Class-action securities lawsuit filings alleging accounting wrongdoing rose 33 percent to 93 last year, the highest level since 2008 and the fourth consecutive annual increase, according to a new report, while settlement values for accounting-related cases reached their highest level of the past nine years.
The annual report, from Cornerstone Research, found an unprecedented number of federal filings of class actions involving mergers and acquisitions were the main drivers behind the increase in accounting-related cases. “Traditional” accounting case filings, those with Rule 10b-5, Section 11, and/or Section 12(a)(2) claims, stayed comparatively stable, though those filings were much bigger in terms of the defendant firms’ market capitalization losses.
“In 2016, total accounting case filings exceeded the historical average for the third year in a row,” said Elaine Harwood, a Cornerstone Research vice president and head of the firm’s accounting practice, in a statement. “In nearly one-third of the M&A filings, plaintiffs alleged that the company failed to provide a reconciliation of non-GAAP measures to GAAP measures. This is the first time we have seen so many M&A filings with GAAP-related allegations.”
The number of accounting case settlements declined from 50 to 46. The total settlement value nevertheless climbed to $4.8 billion in 2016, almost 80 percent larger than in 2015 and the highest level since 2007. The increase was due to a comparative large number of approved settlements, along with an increase in the average amount of the settlement. Nine accounting mega-settlements (those over $100 million) represented $4.4 billion of the total accounting case settlement value last year.
“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 Cornerstone Research senior advisor Laura Simmons in a statement. “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.”
The median settlement value for cases involving write-downs jumped to $18.6 million last year, compared to $10.5 million for the period from 2007 to 2015. Both the number and percentage of accounting case settlements involving restatements increased significantly last year compared to recent years.
Cornerstone considered cases to be “accounting cases” if they involve allegations related to violations of GAAP, auditing violations, or weaknesses in internal control over financial reporting. For the past seven years, the majority of accounting case filings included allegations of internal control weaknesses. That trend continued last year, with 59 percent of accounting case filings including such allegations. An even bigger share of 2016 accounting case settlements, 70 percent, contained allegations of internal control weaknesses.
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