Accounting Class Actions Represent Large Share of Total Settlement Dollars

After an increase in new filings of accounting class actions in 2011, filings fell sharply in 2012. Yet accounting case settlements continued to represent a high percentage of total settlement dollars for all cases settled in 2012, according to a new report by Cornerstone Research, Accounting Class Action Filings and Settlements—2012 Review and Analysis.

New accounting case filings decreased from 78 in 2011 to 45 in 2012, the lowest number in recent years. A waning of filings against Chinese issuers listed on U.S. exchanges through reverse mergers (Chinese reverse mergers) and a considerable slowdown in filing activity in the second half of the year contributed to the sharp decline in class action filing activity overall, and in the share of filings that include accounting allegations. The drop in Chinese reverse merger cases alone accounted for approximately two-thirds of the drop in new accounting cases from 2011 to 2012. For the third consecutive year, the majority of new accounting cases that were filed included allegations of internal control weaknesses, and approximately one in three new cases involved a financial statement restatement.

Despite the decline in new case filings, accounting case settlement dollars represented over 90 percent of all settlement dollars for securities class actions in 2012, and the average and median settlements for accounting cases were higher than for non-accounting cases. For cases with GAAP allegations, settlements in relation to shareholder losses were highest for those that involved a financial statement restatement and/or accounting irregularity. Cases involving company announcements of internal control weaknesses increased to almost 45 percent of all settled cases in 2012 from 34 percent in 2011, and were associated with higher settlements.

Factors such as the Dodd-Frank whistleblower program, a recent increase in restatements of financial statements by accelerated filers, and the JOBS Act extension of the exemption from auditor reports on internal controls for emerging growth companies are watch areas for future accounting-related litigation trends.

Source: Cornerstone Research