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Yahoo
18-04-2025
- Business
- Yahoo
Valuations, impairments spark more class actions than revenue recognition
This story was originally published on CFO Dive. To receive daily news and insights, subscribe to our free daily CFO Dive newsletter. 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. 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. Recommended Reading ADM expects to report 'material' internal control weakness
Forbes
21-03-2025
- Business
- Forbes
The Rise In Business Bankruptcies: Key Trends And Steps For Leaders
Joe Camberato is the CEO and Founder of National Business Capital, a leading fintech marketplace offering streamlined small business loans. From March 2023 to April 2024, business bankruptcy filings rose more than 40%, affecting companies across many different industries. Many large, well-known companies experienced the fallout from high interest rates and inflation. A Cornerstone Research report found that 113 private and public companies with assets over $100 million filed Chapter 7 or Chapter 11 bankruptcy. Plus, 16 'mega bankruptcies'—companies with over $1 billion in assets—occurred in the first half of 2024. This is the highest number of mega bankruptcies in a six-month period since the Covid-19 pandemic. These filings increased across all industries, but the retail trade, services and manufacturing industries got hit the hardest. The services industry in particular accounted for 29% of all bankruptcies, which was a significant increase from its historical average of 17% from 2005 to 2023. Additionally, bankruptcies rose across the finance, insurance and real estate industries. By the end of 2024, total business bankruptcy filings rose 22.1%—from 18,926 in 2023 to 23,107—according to statistics released by the Administrative Office of the U.S. Courts. So, what's causing the increase? Business bankruptcies have grown in recent years, fueled by economic pressure and changes in the market. When a company goes out of business, there's not one factor you can single out as the culprit—it's usually a combination of many different factors. Let's look at four trends that are negatively affecting many companies as well as ways you can protect your business in difficult times. Most companies cite rising costs from inflation and interest rates as the number one reason they filed for bankruptcy. For example, Red Lobster pointed to macroeconomic pressures like inflation and rising wages, while Enviva stated that historically high inflation hurt its profit margins on long-term contracts. Inflation drove up the cost of raw materials, labor and energy, eating into business profit margins. Many companies carry debt with variable interest rates, so the cost of managing this debt also increased as interest rates rose. The combination of inflation and high interest rates put pressure on companies from all sides, making it harder for them to maintain a positive cash flow. These trends pale compared to 2020, when business bankruptcies hit a 10-year high and 630 companies filed for bankruptcy. But in many ways, what we're seeing now is the lingering effects of the pandemic. Over 79% of the mega bankruptcies cited it as a significant contributing factor. Companies like Bed Bath & Beyond and Revlon struggled with supply chain disruptions that increased costs and made their day-to-day operations less efficient. Plus, many businesses dealt with staffing shortages and higher wages, all while trying to navigate lower profit margins. However, perhaps the most significant factor was how the pandemic permanently changed market dynamics. Covid-19 rapidly accelerated changes in consumer behavior, forcing companies to adapt to new markets. Many large companies just couldn't keep up with the speed and scale of these changes. Increased competition within industries also contributed to reduced profits and market share for many companies. Well-established companies are now forced to compete with more agile competitors. For instance, Rite Aid noted it has to compete not only with traditional drugstores and supermarkets but also with online retailers like Amazon. Increased competition forces these companies to lower prices to attract new customers, which also lowers profit margins. When you combine that with rising costs and high interest rates, companies have fewer resources available to deal with these lower margins, increasing the risk of bankruptcy. The Cornerstone Research report also highlights how many companies struggled with unsuccessful strategic initiatives, which led to financial losses. Many companies attempted to pivot during the pandemic by offering new products, but these efforts ultimately fell short. For example, some companies tried to begin offering remote services without understanding the full investment required to make these changes. Many established companies in the retail and manufacturing industries were unable to innovate or pivot quickly enough. Their reluctance to embrace new technologies or change their business models only made them more vulnerable. Federal support, such as the Paycheck Protection Program, provided temporary financial relief. However, it was ultimately a temporary lifeline carrying many companies that would have gone out of business without it. Federal relief programs can help you get through a difficult season in your business, but they aren't a long-term strategy. Start taking proactive steps to improve your financial and operational structures. For instance, you may need to renegotiate your debt terms to improve cash flow. It's also important to address supply chain vulnerabilities and hiring challenges before they turn into major business disruptions. But most importantly, start investing in innovation and digital transformation now. This is about more than just adopting new software—it's about rethinking your company's processes and how you engage with your customers. For example, you may need to diversify your product line or switch up your marketing strategy. Incorporating strategic initiatives and strong financial planning is the best way to navigate a competitive market and protect your business in difficult times. Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
Reuters
05-02-2025
- Business
- Reuters
Column: New wave of investor lawsuits targets 'AI washing'
Feb 5 (Reuters) - In the sometimes-formulaic world of securities class action litigation, there's a buzzy new reason for shareholders to sue: "AI washing." Lawsuits alleging companies misled shareholders about their use of artificial intelligence, the technology's ability to propel their future growth or other AI-related claims more than doubled last year, according to a report, opens new tab released by Cornerstone Research and the Stanford Law School's Securities Class Action Clearinghouse last week. AI washing — derived from the term 'greenwashing' — occurs when a company, knowing that the public has a limited understanding of what the technology can do, invokes it as a marketing gimmick rather than a reflection of genuine AI-powered products or services. The universe of cases is still small, with 15 federal court actions in 2024, up from seven in 2023, according to the report. As a person old enough to remember the bubble 25 years ago, when investors swooned over new internet-related businesses (' because pets can't drive') only to be disappointed at times in the results, some have a familiar feel. Hype, hysteria — and burn. Investors tend to get 'overexcited' over new technology, Alexander (Sasha) Aganin, a Cornerstone senior vice president and co-author of the report, told me. 'When market expectations are really high and a lot of optimism is being built into the stock price, that means the stock is very vulnerable to even a slight change in outlook.' Cue the shareholder suits. The 2024 cases are still in the early stages of litigation. If past patterns hold true, about 50% will get tossed on motions to dismiss, Aganin said, though it could take another year or more to get there. In the meantime, perhaps the most scathing AI-related allegations have been leveled against data engineering company Innodata, which was sued in New Jersey federal court last February. According to the amended complaint, opens new tab, which alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, Hackensack, New Jersey-based Innodata led investors to believe that it had developed a 'proprietary, state-of-the-art' AI platform called Goldengate. In reality, according to plaintiffs' lawyers from Block & Leviton and Carella Byrne Cecchi Brody & Agnello, who point to a report by short seller Wolfpack Research, opens new tab, Goldengate was just 'rudimentary software.' Innodata's operations 'were powered by thousands of low-wage offshore workers, not proprietary AI,' the lawyers wrote, asserting that the company 'did not have a viable AI and was not effectively developing the technology.' The company and its lawyers at Morgan, Lewis & Bockius did not respond to requests for comment. Their answer to the complaint, which covers investors who purchased Innodata stock from May 9, 2019 through Feb. 14, 2024, is due March 7. Another notable AI-related securities class action is pending against Evolv Technologies, and includes claims that the company deceived investors about the efficacy of its flagship AI-powered security screening system, Evolv Express. According to the complaint filed in March in Boston federal court, the Waltham, Massachusetts-based company said in its registration statement, for example, that it uses AI 'to reliably detect real threats and ignore harmless items' in screening people for weapons. The system allows people to walk 'side-by-side while carrying their bags, without emptying their pockets' rather than being funneled through traditional metal detectors, Evolv said. But media reports began to question the limits of the technology, alleging that it failed to flag certain types of knives, as well as some bombs and components. 'Unbeknownst to investors, Express' ability to detect different types of weapons depended on the circumstances,' the complaint states. In November, the U.S. Federal Trade Commission settled, opens new tab a lawsuit against Evolv. The deal bars the company from 'making unsupported claims about its products' ability to detect weapons by using artificial intelligence' and gives certain K-12 school customers the option to cancel their contracts with Evolv. An Evolv spokesperson said via email that the company 'stands behind our technology and our system's ability to leverage sensors, software, and AI.' The spokesperson also noted that the FTC acknowledged that Evolv does in fact use AI in its technology and "did not challenge the fundamental effectiveness of our technology." Another pending AI securities case that caught my eye names Israel-based beauty and wellness company Oddity Tech, which owns the Il Makiage and Spoiled Child brands. Filed in Manhattan federal court in July, the complaint, opens new tab alleges that the company, which went public in 2023, differentiates itself from other cosmetics industry players by touting its 'proprietary AI technologies to target consumer needs.' But plaintiffs' lawyers point to a report, opens new tab last spring by short-seller Ningi Research alleging that the company's AI — which claims to use algorithms and machine learning models to match customers with accurate complexion and beauty products — is 'nothing but a questionnaire.' An Oddity spokesperson did not respond to a request for comment. In a public statement released after the Ningi report, the company said it 'firmly stands behind its use of technology to deliver a personalized beauty experience.' The AI securities litigation trend is continuing in 2025, though the most recent case, per the Securities Class Action Clearinghouse, opens new tab, has a twist. Canadian data analytics software maker Telus, which did not respond to a request for comment, was sued last week, opens new tab in Manhattan federal court – but not for AI washing. Instead, according to the complaint, the company failed to disclose that its new "AI data solutions" required the "cannibalization" of its higher-margin, non-AI offerings, causing revenue to decline. As the year unfolds, I'll be watching to see if similar cases claiming AI is hurting legacy lines of businesses will follow. Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
