Litigation, Arbitration &
Mediation
A Risk Management Program For Accountants
On Dispute Resolution Alternatives
Gary H. Barnes
Gary H. Barnes, P.A.
North Venice, FL
Burlington, VT
ghb@ghbpa.com
© Copyright 2013, Gary H. Barnes Professional Association. All Rights Reserved
Introduction: Statistics On Accounting Malpractice
Lawsuits
Class Action Suits Against Accountants, Recent Research:
 Over the last three years, we have seen a trend in which new filings
are increasingly likely to include internal control allegations without
corresponding allegations of GAAP violations.
 Accounting cases continue to be less likely to be dismissed and
typically take longer to resolve than non-accounting cases.
 Accounting case settlement dollars increased to over 90 percent of
the total value of all settled cases in 2012, up from 73 percent in 2011.
Source: Research on Accounting Class Action Filings and
Settlements, (Cornerstone Research), available online at
www.cornerstone.com.
AAA Statistics

FACT: PARTIES SETTLE PRIOR TO HEARINGS AT A RATE OF 3 TO 1

Disputes in industries where parties typically continue to work together, like Healthcare, settled at a rate of 80%.

The AAA, cognizant of its high settlement rates, works hard to move each case fairly and efficiently, leading to earlier and
less-expensive settlements for the parties. In fact, median forum* costs on the settled cases were just $3,250.

FACT: SOME LARGE COMPLEX CASES (LCC) WERE AWARDED IN 5 MONTHS OR LESS

B2B Arbitration users depend on the AAA for speedy resolution of disputes. A critical component of AAA arbitration is
helping the parties customize the process. While some add litigation-like procedures that lead to a time-consuming
process, most adhere to arbitration’s original intent of a fair, fast and efficient resolution of their disputes.

FACT: BILLION-DOLLAR AND BET-THE-COMPANY CASES TRUST ARBITRATION AND THE AAA

With high stakes cases, transaction costs increase rapidly. In business, time is money. While every LCC case exceeded
$500,000 in claims, several included $1 to $5 Billion. These parties know that AAA is experienced at administering highprofile, high-stakes cases.

* Forum costs = AAA Fees + Arbitrator Fees
AAA Statistics (Cont.)

SETTLEMENTS

PERCENT OF CASES SETTLED

ALL FIVE INDUSTRIES 71% ENERGY 68% HEALTHCARE 80% FINANCIAL SERVICES 68% TECHNOLOGY 72% TELECOM 65%

BIG BUT QUICK

ENERGY HEALTHCARE FINANCIAL SERVICES TECHNOLOGY TELECOM

FASTEST TO AWARD

4.3 Months 4.5 Months 4.8 Months 3.5 Months 4.4 Months

**AVERAGE LCC CLAIM

BIG $ FIGHTS

ALL FIVE INDUSTRIES $2.0M ENERGY $4.3M HEALTHCARE $1.3M FINANCIAL SERVICES $2.2M TECHNOLOGY $1.8M TELECOM $1.6M

LARGEST CLAIM

$4.97B $623M $129M $4.97B $140M $650M
Litigation, Arbitration &
Mediation
 Similarities
 Differences: Adjudication v. Mediation
 Differences: Litigation and Arbitration
Litigation and Literature
“This is the Court of Chancery,… which gives to monied might
the means abundantly of wearying out the right, which so
exhausts finances, patience, courage, hope, so overthrows the
brain and breaks the heart, that there is not an honourable man
among its practitioners who would not give--who does not often
give--the warning, ‘Suffer any wrong that can be done you
rather than come here!’”
 Dickens, Bleak House
Your Default Dispute Resolution Clause
(What happens if you say nothing about dispute
resolution)
 “If any dispute arise out of the relationship of the parties,
then any party shall file suit in any court with any peripheral
connection to the Defendant, the judge need not have any
experience with the accounting profession or the nature of
the work performed, the proceedings shall be open to the
public at all times, all documents filed shall be public
document unless the parties agree otherwise, discovery is to
be fully accessible to all parties, a jury shall decide the case
on the request of any party, no written decision need be
issued, and there shall be no time limits or financial
constraints on the proceedings.
Civil Procedure vs. ADR
Rules
 Civil Procedure Rules
 AAA Rules
 Commercial Arbitration Rules and Mediation Procedures
(Including Procedures for Large, Complex Commercial
Disputes) Rules Amended and Effective June 1, 2009
 Professional Accounting and Related Services Dispute
Resolution Rules
Rules Amended and Effective June 1, 2009
Ethics of Pre-Dispute ADR in
Engagement Letters
 95. Agreement With Attest Client to Use ADR Techniques
 .190 Question—Alternative dispute resolution (ADR) techniques are
used to resolve disputes (in lieu of litigation) relating to past services,
but are not used as a substitute for the exercise of professional
judgment for current services. Would a predispute agreement to use
ADR techniques between a member or his or her firm and a client
cause independence to be impaired?
 .191 Answer—No. Such an agreement would not cause
independence to be impaired since the member (or the firm) and
the client would not be in threatened or actual positions of
material adverse interests by reason of threatened or actual
litigation.
 [Revised, July 2002, to reflect conforming changes necessary due to
the revision of interpretation 101-1.]
Litigation, Arbitration:
Same Independence Rules
 96. Commencement of ADR Proceeding
 .192 Question—Would the commencement of an alternative
dispute resolution (ADR) proceeding impair independence?
 .193 Answer—Except as stated in the next sentence,
independence would not be considered to be impaired because
many of the ADR techniques designed to facilitate negotiation and
the actual conduct of those negotiations do not place the member
or his or her firm and the client in threatened or actual positions of
material adverse interests. Nevertheless, if a covered member
and the client are in a position of material adverse interests
because the ADR proceedings are sufficiently similar to
litigation, ethics interpretation 101-6 [ET section 101.08]
should be applied. Such a position would exist if binding
arbitration were used.
When Dispute Impairs
Independence

08 101-6—The effect of actual or threatened litigation on independence.

In some circumstances, independence may be considered to be impaired as a result of litigation or the
expressed intention to commence litigation as discussed below.

Litigation between client and member

The relationship between the management of the client and a covered member must be characterized
by complete candor and full disclosure regarding all aspects of the client's business operations. In
addition, there must be an absence of bias on the part of the covered member so that he or she can
exercise professional judgment on the financial reporting decisions made by the management. When
the present management of a client company commences, or expresses an intention to
commence, legal action against a covered member, the covered member and the client's
management may be placed in adversarial positions in which the management's willingness to
make complete disclosures and the covered member's objectivity may be affected by self-interest.

For the reasons outlined above, independence may be impaired whenever the covered member
and the covered member's client or its management are in threatened or actual positions of
material adverse interests by reason of threatened or actual litigation. Because of the complexity
and diversity of the situations of adverse interests which may arise, however, it is difficult to prescribe
precise points at which independence may be impaired. The following criteria are offered as
guidelines:
Polling Question
 Does a pre-dispute agreement in an engagement letter
impair the independence of the CPA?
Impairment of Independence
 The commencement of litigation by the present
management alleging deficiencies in audit work for the client
would be considered to impair independence.
 The commencement of litigation by the covered member
against the present management alleging management
fraud or deceit would be considered to impair
independence.
 An expressed intention by the present management to
commence litigation against the covered member
alleging deficiencies in audit work for the client would
be considered to impair independence if the auditor
concludes that it is probable that such a claim will be filed.
Exception to Impairment
 Litigation not related to performance of an attest
engagement for the client (whether threatened or
actual) for an amount not material to the covered
member's firm or to the client company would not
generally be considered to affect the relationship in
such a way as to impair independence.
 Such claims may arise, for example, out of disputes as
to billings for services, results of tax or management
services advice or similar matters.
Issues To Consider: Preview
of Coming Attractions
 Pre Claim Screening
 Privacy v. Publicity
 Rules of Pleading
 Filing Fees
 Selection of Forum, Locale
 Selection / Qualifications of Judge, Jury, Arbitrator
 Availability of Interim Relief
 Counterclaims
 Third Party Claims
More Previews
 Budgeting
 Discovery Limits
 Pretrial Motion Practice
 Scheduling
 Court Reporter
 Length of Hearing
 Decision Format & Timing
 Appeals
Malpractice Insurance
Coverage
 Duty to Defend
 Duty to Cooperate and Insurer Objections To Arbitration
 Risk of No Coverage
 Coverage Within or Outside the Limits
 Impact of Deductible
Reporting Claim to Regulators
 AICPA
 State Society
 State Board of Accountancy
 PCAOB
 SEC
AICPA Investigations

How To File a Complaint

The Professional Ethics Division investigates complaints against AICPA members. All letters of
complaint should be mailed to :

AICPA
220 Leigh Farm Road
Durham, NC 27707
Attn: Professional Ethics Division

The AICPA will conduct an initial review of the complaint and, if necessary, investigate the matter in
accordance with the procedures of the Joint Ethics Enforcement Program. If an investigation is
deemed warranted, the results of the investigation will be shared with you on a confidential basis once
it is concluded. Please note that the procedures of the Joint Ethics Enforcement Program require that
an investigation be conducted in a confidential manner and that the results not be made public, with
the following exceptions: (a) if after investigation, the matter is referred to a hearing panel of the Joint
Trial Board, and the panel finds one or more members guilty of violating the Code of Professional
Conduct, or (b) the investigation results in a settlement agreement involving membership rights (i.e..
suspension or expulsion) and the member agrees to publication, the results will be published.
Polling Question
 As a member of the AICPA are you obligated to report
to the AICPA any lawsuit or arbitration filed against you
in which it is claimed you violated AICPA professional
standards?
Pre-claim screening
 Few Jurisdictions Require Pre-Screening By Experts
 Early Neutral Evaluation or Mediation generally now
required after substantial discovery
 In Contrast, AAA Accountant Rules Require Mediation
first, with Arbitration Only if Dispute Remains
Unresolved
Privacy vs. Publicity
(Litigation)
Reaction from Potential
Jurors
 John2llm hell.. if someone caused me to lose millions
youbet i will be dragging their ass in court!
 norielove460 THATS RIGHT GIRL , GETTHOSE
COINS .. lol
 ·marvciputra gladthat she's more mature & more wiser
now.. You go RIRI.. :)
 Roli252520 glad to see she is keeping a close eye on
her money. she's a wise young woman.
Privacy Under AAA Rules
 Rules governing accountant disputes:
 25. Attendance at Hearings
 The arbitrator shall maintain the privacy of the hearings
unless the law provides to the contrary.
 Any person having a direct interest in the arbitration is
entitled to attend hearings. The arbitrator shall otherwise
have the power to require the exclusion of any witness,
other than a party or other essential person, during the
testimony of any other witness. It shall be discretionary with
the arbitrator to determine the propriety of the attendance of
any other person.
AAA Commercial RulesPrivacy
 R-23. Attendance at Hearings
 The arbitrator and the AAA shall maintain the privacy of
the hearings unless the law provides to the contrary.
Any person having a direct interest in the arbitration is
entitled to attend hearings. The arbitrator shall
otherwise have the power to require the exclusion of
any witness, other than a party or other essential
person, during the testimony of any other witness. It
shall be discretionary with the arbitrator to determine
the propriety of the attendance of any other person
other than a party and its representatives.
Filing suit: Complaint vs.
Arbitration Statement of Claim
 The initiating party (the "claimant") shall, within the time period, if any,
specified in the contract(s), give to the other party (the "respondent")
written notice of its intention to arbitrate (the "demand"), which
demand shall contain a statement setting forth the nature of the
dispute, the names and addresses of all other parties, the
amount involved, if any, the remedy sought, and the hearing
locale requested.
 (b) A respondent may file an answering statement in duplicate with
the AAA within 15 days after confirmation of notice of filing of the
demand is sent by the AAA. The respondent shall, at the time of any
such filing, send a copy of the answering statement to the claimant. If
a counterclaim is asserted, it shall contain a statement setting
forth the nature of the counterclaim, the amount involved, if any,
and the remedy sought. If a counterclaim is made, the party making
the counterclaim shall forward to the AAA with the answering
statement the appropriate fee provided in the schedule included with
these rules.
Pleading and Motion Practice
in Court
 Rule 12. Dismiss For Failure to state a valid claim.
 Rule 5 6. Summary Judgment When no genuine
dispute as to material facts and moving party entitled to
judgment under the law.
 Mandatory Counterclaims
 Mandatory Affirmative Defenses
 Motion Practice
Filing Fees
Amount of
Claim
Initial Filing Fee
Final Fee
Above $0 to
$10,000
$775
$200
Above $10,000 to $975
$75,000
$300
Above $75,000 to $1,850
$150,000
$750
Above $150,000
to $300,000
$2,800
$1,250
Above $300,000
to $500,000
$4,350
$1,750
Nonmonetary
Claims1
$3,350
$1,250
AAA Fees (Continued)
Above $500,000 to
$1,000,000
$6,200
$2,500
Above $1,000,000 to
$5,000,000
$8,200
$3,250
Above $5,000,000 to
$10,000,000
$10,200
$4,000
Above $10,000,000
Base fee of $12,800
$6,000
plus .01% of the amount
above $10,000,000
Fee Capped at $65,000
Filing Fees: Federal Court
 Filing Fee $350
 State Court Filing Fees vary state to state
Polling Question
 As a general rule, the filing fees in court are less
expensive than arbitration filing fees. True or False?
Selection of Tribunal
 Court: plaintiff initially pick the tribunal, and the locale;
defendant can use motion practice to change venue.
 Arbitration. Claimant requests locale based on
arbitration agreement, Respondent can ask for different
locale if agreement provides otherwise, AAA decides.
Locale: Home or (far) Away?
 Personal Jurisdiction
 Impact of Technology (cell phone and Internet
Commerce)
 Disadvantages of Defending Close to Home
 Disadvantages of Defending From Afar
 Benefit of Deciding Locale In Advance
Selection of Judge
 Qualifications of Judge: Elected or Appointed under
state law. Federal appointed with approval of Senate.
Judges result from a political process; may have no
expertise or even experience with accountants and
scope and content of accountants engagements.
 Qualifications for Jurors: Living in the judicial district
 Qualifications for Arbitrator. Selected by the parties or
the AAA for expertise.
Qualifications of Judge
 None.
 Juror: None
 Arbitrator: Initially nominated to AAA panel, subject
specific. Qualifications set forth in resume published
online. Parties or AAA select, depending on arbitration
agreement.
Judge or Jury?
 Jury Pool and Juror selection.
 Appearances, themes, prevail over technicalities
 Difficulties Defending Accountants
 The Role of Charisma
 Either Party Can Require Jury trial
 No Jury in Arbitration
Interim Relief
 Attachment, Garnishment, Injunctive Relief
 Interim Relief in the Courts
 Interim Relief in Arbitration
Case Budget-Case
Management Conference
 Courts. Most Courts Require Case Management
Conference, Stipulated Discovery Plan and Periodic
Review and Adjustment of Plan.
 AAA requires initial conference, by phone or in person,
with cases to be in hearings within 6 months wherever
possible.
Pleadings And Motions
 Substantial Motion Practice in Courts
 Pleading Disputes
 Jurisdiction
 Adequacy of Allegations
 Joinder of Necessary Parties
 Discovery Disputes
 Adequacy of Discovery Production
 Issues with Privilege Claims
 Limits on Repetitive Cumbersome Discovery
 Discovery Abuses: Coaching
 Motion Practice in Arbitration
Co-Defendants and Third
Parties
 Courts: Ability to bring in others as co-defendants or as
liable third parties
 Arbitration: No other party brought in unless arbitration
agreement provides and the co-defendant or third party
has agreed to arbitrate
Discovery
 Interrogatories
 Depositions
 Document Production
 Electronic Discovery
Scheduling Control
 Court: Trial Dates set by Court.
 Arbitration. Because arbitrator typically has only one
arbitration at a time, arbitrators typically have more
flexibility to schedule at the parties convenience.
Cost of Hearing Room, Court
Reporter, Judge
 Court: Costs borne by the government (taxpayer).
 Arbitration: Parties equally pay arbitrator unless
agreement is “loser pays.” Court reporter not required,
if a party wants a transcript that party must retain court
reporter. Hearing room is borne equally by the parties
unless rules of agreement provide for “loser pays.”
Rules of Evidence
 Court: Detailed, complicated rules of evidence that
govern what evidence is admitted.
 Arbitration: All evidence is admitted, objections go to
the weight of reliance by the arbitrator.
Restrictions on Length of
Hearing
 Court: Limits on testimony and cross examination are
typically not allowed.
 Arbitration: If parties agree, time limits are honored.
Format of Decision
 Court: Jury Verdict
 General verdict
 Special Interrogatories
 Court: Judge
 Oral from the bench
 Written Findings of Fact & Conclusions of Law
 Arbitration
 Simple Award
 Opinion and Award
Timing Of Decision
 Jury Verdict. Immediate, as soon as jury reaches
agreement; risk of mistrial.
 Court. No Limits on when Judge must provide written
decision.
 Arbitration. Rules generally require written decision
within 30 days after hearing is closed.
Appeal From Decision
 Court: Appeal based on any reversible error, including pretrial or
discovery rulings, evidence rulings, making findings unsupported
by evidence.
 Arbitration. Generally, no appeal. But arbitration award may be
set aside if
 1. Arbitrator refused to hear pertinent evidence or refused to
postpone hearing when good cause shown or similar misbehavior
 2. Evident Bias or Partiality
 3. Award procured by corruption, fraud, or other undue means; or
 4. Arbitrators exceed their powers
Enforcement of Decision
 Court: Issues self-enforcing judgment which can be
filed in land or business records to create lien which
can ultimately form the basis for seizure and sale by
sheriff or marshal;
 Arbitrator issues award which then is the basis of a
lawsuit seeking enforcement of the award. The
enforcement action is a summary proceeding and if the
award is upheld, is incorporated into the court’s final
order.
Elapsed Time
 Courts: 1-3+ years.
 Arbitration: 6 mos. to 9 mos.
Conclusion
 Consider what you want for your dispute resolution
clause.
 If you are interested in arbitration, check with your
insurer first, then use a carefully drafted dispute
resolution clause in your engagement letter.
 Consider your client. Don’t ask for anything that you
cannot explain as being fair to all.