Avoiding Claims Against CPAs in Tribal Courts

By Daniel W. Lewis

The United States is home to over 500 federally recognized Native American Indian tribes, nations, bands, pueblos, villages and other groups. Most of these native governments are the recipients of federal grants administered through tribal governmental agencies or through non-profit entities. Additionally, with the advent of the Indian Gaming Regulatory Act, many of these tribes are experiencing significant economic expansion and have new investment needs. These and other activities naturally require professional accounting services including bookkeeping, consulting, implementation of accounting software and technology, audits and a host of other accounting services.

Certified Public Accountants who provide any of these professional services should be acutely aware of the issues that may arise in the event of a claim when tribal laws and the tribal judicial system govern the dispute with the client. While no accountant expects a disagreement when entering into a relationship with a new client, there are choice of law and choice of jurisdiction issues that should be addressed in the engagement letter that may lead to a more favorable resolution of any claim.

Tribal Courts

Tribal justice systems are the most visible manifestations of tribal sovereignty. Through various treaties and laws, including the United States Constitution, the Native American Indian tribes are recognized as sovereign nations or governments, albeit subject to oversight by Congress. The creation of judicial systems within the various tribes following the passage of the Indian Reorganization Act in 1934 led to an interesting blend of traditional cultural dispute resolution systems with American jurisprudence and procedure. Approximately 275 Indian nations and Alaskan native villages have established court systems. There is wide variety in the procedures, forums and laws applied in these judicial systems. While some tribal courts strongly resemble the federal or various state judicial systems, others follow more traditional means of dispute resolution including peacemaking and elders’ councils.

Although as a general rule non-Indians are not subject to the exclusive jurisdiction of tribal courts, many tribal clients may request or even require that any disputes be subject to the jurisdiction of tribal courts and be governed by tribal law. If an accountant agrees to a provision specifying tribal law as controlling and a tribal court as having exclusive jurisdiction, then state or federal courts are likely to enforce such voluntary contractual provisions. While some tribal courts have tribal codes and published judicial decisions, the law governing contractual disputes or malpractice claims may be unclear, undeveloped or even non-existent. This can create uncertainty and challenges to successfully defending a claim against an accountant.

Some tribal courts use a jury system composed of tribal members. Outside accountants or firms may be held to an unusually high standard of care based on a perception that they are the experts and bear ultimate and complete responsibility in accounting matters. One Native American attorney explained this phenomenon to me as being not so much a matter of bias or prejudice, but a cultural interpretation of the role of accountants and auditors. Unfortunately, on some reservations, the average juror may have no better than a fifth grade formal education. Anyone who has tried an accounting claim, even to a well-educated jury, knows that explaining accounting standards and principles can be a challenge. Jurors not familiar with accounting terminology and principles can be easily lost in piles of documents, financial statements, and conflicting expert testimony. Facing a jury with less formal education can make the task of explaining the difference between a compilation and a review, or a review and an audit an insurmountable task.

While most state courts and all federal courts require that judges be trained as lawyers and that they have a minimum number of years in practice before taking the bench, not all tribal courts have the same requirements. Some tribal court judges may have extensive legal training and experience while others have very little or none. Some tribal courts have bar exams; others do not. Some allow both lawyers and non-lawyers to represent clients. With wide variation in experience among the tribal judiciary, and frequent lack of legal precedent or restricted procedural rules, defense counsel may be unable to file or prevail on motions to dismiss or motions for summary judgment that would generally be granted in state or federal court.

As evidence of a growing recognition of the place of federal Indian law and tribal law in our judicial system, in 2003, New Mexico became the first state to include a section on Indian Law on the State Bar Examination. Accountants in many states are likely to have the opportunity to provide services to tribal governments, non-profit companies or individual tribal members.Thus, accountants across the country need to be sensitive to issues concerning tribal law and tribal courts.

The Engagement Letter

As a practical matter, most defense lawyers would recommend that accountants avoid entering into engagements where tribal law applies and tribal courts have jurisdiction over disputes. Some tribal governments or other Indian-run businesses may have form contracts or agreements that include such mandatory provisions. What should an accountant do in those circumstances?

Consider that the sample engagement letters available to CNA policyholders or from PPC and other sources have been drafted to address legal issues that have arisen through decades of disputes regarding professional accounting services. Many CPA firms have carefully developed their own engagement letters. Accountants from even long-established firms confirm that many accountants struggle with the effective use and consistent implementation of engagement letters. Sole practitioners or small firms may be even less inclined to spend valuable time to prepare a written engagement letter, especially where the standards do not require a written engagement letter.

Before an accountant or firm enters into any engagement using a client-provided contract or agreement rather than an engagement letter, the accountant may question whether or not to even enter into the engagement. While an engagement may seem attractive, the accountant must weigh the cost of a potential claim being decided based on a contract drafted by the client and requiring the accountant to submit to jurisdiction of a tribal court and to be subject to tribal law.

If the client insists on the use of its form contract, the accountant should consider negotiating the terms of the contract that require application of tribal law and tribal court jurisdiction. Many Indian reservations are adjacent to cities located off the reservation where state or federal courts and law apply. If the tribal client is familiar with the neighboring city, the client may be willing to agree to application of state law and to a state or federal forum. Alternatively, the client may agree to simply remove the choice of law and choice of court provision from the contract so that either forum could be pursued. This would leave the accountant with potential procedural options to object to the jurisdiction of the tribal court or to remove the proceeding to federal court in the event of a dispute.

However, many if not most clients who have form contracts may be just as willing to use the accountant’s engagement letter to memorialize the understanding between the parties. An accountant should not hesitate to recommend using an engagement letter. Using an engagement letter is always preferable to using a contract prepared by the client, which may not even contain language required by the standards.

In recommending to the client the use of an engagement letter, the CPA may want to explain that a CPA’s practice is governed by professional standards and state regulations. For example, the CPA could cite or explain that SSARs 19 requires the CPA to establish an understanding with management regarding the services to be performed for the attest engagement, and that the understanding should be documented through a written communication with management.

While each client and each engagement warrants close, individual attention to the appropriate language to include in an engagement letter, consider the following example of language governing choice of law and jurisdiction:

Our engagement will be governed by the laws of the State of __________. While we do not expect any disputes to arise from this engagement, in the event we or you choose to seek legal resolution of a dispute, we and you agree that the dispute must be filed in the state or federal courts of the State of _____________. We and you further agree that neither we nor you will file any claim or otherwise seek to invoke the jurisdiction of any tribal court to resolve any dispute that may arise in connection with this engagement.

The client’s signature on the engagement letter in virtually every jurisdiction will constitute a binding contractual agreement that the courts will enforce.

Another alternative is to include a binding arbitration clause in the engagement letter. Such a clause would need to clearly spell out the laws of the state that will govern any dispute. A vague or poorly written arbitration provision may be worse than no arbitration agreement at all. A good way to incorporate comprehensive procedural rules into the arbitration provision is to require that the arbitration be governed by the Arbitration Rules for Professional Accounting and Related Services Disputes of the American Arbitration Association. Incorporating these AAA rules into the arbitration agreement provides an objective, neutral forum with an arbitrator who is likely to be well qualified to decide disputes involving accounting issues. Furthermore, the arbitrator’s findings remain confidential, a feature which can prevent adverse press for either the accounting professional or the tribal client. A CPA firm that decides to include an arbitration provision should seriously consider having legal counsel review or draft the arbitration provision.

Finally, there is no limit to the creative agreements that an accounting firm could make with a tribal entity to address choice of law and jurisdiction. For example, the firm and the client may agree that claims involving fee disputes or claims not exceeding a threshold dollar amount (such as the amount of the firm’s insurance deductible) are subject to tribal court jurisdiction, but claims exceeding the threshold dollar amount or claims involving tax matters or any level of attest services would not be subject to tribal court jurisdiction because of the potentially complex nature of these claims and the likelihood the state or federal courts will have previously addressed these types of claims. This approach may demonstrate to the tribal client the CPA firm’s respect for the tribal courts while recognizing that complex claims may require resolution by courts more accustomed to such claims.

Risk Control

While tribal courts may be a satisfactory forum for resolving many disputes, they are generally not the best place to resolve claims by tribal governments, non-profit or other entities against accountants who come from locations off the tribal lands to perform accounting services. While those familiar with the tribal court systems generally believe that an accountant can get a fair trial in tribal court, there are those who disagree. In fact, some tribal claimants have argued in malpractice suits that despite meritorious defenses by the accountants, they fully expected a tribal jury to award any sum the claimant requested. This perception by some claimants may make it difficult if not impossible to reach any reasonable out-of-court settlement in a claim filed in tribal court.

Another potential disadvantage to being in tribal court is a limitation some courts impose on allowing attorneys not admitted to the tribal bar to practice in the tribal court. While most tribal courts will allow a non-admitted attorney to practice on a very limited basis in tribal court (such as one case per year if associated with an attorney licensed in tribal court), in other tribal courts it may be difficult for an accountant to obtain representation from an attorney experienced in defense of accounting malpractice claims. Moreover, in some tribal courts, attorneys are allowed to make their presentations in the native language. The disadvantage to a non-native speaking defense attorney and his accountant client are obvious when their case is presented through an interpreter.

Defending claims against accountants can be time consuming both for defense counsel and the accountant. State laws governing malpractice claims against accountants and misinformed perceptions by non-accountants as to the level of responsibility of accountants can make defending claims against very difficult. Entering into agreements that subject the accountant to tribal laws in a tribal court only adds to that challenge. 

Accountants who have existing engagements with tribal clients may want to carefully review their engagement letters or contracts to determine whether there are choice of law or choice of jurisdiction provisions. Before the engagement is renewed or extended, the accountant should consider minimizing his risk of future claims in tribal court by using an engagement letter with language addressing choice of law and jurisdiction.

Updated August 2012.

1. Daniel W. Lewis is a shareholder and director in the Albuquerque, New Mexico law firm of Allen, Shepherd, Lewis, & Syra, P.A. 

The information contained in this article should not be construed as legal advice or a legal opinion on any factual situation. As legal advice must be tailored to the specific circumstance of each case, the general information provided herein is not intended to substitute for the advice of professional legal counsel.

2. New Mexico has 22 Indian Tribes. Since 2003, several other states have followed by adding Indian Law to their bar examinations (Arizona, South Dakota and Washington).

3. Thirty-five states have at least one federally recognized Indian tribe.

4. AICPA Statements on Auditing Standards No. 108 states that an auditor should establish an understanding with the client regarding the services to be performed for each engagement and should document the understanding through a written communication with the client. AICPA Statements on Standards for Accounting and Review Services No. 19 (SSARs 19) states the same for both compilations and reviews. Other AICPA professional standards, including those for consulting, personal financial planning, and tax engagements, suggest an oral or written communication to establish the nature, scope and limitations of services to be performed.

5. A CPA firm should have its legal counsel review any language concerning choice of law and jurisdiction before including it in an engagement letter. Contract law may vary from jurisdiction to jurisdiction. The quoted example is merely illustrative and is not intended as legal advice. Additionally, if the CPA seeks to sue a tribal government in a state or federal court, there may be questions of sovereign immunity that should be addressed and resolved in the engagement letter.

6. These rules and other information on arbitration can be found at the AAA website www.adr.org.

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