura Simmons in a statement. “CRM cases are also different in that they more frequently name auditors as defendants.”
The report also discusses the Securities and Exchange Commission’s renewed emphasis on identifying accounting-related fraud, which 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 Cornerstone Research vice president Elaine Harwood, who heads 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.”
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.
To read the complete report, click here.