Academic journal article Journal of Accountancy

Stay out of Court

Academic journal article Journal of Accountancy

Stay out of Court

Article excerpt

How ADR can help you save time and money.

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 obligation 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).


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 ADP, 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. …

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