Companies that use conservative accounting principles less likely to face lawsuits, study finds

phys.org | 3/14/2018 | Staff
magiccastlemagiccastle (Posted by) Level 4
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Firms that use accounting practices that basically require more verification for good news than bad news can more easily avoid securities class-action lawsuits and improve the outcomes of litigation, according to a study that includes a University of Kansas accounting researcher.

"Past research has suggested that risk of litigation leads to more accounting conservativism. There has been little empirical evidence on whether and how it works," said Michael Ettredge, the Crown/Sherr Professor of Business at KU.

Accounting - Conservatism - Refers - Practice - Verification

Accounting conservatism refers to the practice of requiring more verification to recognize a firm's positive news as gains than to recognize bad news as losses. In recent decades after corporate accounting scandals, the number of accounting-related class-action lawsuits has increased, which has imposed billions of dollars of direct and indirect costs to public companies and their shareholders.

The researchers' findings were published recently in the journal Accounting Horizons and featured in the Columbia Law School's blog on corporations and the capital markets. His co-authors are KU graduate Ying (Julie) Huang, associate professor in the Department of Accountancy at the University of Louisville College of Business, and Weining Zhang, associate professor of accounting at the Cheung Kong Graduate School of Business in Beijing.

Class-action - Lawsuits - Plaintiffs - Managers - Earnings

In accounting-related class-action lawsuits, plaintiffs often claim that managers intentionally or recklessly overstate earnings. The later revelation of improper accounting can cause stock prices to drop, which could harm the investments of plaintiff shareholders.

Pursuing class-action litigation against publicly funded companies is risky for plaintiffs and their attorneys, and costs are high with uncertain outcomes. Accountants employing conservative financial reporting can reduce the expected value of plaintiffs' lawsuits...
(Excerpt) Read more at: phys.org
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