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Dr. Elaine Harwood Vice President of Cornerstone Research Joseph Grundfest, Esq. Director of the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research April 2013

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 released today 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. The full text of the report is available at the Cornerstone Research website at: Accounting Class Action Filings and Settlements — 2012 Review and Analysis.

Commentary

Dr. Elaine Harwood, Vice President of Cornerstone Research:

Despite the ups and downs in accounting case filings and settlements, we continue to see that these cases are less likely to be dismissed, take longer to resolve, and make up a much greater proportion of settlement dollars than non-accounting cases. New accounting cases filed in 2012 commonly included factors such as restatements and alleged weaknesses in internal controls, suggesting that these trends will likely persist in the future.

Professor Joseph A. Grundfest, Director of the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research:

The lesson from these data is clear: courts care about accounting fraud. These cases are more complicated and expensive to litigate and more likely not to be dismissed. This litigation pattern underscores the importance of the accounting and audit function, and reinforces the need for corporate executives to continue to pay close attention to the numbers.

About “Accounting Cases”

Cases are considered “accounting cases” if they involve allegations of violations of Generally Accepted Accounting Principles (GAAP) and/or of weaknesses in internal control over financial reporting.

About Cornerstone Research

For more than 25 years, Cornerstone Research staff have provided economic and financial analysis in all phases of commercial litigation and regulatory proceedings.

We work with a broad network of testifying experts, including faculty and industry practitioners, in a distinctive collaboration. Our staff consultants contribute expertise in economics, finance, accounting, and marketing, as well as business acumen, familiarity with the litigation process, and a commitment to produce outstanding results. The experts with whom we work bring the specialized expertise of researchers or practitioners required to meet the demands of each assignment.

Cornerstone Research has more than 450 staff and offices in Boston, Chicago, Los Angeles, Menlo Park, New York, San Francisco, and Washington.

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URL: http://www.businessforum.com/Cornerstone_13-Accounting.html
Revised: April 10, 2013 TAF

© Copyright 2013 Elaine Harwood and Joseph A. Grundfest / Cornerstone Research, All Rights Reserved