While there were plenty of accountants who behaved badly in 2021, the accounting profession as a whole was fairly well-behaved and competent last year, according to a new report from Cornerstone Research. Good job, everyone.
From the report, Accounting Class Action Filings and Settlements – 2021 Review and Analysis:
Reversing a three year trend, the number of securities class action filings involving accounting allegations dropped in 2021. Filings referencing financial statement restatements and/or allegations of internal control weaknesses declined to the lowest level in 10 years.
In addition, the total value of all accounting case settlements fell to the lowest level over the last decade, reflecting both a drop in the number of settlements as well as a decline in settlement size.
Last year there were 46 securities class-action filings involving accounting cases, well-below the historical average of 61 and the second-lowest level in the past 10 years, the report states. In 2020 there were 70 accounting-related securities class actions filed by plaintiffs. That 34% year-to-year decrease is the largest in the past 10 years.
“Accounting cases” is defined by Cornerstone Research as cases “involving allegations related to Generally Accepted Accounting Principles (GAAP) violations, violations of other reporting standards, auditing violations, or weaknesses in internal controls over financial reporting.” Like last year’s report, this year’s focuses on class-action filings containing Securities Exchange Act Rule 10b-5, Section 11, or Section 12(a) claims.
Filings referencing financial statement restatements and/or allegations of internal control weaknesses declined to the lowest level in more than 10 years, according to Cornerstone Research. However, accounting case filings involving allegations of improper revenue recognition continue to surge: 41% of all accounting-related class-action filings in 2021, up from 37% in 2020 and 19% in 2019.
Guess what also surged among accounting case filings last year? Accounting allegations involving those pesky special-purpose acquisition companies (SPACs). Approximately 20% of accounting case filings in 2021 involved a SPAC, and in the second half of the year, that figure was nearly one in three. The report states:
During 2019 and 2020, only a handful of federal securities class actions involving SPACs were filed, but in 2021, federal filings involving SPACs became the dominant filing trend. Consistent with that overall trend, SPAC filings that include accounting allegations tripled in 2021 as compared to the prior year.
There are several trends in SPAC cases involving accounting issues that we have observed over the past three years:
- Approximately one in three initial complaints involving SPACs from 2019 through 2021 included accounting issues.
- Three law firms—The Rosen Law Firm, Glancy Prongay & Murray LLP, and Pomerantz LLP—were associated with almost 80% of accounting case filings involving SPACs from 2019 through 2021.
- Short-seller reports were commonly cited in cases involving SPACs. However, those reports were cited over one and a half times more often in accounting cases as compared with non-accounting cases filed during 2019 through 2021.
- The median filing lag after a De-SPAC transaction [the period when the equity of the combined company becomes publicly traded, often referred to as the “De-SPAC” period] was much greater in 2019-2020 (450 days) than it was in 2021 (106 days) for accounting case filings from 2019 through 2021 involving SPACs.
- Inappropriate revenue recognition and weaknesses in internal controls were the most common allegations in SPAC accounting cases, followed by allegedly omitted disclosures of related-party transactions.
Because filings of SPAC cases have largely occurred very recently, based on our research only one of these cases had reached settlement as of the end of 2021, and this case included accounting allegations. As more of these cases progress, we expect that SPAC cases may play a role in future accounting case settlement trends.
Speaking of settlements, there were 33 that involved accounting allegations in 2021, down from 38 settlements in the previous year, according to the report. The percentage of accounting case settlements fell to 38% of all securities class actions settled in 2021, compared to 49% in 2020.
The total value of securities class-action settlements with accounting allegations dropped sharply from $3.7 billion in 2020 to $755 million in 2021. The median settlement value for accounting cases was $7.5 million, down from a median settlement value of $11.3 million in 2020 (adjusted for inflation), despite an increase in the size of issuer firm defendants. According to the report, the average market capitalization of issuer defendants in accounting case settlements in 2021 was $7.3 billion, which is considerably higher than the median market capitalization and an increase of 48% over the average for 2020. As measured by total assets, issuer defendant size for 2021 settlements also grew, the report states. Median total assets of issuer defendants in accounting case settlements in 2021 increased by 14% over 2020.
For defendant companies named in accounting case filings, the Disclosure Dollar Loss Index, a measure of market capitalization losses, fell from $70.9 million to $29.4 million, its lowest level since 2017, according to Cornerstone Research.