Attorneys and risk management professionals have emphasized for years that engagement letters are an important and powerful risk management tool for accountants in all types of engagements. Well-crafted engagement letters should at a minimum define and limit the scope of the accountant’s services, explain the client’s responsibilities and emphasize the limitations inherent in the services being provided. However, client engagement letters can provide other benefits.
One of the more important provisions in a client engagement letter defines how a dispute with a client, if one should arise, would be resolved. The central questions here are the forum (e.g., court versus arbitration), where the forum will be convened (e.g., in your city and state) and how the forum could be applied to your dispute (e.g., decided by a judge or a jury, or one arbitrator versus three). The following observations may provide some guidance in deciding which option is best for your firm.
The default forum for resolving client disputes will be a court if you do not include a dispute resolution provision in your engagement letters. The civil court system generally is open to the public and is designed to resolve disputes between and among citizens. In most jurisdictions, the party seeking redress will file documents with the court to initiate legal proceedings between the parties ‒ here, the client and the accounting firm. Thereafter, a process will ensue aimed at narrowing and understanding the subject matter of the dispute. Ultimately, the matter will go to trial if it is not otherwise resolved. Most civil disputes can be decided by a jury, but a jury can be waived and the dispute decided by a judge. Some types of civil claims do not give rise to a right to a jury, so those types of dispute always are decided by a judge.
Arbitration is a private process that occurs for the most part outside of the court system. If you want your disputes decided in arbitration, and not by a court, you will need to insert an arbitration agreement into your engagement letters, which must be signed by the client.
There is no clear consensus among the accountants, their lawyers and the insurers who have considered this issue that one forum is superior to the other for disputes between accountants and their clients. Some feel strongly that arbitration provides a less-expensive forum and that disputes reach final resolution more quickly in arbitration. Others would dispute those assertions. Some believe that courts, judges and/or juries should be avoided at all costs, while others are concerned that arbitrators are not necessarily constrained by the law, and their decisions are not subject to any meaningful appellate review. The bottom line on this particular issue is that choosing arbitration instead of the courts is a very personal decision that can be influenced heavily by the types of services you provide, where you practice and where your clients are located.
One additional consideration should be kept in mind. Lawsuits and court filings are public, while arbitration is private and can, with a properly drafted arbitration agreement, be confidential. If your practice regularly involves public figures or otherwise newsworthy clients, or if you just want to avoid having your disputes resolved in public, then arbitration may be something you want to consider strongly. However, remember that arbitration is not automatically confidential, so confidentiality requirements must be included in your arbitration provision if you want to prevent your clients from making public statements about disputes.
One additional consideration: as we continue to work our way through COVID-19, there are almost no jury trials proceeding in civil matters. If your aim is to address disputes as they come up and move past them ‒ which may be a valid consideration if you are nearing the end of you career ‒ then you may want to avoid matters going to court with a jury for the immediate future. Arbitrators are hearing matters on virtual platforms, while the courts generally are falling further and further behind. If you prefer having a court decide your dispute, but do not want to be mired down indefinitely in the delays caused by COVID-19 restrictions, a jury waiver will help somewhat, although there still will be delays in many parts of the country. There are very few U.S. venues where civil jury trials are proceeding, so avoiding a jury trial will be an important consideration if you do not want your dispute the drag out indefinitely.
Mediation is a private, nonbinding process that allows parties with a dispute to employ a third-party neutral to assist in facilitating a resolution. The mediator will have to be paid, with most agreements defaulting to the parties splitting the cost. While some disputes are not amenable to resolution through mediation because the parties’ views are too far apart or for other reasons, many if not most disputes can be resolved through mediation. Requiring mediation as a condition precedent to commencing a lawsuit or arbitration provides a built-in cooling-off period before litigation commences during which the parties can come together and attempt to work things out.
If your practice is almost entirely a 1040, personal income tax preparation practice, requiring mediation may seem like an unnecessary expense for many disputes. However, even in personal income tax practices, the disputes can sometime amount to substantial sums, so the idea of mediation should not be disregarded out-of-hand, even if it may add a layer of expense to resolution. Additionally, there is no reason a simple and clear-cut dispute cannot be resolved even before going to mediation, so the expense does not have to be incurred if the dispute really is clear-cut. Further, if a contested dispute is resolved in mediation, the expense incurred in a successful mediation almost always will be less than the expense of litigating in court or at arbitration.
Subject to some differences in the laws of the various states, you can exercise some control over where you are sued, if that becomes inevitable. Arbitration agreements generally include a provision specifying that the arbitration will take place in an agreed city and state. Similarly, your engagement letter, which is a contract, can specify that any lawsuit must be commenced in a specific court in a specific state. While some states are less inclined to enforce these provisions than others, most states will honor a clear indication that a specific forum has been selected so long as the choice is prominently displayed in the engagement letter. When used effectively, these provisions can avoid having to litigate in a distant jurisdiction.
First, consider whether you are comfortable with a jury. Some attorneys and risk management professionals reflexively believe that juries are poorly equipped to understand the nuanced and often technical aspects of what accountants do and do not do for their clients. Some attorneys who often litigate against accountants rely on juries not being interested in the professional standards and the details that often support the defense.
I personally have had good experiences trying accountant liability cases before juries. Plaintiffs’ attorneys sometimes believe they will do better with a jury because they will be able to tell a simpler story. While the story the defense will tell in an accountants’ case may not be as simple as the plaintiffs’ narrative, it can be every bit as compelling and effective if properly planned and supported by well-prepared witnesses.
Every time I see jurors leaning closer to listen intently to what my accountant witness is saying, I know we are winning the battle. For this reason, I do not believe juries should be avoided automatically in every jurisdiction. However, there are some jurisdictions where studies suggest it will be a challenge to get a defense verdict. Again, this is a very personal decision, and perhaps the less-risky path is to include a jury waiver or go to arbitration, but I do not believe that juries have to be avoided at all costs.
If you do not want to entrust your disputes to a jury, you may consider a jury waiver in your engagement letter. Some states do not favor jury waivers, and others have specific requirements for the waiver to be enforceable, but they are enforceable in general. The benefit of a jury waiver is that an experienced judge, whose decisions will be subject to appellate review, will decide the case based on a hopefully objective view of the facts and proper application of the law. The vagaries of what a jury does during deliberations is taken away, and a well-trained and experience legal mind, either elected or appointed, is tasked with making a proper decision.
However, there are some jurisdictions around the country where the strength of the judges on the bench and the volume of cases on the docket give some pause about entrusting an important case to a judge. In those jurisdictions, arbitration may be the better choice.
A major drawback for arbitration is that, generally, there are no appellate rights. Accordingly, unless you specify an arbitration forum that has an appellate procedure, or build appellate rights into your arbitration agreement, whatever the arbitrator or arbitrators decide is the final decision ‒ win, lose or draw. That finality may seem like a virtue, unless you come out on the losing side of the award.
A potential advantage of arbitration is being able to select arbitrators and/or arbitration rules that are tailored to your dispute. Arbitration forums will ask the parties for qualities they would prefer in the list of potential arbitrators from which to select. The parties can indicate that they would prefer an arbitrator with a legal background or a former judge, or one with experience in business disputes. There also are procedural rules available in some of the forums that are specific to disputes involving accountants or commercial disputes, which are tailored to the sometimes document-intensive nature of these matters.
On a personal note, I do not ask for arbitrators that have a background in accounting as practitioners. It has been my experience that accountants often are harsh critics of other accountants. Surely there is no less charitable assessor of an accountant’s skills than a successor accountant who would have handled things differently. Whether it be jury selection or selection of an arbitrator, I tend to think there is significant risk involving an accountant as the ultimate finder of fact because a difference of opinion in how to handle an assignment can result in a strongly held opinion that the defendant accountant did something wrong.
One further consideration is whether to have one arbitrator or three, and if three, how they will be chosen. Since the reason for selecting arbitration is to reduce cost, all cost savings seem likely to be lost if three arbitrators have to be paid at their hourly rates to attend to all pre-hearing, hearing and post-hearing duties. If three arbitrators seems safer than one, then it would seem best that all three be selected as unaffiliated neutrals, as opposed to each side picking one and those two arbitrators picking the third, since the latter system often leads to the third arbitrator really being the only swing vote and, thus, the case coming down to a single arbitrator in any event.
This discussion could run broader and deeper on each of these issues. One’s analysis may also change based on the jurisdictions most likely to be involved in choosing these types of provisions. Accordingly, this article should be considered a brief overview to prompt your thinking on these issues, which you should then discuss fully with an experienced attorney or risk management professional.
Peter Larkin provides legal counsel and representation to accountants and accounting firms in connection with all aspects of their businesses. He is co-chair of Wilson Elser’s national Accountants practice. In addition to professional malpractice defense and commercial disputes, Peter’s practice encompasses regulatory investigations and proceedings, risk management, ethics proceedings, and transactional matters involving accounting firms.
Given his strong working knowledge of accounting principles and familiarity with the New York Office of the Professions, Peter regularly is called upon by accountants facing ethics complaints and the potential loss of license. Peter also is involved in such diverse areas as securities, tax and banking laws, RICO, ERISA, accounting standards, fraud investigations, employment disputes, post-employment restrictive covenants, purchases and sales of professional practices, partnership disputes and separations, and risk management and best practices for accounting and financial professionals. The Landy Insurance Agency is a national leader in providing non-medical, professional liability and cybercrime insurance for accountants, attorneys, and real estate professionals. Visit www.landy.com for more information. If you are a business owner looking to obtain coverage, please click on the main header to visit our public website. You will find links to the appropriate information in the left hand, green, navigation area If you are an insurance producer looking to register with us or obtain coverage for your client, please visit Producer Resource Center for information.