Risk & Compliance

Accounting-Driven Class Actions Rising, Study Finds

Twenty of the accounting-related class actions included allegations of improper revenue recognition, PwC finds
Katie Kuehner-HebertApril 10, 2015

Now that securities litigation related to the 2008 financial crisis has largely petered out, accounting-driven class-action suits based on regulatory enforcement actions are on the rise, according to PwC’s 2014 Securities Litigation Study released Friday.

There were 53 accounting-driven cases filed last year, representing 31% of all federal securities class-action cases filed during the year, according to the report. In 2013, 46 cases were filed, representing 29% of all cases that year. PwC tracks U.S. federal securities class-actions filed since the passage of the Private Securities Litigation Reform Act in 1995.

“There have been numerous cases, regulations, and technological advances which may indicate that accounting enforcement actions from regulators — and federal securities class action litigation from shareholders — could continue to grow in the years ahead,” the authors wrote. “This trend may be driven by increased public attention on financial fraud, in addition to the U.S. Securities and Exchange Commission’s and other regulators’ focus on detecting and prosecuting various forms of improper financial reporting.”

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

Twenty of the accounting-related cases included allegations of improper revenue recognition. Of those, at least four cases involved revenue-related fraud in the form of fictitious contracts and/or sales invoices in order to inflate company revenue and earnings, according to the report.

The reports authors advise companies to be alert to the proliferation of the enforcement of anti-corruption statutes such as the U.S. Foreign Corrupt Practices Act; cyber breaches with lasting effects;  lawsuits stemming from such capital-market complexities as high frequency trading and “dark pools”; the increase of initial public offerings involving emerging growth companies; and the robust mergers and acquisitions market.

PwC tracks all cases filed and more than 50 data points related to each case, including court, circuit, company location, SIC code, class period, stock exchange, and lead plaintiff type. The firm also analyzes a variety of issues, including whether the case is accounting related, a breakdown of accounting issues, and settlement data.