LOS ANGELES (Legal Newsline) – With a Cornerstone Research report recently revealing that the number of accounting securities class action lawsuits went up
again in 2015, Dorsey & Whitney LLP partner Thomas O. Gorman told Legal Newsline that “firms would be
well advised to carefully evaluate their compliance programs and internal
controls to ensure they are effective.”
“This is a very important issue because it impacts investments and stock prices across the board,” Gorman said.
The report found that accounting case filings involving
company announcements of internal control weaknesses were the highest in 10
years. In 2015, 86 percent of accounting case settlements involved allegations
of internal control weaknesses, also the highest proportion in the last 10
years, Cornerstone reported.
According to the report, 2015 was the third consecutive year
that the number of accounting-related filings increased. Specifically, the
report found that there were 71 securities class action filings with accounting
allegations in 2015.
According to Cornerstone Research, cases are considered
accounting cases if they involve allegations related to Generally Accepted
Accounting Principles (GAAP) violations, auditing violations or weaknesses in
internal control over financial reporting.
Gorman points to a post-market-crisis focus on these accounting
claims, as well as “an at-best weak economic recovery” as driving factors for
“In the post-Sarbanes-Oxley era, these types of claims
dwindled, at least in part because of the legislative reforms but also in the
wake of a series of high-profile SEC enforcement actions,” Gorman said.
market crisis, the SEC and the private bar again began to focus on these
claims. That focus, coupled with an at-best weak economic recovery, is probably
fostering the increase in claims. This is particularly true for firms in areas
where the economic recovery has been limited.”
Gorman said the Securities and Exchange Commission and class action attorneys are bringing larger numbers of financial fraud cases that include a
variety of claims.
“Typically the cases involve efforts to boost the revenue by
things like ‘channel stuffing,’ premature recognition of revenue and sham
sales,” Gorman said. “An alternate approach is to suppress the expenses by
things such as improperly capitalizing them, which has the same effect as
boosting revenue directly.”
Cornerstone reported that the Disclosure Dollar Loss (DDL)
Index rose to $34.8 billion for accounting cases filed in 2015, the second
largest amount in the last seven years.
The district encompassed by U.S. Court of Appeals for the Ninth Circuit, which includes California, saw the most accounting cases in 2015,
with 37 percent of cases filed there. The number of accounting cases against
companies with headquarters outside the United States increased 43 percent to
its second highest level in the last 10 years. Also, the report indicated that
accounting cases against companies headquartered in China increased 75 percent
from 2014 to 2015.
For settled cases with GAAP allegations, settlement amounts
were highest for write-downs. Following a significant decline in 2014, the report
found that the proportion of accounting settlement dollars represented by
financial firms led all sectors in 2015, with 11 settlements in this sector averaging
more than $133 million.
Gorman expects the trend of accounting claim increases to
continue, given the current financial environment, especially in economic areas
where the recovery may be faltering.
“In addition, look for the expertise of
the regulators to increase as they continue to focus on these claims,” Gorman