Dive Brief:
- For the first time in many years revenue recognition did not top the list of violations of generally accepted accounting principles alleged in accounting-related securities class action filings in 2024, according to a report from Cornerstone Research.
- Instead, asset valuation and impairment was the most cited GAAP error detailed in suits brought by shareholders against companies last year, accounting for about one-third (33%) of the complaints, compared to 20% in the year earlier, while revenue recognition was cited in 23% of the cases, down from 27%, in the year earlier. Meanwhile related party disclosure violations were alleged in 16% of the suits, and liability and contingencies valuations in 7%.
- “Our research shows that revenue recognition has been the most common GAAP violation since 2019 when we first began our tracking,” Frank Mascari, vice president at Cornerstone and one of the report’s co-authors said in an emailed response to questions, adding that it’s not clear what is behind the shift.
Dive Insight:
Revenue recognition has been one of the thornier accounting issues that has tripped up report preparers in recent years, even sparking the Financial Accounting Standards Board to clarify its standards related to recognizing revenue from construction contracts, CFO Dive previously reported.
The drop in revenue-recognition-sparked suits comes as the volume of class action suits held steady, according to the study. Plaintiffs filed 217 securities class actions in 2024, up from 207 in 2023, according to Cornerstone. Of those suits, some 25% were accounting-related class actions, with the total number holding about steady at 57 compared to 56 in 2023, according to the report.
While the number of accounting cases was roughly flat, the value of the settlements declined by about 25%, with the payouts on average dropping to $1.1 billion last year from $1.6 billion in 2023, the report found. Ninety-oner percent of the accounting settlements were small or less than $10 million.
