Financial Fraud Actions – The New SEC Staple?

by Dorsey & Whitney LLP
Contact

With the creation last year of the Financial Reporting and Audit Task Force, the Commission is returning to one of its enforcement staples – financial statement fraud. Following then Chairman Levitt’s “Numbers Game Speech” in 1998 the SEC brought a series of significant financial statement fraud actions against issuers, their executives and in some instances the auditors and third parties. The driving force behind the wrongful conduct was often the same: Making the numbers or meeting street expectations.

Some commentators have argued that with the passage of Sarbanes-Oxley things have changed, and financial statement fraud is less prevalent. In probability it will be some time before the results of the Task Force work, and that of its partner, the Division of Economic and Risk Analysis, are known.

One possible indication of those results is the new report on accounting class actions filings and settlements published by Cornerstone Research titled “Accounting Class Action Filings and Settlements 2013 Review and Analysis” (here). While the private bar does not have the benefit of the new Accounting Quality Model or “RoboCop” being developed by the agency – a kind of big data and metric approach to identifying possible fraud – the statistics may give some notion of things to come.

The number of accounting cases brought in 2013 compared to the prior years was essentially flat. Last year 47 cases were filed, up 1 case from the prior year. As a percentage of the number of cases filed however, the number of accounting cases declined to 28% compared to 30% in 2012. Indeed, the 28% figure is the lowest in the last decade.

In contrast, for the second year in a row, the number of cases settled involving accounting issues increased. In 2013 44 cases were resolved compared to 38 in 2012 and 33 in 2011. The 44 cases settled involving accounting issues last year represents 66% of the overall total. That percentage has remained relatively constant over the decade, ranging from a low of 55% in 204 to a high of 75% in 2008.

Traditionally, accounting cases have represented a large majority of the total value of cases settled, according to Cornerstone. Yet last year, for the first time since the passage of SOX, the total value of accounting case settlements was lower than for others. In 2013 the dollar value of the accounting cases was just 25% of the total amount of settlements. That is by far the lowers percentage in the last decade in which the range ran from 73% to 97%. The 2013 settlements were, however, more evenly distributed over the various business sectors and fewer actions were brought against those in the financial sector.

One key metric is the number of cases involving allegations of an internal control weakness. Last year the percentage of cases alleging such a weakness was the highest since 2008 at 70%. In other years the percentage ranged from 30% to 45%. Similarly, the number of settled accounting cases involving such a claim was at a six year high of 66% last year, compared to a range since 2008 of 28% to 41%.

Recently the number of restatements by large firms has increased, the Report notes. Correspondingly, the number of accounting cases involving restatements increased. Last year 40% of the accounting cases filed involved a restatement. That reflects an increase from the 37% in the prior year and is the largest percentage since 2008.

In contrast, the number of settled cases involving accounting issues declined last year to 35%, compared to 47% in 2012. The 32% for last year represents the lowest number of settlements involving a restatement since 2008. The Report notes that this may reflect the fact that it takes about three years from filing to settlement for these actions.

Overall, while the number of cases filed has remained flat this year but there are indications things may change. The increase in restatements, large number of actions involving internal control issues and the increased number of accounting cases recently filed centered on a restatement suggest that perhaps the Task Force and its big data approach may start churning out actions. And, perhaps SOX did not cure the driver of financial fraud identified by Chairman Levitt years ago.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP
Contact
more
less

Dorsey & Whitney LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.