Accounting class-action filings rose slightly last year

The number of accounting-related securities class-action filings increased slightly in 2024, but were filed against smaller companies, according to a new report.

The report, released Wednesday by Cornerstone Research, found that filings rose to 57, up from 56 in 2023. Even though the number (35) of accounting-related securities class-action settlements in 2024 remained consistent with 2023, the total value associated with these settlements dropped significantly, from $1.6 billion in 2023 to $1.1 billion in 2024, the second-lowest level in the past 10 years. That was partly due to the finding that there was only a single megasettlement larger than $100 million in 2024, compared to the historical average of four mega settlements per year.

While the number of settlements remained the same as 2023, the total value of those settlements declined by 36% from the prior year.

While the number of accounting cases remained steady last year, they were filed against smaller issuer defendants. The median predisclosure market capitalization of issuer defendants dropped to $445.6 million, the lowest level in the past 10 years. In addition, the DDL Index (the dollar-value change in the defendant firm’s market capitalization) of accounting cases fell 42% to $45.6 billion and was 17% lower than the 2015–23 historical average of $54.8 billion.

Last year, some of the filing trends changed. “For many years, revenue recognition had been the most common GAAP violation alleged in accounting-related securities class action filings,” said Frank Mascari, a report co-author and vice president at Cornerstone Research, in a statement. “That changed in 2024 when, for the first time since tracking began, allegations related to asset valuations and/or impairments were the most common.”

For the fourth consecutive year, the median predisclosure market capitalization of issuer defendants declined in 2024. Accounting cases filed in 2024 involving restatements decreased over 30% from 2023, returning to historical levels. Since 2015, 32 issuers had at least two separate complaints that included accounting allegations filed against them.

The median predisclosure market capitalization of issuer defendants decreased by 39% in 2024 to $745.5 million, which is consistent with lower median and average settlement amounts, as issuer defendant size is a proxy for the resources available to fund the settlement. The average settlement amount declined from $47 million to $30.1 million, while the median settlement amount fell from $15.4 million to $12 million.  

After a spike in 2023, the average time from filing to settlement for accounting cases declined by over seven months, returning to a level consistent with the average over the previous nine years. 

“The single most important factor in explaining individual settlement amounts is ‘plaintiff-style damages,’ a proxy for the amount of potential investor losses that plaintiffs may claim in a securities class action,” said Elaine Harwood, a report co-author and senior vice president at Cornerstone Research, in a statement. “The sharp decline in the size of accounting case settlements in 2024 can be explained, in large part, by the nearly 50% decline in the median plaintiff-style damages for accounting case settlements compared to 2023.”

Accounting case settlements with both alleged GAAP violations and allegations of internal control weaknesses dropped to the lowest level in the past decade. The value of accounting case settlements for cases involving allegations of internal control weaknesses also decreased to just 27% of the total of all accounting case settlements.

While the number of accounting case settlements involving restatements increased, the median settlement amount was 85% lower than in cases not involving a restatement.

The median settlement amount as a percentage of plaintiff-style damages for accounting case settlements in 2024 was in line with the 2015–23 average for cases involving restatements and/or GAAP violations; however, cases involving a write-down were 42% lower than the average.

Earlier reports from Cornerstone Research have presented “simplified tiered damages” as a measure of potential investor losses. This year’s report is introducing “plaintiff-style damages” as a way of measuring potential investor losses that accounts for more case-specific data while still employing a consistent approach across a large volume of cases, drawing on investments in big data analytics and other capabilities from Cornerstone Research’s Data Science Center.