The number of securities class actions alleging accounting violations increased in 2014, spurred by increased SEC enforcement and more cases involving corporate restatements, according to a report released Tuesday by Cornerstone Research.
Accounting cases involve allegations of failing to follow generally accepted accounting principles, auditing violations or weaknesses in internal controls over financial reporting. In 2014, such cases represented 70% of all class-action settlements, up from 52% in 2011, the economic and financial consulting firm found, and 85% of all settlement dollars.
Cases involving inquiry or action by the Securities and Exchange Commission increased noticeably to 18, up from five cases in 2013 — a reflection of the agency's increased attention to accounting fraud. Cases involving restatements of financial statements reached their highest level in the past seven years, said Elaine Harwood, Cornerstone vice president, in an interview. “Institutional investors historically have been more likely to serve as lead plaintiffs in cases involving restatements, and this continued to be true for cases settled in 2014,” she said.
Allegations of internal control weaknesses made up 60% of accounting suits last year, some of which involved company announcements of such weaknesses.
Estimated damages, which help to predict settlement amounts, continued to be higher for accounting cases in 2014, along with median settlements. Higher median settlement amounts are also associated with SEC actions and corporate restatements, Cornerstone said. The median settlement for non-accounting cases over the past five years was $6.3 million, compared to $10.4 million for accounting restatements and $11.4 million for accounting irregularities.
