Insightful lessons can be learned by reviewing professional liability issues. With this in mind, Gallagher Affinity provides this column for your review. For more information about liability issues, contact Irene Walton at firstname.lastname@example.org.
Due to the impact of COVID-19 on the nuts and bolts administration of justice, there is a particularly troublesome backlog in the court system. Legislators at all levels and court watchdog groups are proposing methods to streamline the litigation process. One solution that may be gaining traction is the use of alternative dispute resolution (ADR), such as mediation. This article focuses on the benefits of mediation as a method of dispute resolution, particularly as a means of resolving disputes for CPAs.
Doesn’t the availability of a quick and easy means of dispute resolution increase claims costs and frequency? – The facts do not support this assumption. Studies show mediation reduces both the overall expense of claims handling and the frequency of claims. Here is what one senior claims analyst in the industry had to say:
“So long as you bring the dissonant parties to the table and achieve discussion and a potential resolution, you have a positive result. Traditional litigation is a win-lose proposition; innovative mediation is a win-win. Sometimes the result is other than the payment of money.”
Resulting settlements are often less costly than traditional litigation. Protracted time spent in litigation not only drains capital, but it also takes away from attracting and servicing clients. Mediation is a prompt path to achieving results. Litigation can involve expensive posturing and appeals.
Won’t a dispute with a client result in the loss of that client? – If litigation were to play out, perhaps that would be the case. Mediation can often preserve your relationship with a client and avoid damaging the reputations of all parties. Traditional litigation is adversarial. Mediation can be confidential, and in some jurisdictions, including Pennsylvania, settlements need not be reported to licensing boards. A skilled mediator can build bridges in an otherwise tense situation and bring the parties to an understanding without animosity.
Aren’t mediators less capable than state and federal judges, or even a jury of peers? – Mediators are specifically selected for their knowledge and expertise, and the parties select the mediator. In that regard, mediation is better suited for a technical case. This is often untrue of judges, and rarely true of jurors. But if you still have a soft spot for the judiciary, know that retired judges compose the bulk of many ADR firms in the United States.
Mediated settlements are usually analytical, dispassionate assessments of the case, removing the sometimes emotional judgments of a jury.
ADR clauses in engagement letters are generally considered an effective loss-prevention technique. The clause only affects parties to the engagement. It will not limit or have a bearing on claims brought by third parties. However, claims experience shows that the large majority of claims brought against CPA firms are brought by their clients as opposed to third parties.
Mediation at Work
Let’s say you had been engaged to provide a financial statement review and tax returns for ABC Widget. Executives eventually uncover a $210,000 overstatement of receivables over the past two years. The client’s internal bookkeeper had left before the discovery, and it appears as though the records were altered to hide an embezzlement.
ABC contends that your review was inadequate and should have prevented this problem. Inasmuch as this was a review and tax return engagement, not an audit, there appears to be no deviation from any accepted standard of care.
ABC demands a minimum $150,000 in settlement. Your insurer believes offering $15,000 is the best they can do. You are at an impasse, but your engagement letter calls for mediation.
A respected local CPA/JD with considerable experience in this area is selected as the mediator.
Phase I – The mediator makes an opening statement explaining the process, its goals, and its limitations. Of particular note is the admonition that mediation does not render binding decisions, but rather helps the parties reach a mutually acceptable resolution.
Often, the attorneys give brief statements of their cases. The attorney for ABC notes that the accounting firm should have seen the problem with the receivables and the bookkeeper’s overall performance. Your attorney notes the limited nature of a review engagement and your compliance with standards. The attorney also points out that a review is not “designed to reveal defalcations or illegal acts,” and this very language was part of the engagement letter.
Phase II – The joint session is terminated, and the groups meet privately with the mediator in separate rooms regarding settlement position. These sessions are usually lengthy because this is a time for both sides to air grievances privately while at the same time giving the mediator a sense of where there is room for compromise on key points and issues.
Phase III – This is the movement phase as the passion of the morning gives way to sound business reasoning. This has been accomplished by the mediator through numerous “feeling out” meetings with you and ABC. Movement takes the form of reduced dollar demands as well as proposals for resolution.
Phase IV – Another brief joint session is held, but the mediator does all the talking. The mediator remarks upon the progress made and makes general suggestions for resolution. Among the comments is a reminder that the true bad actor is the bookkeeper who stole $210,000. The parties are urged to discuss how to jointly effectuate retribution from the bookkeeper.
Resolution – Facilitated by the mediator, a compromise is reached. You and ABC work jointly to recoup the money from the bookkeeper. Your insurance carrier will fund the assets search, the investigation, and whatever lawsuits need to be pursued against the bookkeeper or her assets. You agree that in the event that the actions against the bookkeeper do not bear fruit (or enough fruit), you will contribute up to $35,000 to ABC and your current bill to ABC will be zeroed out. You walk out of the room together with the combined purpose/goal of recouping the money lost.
In the end, your insurer may pay as much as $65,000 (and your deductible of $10,000) to fund the settlement and the actions assisting ABC. You may not be happy, but you will have saved yourself years of worry and hours of time that would not have been spent working for clients because you were focused on the litigation process. Also, you and your client are still working together and, if all goes well, the settlement may result in the bookkeeper paying for her theft.
All in all, this is a significantly more palatable result.
Wilhelm Dingler, JD, is a shareholder in the Seattle office of Bullivant Houser PC. Licensed to practice in Washington and Pennsylvania, he primarily represents accountants, attorneys, and other professionals. He can be reached at email@example.com.