External Audit Engagement Letters Unsafe and Unsound Use of Limitation of Liability Provisions and Certain Alternative Dispute Resolution Provisions

• The attached proposed interagency advisory alerts financial institutions’ boards of directors, audit committees, management, and external auditors to the safety and soundness implications of provisions that limit the external auditor’s liability in a financial statement audit.
• The proposed advisory would apply to all financial institution external audits, regardless of the size of the financial institution, whether the financial institution is public or not, and whether the external audit is required or voluntary.
• Limitation of liability provisions may weaken the external auditor’s objectivity, impartiality and performance and, thus, reduce the regulatory agencies’ ability to rely on the external audit.
• Limitation of liability provisions may not be consistent with the auditor independence standards of the U.S. Securities and Exchange Commission, the Public Company Accounting Oversight Board, and the American Institute of Certified Public Accountants.
• As proposed, the inclusion of limitation of liability provisions in external audit engagement letters and other agreements related to financial statement audits will generally be considered an unsafe and unsound practice.
• The FDIC encourages all institutions to review the attached Federal Registe r notice, and to comment on the proposed advisory and the questions in the notice about the proposal and its effects.

Distribution:
FDIC-Supervised Banks

Suggested Routing:
Chief Executive Officer
Chief Financial Officer
Board of Directors
Audit Committee

Proposed Interagency Advisory - PDF 77k ( PDF Help )

Note:
FDIC Financial Institution Letters (FILs) may be accessed from the FDIC's Web site at www.fdic.gov/news/financial-institution-letters/2005/index.html .

To receive FILs electronically, please visit http://www.fdic.gov/about/subscriptions/fil.html .

Paper copies of FDIC FILs may be obtained through the FDIC's Public Information Center, 801 17th Street, NW, Room 100, Washington, DC 20434 (1-877-275-3342 or (703) 562-2200).