Cornerstone Report: Accounting Violations and Class Actions

Accounting violation allegations have long been an important feature of securities class actions. Over the last five years the number of these actions filed each year has generally increased. For example, in 2017 there were 58 securities class actions filed which alleged accounting filings. The next year the number increased to 64 and in 2020 to 70. Last year, however, the number dropped to 46, a fall of 34%, according to a new report published by Cornerstone Research titled Accounting Class Action Filings and Settlement, 2021 Year in Review, released April 13, 2022 (here).

A similar trend is evident in the number of all securities class actions filed. From 2012 the number of cases filed each year generally trended up until l219 when it peaked at 154 and then trailed off in 2020 and 2021.

Restatements have frequently been a feature of class actions involving accounting violations. Typically, over the last 10 years a small percentage of the cases involving accounting allegations were based in part on a restatement. The percentages ranged from a low of 16% in 2020 to a high of 42% in 2014. Last year it dropped to 11%, the lowest over the period.

Allegations of internal control violations reflect a similar trend. Generally, cases alleging this difficulty represent a small, but significant portion, of the cases involving accounting violations. Last year the percentage of cases alleging internal control issued declined to 17% compared to 23% and 36%, in 2020 and 2019.

For the first time since 2012, last year there were more class actions filed alleging accounting violations by firms in the technology sector than in any other. In prior years cases involving the consumer non-cyclical sector typically dominated. In 2021 the number of actions alleging accounting issues in the energy sector increased by 50%. Cases filed centered on the financial sector declined by over 50%.

Finally, SPACs have enjoyed significant popularity recently. At the same time SPACs have become a focus of the SEC. Recently for example, the agency published proposed new rules to govern these entities which have become a popular IPO vehicle. Cornerstone found that in 2019 and 2020 only a handful of federal securities class actions involved SPACs. In contrast, in 2021 SPAC filings involving accounting violations tripled, contrary to the numbers of other securities class actions involving accounting violations.