Just as regulators are targeting accounting anomalies and internal control violations, so are shareholders in class action suits. Accounting-related class action settlements jumped to $2.6 billion in 2015, with 86 percent of the cases involving allegations of internal control weaknesses, according to the latest analysis by Cornerstone Research.
Cornerstone says the largest increase in settled cases in 2015 involved cases where investors raised allegations of internal control weaknesses but the company did not announce any such weaknesses. Of the 50 settled cases in 2015, 24 involved both shareholder allegations and company announcements of internal control weaknesses. In another 19 settlements, shareholders alleged internal control weaknesses but companies did not make such an announcement. Settlements where companies announced internal control weaknesses were associated with “substantially smaller cases” as measured by median estimated damages, the firm reported.
In terms of filings, the number of accounting-related cases containing internal control allegations has increased steadily since 2012, the firm’s report says. The figure in 2015 represents the highest level of internal control claims in the firm’s 10-year analysis. Of the 71 cases filed, 19, or 27 percent, involved allegations around internal control where the company also announced internal control weaknesses. Another 25 cases raised allegations of internal control weaknesses where the company did not report such weaknesses on its own.
Elaine Harwood, a vice president at Cornerstone and head of the firm’s accounting practice, says not only did the number of accounting case filings increase in 2015, but so did the market capitalization losses associated with those filings, as measured using the firm’s proprietary measurement approach. “The increase is attributable, in part, to accounting cases filed against NYSE-listed firms,” said Harwood in a statement. “The market capitalization losses associated with those filings more than doubled in 2015.”
In other highlights from the analysis, the number of cases filed against companies headquartered outside the United States jumped 43 percent to its second highest level in 10 years, with cases against companies based in China spiking 75 percent from 2014 to the following year.
The analysis also shows settlement amounts were greatest in accounting cases involving write-downs or impairments. Settlements grew the most in financial firms, and the majority of accounting settlements in the finance sector included allegations around asset write-downs. More than 70 percent of the settlements in financial firms involved allegations related to loan loss reserves.