Risk Management

Accounting-Related Lawsuits Fall

Reflecting a decline, just over a third of securities suits filed last year mentioned accounting issues, according to PricewaterhouseCoopers.
Sarah JohnsonApril 1, 2010

Shareholder class actions citing accounting issues fell last year to their lowest level since the passage of the Private Securities Litigation Reform Act, which transformed private litigation beginning in 1995.

Just 37% of the 155 federal filings in 2009 mentioned possible accounting problems, according to a PricewaterhouseCoopers report released Wednesday. In 2008 the percentage of lawsuits citing accounting-related issues was 41%. The accounting firm attributed some of the decline to the fact that many of the cases were connected to the financial crisis and tended to focus more on disclosure issues not having to do with whether the defendants followed generally accepted accounting principles.

At the same time, the number of settlements involving accounting-related issues also fell last year, by 15%. Still, those settlements, with a total value of $2.3 billion, made up the bulk of the costliest settlements last year, according to PwC. Seven of the top 10 settlements by dollar amount in 2009 had an accounting component in the allegations.

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Many plaintiffs in the accounting cases took issue with estimates, with more than half of the accounting-related suits alleging estimate problems, such as those against ING, Royal Bank of Scotland, and Triad Guaranty. These accusations included a failure “to adequately reserve for mortgage-related exposure” and “goodwill…impaired to a greater extent than…disclosed.” Other commonly cited issues included internal controls and overstated assets (see chart below).

Conversely, estimates were lower on the list of accounting-related cases brought by the Securities and Exchange Commission last year, according to PwC’s reviews of the regulator’s announcements about new lawsuits against corporations and employees. Only 20% of the SEC’s litigation releases cited estimates, while almost all of the cases took issue with the defendant’s books and records and internal controls. Fewer than half of the cases cited revenue-recognition issues.


Accounting Suits Fall