Who Uses Mediation And Arbitration, And Why

July 9, 2001

Reprinted by permission of The CPA Journal.

Certified Public Accountants (CPA’s) 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.