By John Filar Atwood
In an analysis of 2020 accounting class actions and settlements, Cornerstone Research found that despite the pandemic the number of securities class action filings involving accounting allegations increased in 2020 for the third consecutive year. Accounting allegations were present in more than 30 percent of all federal securities class action filings, and accounting cases made up 84 percent of total settlement dollars in 2020.
Cornerstone defines an accounting case as one that involves allegations related to GAAP violations, violations of other reporting standards, auditing violations, or weaknesses in internal controls over financial reporting. The report focuses on federal securities class action filings containing Rule 10b-5, Section 11, or Section 12(a) claims.
Plaintiffs filed 70 securities class action lawsuits involving accounting allegations in 2020, according to the report. That represented an increase of three filings over 2019, and was the second-highest annual total in the last 10 years.
Of the 70 accounting cases, 38 involved settlements, a slight increase over 2019 (34 settlements). The total value of those settlements reached $3.5 billion in 2020 compared to only $932 million the year before. Cornerstone attributed the increase to the few mega settlements—those valued at $100 million or higher—last year. The median settlement value in 2020 was $10.8 million, nearly matching 2019’s $10.6 million median value.
Revenue recognition. The report states that more than one-third (37 percent) of accounting cases filed in 2020 included allegations of improper revenue recognition, nearly double the 2019 level (19 percent). Improper revenue recognition was alleged in 26 accounting case filings last year.
There were 25 accounting case filings containing an allegation, but no announcement, of internal control weaknesses, the report notes. That represents the highest level since 2015. Of the 19 settlements in 2020 that involved a company announcement of an internal control weakness, 42 percent also involved a restatement.
Cornerstone found that in 2020, accounting cases took 3.1 years on average to reach a settlement hearing. Of the accounting cases settled last year, 29 percent involved Section 11 claims. Some of those were standalone Section 11 claims and others were combined with Rule 10b-5 allegations.
Firm size. The trend of accounting case filings against larger companies continued in 2020. According to the report, the 10 largest issuer defendants accounted for almost 70 percent of the market capitalization losses for accounting cases last year.
At $1.3 billion, the median market capitalization of issuer defendants last year was 56 percent higher than the 2011-2019 average. The study indicates that four of the five accounting case filings involving the largest issuer defendants, as determined by pre-disclosure market capitalization, were in the financial sector.
Industries. For the third straight year, there were as many or more accounting case filings and accounting case settlements in the consumer non-cyclical sector than any other industry sector. For purposes of Its report, Cornerstone includes biotechnology, healthcare, and pharmaceutical companies in the consumer non-cyclical sector.