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 [email protected] © 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

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Disputes in industries where parties typically continue to work together, like Healthcare, settled at a rate of 80%.

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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.

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FACT: SOME LARGE COMPLEX CASES (LCC) WERE AWARDED IN 5 MONTHS OR LESS

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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.

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FACT: BILLION-DOLLAR AND BET-THE-COMPANY CASES TRUST ARBITRATION AND THE AAA

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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.

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* Forum costs = AAA Fees + Arbitrator Fees

AAA Statistics (Cont.) 

SETTLEMENTS

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PERCENT OF CASES SETTLED

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ALL FIVE INDUSTRIES 71% ENERGY 68% HEALTHCARE 80% FINANCIAL SERVICES 68% TECHNOLOGY 72% TELECOM 65%

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BIG BUT QUICK

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ENERGY HEALTHCARE FINANCIAL SERVICES TECHNOLOGY TELECOM

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FASTEST TO AWARD

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4.3 Months 4.5 Months 4.8 Months 3.5 Months 4.4 Months

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**AVERAGE LCC CLAIM

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BIG $ FIGHTS

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ALL FIVE INDUSTRIES $2.0M ENERGY $4.3M HEALTHCARE $1.3M FINANCIAL SERVICES $2.2M TECHNOLOGY $1.8M TELECOM $1.6M

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LARGEST CLAIM

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$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.

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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.

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Litigation between client and member

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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.

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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 :

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AICPA 220 Leigh Farm Road Durham, NC 27707 Attn: Professional Ethics Division

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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.