Filings involving company announcements of internal control weaknesses hit highest level in 10 years
While Valeant Pharmaceuticals continues to battle allegations of bookkeeping misdeeds, it's not the only company dealing with accounting problems. The number of class-action securities law suits based on allegations of accounting missteps increased for the third straight year in 2015, according to a new report from Cornerstone Research. There were 71 such class-actions in 2015, up from 69 in 2014.
Accounting-based class-actions continued to costs companies a bundle, too. Accounting case settlement dollars reached $2.6 billion in 2015. Not only did the number of accounting case filings increase in 2015, the market capitalization losses associated with those filings jumped as well," said Elaine Harwood, a vice president of Cornerstone Research and head of the firm's accounting practice.
The high number of cases has been driven, in-part, by cases filed against companies that may trade on U.S. exchanges, but are headquartered outside the United States. The number of accounting cases against companies with headquarters abroad increased 43 percent to its second-highest level in the last 10 years. Cases against companies based in China, for example, increased 75 percent from 2014 to 2015.
Another problem contributing to the high number of cases were those brought against companies after they announced problems with internal controls or were weaknesses were alleged. Accounting case filings involving company announcements or allegations of internal control weaknesses were the highest in 10 years at 44 cases. Those cases also represented a high portion of settlements last year. In 2015, 86 percent of accounting case settlements involved allegations of internal control weaknesses—the highest proportion in the last 10 years.
"The total settlement value for cases with accounting allegations in 2015 was almost three times the level for 2014," said Laura Simmons, a Cornerstone Research senior advisor. "Looking at overall settlement dollars for 2015, accounting cases represented 87 percent of the total value."
Financial Sector Still Getting Hit
The fallout from the Financial Crisis of 2008 continues. The growth in settlement dollars associated with financial firms in 2015 reflects 11 settlements averaging more than $133 million—substantially higher than the average for other industry sectors. Unlike other industry sectors, the majority of accounting settlements in the financial sector include allegations of asset write-downs. This is consistent with many of these cases involving allegations related to the allowance for loan losses. Over 70 percent of the financial sector settlements involving write-downs in 2015 included allegations related to loan loss reserves.
There was still some good news for financial firms in the numbers. The total number of new cases filed against financial firms over accounting problems declined to just over 10 percent of the total number of cases, well under its historical average.