September 1998 Issue

THE CPA IN MEDIATION AND ARBITRATION

THE CPA AS ARBITRATOR

By Vincent J. Love

If you are a good auditor, you are well on your way to becoming a good arbitrator. The standards and skills used by a CPA in conducting an audit in accordance with generally accepted auditing standards are similar to those required in conducting an arbitration. The only remaining skills the CPA needs to develop relate to administrating the arbitration, particularly interfacing with the parties. The crossover skills and ethical considerations of the CPA as an arbitrator can be understood by comparing the characteristics of the good auditor with those of a good arbitrator.

The arbitrator has a responsibility to the parties, and also to the process itself. The arbitrator must observe high standards of conduct to preserve the integrity and fairness of the process. The CPA has the same responsibilities to the client and the public in conducting an audit.

Arbitration is a professional service, and the parties are the client. A CPA is governed by the profession's various codes of conduct when acting as a neutral in alternative dispute resolution.

Independence, Integrity, and Objectivity. The hallmark of the CPA in conducting an audit in accordance with generally accepted auditing standards is independence, coupled with integrity and objectivity. These ethics rules are embodied in the first two standards of the code of conduct. These rules are also applicable in the arbitration process. They are included in the first two volumes of the Code of Ethics for Arbitrators in Commercial Disputes prepared in 1997 by the American Arbitration Association and the American Bar Association. In arbitration, however, independence violations can be waived by agreement of the parties. Integrity and objectivity, however, can never be waived.

One of the four grounds for vacating an arbitration award in New York State is proof of bias of an arbitrator appointed as a neutral. The arbitrator has the duty to disclose all relationships with the parties and is best advised to disclose even questionable relationships. The ethics code section of the code of conduct gives appropriate guidance for determining independence in the arbitration process.

The arbitrator should have the respect and confidence of all the parties to the dispute. CPAs are known for their integrity and objectivity. These character attributes are most often associated with CPAs and are the basis for the respect and confidence the public has in the profession. The integrity and objectivity standards in the code of conduct are as important in rendering an arbitrator's award as they are in rendering an auditor's opinion.

Impartiality. The arbitrator must remain unbiased throughout the process. CPAs are trained to collect all relevant data before reaching a conclusion. Often the auditor finds information that could lead to several conclusions, but it is not until all of the facts are known that the auditor can reach a conclusion that is well-founded on the total results of the examination. As in an audit, a reasoned, dispassionate analysis of the facts and the rights of the parties forms the foundation for the arbitrator's award. Arbitrators and auditors must be impartial in both fact and appearance.

Fairness. While arbitration does not necessarily follow the rules of evidence or always require a written reasoned opinion, it is important that the arbitrator be fair in ruling on evidence and other objections and in reaching a decision. This same trait is important to the auditor in reviewing and evaluating the audit evidence before forming an opinion on the financial statements. The good auditor always measures the sufficiency, competency, and relevancy of the audit evidence in reaching an opinion.

The auditor must obtain sufficient competent evidential matter through inspection, observation, inquiry, and confirmation to afford a reasonable basis for an opinion regarding the financial statements. To be competent, evidence must be both valid and relevant. CPAs are required to be unbiased in evaluating evidence and are trained to evaluate the evidence based on its nature, source, and relevancy and the existence of corroborating evidence. The same skills come into play when evaluating evidence in an arbitration.

Knowledgeable. A key ingredient that CPAs bring to the arbitration process that many other professionals do not is an in-depth knowledge of the operating and financial systems of businesses in many different industries. CPAs learn about a business from the bottom-up, working with the basic transactional details as young staff-persons and, later in their careers, consulting with management on business tactics and strategies. This knowledge adds to the quality of evaluation and decision making in the arbitration process.

Inquisitiveness. The result of inquisitiveness is a thorough examination of the facts and search for causes and answers. The training in basic auditing, at the college level and in the early years of working for a CPA firm, is directed at instilling in the auditor the inquisitiveness necessary to satisfactorily conduct an audit. This inquisitiveness is also characteristic of a good arbitrator.

Attentiveness. The arbitrator must absorb all that is being said and be able to distinguish between an advocate's arguments and probative evidence. There is a need to wait until all the evidence is presented, understood, and evaluated before reaching any conclusions. The patient ability to wade through mounds of detailed evidence and complex theories and transactions is learned by the CPA through the audit process.

Analytical Ability. In conducting an audit or performing a review, the CPA performs analytical review procedures. The auditor recognizes plausible relationships among both financial and nonfinancial data and searches the evidence to determine if those relationships exist. In addition, the auditor analyzes all of the evidence to determine whether the transaction is real and properly recorded. These same analytical skills are used to evaluate evidence in an arbitration.

Thoroughness. The auditor searches all of the available data and then separates the wheat from the chaff. The auditor is thorough in collecting audit evidence, but through analysis and evaluation, identifies the relevant data that leads to a reasoned opinion. All of the evidence is given its due weight. The arbitrator performs the same analysis and evaluation before rendering an award.

Good Judgment. The profession is built on the exercise of good and reasonable judgment. Clients confide in their CPAs because they trust them and respect their opinions. This characteristic of a CPA is at the heart of an arbitration. The parties want a fair hearing of their positions by an unbiased, knowledgeable individual who will decide on the merits of the case and exercise good judgment in rendering an award.

Confidentiality. The arbitration process settles disputes between two or more parties in private. Indeed, one of the principal benefits of arbitration is the confidential nature of the proceedings. In performing any professional service, a member of the state society is precluded under the code of conduct from disclosing any confidential client information without the client's specific consent.

The enforceability of an arbitration award could depend upon how the evidentiary hearings were conducted. The CPA has many of the skills and characteristics to become a good arbitrator. A better understanding of the process and experience in conducting hearings are usually the only obstacles separating the good auditor from the good arbitrator. The American Arbitration Association is the best source for obtaining training and literature on the process. The CPA should give serious thought to joining the association or a similar organization and utilizing its resources. *

Vincent J. Love, CPA, Kramer and Love, is a member of the board of directors of the American Arbitration Association and a member of the New York Metropolitan Large Complex Case and Commercial Panels of the AAA.

IN CASE YOU ASKED ...

By Philip Zimmerman, CPA

Here's a sampling of the most frequently asked questions about getting started as an arbitrator.

Q. How can I obtain training to become an arbitrator?

A. Various associations offer courses on becoming an arbitrator. First would be your state society's committee on arbitration and mediation or its educational arm. For New York, call (212) 719­8300 or e-mail pzimmer@aol.com. Other sources are the National Association of Securities Dealers (NASD) (212) 858­8300 and the American Arbitration Association (AAA).

Q. How do I gain experience in arbitration?

A. 1. Join your state society's arbitration and mediation committee--and actively participate.

2. Contact the NASD and learn about its program. By attending its training program, you may be able to network and connect with that first engagement.

3. A client might list you as a party-appointed arbitrator for a panel of three arbitrators related to a dispute it has.

4. Parties may select an independent CPA to arbitrate any dispute that may arise or exist between them.

Q. How much can I charge for my services as an arbitrator?

A. 1. For your state society committee--pro bono.

2. NASD--Daily rate of $225. A proposed rule change would substantially increase the rate.

3. Client or parties in a dispute--customary billing rate.

4. AAA--Rates are suggested by the arbitrator prior to appointment to a panel, and normally run from $100 to $200 per hour, depending on experience. *

Editor:
Philip Zimmerman, CPA
Mediator and Arbitrator

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