It’s a fact of life: in our practice of public accounting we are exposed to liability. The exposure primarily is to our clients and, under prescribed conditions, to third parties who use our clients’ financial statements. Plus, it can come from other sources, including partners and business associates. It is worthwhile to consider providing for arbitration of disputes in order to avoid being caught up in the public court system.

The Public Court System
Virtually everyone has a perception of what happens in a lawsuit filed in the public court system. Television and popular novels provide pictures of the process, but with varying degrees of accuracy. One myth fostered by television is that court cases are resolved in an hour.

While there are variations between the federal and state courts, the basic process is the same. A complaint gets filed, there is a long “discovery” period, a lot of procedural maneuvering goes on before the judge, and then you finally get to trial after a couple of years of grief. But winning at trial doesn’t mean it’s over. The loser can get a second bite of the apple by appealing the decision to the next level in the court system. Then you’re off to the races again.

A couple of key concerns with the trial system are the length and extent of the discovery period and the public nature of the process. In the discovery phase the other side has the opportunity to ask all kinds of questions, many of which may challenge your ability to intelligently answer; force you to produce a multitude of records, regardless of how deep they are in your storage unit; and put you and your people through hours of deposition designed not to learn truth but rather to trick you into saying something you don’t want to say.

In addition, all the court filings and the trial process are open to the public. On a slow news day you could find your case on the front page of the local newspaper.

The Nature of Arbitration
It has long been recognized that the arbitration process is more efficient and less expensive than a trial. The process from beginning to end normally takes less time and is less disruptive of your most important asset, your time.

Procedurally, arbitration can have exactly the same elements as a court trial, though less extensive and always less formal. To a significant degree, the process can be controlled by agreement of the parties, including the complete elimination of some court trial procedures. In fact, in arbitration some court trial procedures can take place only if one of the parties can convince the arbitrator that not having the procedure would result in unfair prejudice against the party’s case. For example, it is rare that depositions are a part of the process.

Two key benefits of arbitration are confidentiality and finality. No information about the claims enters into the public arena. Confidentiality is maintained over all documents that become part of the process. When the arbitrator’s ruling is issued, in the absence of a few unique circumstances, the process is done. There can be no appeal of the ruling. If a losing party does not comply with the ruling, it can be taken to the appropriate court where it will be enforced without any review of the decision.

Arbitration Rules
The American Arbitration Association (AAA) has developed arbitration rules for differing situations. While a set of rules has been developed specifically for Professional Accounting and Related Services Dispute Resolution, they contain little substantive difference from the general Commercial rules.

Assurance that any dispute will be resolved by arbitration rather than going to court can be achieved by putting a provision in engagement letters and other contracts. The recommended AAA language is:

Any controversy or claim arising out of or related to this (engagement letter) (contract), or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Arbitration Rules for Professional Accounting and Related Services Disputes and judgment of the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

If you have a dispute but did not include the above provision in the contract, you are not precluded from going to arbitration. As long as both parties agree, application can be made to AAA for arbitration of the dispute. This can be accomplished by filing a jointly signed document as follows:

We, the undersigned parties, hereby agree to submit to arbitration administered by the American Arbitration Association under its Arbitration Rules for Professional Accounting and Related Services Disputes the following controversy: (describe briefly). We further agree that the above controversy be submitted to (one) (three) arbitrator(s). We further agree that we will faithfully observe this agreement and the rules, that we will abide by and perform any award rendered by the arbitrator(s), and that a judgment of any court having jurisdiction may be entered on the award.

While AAA rules are comprehensive, the parties may agree on any modifications to suit their preferences. For example, the rules contain an arbitrator selection process; however, the parties can obviate that process and specify a particular arbitrator.

Application of the Process
When we think of potential liability, we usually think about clients and third party users of the financial statements we issue. In addition, there are a number of other places where arbitration could be an effective approach to dispute resolution including, for example, client fee agreements, partnership agreements, and contract arrangements with other practitioners.

Of course, if a dispute arises that places you in a position of material adverse interests with a client you probably have lost your independence. That’s when you need to look at Ethics Interpretation 101-6 and Rulings 95 and 96.

Always do high quality work and insist on clearly written contracts to avoid disputes altogether. However, differences of opinion may still arise. Before that happens, arrange for the benefits of arbitration. If you don’t arrange for arbitration beforehand and problems arise, consider recommending arbitration to settle the dispute.

About the Author
Gerald W. Hepp is a retired partner of Plante & Moran, PLLC. He has over 40 years of experience performing expert witness work and arbitrating disputes. He is currently a registered arbitrator with the American Arbitration Association and the Financial Industry Regulatory Authority. He can be reached at gerald.hepp@plantemoran.com.