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Will Changes in Lease Accounting Standards Bring Even More Class-Action Lawsuits?

Posted by Amber Bigler Newman | 9/14/17 7:13 PM

Hand about to bang gavel on sounding block in the court room.jpegThe CFO of one of our large retail clients that is currently in the process of making the transition to the new FASB lease accounting standard remarked the other day, “We can’t afford to get this even 1% wrong.” He’s 100% correct. Earlier this year, Cornerstone Research revealed that securities class-action lawsuits related to accounting allegations like GAAP violations and weak internal controls increased 33 percent in 2016 over the year before.

The study called Accounting Class Action Filings and Statements – 2016 Review and Analysis found that an unprecedented number of mergers and acquisitions was a big contributor to the rise in lawsuits, with many cases alleging problems in reconciling non-GAAP to GAAP measures.

There were 93 accounting-related class-action lawsuits filed last year, up from 70 in 2015 and 69 in 2014. The 93 filings last year represent the highest number in a single year since 2008. For the past seven years, the majority of accounting case filings have included allegations of internal control weaknesses. That held true in 2016, with 59 percent of accounting case filings containing these allegations. An even larger share of 2016 accounting case settlements, 70 percent, included allegations of internal control weaknesses.

Speaking of settlements, the value of accounting case settlements in 2016 was the highest in nine years. This is due to an increase in the average settlement amount. Although just 46 settlements were approved in 2016, down from 50 in 2015, the total value of settlements was $4.8 billion, which is 80% higher than the prior year and the highest total since 2007.

Writing for Law 360, Adoria Lim and Chi Cheng of The Brattle Group Inc, note that accounting related cases make up the majority (54%) of securities class actions and that they result in disproportionality protracted and expensive litigation. In fact, they represented an astounding 80 % of total settlement dollars for securities cases. “These statistics suggest that the ongoing changes in accounting standards could have a significant impact on the volume of litigation involving accounting issues and their outcomes,” they conclude.

For companies working to comply with the new FASB lease reporting mandate, this means that the risks are high. Not only will regulators and auditors be paying close attention to how lease data is reported, investors and lenders will as well, so it absolutely must be accurate and complete.

Be sure to select a technology solution that has been validated and recommended by financial reporting experts. Invest in the resources to get it right, even if it means auditing existing lease data, and review lease negotiation and data management processes and approvals to ensure accuracy over the long term. It will require a significant amount of expense and work, but that works out to peanuts compared to a class-action lawsuit, even one that you win.

 

 

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