THE CPA IN MEDIATION & ARBITRATION

WHO USES MEDIATION AND ARBITRATION, AND WHY

By Philip Zimmerman, CPA

CPAs reading the business press are aware that there is frequent mention of disputes resolved by mediation and arbitration. In late 1998, PricewaterhouseCoopers LLP, Cornell University, and the Foundation for the Prevention and Early Resolution of Conflict released their final report on a survey of 1,000 of the largest U.S. corporations to determine their use of alternative dispute resolution (ADR) techniques.

The survey established that during the prior three years, 87% of respondents used mediation and 78% used arbitration; that respondents expect to expand significantly their use of ADR in the future; and that there is widespread use of ADR in commercial and employment disputes. The survey also revealed that mediation is preferred to arbitration. Mediation is preferred because it has proven useful in almost all industries and types of disputes.

Cost and Time Savings

Nearly 90% of respondents found that mediation saved money, and almost the same number found that it saved time as well. A strong reason reported for using mediation was that it allowed the parties to control their own destinies, as both sides must agree to the settlement. With arbitration and litigation, the outcome is adjudicated, and the parties may not agree with the decision. Mediation frequently allows the parties to preserve relationships.

Slightly lower percentages of respondents reported that arbitration saved both time and money. The survey showed contractual requirements and greater satisfaction from the process as compared to litigation (even though the decisions are binding) as two important reasons for using arbitration.

Parties generally choose arbitration when it is widely used in their industry. For example, arbitration is generally contractually required in the construction industry. The thinking is that costly construction delays can be avoided by using the faster arbitration process instead of time-consuming litigation.

Mediation is rarely entered into contractually. The parties generally enter it at any time prior to or even during litigation, either voluntarily or by court mandate. Courts and governmental agencies are more often requiring parties to use ADR because of backlogs on their calendars.

The Future of ADR and the CPA

The large majority of respondents (84%) reported that they are "likely" or "very likely" to use mediation in the future. A smaller number, 71%, reported the same for arbitration. The major reason given for not using ADR was that the opposing party was not willing to enter into the process.

How does all this relate to public accounting, which was not separately covered in the survey? A few large firms, such as Ernst & Young and BDO Seidman, and some smaller firms are using ADR clauses in their engagement letters as a means for resolving disputes with clients and say they are satisfied with it. A few state societies, such as New York and Massachusetts, have encouraged members to adopt ADR clauses in their engagement letters and contracts, and the NYSSCPA has even established a program to help resolve disputes between CPAs. The AICPA and a number of other state societies, such as California and New Jersey, have active ADR committees and have undertaken ADR educational programs. Also, most major professional liability insurers have accepted mediation as a means for resolving disputes and even offer financial incentives for its use.

Despite this, the immediate outlook for the use of ADR in public accounting is not as bright as the survey indicates for the corporate world. Still, the survey indicates that once an industry generally accepts ADR, its use grows rapidly. CPA firm consolidators (some of which have roots in the securities industry) and non-CPA managers from the corporate world (where ADR is generally accepted and used) may be a factor in furthering greater use of ADR into the accounting firm marketplace. In addition, competitive pressures to reduce costs and court-mandated use of ADR to reduce backlogs can be expected to accelerate the use of ADR in the profession. Once a certain critical mass is reached, the use of ADR should spread rapidly, to the point where public accounting will begin matching the level of use seen in the PricewaterhouseCoopers survey.

Nevertheless, forward-looking CPAs are beginning to insert ADR clauses into their engagement letters and commercial and employment contracts to obtain the same cost- and time-saving benefits as the corporate world. *

THE ROLE OF CPAS AS
NASD ARBITRATORS

By Deborah Masucci

As ADR continues to grow, the need for qualified nonjudicial decision makers increases. CPAs can play an important role as arbitrators and decision makers. Parties choosing arbitration need impartial experts to hear the facts of the case, evaluate witness testimony, and determine what relief should be granted. CPAs have important skills and expertise for serving as arbitrators. CPAs are particularly helpful in resolving disputes between investors and the securities industry.

The National Association of Securities Dealers, Inc. (NASD), administers arbitration rules for the resolution of investor disputes. During 1998, over 4,500 arbitration cases were filed at NASD. A majority of the cases involve investors, but many cases involve disputes between members, employees, and others. Most of the cases require panels of three arbitrators. NASD maintains a roster of 6,900 arbitrators nationwide from which panels for individual cases are selected. Arbitrators come from diverse backgrounds, including academia, accountancy, the securities industry, and law.

Recently, NASD adopted a new fee schedule for forum charges and arbitration. The new schedule was effective March 18, 1999, for new cases filed on or after that date. Arbitrator fees are $400 per day, with the chair receiving an additional $75 per day.

How are arbitrators appointed to a case, and how can CPAs improve their chances of being selected to a case? In November 1998, NASD amended its rules for appointment of arbitrators. Parties now have substantial control over who ultimately decides their case. Under the new process, parties receive a list of potential arbitrators. The list is produced by a computer system that rotates listing of potential arbitrators from the national roster based on the geographic area where the hearing will be conducted. Parties may request that the list include arbitrators with expertise in the subject matter or product in dispute.

The list of potential arbitrator names is accompanied by background information about each candidate, including the arbitrator's employment history for at least the past 10 years. The employment history is supplemented by a paragraph describing the arbitrator's business and professional background. Parties also may obtain arbitration decisions previously rendered by the candidates.

NASD sends the list of potential arbitrators to the parties after party statements about the case are exchanged. The parties have 20 days to return the list to NASD after striking unacceptable arbitrators and ranking the remaining arbitrators in order of preference. The NASD computer system consolidates the parties' rankings and ranks the remaining arbitrators. The NASD staff then contacts each potential arbitrator in order of ranking to determine whether the arbitrator is available to serve on the case. The staff also determines whether the arbitrator is aware of any conflict of interest, bias, or other condition that may preclude the rendering of an objective and impartial decision.

Once the panel is finalized, the parties are asked to appoint a chair by mutual agreement. If the parties fail to appoint a chair within 15 days NASD will, using the consolidated rankings of the parties.

How can you maximize your opportunity to be selected by the parties? In the short time that the new arbitrator selection rule has been in place, a few preferences have been shown by participating parties. Parties seek arbitrators that are knowledgeable, objective, and neutral; they should appear to be fair and have demonstrated fairness. First, parties prefer arbitrators whose background reflects active business and professional interests. A high level of activity suggests that the hearing will be managed efficiently, because the arbitrator recognizes the importance of returning to normal business activities quickly without prejudicing the resolution of the dispute. Second, arbitrators should review their biographical information periodically to ensure that it is accurate, complete, and reflects their breadth of life experience. Disclosure of potential conflicts of interest up front avoids perception of bias problems later on. Finally, parties are reluctant to choose arbitrators that have no arbitration experience. Arbitrators should become qualified at ADR forums and include other ADR experience on their background profiles. *

Deborah Masucci consults in the area of dispute resolution and conflict management, advising corporations and universities on the development of dispute resolution procedures and courses and is an adjunct professor at Brooklyn Law School. She was formerly vice president of dispute resolution for NASD.

Editor:
Philip Zimmerman, CPA
Mediator and Arbitrator

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.