Academic journal article Journal of Accountancy

Five Tips to Steer Clear of the Courthouse: How CPAs Help Companies Reduce Litigation through Risk Management

Academic journal article Journal of Accountancy

Five Tips to Steer Clear of the Courthouse: How CPAs Help Companies Reduce Litigation through Risk Management

Article excerpt

Alarmed at the rising toll of litigation costs, more and more companies are taking steps to stop lawsuits before they begin. As part of their risk nanagement strategies, finance executives, internal auditors and risk managers increasingly are turning to CPAs to review policies and controls and scrutinize internal procedures to help keep their companies out of the courthouse. In 2000 when court costs, attorneys' fees, insurance premiums, payments to claimants and "every other conceivable expense were added up" reports Loretta Worters, director of media relations at the Insurance Information Institute in New York, the legal tab hit $179 billion. How does a business distance itself from legal problems? Here are some tips from CPAs who work as litigation consultants on how they helped their corporate clients identify issues and implement strategies to manage risks and avoid legal conflicts.


It was just one of those serendipitous things, says Cheryl Sparkes, CPA and partner in charge of litigation advisory services at the New York office of Ernst & Young LLP, referring to a consumer products company's retaining E&Y for a fact-finding mission. The client had asked the firm to settle a dispute involving a disgruntled employee who had accused a senior manager of taking kickbacks from a vendor. Eventually the manager was exonerated. But what Sparkes saw at the company aroused concern. "The manager was not taking kickbacks, but we found the company lacked ethics policies," she says. "We discovered salaried employees were working as consultants for other companies. They weren't doing anything wrong, per se, but they were exposing their employer to allegations of self-dealing and conflicts of interest"

Because the CPA firm alerted it to the risks, the company took action. Management instituted a code of ethics as part of its efforts to ensure good corporate governance. Now, Sparkes says, when the company hires a salaried employee, he or she agrees not to take on outside work lest there be a conflict of interest. Moreover, employees are required to shun improper relationships with vendors, such as the accepting of gifts valued above a certain dollar amount--"a trip to Hawaii," for example, says Sparkes. If employees become compromised, a company may have to defend itself against charges of restraint of trade, self-dealing, failure to use competitive bidding practices and even insider trading violations.

What began as a nasty episode, Sparkes says, had favorable results. Not only was the manager absolved of any wrongdoing, but the company--which Sparkes describes as "young and successful" and one that had planned to take care of back-office issues "later rather than sooner"--dodged potential legal and ethical bullets by tightening up its internal controls.

Once a company has a code of conduct in place, how does management improve ethics awareness among employees? CPAs who are accustomed to assessing controls can recommend these "best practices" to their clients:

* Incorporate ethics policies into the company mission statement and publicize them to employees.

* Inform employees of responsibilities through training, procedure manuals and other internal communications.

* Conduct periodic reviews of compliance programs to keep them current.

* Put a senior executive in charge of compliance and regulatory matters to signal the importance of corporate integrity.


One way businesses reduce litigation costs is to avoid going to court whenever possible. CPAs can encourage their clients to include arbitration clauses in their contractual agreements or to select alternatives to litigation when disagreements arise. Alternative dispute resolution (ADR) methods, such as arbitration and mediation, offer a variety of techniques for resolving conflicts with the aid of a neutral party and without resorting to litigation. …

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