alternative dispute resolution for accounting and related

DECEMBER 2017 / THE CPA JOURNAL54

Given the ongoing changes in accounting,auditing, tax and consulting standards; thescope of services provided; the proliferationof reporting frameworks; and the exponentialincreases in the number, complexity, veloc-

ity, and internationalization of business transactions, dis-putes between CPAs and their clients may seeminsignificant. Nevertheless, the number of disputes islarge and growing. Therefore, CPAs serving as accoun-tants, auditors, tax preparers, or business advisors—and

the users of these services—should be familiar with thebenefits and disadvantages of the various available alter-native dispute resolution (ADR) forums to resolve dis-putes, especially since the alternative, traditional litigation,is often more expensive, time consuming, and public.

This article addresses the pros and cons of differentADR forums, discusses the mental attitude necessary tosuccessfully resolve a dispute, and suggests the inclusionof ADR clauses in engagement letters. One importantconsideration for CPAs is to have the wording of any

Alternative Dispute Resolution for Accounting and Related Services DisputesBy Vincent J. Love and Thomas R. Manisero

DEPARTMENTS I Dispute ResolutionDEPT

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Reprinted from The CPA Journal, December, 2017, copyright 2017, with permission from the New York State Society of Certified Public Accountants.

ADR clause approved by a professionalliability insurer and legal counsel.Virtually all professional liability insurersencourage non-binding forms of disputeresolution and usually encourage (or donot object to) binding arbitration clausesin CPAs’ engagement letters, althoughsome do not permit (or may object to)binding forms of ADR. Outside thescope of this article is the effect of anADR clause on any dispute between aCPA and a third party. This is a compli-cated, diverse, and changing area of thelaw, and CPAs are encouraged to seeklegal advice under such circumstances.

Setting the Stage for ADRThe primary ADR methods available

to CPAs and their clients—that is, medi-ation and arbitration—relate to the pre-vention of disputes through the inclusionof risk sharing and dispute resolution pro-visions in engagement letters. They aregoverned under the AAA’s Accountingand Related Services Arbitration Rulesand Mediation Procedures (https://com-munity.adr.org/docs/DOC-1442). Themost important ingredient in these rulesis the parties’ recognition and acceptancethat the process is fair and impartial. Thisfairness and impartiality must be incor-porated in the ADR provisions includedin a CPA’s engagement letter. It is also important to ensure that the

wording of the ADR clause does notaffect a CPA’s independence withrespect to any attestation services pro-vided to a client. The AICPA Code ofProfessional Conduct (section 1.228) pro-vides guidance relating to CPAs’ use ofdispute resolution forums and liabilitylimitation clauses. If a client files finan-cial statements with the SEC, CPAsshould understand the SEC’s andPCAOB’s independence requirementsbefore inserting an ADR or limitation ofdamages clause into an engagement let-ter. Normally, the inclusion of ADRclauses will not affect CPAs’ indepen-

dence; however, SEC registrants and cer-tain other governmental regulated enter-prises are precluded from including anindemnification or liability limitation pro-vision in an engagement letter, other thanone related to a knowing misrepresenta-tion by management.

The inclusion of an ADR clause in anengagement letter does not absolve a CPAof liability for failure to comply with therelevant professional standards, or a clientfor misleading or lying to its CPA. Somestate boards of accountancy require CPAsto self-report awards or settlementsexceeding a given dollar amount relatedto allegations of professional malpractice,regardless of the dispute resolution forum.The Uniform Accountancy Act, in ModelRule 11.2(a)(6), addresses CPAs’ obliga-tion to self-report certain situations: Any judgment, award, or settlement ofa civil action or arbitration proceedingof $150,000 or more in which thelicensee was a party if the matter includ-ed allegations of gross negligence, vio-lation of specific standards of practice,fraud, or misappropriation of funds inthe practice of accounting; provided,however, licensed firms shall only noti-fy the Board regarding civil judgments,settlements or arbitration awards direct-ly involving the firm’s practice of publicaccounting in the state.CPAs should be familiar with the rules

of the board of accountancy in the juris-

diction where they are licensed or per-forming the service. New York, forexample, requires that a CPA self-reporta judgment in excess of $25,000,whether granted in a court of law or arbi-tration. It does not, however, address amediation or negotiated settlement.Understanding the rules governing thepractice of public accounting in theappropriate jurisdiction is thus importantin determining the type of ADR provi-sion to include in an engagement letter.

NegotiationAs a general rule, the parties should

make an effort to resolve a disputethrough reasonable negotiations beforeADR (or worse, litigation) is considered.The best and least expensive way to set-tle a dispute is to resolve it through nego-tiation when it first arises, as thisminimizes the disruption to the parties’business relationship. Another benefit ofa negotiated settlement is that the partiescan be creative in designing the settle-ment, which could, for example, includefree services or extended payment peri-ods for unpaid fees. CPAs are again cau-tioned, however, to considerindependence, if applicable, in designingany resolution.Businesspeople know how to negoti-

ate; nevertheless, in certain circumstancesegos or other issues can interfere with areasonable analysis of the underlyingfacts and circumstances, which in turnundermines the negotiation process. Theparties must control their emotions andrationally focus on the business aspectsof the dispute. If either party enters thenegotiations in bad faith, it will be a fruit-less waste of time and money. It is gen-erally wise to have an attorney involvedin the negotiations, particularly to drafta potential settlement agreement. If theparties believe they are too emotionallytied into underlying issues, they shouldconsider having someone else conductthe negotiations.

55DECEMBER 2017 / THE CPA JOURNAL

As a general rule, theparties should make aneffort to resolve a dispute

through reasonable negotiations before ADR(or worse, litigation)

is considered.



MediationBusiness owners or managers gener-

ally feel more comfortable with media-tion than with other forms of ADRbecause it is nonbinding. A neutral thirdparty, the mediator, facilitates a negoti-ated resolution to the dispute. The medi-ator acts as an intermediary between theparties, helping them focus on the busi-ness and legal issues and the relativestrengths and weaknesses of each side’spositions. Mediation can only work ifboth sides have a positive attitude andunderstand that, while the resolution maynot be the best one for them, it can bean acceptable one.

Mediators, unlike arbitrators, do notdecide disputes; their role is to encouragethe parties to reach an equitable settle-ment of their differences. A mediator’sgreatest asset is the ability to gain theconfidence and trust of the parties. Othernecessary qualities include maintainingobjectivity, tenacity, a thick skin, and theability to convince the parties to step out-side of their emotions, to focus on thereal issues in dispute, and to be reason-able in their demands.

There are variations to the normalmediation process. Depending on theparties’ desires and the provisions of theADR clause, a mediator can render anonbinding opinion on the dispute orissue a binding award (a process knownas “Med/Arb”). These variations are notcommon, but they indicate how an ADRclause in an engagement letter can be tai-lored to specific needs and personalities.

The major benefit of mediation is thatit brings the parties to a mutually agreed-upon resolution. Neither the CPA nor theclient may be totally happy with theresult, but they can both be satisfied thatthe dispute is resolved. Mediation alsoproduces a timely settlement that canremain confidential. Another advantageis that it is flexible; the parties can designthe rules that will govern the process.

Since mediation does not take placewithin an adversarial atmosphere, itenables the parties to explore creativesolutions. Finally, other than a negotiatedsettlement, it is most often the least costlymethod of dispute resolution.

The mediation process does, however,have some drawbacks. Each side exposesits position, thereby giving the other partythe opportunity to gain some limitedknowledge that could be used later, if themediation fails, in binding arbitration orat trial. In addition, all parties must trulywant to resolve the dispute; it requires a

good faith belief in the process and a will-ingness to accept a less-than-total win. Ifa mediation fails due to lack of goodfaith, it delays the end of the dispute andcan add to the cost of resolution.

ArbitrationThe most common form of formalized

ADR is binding arbitration. Arbitration issimilar to courtroom litigation, since theparties argue their positions and presentevidence to an impartial trier-of-fact. Thetrier-of-fact in arbitration is one or moreimpartial people (known as an arbitrationpanel) whose decision will be binding onthe parties. Arbitration is, however, less

formal than courtroom litigation and itstiming is much more flexible.

Just as parties in litigation can appealto a higher court, arbitration awards canalso be appealed within the process underthe American Arbitration Association’s(AAA) Optional Appellate Rules, but onlyif the parties either include the appeal pro-cess in the engagement letter or subse-quently agree to the submission of anydecision to the appeal process. One partycannot unilaterally commence the appealprocess unless it has been specificallyincluded in the arbitration agreement.

One benefit of arbitration is that it isprivate and often confidential. Arbitrators’decisions are not made public except withthe consent of the parties (although, asstated above, CPAs may be required toself-report an arbitration decision to anappropriate board of accountancy). Unlikejudicial decisions, arbitration awards donot create legal precedent.

Arbitration is generally quicker andless expensive than courtroom litigation;for example, the time-consuming andexpensive process of discovery can belimited. Also, unlike jurors and judges,arbitrators are specifically selectedbecause of their knowledge of the subjectmatter or the law involved in the partic-ular dispute. The AAA has a panel ofspecifically identified arbitrators who arequalified to handle disputes relating toaccounting and related services disputes;the panel includes CPAs, financial offi-cers, and lawyers and judges who arefamiliar with the professional standardsgoverning the profession.

The arbitration process can often becontrolled by the parties and, to a cer-tain extent, tailored to their needs. Forexample, the parties can, by mutualagreement, decide the number of arbi-trators and how they are appointed, thelimits of any discovery, and whichissues are subject to the arbitration. If arestriction or condition is written into



The major benefit of mediation

is that it brings the parties to

a mutually agreed-upon

resolution.



57DECEMBER 2017 / THE CPA JOURNAL

the ADR clause, it can be incorporatedinto the procedures.

There also can be downsides to arbi-tration. In certain circumstances, arbi-tration can be costlier than litigation,as it typically requires higher filing feesthan courts, and arbitrators’ time canbe expensive. When a dispute involvesa relatively small amount of money,the costs and fees in the arbitral forumscan outweigh the costs of going tocourt. In these instances, however, theparties can agree to arbitrate under theAAA’s Expedited Rules, which stream-line and accelerate the process, thusreducing the cost.

The arbitration process offers fewerbarriers to entry than litigation and maylead to more claims being filed; how-ever, the disbursements, costs, andawards related to arbitration tend to beless than in litigation.

While arbitrators may be chosen fortheir knowledge and understanding ofthe profession, they usually areunknown quantities from the lawyers’perspective. In courtroom litigation,attorneys can consider a judge’s repu-tation and previous decisions whenadvising their clients about such itemsas the pace of the process, or the lean-ings of the judge, which are importantconsiderations in the process.

In addition, while discovery is morelimited in arbitration, this is not neces-sarily an advantage. The discovery pro-cess may be abused by some, but inmany instances it is a necessary evil.Arbitrators do not have the sameauthority as judges to compel discoveryand have virtually no power over non-parties. In some instances, this requiresthe parties to go to court to gain assis-tance with discovery.

While not as effective as mediationat saving relationships, arbitration isgenerally less acrimonious than litiga-tion. It is also more flexible than litiga-

tion, since the parties may agree onspecifically tailored procedures.

Drafting Dispute Resolution ClausesDispute resolution clauses can be

included in all engagement letters for allof the services a CPA firm renders.Clauses mandating mediation, since it isnonbinding, do not represent any prob-lem. Before mandating arbitration in anengagement letter, however, a CPA firmshould get the explicit approval of its pro-

fessional liability insurer, as the inclusionof such a clause will affect the mannerin which the insurer must handle an erroror omissions claim. Some insurers maydeny coverage if the engagement agree-ment requires binding arbitration, claim-ing that the insured CPA firm impairedtheir authority to control the defense ofclaims under the insurance policy.

The mediation/arbitration clause canbe as simple or as definitive as a CPAand client desire. The following is anexample of a simple arbitration clause:

Any controversy or claim arising outof or relating to this engagement letter,or breach thereof, shall be settled byarbitration administrated by theAmerican Arbitration Association inaccordance with its Accounting and

Related Services Arbitration Rules andMediation Procedures and judgmentupon the award rendered by the arbi-trator(s) may be entered in any courthaving jurisdiction thereof.If the engagement letter does not

include an arbitration clause, but the par-ties would like to take advantage of theAAA rules specifically designed for suchdisputes, the parties can agree to arbitrateby signing the following statement:

We, the undersigned parties, herebyagree to submit to arbitration adminis-tered by the American ArbitrationAssociation under its Accounting andRelated Services Arbitration Rules andMediation Procedures the followingcontroversy [cite briefly]. We furtheragree that we will faithfully observe thisagreement and the rules, and that wewill abide by and perform any awardrendered by the arbitrator(s) and that ajudgment of the court having jurisdic-tion may be entered upon the award.The parties can tailor these standard

clauses to meet their needs and desires.They may wish to set the venue, to limitdiscovery, to arrange for specific arbitra-tors, to allow for the appeal of any deci-sion, and more. If they change thestandard language, however, they shouldseriously consider retaining an attorneyto draft such changes.

Below are some of the elements of anagreement that can be subject to modi-fication by the parties.Scope. A CPA firm and its client may

wish to limit the application of the arbi-tration provision to disputes involvingfees. Since fee disputes are the mostcommon, using this type of clause maydiscourage the malpractice counterclaimsthat typically are interposed when a pro-fessional sues to collect a fee. The draw-back is that all other disputes then go toa court of law for resolution; the resultis splintered litigation, part in arbitrationand part in court.

While not as effective as mediation at savingrelationships, arbitration

is generally less acrimonious than

litigation.




Governing law. It is common for par-ties to specify the law that will govern thecontract and any disputes arising under,or relating to, the contract. For example,a CPA may wish to use the laws of a statethat does not recognize punitive damagesas a remedy in arbitration. It is highly rec-ommended that a CPA discuss this subjectwith legal counsel.Venue provisions. A CPA and client

may want to add language specifying theplace for any hearings. In specifying alocale, the parties also should consider1) the cost and convenience (e.g., trans-portation, hotels, meeting facilities), 2)availability of qualified mediators andarbitrators, and 3) the applicable proce-dural and substantive law.Arbitrator provisions. The parties may

want to use arbitrator appointment systems,such as the party-appointed method inwhich each side designates one arbitratorand the two thus selected appoint the chairof the panel. The arbitration clause canalso specify by name the individuals theparties want as their arbitrators.

Some complain that arbitrations maybe lost on issues of fact that, in a courtof law, would not have been relevant. Toremedy this, the panel of arbitrators caninclude lawyers familiar with the relevantlaw, and these ideas can be incorporatedinto the arbitration agreement. The qual-ification requirements might also includespecific educational, professional, ortraining experience. Furthermore, partiesconcerned about the number of arbitra-tors appointed in a case can predeterminewhether the dispute shall be heard by onearbitrator or a panel of three. Discovery. In disputes between pro-

viders of accounting services and theirclients, much of the evidence is in thepossession of the parties, or else it canbe identified very specifically. Partiesmay want to limit discovery to theexchange of documents, with no depo-sitions permitted. They also may agree

to permit depositions, but impose limitson their number and duration.Bifurcation. The parties can provide

for a bifurcated proceeding in their arbi-tration clause. For example, the partiescould agree that evidence and testimonywill first be given on the issue of liability,and then, only if liability is found, con-tinue on the issue of damages. It shouldbe noted, however, that not all cases lendthemselves to bifurcation.Remedies. Under a standard arbitration

clause, an arbitrator may grant any rem-edy or relief deemed equitable within the

scope of the agreement between the par-ties, except for an order mandating aCPA to perform a specific engagementor render a specified form of opinion orreport. Sometimes, parties want toinclude or exclude certain specific reme-dies. Legal counsel should be consultedbefore the inclusion of such language.Payment of fees and expenses. The

fees and expenses of arbitration, includingattorney’s fees, can and should be dealtwith in the arbitration clause. In theabsence of a contractual allocation, therule is that each party bears its own costsand attorney’s fees, and its proportionate

share of the arbitrator’s fees. The contractalso can provide that the losing party willshoulder all or some of these expenses.Written opinions. Arbitrators in busi-

ness disputes customarily render a mon-etary award without a written opinion. Alengthy written opinion can prolong aproceeding and might lead to unnecessaryappeals. Often, an itemized award caneliminate the need to render an opinion;however, in some situations, parties mightdesire an award with written findings.

A Low-Cost, Low-Acrimony AlternativeCPAs and their clients generally

appreciate the economics of resolvingdisputes at the lowest possible cost. It ispossible to take all of one’s disputes tolitigation and, if necessary, to appeal alldecisions to their ultimate conclusion.The result may be an enviable win/lossrecord. But at what cost, in both moneyand the firm’s relationships?

Accounting firms that choose toinclude a mediation or arbitration clausein their engagement letters are urged tofirst consult their insurers. Includingsuch a clause in an engagement lettermay increase the number of disputes inthe process; the total cost of resolvingdifferences with clients should be less,however, and many relationships thatwould have been lost should be saved.

Finally, the AAA provides an excel-lent, comprehensive, and concise tutorialon mediation and arbitration, A Guide toCommercial Mediation and Arbitrationfor Business People, on its website(https://community.adr.org/docs/DOC-1165). q

Vincent J. Love, CPA/CFF, CFE, is thechairman of VJL Consulting, LLC, NewYork, N.Y., and a member of The CPAJournal Editorial Advisory Board.Thomas R. Manisero, JD, is a partnerat Wilson Elser Moskowitz & DickerLLP, White Plains, N.Y.


Accounting firms that choose to include a mediation or

arbitration clause in their engagement letters are urged to first consult their insurers.

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