Aggressive accounting techniques more likely to lead to lawsuits.

Companies that book high rates of accruals or employ other so-called "aggressive" accounting techniques are more likely to face shareholder lawsuits--even lawsuits not related to the accounting--according to a new study from Criterion Research Group LLC.

Criterion, which previously established a link in a June 2004 study between the filing of accounting-related class actions against a company and the degree to which the company included noncash components in its earnings, said the new data shows that the size and frequency of accruals can be predictive of future nonaccounting related lawsuits, and that the risk of liability rises along with accrual rates and patterns.

"What wasn't clear (from previous studies) is using someone who has accruals right now or in the past few years as a predictor of a class-action lawsuit over the next, say, 12 months,' study author Tony Figueiredo said.

Criterion, which markets its disaggregated results to writers of directors and officers and other liability coverages, looked at the earnings of more than 5,000 public companies from 1996 through 2005. The study found that companies in the top 10% of accruals--estimates of future cash flows and expenses that impact current earnings--were six times more likely to be sued for accounting-related transactions, and five times more likely to be sued for nonaccounting-related transactions, than companies in the bottom 10% of accruals.

"The relationship is stronger for accounting-related lawsuits, but it is still strong for nonaccounting suits," Figueiredo said. "My explanation is that the same pressures that would lead a management team to be aggressive with the accounting, or make liberal use of accruals, could also lead them to engage in other types of behavior that could land them in trouble."