The author describes the mediation process from a CPA firm's point of view - who, what, and how - as well as the resulting advantages. It works for the client as well.

An emerging process for helping CPAs manage their exposure to the risk of litigation is the increasing use and availability of a form of alternative dispute resolution (ADR) known as mediation. The advantages of the process are not one sided; the other party - the user of the CPA's services - also has the potential to benefit from it.

There have been several articles (see accompanying list) explaining various ADR procedures. But these articles either emphasize arbitration or stress the advantages of mediation from a legal point of view. For the CPA firm considering mediation, there is essential information to be absorbed, including appropriate engagement letter clauses, the extent to which various insurers embrace mediation, and an understanding of the mediation process from the CPA's point of view.

Most underwriters of CPA professional liability insurance now allow mediation as an ADR method and some even subsidize it in whole or part ILLUSTRATION FOR EXHIBIT 1 OMITTED!. At least one major CPA firm is testing the use of mediation in disputes with its clients by including mediation clauses in its engagement letters for certain of its offices. Marry judges, because of court overload, require disputing parties to use mediation in the hope of avoiding lengthy court hearings. A lengthy heating usually occurs when a case includes a great deal of factual material, as in many disputes involving financial matters.

What Is Mediation?

Mediation as it relates to resolving a dispute between a CPA firm and a client or other third party is a facilitated negotiating process in which the firm and the other party to the dispute meet with a neutral third party, the mediator, whose sole function is to try to assist the parties in reaching an acceptable settlement. Mediation is generally a quick procedure that, if properly organized, can be accomplished in a few meetings, with an extremely high success rate. The process is voluntary and either party can terminate it at any time.

Who Can Assist with the Process? The parties may retain attorneys or conduct the process without them. It is unusual for the parties to come to a mediation conference with an attorney, although there generally are consultations prior to or after a particular conference. In complex cases, however, liability insurance underwriters may also suggest the presence of a CPA firm's attorney at the conference. The parties should be represented by persons from their organizations who know the facts behind the dispute and have the authority to resolve the dispute or have easy access to someone who has such authority. This ability to negotiate and settle is essential to the mediation process.

There are several organizations equipped to assist in the preparation of an agreement to mediate and the selection of a qualified mediator. The leading organizations that operate nationally are shown in Exhibit 2.

The AAA experience is that settlement is reached in 80% of the disputes submitted to it. JAMS/Endispute, Inc. has reported that 90% of the cases submitted to it during 1992 were settled. Other knowledgeable mediators state that 60% to 95% of all disputes are settled by mediation.

How Does Mediation Differ from Arbitration? Mediation is a voluntary dispute resolution process that does not become binding unless the parties reach their own settlement of the dispute. Arbitration differs in that an arbitrator makes a determination to resolve the dispute that is binding on all the parties. Mediation is also more effective in saving the relationship between a CPA firm and its client in the event of a dispute.

Mediation Is Preferable to Litigation. Even if a CPA firm is victorious in litigation, there is usually a large out-of-pocket cost for counsel, experts, depositions, copies of documents, etc. Litigation also takes its toll through the high cost in time lost from work and emotional trauma.

Satisfaction with litigation is generally low because control, by the involved parties, is lost in the process. Counsel argues the case if it goes to trial, and if the case is settled before trial, the attorneys generally have proposed it based on the hazards and costs of litigation. If the case reaches a jury, the outcome is extremely unpredictable.

Litigation results in a winner and a loser. Because of its adversarial relationship, the process tends to destroy even long-standing client relationships.

The cost of mediation is lower than either arbitration or litigation. Since mediation does not usually require a great deal of an attorney's time, and is generally successfully concluded in a few days, the out-of- pocket costs are not considerable, and the loss of valuable partner and staff time is minimized.

How Does Mediation Work?

A CPA firm and a client who are in a dispute can enter the mediation process, either under a mediation clause that was part of an engagement letter entered into prior to the dispute, or they may agree to mediate after the dispute arises if there was no prior arrangement. There is also the possibility that a court can order mediation after litigation has started.

Sample mediation clauses for engagement letters can be obtained from one of the ADR agencies or adopted from an existing model with the help of an attorney.

The Mediator. Under AAA rules, the AAA selects the mediator subject to approval by the parties. The other ADR agencies maintain lists and biographies of experienced and trained mediators. The parties involved then approve or select a mutually agreeable mediator. The process for selecting an appropriate mediator is covered in greater detail later.

The mediator's task is to help the parties resolve their dispute in whatever manner the parties decide and the mediator will act neither as counsel nor advisor to the parties. The parties should consult their own attorneys during the process and have them review the final settlement.

Preparation. It is advisable for the CPA firm to ready itself in advance for the mediation by preparing a negotiating plan that does the following:

1. Defines the issues involved.

2. Identifies the firm's interests and prioritizes them. In mediation, "interests" means the needs of the parties that relate to the dispute or the area affected by the dispute. These could include a CPA firm's economic interests (e.g., desire to retain the client), confidentiality (desire to preserve the firm's reputation), and timing (desire to resolve the case quickly to avoid loss of partner and staff time).

3. Explores possible solutions, including an initial proposal - high enough to allow for further negotiation - and a bottom-line proposal.

4. Determines the strengths and weaknesses of its case.

5. Gathers facts and documents to support its case.

6. Anticipates the other party's needs, interests, demands, positions, strengths, and weaknesses.

7. Develops a strategy and tactics, considering the interests of the other party.

To expedite the process, each pasty may prepare and supply the mediator and the other party with one or more position statements. The acceptance, depth, and contents of these statements need to be agreed on among the mediator and the parties.

The Mediation Conference. The next step is the mediation conference. The mediator first describes the ground rules to be followed. The initiating party presents its side of the dispute, what it wants, and why. The other party then responds in a similar fashion. The mediator tries to understand how each party views the dispute, their interests, and their positions. As previously noted, depending on the nature of the dispute, it may or may not be necessary for the parties to have their attorneys at the mediation conference.

When the first session reaches this point, the mediator will usually seek adjournment and caucus separately with each party. During the caucus, the mediator tries to clarify the facts and positions, while trying to loosen frozen positions and explore alternative solutions. The mediator tries to make each side deal realistically with the other's arguments. A party's position usually changes after it hears the opposing party's arguments and a settlement range may begin to emerge. The mediator then has the parties focus on the risks and costs of litigation in relation to other alternatives. At this point, there may be one or more joint sessions or caucuses, during which the mediator helps to narrow differences between the parties and obtain agreement on as many issues as possible.

Settlement. In a caucus, the mediator may suggest a final settlement, but it is the parties themselves that negotiate the final terms in a joint session. It is up to the mediator to make sure that the agreement is complete and sufficiently clear to settle the dispute.

The final step is the signing of a written settlement agreement and the exchange of releases. If a settlement is not possible, and this rarely happens, the parties may agree to arbitration, or go directly to litigation.

Selecting an Appropriate Mediator

The selection of an appropriate mediator enhances the chances for a successful mediation and an ultimate resolution of the dispute. The mediator should match the needs of the parties and the type of dispute, as well as be prepared to overcome the impediments to resolving the dispute.

The prime qualification for an appropriate mediator is that he or she is respected by both parties. The mediator should also be independent, experienced, trained, and have the time to resolve the dispute. Among the desired personal qualifies is creativity, including flexibility and adaptability; diligence, including persistence and an interest in preparation; and leadership, including patience and the ability to bring the parties together.

Independence of the mediator is necessary for a successful mediation process; it helps to reduce the hostility of the parties by facilitating a frank discussion of each side's interests, strengths, and weaknesses. An independent mediator can aid each party in assessing the reality of its position. The parties then usually narrow the issues, and excessive demands are deflated. The result is an extremely high percentage of cases ending in a voluntary settlement at a minimum of cost in time and money.

There is no reason the parties can't interview the mediator and satisfy themselves that the mediator has the necessary background, experience, approach, and personal qualities desired. It is generally preferable for the parties to jointly interview the prospective mediator to avoid any perception that one of the parties unduly tried to influence the mediator. Because the AAA rules provide for it to select the mediator, the appearance of neutrality is enhanced. The only contact with the mediator prior to the mediation and, except for caucuses during the mediation, is through an intermediary, the AAA.

The two main approaches to mediation are -

* the "evaluative" approach, which relies on expertise in a technical area, such as law or the accounting profession, and the ability of the mediator to evaluate the case for each side and make recommendations, or

* the "facilitative" approach, which relies on having the parties articulate their interests, the narrowing of these interests, and the use of other dispute-resolution techniques to help the parties themselves resolve their differences without the mediator's intervention.

A CPA firm may be better off in certain cases with the facilitative approach. It should be prepared to deal with the fact that some litigating attorneys have difficulty in accepting the facilitative approach and are comfortable only with the evaluative approach; their experience is with a process that relies on rules and precedent.

Advantages of Mediation

Putting the whole process together, the advantages of mediation are many:

1. Client relationships can be maintained.

2. There are no winners or losers.

3. Costs are usually less for the CPA firm and its client. Much less legal advice is required. Discovery is limited because the parties have all of the facts or documents and key witnesses within their control and, by mutual agreement and in the interest of reaching a settlement, will agree to supply them voluntarily.

4. The mediator selected understands the parties' businesses.

5. Even if a CPA firm wins in litigation, the costs are generally significantly higher than in mediation, and the CPA firm usually bears a meaningful amount of them. This is true even if the firm is insured because of the deductible and the loss of productive time.

6. There is little risk to mediation since either party can terminate the mediation at any time without prejudice and proceed to either arbitration, with the consent of the other parry, or litigation.

Mediation's disadvantages arise when litigation is needed to achieve certain objectives or other conditions exist such as the following:

* A nonconfidential process is needed,

* A legal precedent is desired,

* Public vindication is felt to be important,

* Maximizing recovery is important,

* More is involved than a simple dispute, or

* The rights and responsibilities of third parties are involved.

The Process of Mediation

The CPA firm planning to use mediation or have it available in the event of a dispute should do the following:

1. Consult with its liability insurance underwriter to see if mediation is acceptable and what special, if any, requirements it has.

2. Work with an attorney to develop special language to be included in new engagement letters. Also, some of the leading CPA liability insurers will provide suggested engagement letter wording requiring mediation.

3. Explain to partners why mediation is good for both clients and the firm and provide them with answers to questions clients may ask of them.

Answers to Some Myths About Mediation

A number of myths are circulating about the results of using mediation.

You give away your case. The language setting up the mediation can make what is discussed confidential, not admissible (if solely arising from the mediation) in any subsequent litigation, and prevent the mediator from appearing as a witness for either party.

Mediation doesn't prevent a non-client from suing the CPA in another action. Most clients of CPA firms are privately held and third party suits are in the distinct minority.

Mediation can go on for too long and delay the resolution of the dispute for an unreasonable time. A time limit can be put on the proceeding, unless extended by mutual consent.

Clients will not want to give up a jury trial and the right to appeal an unfavorable verdict. If the mediation is not successful, the client can still litigate. Even if an unfavorable verdict is appealed, the outcome is uncertain and the cost is high in money and in the continuation of the emotional trauma.

Insurers won't approve mediation. Most insurers now approve mediation, and some even are willing to absorb part or all of the cost.

Mediation seems to be a win-win situation. The benefits of at least making it the first line of defense are so compelling that all firms will want to give it serious consideration.

OTHER ARTICLES ON MEDIATION

1. Vincent J. Love; CPA "CPAs Get New Tool to Use in Disputes with Clients; Accounting Today (May 2, 1994); p. 38.

2. Seymour W. Miller, Esq.; Mediation - An Alternate Dispute Resolution Methodology Whose Time Has Come; The CPA Journal (July 1994); pp. 54-55.

3. Peter J. Berman, Esq.; "Resolving Business Disputes Through Mediation and Arbitration"; The CPA Journal (November 1994); pp. 74-77.

EXHIBIT 2

NATIONAL MEDIATION ORGANIZATIONS

American Arbitration Association (AAA) 140 West 51st Street New York NY 10020 Telephone: (212) 484-4000

This organization also has a new program with special rules specifically prepared by experts in the field for resolving professional accounting and related services disputes. Additionally, the AAA provides administrative assistance to facilitate the process.

CPR Institute for Dispute Resolution (CPR) 366 Madison Avenue New York NY 10017 Telephone: (212) 949-6490

JAMS/Endispute, Inc. (JAMS) 300 Park Avenue New York NY 10022 Telephone: (212) 223-8300

New York County Lawyers' Association 14 Vesey Street New York NY 10007- 2992 Telephone: (212) 267-6646

Limited to large and complex cases involving claims of $500,000 and up.

RELATED ARTICLE: THE BDO SEIDMAN ADR SYSTEM

After reviewing his litigation files and noticing that, even in successful cases, the cost of litigation was extremely high, Scott Univer, general counsel for BDO Seidman, obtained firm approval to design an ADR system for certain test offices. All new, or renewed, BDO Seidman client engagement letters in the test offices contain clauses that first require mediation and then arbitration in the event of a dispute that cannot be settled by the parties themselves.

Before implementing the system, it was necessary to train partners in its use. The firm's counsel prepared an outline for the partners that briefly explained the process and provided a list of the most frequently asked questions about the process and appropriate answers.

Partners were concerned about the firm not being as competitive as others if it required adherence to this pioneering system. Experience over the last two years has shown that this is not a real problem. Almost all clients signed up to participate in the system. Some, or their attorneys, had questions which, if not answerable by a partner, were answered by Mr. Univer.

BDO Seidman reports that, considering its size, it has had very few claims made against it. But in any event, only one dispute is now in arbitration from the five major offices that have tested the program in the first two years.

Scott Univer cautions anyone planning to make use of an ADR system, as follows:

1. A CPA firm should first obtain approval of its system from its professional liability insurer, especially if arbitration is also required.

2. The firm's attorney should be involved in the preparation and implementation of the ADR system.

3. A CPA firm should expect to receive some adverse results in arbitration but remember that the money saved in legal costs and lost time should more than make up for them. Also, there is no guarantee that the same - or an even more severe - adverse result might not occur in litigation where the firm has less participation and the outcome may be decided by a judge or jury that is not familiar with CPA practice and its limitations.

Philip Zimmerman, CPA, CLU, is a member of the American Arbitration Association Panel of Accounting and Other Professional Disputes Arbitrators and member NASD Board of Arbitrators. He has been chairman or a member of the New York State Society of CPAs' Professional Liability Insurance Task Force for the past 15 years. He retired in 1993 as the managing partner of Paneth, Haber & Zimmerman, a medium-sized CPA firm.