The number of securities class action lawsuit filings raising accounting allegations rose by 47 percent in 2014 compared to the prior year, according to a new report from Cornerstone Research. The March 31, 2015 report, entitled “Accounting Class Action Filings and Settlements: 2014 Review and Analysis,” can be found here. Cornerstone Research’s March 31, 2015 press release about the report can be found here.
The report tracks what it calls “accounting cases,” which are cases that include allegations related to Generally Accepted Accounting Principles (GAAP) violations, auditing violations, or weaknesses in internal controls over financial reporting.
According to the report, there were 69 accounting case filings in 2014, representing 41% of all securities class action filings during the year, compared with 47 accounting case filings in 2013, representing 28% of all securities suit filings during the year. The 69 accounting case filings in 2014 is roughly equal to the 2005-2015 average annual number of accounting case filings of 68. The increase in the number of accounting case filings “occurred against the backdrop of a year marked by essentially no change in the overall securities class action filings activity.”
The filing of accounting cases that also involved an SEC inquiry or action reached the highest level in 2014 since Cornerstone Research began tracking this factor in 2010. In 2014, 18 accounting cases related to an SEC inquiry or action, compared to only five in 2013. The report notes that the rise in the number of accounting cases with associated SEC action is “consistent with the SEC’s increased focus on identifying accounting-related fraud.”
The report also examines what it calls disclosure dollar loss, which is the dollar value change in the defendant firm’s market capitalization between the trading day immediately before the end of the class period and its capitalization immediately after the end of the class period. The report notes that the disclosure dollar loss declined significantly for all securities class action filings in 2014 compared to 2013, but the decline for accounting cases (35%) was less severe than for non-accounting cases (52%). In 2014, accounting cases amounted to 50 percent of the aggregate disclosure dollar losses for all securities suit filings, even though only 41 percent of all securities class action lawsuits were filed as accounting cases.
The number of restatement cases increased in 2014. There were 29 cases filed in 2014 involving restatements, representing 42% of all accounting cases filed during the year, compared to 19 restatement cases representing 40% of all accounting cases in 2013. The 29 restatement cases filed in 2014 was the highest number in the last seven years and is well above the 2009-2013 annual average number of restatement case filings during the period of 19. The increase in the number of restatement case filings during 2014 was “consistent with data showing that the number of restatements by accelerated filers (i.e., large companies that are heavily targeted in securities class actions) has increased in recent years.”
The report also notes that the median stock price drop surrounding announcements of financial statement restatements was “the second highest in the last 10 years.” The aggregate disclosure dollar loss for accounting case filings with restatements was over 80 percent greater than the average between 2005 and 2013.
For the past two years, the number of accounting case filings involving allegations of internal control weaknesses has increased; indeed, the number of accounting case filings alleging internal control weaknesses was higher in 2014 than any of the previous five years. Of the 29 accounting case filings that included a restatement, two in three also included allegations of weaknesses in internal controls.
The report also notes that accounting cases generally involve higher “estimated damages” (a simplified calculation of shareholder losses) that securities class action lawsuit filings without accounting allegations, a trend that continued in 2014. Overall, the report also notes that the median settlement for accounting cases has also been higher for accounting cases than for non-accounting cases. The presence of a restatement is a significant factor in explaining higher settlements amounts, and as is the existence of a related SEC action or inquiry. Cases involving restatements have settled for the highest percentage of “estimated damages.”
In 2014, there were 44 settlements of accounting cases, representing 70% of all securities class action settlements during the year, the highest proportion of settlements since 2010. The aggregate value of accounting case settlements as a portion of aggregate value of all securities class action lawsuit settlements represented an even greater proportion; the accounting suit settlements represented 85% of the total value of all securities class action lawsuit settlements.
My recent post on Cornerstone Research’s annual report on securities class action lawsuits generally can be found here.