Public companies now have the option to resolve disputes with their auditors faster and with less expense if they agree to a new “accelerated adjudication” process recently established in New York—and if auditors agree to it as well.

Created by the New York State Supreme Court, accelerated adjudication is considered a middle ground between arbitration and litigation. It offers an expedited process commonly associated with arbitration, but with some appeal rights normally reserved for litigation. “This is going to become very popular if it’s implemented as intended,” says Tammy Bieber, a partner at law firm Thompson Hine. “It’s hard for me to see how it would not be beneficial to most.”

The new procedure came into existence in early June when New York courts adopted Rule 9 of the Rules of Practice for the Commercial Division. When parties to a commercial contract agree to accelerated adjudication, they waive the right to a jury trial and punitive damages, and they agree to sharply limit discovery so that disputes are ready for trial within nine months. Discovery—typically a drawn-out, tedious process in many audit disputes—is limited to seven interrogatories, five requests to admit, and seven depositions, per side.

Stewart Aaron, a partner with Arnold & Porter and a member of an advisory council to the New York division that helped shape the new process, says the accelerated adjudication process was established as an alternative to arbitration. “You get a lot of the advantages that companies perceive to private arbitration, but in the context where you actually have a judicial officer presiding as well as some opportunities for appeal,” he says. “The genesis really was that a lot of businesses had complained about how long it took for cases to wind their way through the courts, and the cost and length of discovery.” The idea was to develop a procedure that would speed the resolution of cases, with less burden and expense on the parties, he says.

“This is trying to address the criticisms of arbitration,” says Nancy Reimer, a partner with law firm LeClairRyan. “They’re trying to streamline discovery to really just focus on the important issues in the case.” Setting a limit of nine months on preparing the case for trial would dramatically shorten the typical timeline associated with dispute resolution, she says. “The average case in Massachusetts is probably three years, and New York is probably longer. So this is limiting discovery, which is what arbitration was supposed to be.”

“This is trying to address the criticisms of arbitration. They’re trying to streamline discovery to really just focus on the important issues in the case.”
Nancy Reimer, Partner, LeClair Ryan

Audit firms and their clients normally establish in engagement letters the terms for how they would resolve any disputes that might arise in an audit engagement, says Reimer. For calendar-year companies, engagement letter season is typically in the fall. “So the firms are probably discussing it internally now,” she says.

None of the major audit firms responded to a request to discuss the new adjudication option, except Grant Thornton, which issued a brief statement: “Grant Thornton is always interested in ways to make litigation more efficient and cost effective and will watch to see how the program develops.” The Center for Audit Quality and the American Institute of Certified Public Accountants also had no comment. Some attorneys who work with audit disputes, however, say the conversation is getting started. “There is a lot of discussion about it,” says Gale Dick, a partner with law firm Cohen & Gresser. “But it’s very new.”

Will Audit Firms Go Along?

Because audit firms by their nature are typically on the defensive in disputes with clients, they’re less likely to initiate the idea to pursue accelerated adjudication, says Dick. “In very broad terms, defendants reflexively like litigation more because there are more tools in their tool box,” he says. “There are more ways to slow things down, a lot of procedural tools they can use to make it difficult for people to recover money.” On the other hand, it’s more expensive to draw things out and might make it more difficult to have a collegial working relationship with an audit client going forward, he says.

Kelly Bossard, a managing director at FTI Consulting, says he is involved with audit disputes routinely and so far has heard of no one agreeing to accelerated adjudication. Given its benefits, however, “I wouldn’t be surprised to see it in the future,” he says. Audit firms and their clients typically prefer arbitration over litigation, he says, and audit firms definitely have a preference for having cases heard by a panel of arbiters or a judge over a jury. Juries represent the general public, who aren’t as knowledgeable in the intricacies of accounting or auditing standards and often have different expectations about what an audit is expected to provide in the way of assurance, he says.

QUESTION OF INDEPENDENCE

Below is question number 4 on the SEC’s list of questions and answers regarding the issue of auditor independence.
Q: Has there been any change in the Commission’s long standing view (Financial Reporting Policies – Section 600 – 602.02.f.i. “Indemnification by Client”) that when an accountant enters into an indemnity agreement with the registrant, his or her independence would come into question?
A: No. When an accountant and his or her client, directly or through an affiliate, enter into an agreement of indemnity which seeks to provide the accountant immunity from liability for his or her own negligent acts, whether of omission or commission, the accountant is not independent. Further, including in engagement letters a clause that a registrant would release, indemnify or hold harmless from any liability and costs resulting from knowing misrepresentations by management would also impair the firm’s independence.
Source: SEC.

Bossard can envision audit firms and their clients preferring the streamlined process and reduced cost associated with accelerated adjudication, but he wonders if that means cases would be subject to public scrutiny by going through the New York court system. “If publicity is somehow decreased under this rule, that would be another benefit that audit firms would appreciate,” he says. “But if this is going to be in the public realm, that’s one area where mediation and arbitration could be a better option for some.”

Bieber says she believes the Securities and Exchange Commission might have concerns over whether an agreement to accelerated adjudication would somehow compromise an auditor’s independence. SEC rules prohibit auditors from establishing any terms in their engagement letters that would somehow limit their exposure to legal liability, such as indemnity clauses.

“There’s a concern that if an auditor feels less threatened, then the audit procedures might be less robust,” Bieber says. Banking regulators have held that any provision limiting punitive damages would be seen as a threat to independence, she says, and the accelerated adjudication process requires a waiver of rights to punitive damages. “So there’s a question of whether regulatory bodies would deem this acceptable from an independence perspective,” she says. The Public Company Accounting Oversight Board referred questions on auditor independence to the SEC, which also did not respond to a request for comment.

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