Mar 31, 2015
Class-Action Lawsuits Follow SEC Interest in Accounting Issues
The number of securities class-action lawsuits alleging accounting fraud jumped 47% in 2014, even as the overall number of securities class actions was little changed, according to a new report from Cornerstone Research issued Tuesday. The increase stems partly from a similar jump in accounting-fraud enforcement cases brought by the Securities and Exchange Commission, Cornerstone said, as the SEC renewed its focus on financial-reporting and disclosure issues in 2014 after several years of focusing on other matters.The numbers compiled by Cornerstone, a financial-consulting firm that focuses on litigation and regulatory proceedings, show 69 new securities cases with accounting allegations filed in 2014, up from 47 in 2013. There were 170 total new securities class action filings in 2014, up only slightly from 166 the previous year.
The jump in accounting lawsuits mirrors a 46% increase in SEC accounting-fraud enforcement actions in the fiscal year that ended last Sept. 30, the first year-over-year increase in SEC accounting cases since 2007. The agency has said publicly over the past year or two that it’s paying more attention to accounting fraud, after several years of concentrating on misconduct related to the financial crisis.
The accounting class-action increase “appears to be, at least in part, a result of the SEC’s heightened focus on accounting-related fraud,” Elaine Harwood, head of Cornerstone’s accounting practice, said in a statement. More than one in four of the new accounting cases referred to an SEC inquiry or action, the highest level since Cornerstone began tracking that question in 2010.
Accounting lawsuit filings involving restatements of financial statements hit a seven–year high, at 42% of accounting cases. Cornerstone noted that the severity of stock-price drops surrounding restatements also increased in 2014, potentially encouraging investors to file such cases.
Of the securities class-action settlements reached during the year, 70% were in cases involving accounting allegations, according to the report, the highest level since 2010.