Securities class action filings that involve accounting allegations increased in 2011 from 2010, which had the lowest number of accounting case filings in recent years, according to a new report.

The report, by Cornerstone Research, found that of the 188 securities class actions filed in 2011, 70 included accounting allegations, compared with 46 in 2010. This increase can be attributed in part to the number of Chinese reverse merger filings in 2011, which are significantly more likely to involve restatements of financial statements and, as a result, include alleged violations of generally accepted accounting principles.

The number of accounting case filings involving financial restatements also increased, reversing a four-year trend of declines. In 2011, 20 accounting case filings included financial restatements, as opposed to 12 case filings in 2010.

Declines in the number of restatements had been widely attributed to improved corporate governance practices as a result of the Sarbanes-Oxley Act. In 2010, however, the number of restatements by public companies increased, which may have contributed to the increase in case filings involving restatements.

For the second year in a row, more than 60 percent of accounting case filings included allegations of internal control weaknesses. These allegations relate to compliance with the reporting requirements of Section 404 of Sarbanes-Oxley. In 2011, only 17 percent of the initial filings with these claims were accompanied by company announcements reporting the presence of internal control weaknesses over financial reporting. Plaintiffs may believe that including these claims will bolster their position in litigation, whether or not material internal control weaknesses were actually present, the report noted.

 

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