U.S. companies, and certain foreign companies, that file periodic reports with the Securities and Exchange Commission (“SEC”) are obligated to prepare and publish their financial statements in accordance with Generally Accepted Accounting Principles, or “GAAP.”
If a company purports to publish its financial statements in conformity with GAAP, but fails to follow GAAP rules or principles, that may give rise to a claim of securities fraud under the U.S. securities laws.
For example, companies sometimes publishing false and inflated revenue because a company’s success so often depends on its revenue growth. GAAP requires that revenue only be recognized when collectability of funds is reasonably assured. This common sense rule prevents companies from claiming to have earned revenue when there is significant doubt whether the company will ever be paid. In other words, it prevents companies from recognizing speculative or merely anticipated income prematurely. Improper revenue recognition is typically revealed to the market when a company announces that it will revise previously issued financial reports to correct the improper recognition. Such disclosures may cause a company’s stock price to plummet, injuring investors that purchased shares during the periods the company was publishing false revenue figures, and giving rise to a claim for securities fraud.
For cases based on improper accounting, a skilled securities lawyer is necessary, since effective prosecution requires not only an understanding of the applicable securities laws, but also the financial acuity necessary to understand GAAP and identify the ways in which the Company violated GAAP rules.
The securities class action lawyers at GPM have a demonstrated that they possess the skill and experience necessary to prosecute such actions. If you believe a company has engaged in improper revenue recognition, or any other form of accounting manipulation, please contact GPM.