Justice outside the courtroom
- May 7, 2012
Litigation is a notoriously expensive, slow-moving and uncontrollable process, so companies and individuals alike must evaluate how they manage conflict. At its core, effective conflict management should control costs while maintaining business relationships. Alternative dispute resolution (ADR) is a method that parties can use to achieve that goal, and CPAs can help.
ADR is any method of resolving conflict outside the courtroom, including arbitration and mediation. According to the American Bar Association (ABA), 95 percent of commercial litigation is resolved before trial. By avoiding the court system, ADR can be more economical, private and streamlined than litigation. In fact, ADR offers the conflicting parties significant flexibility since they can often choose their preferred method of resolution, the length and complexity of the process and the designated neutral third party, among other things. Given these benefits, the terms of many contracts mandate that the parties use ADR to resolve disputes. Additionally, in an effort to ease crowded court dockets, many courts require parties to pursue mediation prior to conducting a trial.
ADR is used in a variety of circumstances ranging from marital dissolution to multibillion dollar commercial disputes. CPAs are often engaged to assist companies through ADR as expert witnesses, consultants or designated neutral third parties called arbitrators or mediators. While both arbitration and mediation avoid the courtroom, both have differentiating characteristics.
To arbitrate or mediate?
Arbitration is similar to litigation in that each party agrees to present its case to the neutral third-party panel of arbitrators, who then typically render a binding written opinion. Many conflicting parties prefer arbitration over litigation because it can be conducted privately through an informal process with less stringent rules. Awards issued in binding arbitration tend to have more finality than litigation, because decisions can only be appealed in very limited circumstances. Also, since arbitrations are held outside the court system, arbitrators generally are not strictly bound by the legal principles established in other cases in the same way as common law courts. Consequently, parties who believe that judicial precedent is in their favor may wish to submit their disputes to the courts, while parties with unfavorable judicial precedents may prefer arbitration.
Mediation is a non-binding, confidential settlement negotiation that is led by a mediator who serves as an unbiased third party. According to the American Arbitration Association (AAA), 85 percent of commercial disputes and 95 percent of personal injury matters that are voluntarily submitted to mediation successfully result in a settlement. In contrast to arbitration, the mediator does not render an opinion, but rather guides the negotiations with the goal of reaching a voluntary resolution of the dispute between the parties. The mediator holds joint and separate meetings called caucuses with the parties to understand the issues, evidence and each party’s positions and priorities. With the help of counsel, mediators may identify key issues and help the parties explore alternative solutions; however, the final settlement decision is at the discretion of the conflicting parties.
Mediators and arbitrators are carefully selected and vetted retired judges, attorneys or professional and industry experts. In contrast to litigation, in which decisions are rendered by an appointed jury or judge, mediators and arbitrators are selected for specific cases based on their specialized knowledge. Parties presenting disputes can often assume that the arbitrators or mediators have a base level of relevant knowledge, which allows for potential cost savings. Rather than spending time educating the arbitrator or mediator regarding industry practices, the parties can focus on analyzing the important issues in the case.
Selection of the arbitrators or mediators is paramount to the conflicting parties. While arbitrators and mediators are independent and objective decision makers, each party wants to increase the likelihood that the selected mediator, arbitrator or panel will be open to adopting their positions. Consequently, the legal teams for each party will often carefully evaluate potential arbitrators or mediators with respect to their understanding of the industry, decisions in prior cases and other similar considerations.
The rules and protocols of arbitration and mediation can differ based on the selected ADR forum and agreements between the parties. Arbitrations and mediations that follow the prescribed rules of an ADR administrator, such as the AAA, are generally more streamlined and allow for less discovery and fact-finding than litigation. However, the parties can agree to modify the provisions of the selected ADR forum to allow for stricter rules and greater discovery.
The Role of the CPA
If your business is engaged in ADR, your legal counsel may advise you to hire a CPA as an expert witness or consultant. As expert witnesses or consultants, CPAs are engaged to assist attorneys and the ADR panel in understanding complex accounting and auditing issues, financial matters, business practices and damage assessments, among other things. CPAs may support their client through the discovery process, which can include assisting with documentation requests from the opposing party and depositions of key individuals.
The CPA will use the information gleaned during discovery to form an opinion regarding the key issues in the case, which can include a business valuation, calculation of economic damages or determination of compliance with U.S. Generally Accepted Accounting Principles (GAAP) or U.S. Generally Accepted Auditing Standards (GAAS). If the CPA is engaged as an expert witness in arbitration, the expert may also provide that opinion to the arbitrators through the issuance of an expert report and testimony. When CPAs are engaged during mediation as an expert witness or consultant, they can provide opinions or analysis related to the merits of a party’s position.
CPAs may also be engaged in ADR as the designated neutral third party or to assist with disputes involving complex accounting issues. Accordingly, if your business is engaged in ADR involving a high-level accounting issue, it may be advisable to select an arbitrator or mediator who is a CPA.
Protecting Your Business
Is your business prepared for future conflict?
The AAA is a nonprofit that offers a variety of ADR services for attorneys, businesses, individuals, associations, communities and the government. One of the primary goals of the AAA is to connect disputing parties with qualified arbitrators or mediators across the country. The AAA has offices located in major cities throughout the country, including Washington, D.C., but will hold hearings at any location convenient to the parties.
As globalization continues, more disputes are arising between foreign parties. International arbitrations or mediations are defined as those occurring outside the United States, between parties from different countries, or on contracts executed outside the United States. One of the goals of international arbitration is to ensure that all parties have equal advantage with respect to the language used and location of the arbitration.
Additionally, parties entering into international arbitration or mediation want to ensure that any award will be accepted and enforced in the international community. The International Chamber of Commerce’s (ICC) Commission on Arbitration is one of many organizations that offer a wide variety of international ADR services, including arbitration and mediation. The AAA also has a separate division called the International Centre for Dispute Resolution (ICDR) to handle international matters. By selecting an internationally respected ADR forum such as the ICC or ICDR, the parties increase the likelihood that the decision will be administered fairly and that the award will be enforced internationally.
So if your business finds itself engaged in litigation, consider opportunities outside the courtroom and remember that CPAs are there to help.
BETH HELLE, CPA/ABV, is a manager with Veris Consulting Inc., a provider of specialized forensic accounting and litigation consulting services headquartered in Reston. She is a member of the VSCPA Editorial Task Force. Contact her at email@example.com.