|PAUL GEOGHAN is assistant general counsel in the AICPA general counsel office. Mr. Geoghan's views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.|
The threat of lawsuits plagues CPAs as they expand their practices and offer new services in today's litigation-friendly environment. CPAs who offer attestation services are particularly vulnerable to lawsuits because they play an indispensable role in a majority of financial transactions and often are considered "lucrative" targets. In fact, more lawsuits against CPAs have been filed during the last 16 years than in the entire history of the profession.
So strident is the suing sentiment that clever litigators are suing in state courts to circumvent the reforms included in the Private Securities Litigation Reform Act of 1995, a federal law intended to curb unwarranted professional liability. (See "Tort Reform Revolution," JofA, Sept.96, page 53.)
In such a hostile environment, what's a CPA to do? Simply to accept the risk of litigation as common practice is not enough. There are alternatives to litigation that can be used to settle disputes and help reduce the number of times a CPA must appear in court. These alternatives collectively are known as alternative dispute resolution (ADR).
UNDERSTANDING A USEFUL TOOL
The ADR umbrella includes arbitration, mediation and hybrid methods that combine arbitration and mediation. All of these options can help CPAs resolve disputes faster, avoid high litigation costs, protect CPA-client confidentiality, avoid state board of accountancy sanctions and preserve client relationships.
Arbitration. In arbitration, parties argue their positions and present evidence to an arbitration panel that decides the case. As in litigation, the outcome is binding; however, arbitration is less formal than litigation and is based primarily on fact finding and only secondarily on legal issues. Also, arbitration does not adhere to traditional court evidence and procedure rules. Nevertheless, many lawyers serve as arbitrators, and most arbitration panels include at least one attorney.
Private arbitrations often are set up by an arbitration provider. The most widely known provider is the American Arbitration Association (AAA), a not-for-profit entity with regional offices around the country.
Arbitration usually provides timely and economical results. The parties control the process and can tailor it to their needs. However, according to the Federal Arbitration Act and existing state laws, decisions cannot be appealed to a higher court and can be overturned only under specific conditions.
Mediation. Mediation is a nonbinding negotiation process. A neutral third party, the mediator, facilitates discussion between the parties, working toward a negotiated resolution. The mediator acts as an intermediary in helping the parties resolve business and legal issues while explaining the relative strengths and weaknesses of the positions.
Unlike arbitrators, mediators don't decide disputes. Their only role is to encourage the parties involved to reach an equitable settlement of differences. There are several variations of the mediation process. Parties can request that the mediator render a nonbinding opinion on the dispute or a binding award if the negotiation process fails.
At the conclusion of a successful mediation, all parties agree and the matter is resolved. If all parties do not agree, the matter can proceed to arbitration or traditional court channels.
The major benefit of mediation is that the process brings the parties to a mutually satisfactory resolution and—in a best-case scenario—preserves the relationships. Also, mediation is most often the least expensive ADR method.
Other ADR methods. Hybrid variants of ADR techniques include nonbinding arbitration and mediation-arbitration. Nonbinding arbitration is similar to arbitration in that an arbitrator renders an award after a hearing, but it is not binding on the parties. Mediation-arbitration offers mediation that becomes an arbitration process if it is not successful.
ADR FOR THE CPA
Each of the above methods has its benefits and drawbacks for the CPA profession. Arbitration can benefit CPAs who wish not to go to court over a fee dispute. Arbitration saves CPAs time because the parties involved—not the courts—set their own calendars, and insurance companies often waive or split the deductible for CPAs who use arbitration. However, arbitration for the CPA carries four significant pitfalls:
Limited discovery. For example, the CPA in arbitration
cannot depose members of the client or its staff in preparing a defense.
Possible loss of independence in a controversy with a client.
Two AICPA ethics rulings (191 and 192) provide that binding
arbitration causes a loss of independence for the CPA.
Potential compromise in professional liability policy coverage.
Nearly every professional liability insurance policy gives
the insurer the option of limiting or denying coverage to a
policyholder entering into any agreement that affects an insurer's
rights in defending the policyholder.
- The chance the CPA will have one controversy in both arbitration and in court. For example, if the CPA had an engagement letter specifying arbitration (see sample engagement letter language ), the matter would be assigned to arbitration. However, some of those clients may sue for malpractice, frequently alleging failure to detect a defalcation or a financial statement error relied on by a third party. Also, if a third party is involved, that party likely will not be bound to arbitration and will seek a resolution in the courts.
|Liability Insurance and ADR|
|Several insurance carriers offer professional liability coverage to CPAs who have adopted ADR as a viable alternative to litigation. Most carriers offer the policyholder a 50% reduction in the deductible, often up to $25,000 if mediation is chosen and completed successfully. Carriers also actively promote ADR techniques through a series of risk management seminars. However, no carrier has espoused arbitration as a preferred method of dispute resolution and, in some cases, it may be construed as an act of noncooperation in violation of the policy terms. Here are some carrier contacts:|
|Aon Insurance Services
AICPA Professional Liability
4870 Street Road
Trevose, Pennsylvania 19049
Monterey, California 93940
|CAMICO Mutual |
255 Shoreline Drive, Third Floor
Redwood City, California 94065
333 South Wabash Avenue
Chicago, Illinois 60685
Mutual Insurance Company of
America CPA Mutual Management
2811 Northwest 41st Street, Suite A2
Gainesville, Florida 32606
|Westport Insurance Co.
181 West Madison, Suite 2600
Chicago, Illinois 60602
|Landy Insurance Agency
Chicago Insurance Co.
75 Second Avenue,
Needham, Massachusetts 02194
SAFECO Insurance Companies
4225 Naperville Road
Lisle, Illinois 60532
|Herbert L. Jamison & Co.
100 Executive Drive
West Orange, New Jersey 07052
On the other hand, mediation almost always makes sense for the CPA. Prelitigation language in an engagement letter ensures the process is available before any dispute reaches litigation. Mediation often can resolve a problem with a client to everyone's satisfaction.
Mediation carries few pitfalls for the CPA. For example, if a CPA includes a mediation clause in the engagement letter, the CPA and client have to use mediation before issuing a summons. This situation is far less adversarial in tone because the parties would not be as entrenched in their positions. It also allows skilled mediators to craft a mutually acceptable resolution. If the parties are not successful, they at least are given the time to explore each other's cases and positions.
How can the CPA use ADR in his or her practice? Since the mid-1980s, several state CPA societies have promoted the use of ADR to resolve fee disputes, among them the Florida Institute of CPAs (FICPA). (The AICPA accountants' legal liability committee studied the matter and concluded that the state societies offered the best means of resolving statewide insurance and regulatory issues that could promote or hinder ADR.) State societies can provide information on ADR education, service providers and neutral individuals who can serve as mediators or arbitrators.
In December 1993, the AICPA committee issued a "do-it-yourself" guide to assist state societies in developing member ADR programs. The guide provides background information on the ADR environment, guidance on creating ADR policies and instruction on establishing an effective ADR program. It also offers materials from the FICPA program as well as from the AAA, whose services are part of the Florida plan's recommended course of action.
FLORIDA'S SUCCESSFUL STATE PROGRAM
The FICPA mediation program followed the lead of Florida courts to order pending cases to pretrial mediation, both as a supplemental means of discovery and as a successful method of inducing settlement between the parties. The program's success also is the result of the FICPA's decision to promote the purchase of professional liability insurance by FICPA members.
CNA Insurance, the first carrier to endorse ADR techniques nationally, worked closely with the FICPA to develop an acceptable ADR program.
When ADR Works for the CPA: Solve Disputes Before Costs
Following resolution of this case, John and Sheri's firm decided to include language in all of its engagement letters that required the parties to mediate a dispute before filing a lawsuit. In 1997, a client filed a suit for missed issues in a tax engagement. Because the engagement had been performed under the terms of the new prelitigation mediation engagement letter, the court agreed to dismiss the suit until the parties reached a resolution or there was a mediation impasse.
The CPA firm contacted the American Arbitration Association and obtained a list of five mediators with business and professional liability experience. Two mediators had conflicts that prevented their service, and the AAA then selected a mediator from the remaining list.
The first mediation session was not simple. The plaintiff was very angry, and John and Sheri felt nothing could bridge their differences. Fortunately, the skilled mediator recessed the session early and scheduled another two weeks later.
At the second session, the mediator encouraged the parties to focus on their needs. Both the plaintiff and the CPA firm agreed it was most important to solve the plaintiff's tax problem. John and Sheri presented the plaintiff with a plan to solve the current tax problem and left the session with an arrangement to provide the plaintiff with future services. They also agreed to pay all the mediation costs and made an accommodation on future billings.
Observation. John and Sheri retained the client, avoided a lengthy and costly discovery process, obtained a reduction in their deductible from their malpractice carrier and were exempted from an investigation by the state accountancy board because there was no lawsuit.
—Contributed by Steven M. Platau, chairman,
When ADR Doesn't Work for the CPA: Arbitration at a Cost
I n 1996, Frank was engaged by Sara, a successful local businesswoman, to prepare tax returns for a number of Sara's closely held corporations and, as an accommodation, Sara's individual tax return. At the outset of the engagement, Frank obtained from Sara a signed engagement letter in which he incorporated a binding arbitration provision that covered the corporate tax returns.
An IRS audit of one enterprise turned into an audit of nearly all of Sara's affiliated enterprises, including Sara's own return. The IRS assessed additional taxes related to several technical errors in the returns and added a substantial alternative minimum tax.
Sara and several of the corporations filed suit against Frank and his firm in state court demanding damages for the additional tax, penalties and interest. Frank asked the court to refer the matter to binding arbitration. The court agreed to refer all but Sara's individual suit to arbitration.
The arbitrator limited discovery to certain documents, a common practice to speed up the dispute resolution process. Because of this, Frank was unable to obtain through discovery any information about Sara's prior audit history with the IRS, the yield on funds invested (that would have been paid as tax) to offset damages and information from company employees about business practices.
Sara and the corporations received a large award from the arbitrator. After the arbitration hearing, the state accountancy board heard evidence on breach of professional standards for failing to correctly research applied tax law and disciplined Frank.
Sara's personal civil suit progressed toward jury trial. During that case, Frank prevailed because he had discovered information about Sara's enterprises and history that he had not been permitted to obtain during arbitration.
Observation. Although arbitration is faster and less costly than a civil lawsuit, it sometimes comes at a high cost—discovery may be limited and you may not be able to defend your case. If you want the choice of arbitration, you must include arbitration language in all engagement letters or you may end up in arbitration and in a jury trial. If you include a discovery provision in your agreement, you may be better protected but you also may sacrifice the time and cost benefits arbitration is intended to provide.
—Contributed by Steven M. Platau, chairman,
The FICPA chose the American Arbitration Association as the sole provider of mediation services for FICPA members because of its successful track record in the ADR industry, its large number of trained mediators in Florida and its promulgation of a nationally accepted set of mediation rules tailored to accounting disputes. In providing for uniform application of procedures to all parties in a dispute, the AAA commercial mediation rules served as the national standard.
The FICPA mediation program now prescribes a five-step process for members in seeking ADR:
- Agree to mediate, immediately notify one's insurance carrier of
the dispute and seek the advice of legal counsel.
- Arrange a mediation conference by contacting the
nearest AAA office and submit the original engagement letter
containing the mediation language or, absent engagement letter
language, an agreement to mediate.
- Select a mediator from a list submitted by the AAA,
considering such factors as past business dealings and conflicts of interest.
- Conduct the mediation conference, using
prelitigation mediation with both parties accompanied by their
attorneys and joined by the mediator, at a neutral location.
- Conclude the mediation conference, drafting a brief statement reflecting the agreement on the issues resolved or, if no agreement is reached, declaring an impasse and allowing the parties to pursue other avenues, including litigation.
It has been difficult to gauge the program's success because mediation is confidential and parties are reluctant to disclose outcomes. However, according to Steven M. Platau, CPA, JD, chairman of the Accounting Department at the University of Tampa and a prominent advocate of ADR, "in my interviews with those familiar with the mediation process, I've heard nothing but good stories." In one case in which Platau was the mediator, the client not only indicated a desire to continue working with the CPA but also mentioned to the CPA that he had never realized what the CPA was prepared to do for him until it was revealed across the mediation table.
More corporations, federal agencies and state courts are using ADR programs. In a survey by Price Waterhouse and the Foundation for the Prevention and Early Resolution of Conflict, 88% of the 530 largest U.S. companies reported using mediation to resolve disputes during the past three years, while 79% used arbitration to offset litigation costs. Overall, 90% of the companies surveyed considered ADR a "critical cost control technique." Of all the ADR options, mediation scored the highest; more than 84% of the companies said they would use mediation in the future.
Other professional associations also endorse ADR. Many state bar associations have developed arbitration programs to handle disputes between members and their clients over fees. Other professionals such as engineers and architects and members of the financial services industry, including bankers and stockbrokers, also frequently use ADR techniques.
CONSIDER THE CHOICES
It is important that CPAs remain informed of their options and that they consult with legal counsel, the AAA and insurance providers before going forward with ADR. CPAs also would be wise to consult their state CPA societies for more information on state laws and regulations pertaining to ADR.
The payoff? When chosen wisely, ADR can not only curb the high costs of litigation but also help CPAs avoid state board of accountancy sanctions; many states require all CPA defendants to report malpractice lawsuits to the state board, but this rule is not extended to ADR. CPAs also stand to save when their liability insurance carriers waive or split the deductible for using ADR. Perhaps the greatest benefit of ADR is that it gives CPAs an opportunity to replace a courtroom battle with an over-the-table discussion that could salvage a frayed client relationship.