External Audit Engagement Letters Unsafe and Unsound Use of Limitation of Liability Provisions and Certain Alternative Dispute Resolution Provisions
FIL-41-2005 May 10, 2005
The federal banking, thrift and credit union regulatory agencies are seeking public comment on the attached proposed Interagency Advisory on the Unsafe and Unsound Use of Limitation of Liability Provisions and Certain Alternative Dispute Resolution Provisions in External Audit Engagement Letters. Comments are due by June 9, 2005.
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 auditors 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 auditors 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 Register notice, and to comment on the proposed advisory and the questions in the notice about the proposal and its effects.