Although decreased slightly from a record high level in 2017, accounting class action filings in 2018 remained “uncharacteristically high,” according to the latest analysis by Cornerstone Research.
Companies faced 143 securities class action filings over accounting disputes in 2018, nearly double the historic average of 77 filings annually over the past decade. Companies paid out some $5.1 billion to settle securities violation claims in 2018, with 88 percent of that paid to resolve accounting claims.
According to Cornerstone’s analysis, the total number of accounting-related class action filings declined in 2018 by 13 percent over the number in 2017 as a result of a decline in disagreements over mergers and acquisitions. While the total number of accounting-driven cases decreased in 2018, the proportion of all securities class action filings that involved accounting claims held relatively steady at 35 percent. “Although the pace of M&A accounting case filings slowed in the second half of 2018, the number of cases filed remained at relatively high levels,” the report says.
For the past 10 years, accounting-related filings annually ranged from a low of 45 in 2012 to a high of 88 in 2016 until the number jumped to 165 in 2016. That’s similar to the pattern with securities filings overall, which ranged from a low of 104 in 2009 to 183 in 2016 and then jumped to 247 in 2017 and 260 in 2018.
Settlement amounts have bounced around more over that same period of time. While accounting cases accounted for 88 percent of the $5.1 billion paid in 2018, they represented 58 percent of the $1.5 billion paid in 2017. In 2016, accounting cases represented 80 percent of $6.3 billion in settlement dollars, and that was a big spike over 2015 and 2014 figures. Over the 10-year span, the average payout for accounting cases has been $2.4 billion.
Cases revolving around accounting claims that involved restatements represented 20 percent of the total number of accounting cases. “Both the number and proportion of accounting case settlements involving financial statement restatements was the lowest since 2013,” Cornerstone says. Three of the five largest securities class action settlements in 2018 involved restatements, according to the report.
While the Securities and Exchange Commission has pursued an increasing number of enforcement actions for internal control violations, even when no other accounting issues were identified, investors are zeroing in on control issues as well, the analysis shows. Only 39 percent of the accounting case filings involved no allegation or announcement with respect to ICFR issues, but 23 percent of cases involved both investor allegations and corporate disclosures of ICFR issues. The remainder, or 38 percent, involved situations where investors alleged control problems that companies themselves did not disclose.