USA, April 18, 2018
Securities class-action filings containing accounting-related allegations reached unprecedented heights last year, although the total settlement value declined significantly, according to a new report.
The annual report, from Cornerstone Research, found a record number of 165 accounting filings during 2017, nearly twice the 88 filed the previous year.
Meanwhile, the number of accounting-related settlements increased from 46 to 49, the highest amount since 2010. On the other hand, the total accounting settlement value fell substantially last year, to $861.6 million in 2017 versus $4.9 billion in 2016.
The overall increase in accounting case filings was mainly attributable to 107 “nontraditional” filings related to mergers and acquisitions. All of them contained accounting disclosure allegations. The number of “traditional” (or non-M&A) filings declined from 64 in 2016 to 58 in 2017, but they involved larger firms as defendants.
“Relatively larger defendant issuers have been the subject of traditional accounting class action filings in each of the past four years,” said Cornerstone Research vice president Elaine Harwood, who heads the firm’s accounting practice. “We have not seen class action filings against firms of this size since 2008.”
The industrial sector had 22 percent of the traditional accounting case filings in 2017, which was double the historical average. The Disclosure Dollar Loss, or DDL, for the accounting case filings in that sector was the biggest of all the sectors for the first time in the past 10 years.
On a positive note, for the third year in a row, the number of traditional accounting case filings involving restatements fell. The number of 2017 restatement cases was 35 percent less than the historical average; while the restatement case DDL was 49 percent lower than the historical average. In addition, the total settlement value that could be attributed to accounting cases fell to $861.6 million in 2017, the lowest level since 1999, with only two accounting-related settlements reaching $100 million or more. There weren’t any auditor defendants named in traditional accounting case filings last year, which was the first year that has happened since enactment of the Private Securities Litigation Reform Act of 1995.
But, despite the smaller settlement sizes, the issuer defendants who were involved in accounting settlements were the largest seen in the past five years. In addition, the cases involving financial statement restatements settled for significantly higher amounts than non-accounting cases. Also, the number of accounting case settlements in 2017 increased a bit compared to 2016 and represented over 60 percent of all settled cases.
“While event-driven litigation has gained recent attention, we find that accounting-related claims continue to be prevalent allegations and are a significant determinant of settlement outcomes,” said Cornerstone Research senior advisor Laura Simmons, who co-authored the report.