April 27, 2023

Accounting Lawsuits—Probably More Expensive than Investing in ICFR

Cornerstone Research recently released a report, Accounting Class Action Filings and Settlements—2022 Review and Analysis, that reviewed lawsuits related to financial restatements, material weaknesses in ICFR and other accounting issues and concluded that companies are paying a lot more to settle these types of suits. Here’s an excerpt from their press release:

The total value of accounting case settlements grew by more than 67% in 2022 to $1.4 billion, up from $817 million the previous year. Key contributors to the significant jump in total settlement value were an increase in the average settlement amount to $31.7 million in 2022 from $24.7 million in 2021, coupled with a 30% year-over-year increase in the number of settled cases to 43 from 33 the prior year.

Over on Radical Compliance, Matt Kelly’s blog reminds anyone lobbying their CFO for more investment in internal controls not to forget the legal costs in your plea since accounting cases settled in 2022 also took longer to reach settlement:

These numbers add up. Even if your company wins dismissal of the case — are those millions spent on legal fees really going to be less than whatever it costs to configure your ERP software correctly or to automate your key accounting controls? Of course not.

That’s the real argument in favor of investing in strong internal accounting controls, including automation and audit management software and all the rest. Configuring all those systems is a tedious, exacting pain in the neck, but it’s still going to be less expensive than the damage of a half-baked set of internal controls that finally collapses.

– Meredith Ervine