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FDIC Federal Register Citations
[Federal Register: February 9, 2006 (Volume 71, Number 27)]
[Notices]
[Page 6847-6855]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09fe06-116]
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Correction
DEPARTMENT OF THE TREASURY
FEDERAL RESERVE SYSTEM
FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION
[No. 2006-04]
Office of the Comptroller of the Currency
Office of Thrift Supervision
Interagency Advisory on the Unsafe and Unsound Use of Limitation
of Liability Provisions in External Audit Engagement Letters
AGENCIES: Office of Thrift Supervision (OTS), Treasury; Board of
Governors of the Federal Reserve System (Board); Federal Deposit
Insurance Corporation (FDIC); National Credit Union Administration
(NCUA); Office of the Comptroller of the Currency (OCC), Treasury.
ACTION: Issuance of Interagency Advisory.
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SUMMARY: The OTS, Board, FDIC, NCUA, and OCC (collectively, the
``Agencies''), have finalized the Interagency Advisory on the Unsafe
and Unsound Use of Limitation of Liability Provisions in External Audit
Engagement Letters (``Advisory''). The Advisory informs financial
institutions'' boards of directors, audit committees, and management
that they should not enter into agreements that incorporate unsafe and
unsound external auditor limitation of liability provisions with
respect to engagements for financial statement audits, audits of
internal control over financial reporting, and attestations on
management's assessment of internal control over financial reporting.
DATES: Effective Date: The Advisory is effective for engagement letters
executed on or after February 9, 2006.
FOR FURTHER INFORMATION CONTACT: OTS: Jeffrey J. Geer, Chief
Accountant, at jeffrey.geer@ots.treas.gov or (202) 906-6363; or
Patricia Hildebrand, Senior Policy Accountant, at
patricia.hildebrand@ots.treas.gov or (202) 906-7048.
Board: Terrill Garrison, Supervisory Financial Analyst, at
terrill.garrison@frb.gov or (202) 452-2712; or Nina A. Nichols,
Assistant Director, at nina.nichols@frb.gov or (202) 452-2961.
FDIC: Harrison E. Greene, Jr., Senior Policy Analyst (Bank
Accounting), Division of Supervision and Consumer Protection, at
hgreene@fdic.gov or (202) 898-8905; or Michelle Borzillo, Counsel,
Supervision and Legislation Section, Legal Division, at
mborzillo@fdic.gov or (202) 898-7400.
NCUA: Karen Kelbly, Chief Accountant, at kelblyk@ncua.gov or (703)
518-6389; or Steven Widerman, Trial Attorney, Office of General
Counsel, at widerman@ncua.gov or (703) 518-6557.
OCC: Zane Blackburn, Chief Accountant, at
zane.blackburn@occ.treas.gov or (202) 874-4944; or Kathy Murphy, Deputy
Chief Accountant, at kathy.murphy@occ.treas.gov or (202) 874-5675.
SUPPLEMENTARY INFORMATION:
I. Background
The Agencies have observed an increase in the types and frequency
of provisions in financial institutions' external audit engagement
letters that limit the auditors' liability. These provisions take many
forms, but can generally be categorized as an agreement by a financial
institution that is a client of an external auditor to:
Indemnify the external auditor against claims made by
third parties;
Hold harmless or release the external auditor from
liability for claims or potential claims that might be asserted by the
client financial institution; or
Limit the remedies available to the client financial
institution.
Reliable financial and regulatory reporting supports the Agencies'
risk-focused supervision of financial institutions by contributing to
effective pre-examination planning and off-site monitoring and
appropriate assessments of an institution's internal control over
financial reporting, capital adequacy, financial condition, and
performance. Audits play a valuable role in ensuring the reliability of
institutions' financial information.
The Agencies believe that when financial institutions agree to
limit their external auditors' liability, either in provisions in
engagement letters or in provisions that accompany alternative dispute
resolution (ADR) agreements, such provisions may weaken the external
auditors' objectivity, impartiality, and performance. The inclusion of
such provisions in financial institutions' external audit engagement
letters may reduce the reliability of audits and therefore raises
safety and soundness concerns.
On May 10, 2005, the Federal Financial Institutions Examinations
Council (FFIEC) on behalf of the Agencies published in the Federal
Register a 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 (70 FR
24576) and sought comments to fully understand the effect of the
proposed Advisory on financial institutions.
II. Scope of Advisory
The Advisory applies to engagement letters between financial
institutions and external auditors with respect to financial statement
audits, audits of internal control over financial reporting, and
attestations on management's assessment of internal control over
financial reporting (collectively, ``Audit'' or ``Audits''). The
Advisory does not apply to:
Non-audit services that may be performed by financial
institutions' external auditors;
Audits of financial institutions' 401K plans, pension
plans, and other similar audits;
Services performed by accountants who are not engaged to
perform financial institutions' Audits (e.g., outsourced internal
audits, loan reviews); and
Other service providers (e.g., software consultants, legal
advisors).
The Advisory applies to all Audits of financial institutions,
regardless of whether an institution is a public or a non-public
company, including Audits required under Section 36 of the Federal
Deposit Insurance Act, OTS regulations, or Section 202 of the Federal
Credit Union Act, Audits required by any of the Agencies, and voluntary
Audits.
[[Page 6848]]
III. Summary of Comments
Overview
The Agencies received 44 comment letters from auditors, financial
institutions, trade organizations, attorneys, arbitration associations,
and other interested parties. While public comments were requested on
all aspects of the Advisory, the Agencies specifically sought comments
on seven questions. Less than one third of all commenters addressed all
seven questions.
Most financial institutions and industry trade groups supported the
proposed Advisory and commended the Agencies' efforts. A number of the
commenters explained that limitation of liability provisions in audit
engagement letters originate with external auditing firms rather than
financial institutions.
Most of the letters from external auditors opposed the proposal.
External auditors explained that limitation of liability provisions are
risk management tools commonly used in audit engagement pricing as well
as in other business transactions. They asserted that such provisions
allocate risk and facilitate a timely and cost effective means to
resolve disputes while minimizing litigation expenses. Further,
auditors stated that they should not be liable for losses resulting
from knowing misrepresentations by the client's management.
A number of commenters asked for clarification on the scope of the
Advisory and on the application of the Advisory to ADR agreements
(e.g., arbitration) and waivers of jury trials. The Agencies have
addressed these comments in the Advisory.
A number of commenters stated that the U.S. Securities and Exchange
Commission (SEC), the Public Company Accounting Oversight Board
(PCAOB), and the American Institute of Certified Public Accountants
(AICPA) have established auditor independence rules and requirements;
therefore, they asserted, the Advisory is not needed. Other commenters
expressed a need for the SEC, PCAOB, and AICPA to clarify their
guidance. On September 15, 2005, the AICPA published for comment its
proposed interpretation of its auditor independence standards. In that
proposal, the AICPA specifically identified limitation of liability
provisions that impair auditor independence under its standards. Most
of the provisions cited as unsafe and unsound in the Agencies' Advisory
were also deemed to impair independence in the AICPA's proposed
interpretation.
Comments
A. Application to Non-public Companies
A number of commenters expressed concern that the Agencies were
applying SEC and PCAOB auditor independence rules to Audits of non-
public companies. The Agencies' audit rules for financial institutions
generally reference both the AICPA and SEC auditor independence
standards and already apply to many non-public institutions. Therefore,
the concept of applying SEC auditor independence standards to non-
public financial institutions is in place under existing bank and
thrift audit regulations and is not the result of the issuance of the
Advisory. Since safety and soundness concerns apply equally to all
institutions' Audits, the Advisory does not establish different
requirements for public and non-public financial institutions.
B. Risk Management and Business Practices
Auditors asserted that to the extent the Advisory would limit an
auditor's ability to use risk allocation tools such as: (1) Capping
damages; (2) restricting the time period to file a claim; (3)
restricting the transfer or assignment of legal rights by an audit
client; or (4) otherwise limiting the allocation of risk between
contracting parties, the Advisory would result in auditors assuming
more risk, which would lead to economic costs with no countervailing
showing of benefits, such as improved audits.
Auditors further stated that the Advisory largely ignores the
interest that financial institutions have in obtaining professional and
independent audit services within a framework of allocated risk.
Further, auditors stated that the Advisory attempts to use safety and
soundness as a means for setting auditor independence standards and
limits the use of accepted business practices to manage disputes. In
addition, the auditors and some financial institutions expressed
concerns that the Advisory may result in an increase in costs and be a
disincentive for financial institutions to continue to engage an
auditor when not required to do so.
The Agencies continue to believe that certain limitation of
liability provisions reduce the auditor's accountability and thus may
weaken the auditor's objectivity, impartiality, and performance. In the
Agencies' judgment, concerns about potential increased costs or
restrictions on the ability of the parties to an audit engagement
letter to allocate risk do not outweigh the need to protect financial
institutions from the safety and soundness concerns posed by such
limitation of liability provisions. Furthermore, any disincentive for
financial institutions to obtain Audits when not required should be
limited because Audits represent best practices and are strongly
encouraged by the Agencies.
In addition, these limitations on external auditor liability may
not be consistent with the auditor independence standards of the SEC,
PCAOB, and AICPA. All financial institution Audits must comply with the
independence standards set by one or more of these standard-setters.
C. Management's Knowing Misrepresentations
Many auditors asserted that the information provided to outside
auditors is management's responsibility and that audit firms should not
be liable unless fraudulent behavior or willful misconduct exists on
the part of the auditor. Further, if management knowingly misrepresents
significant facts to the external auditor, it is sometimes impossible
for the auditor to uncover the true facts of a situation. The auditors
asserted that they should be allowed to limit their liability when
knowing misrepresentations of management contribute to the loss.
Those commenters further stated that indemnification for
management's knowing misrepresentations communicates a commitment that
financial institution management and its governing board understand
their responsibilities to perform honestly and legally. These
commenters rejected the assertion that indemnifying auditors for
management's knowing misrepresentations might cause an auditor to lose
independence or to perform a less responsible audit. They also stated
that protections that the client may provide against the client's own
knowing misrepresentations do not preclude third parties from suing the
auditor.
Nevertheless, a clause that would release, indemnify, or hold an
external auditor harmless from any liability resulting from knowing
misrepresentations by management is inappropriate under the SEC's
existing guidance on auditor independence (see Appendix B of the
Advisory). The inclusion in external audit engagement letters of
limitation of liability provisions that are prohibited by the auditor
independence rules and interpretations of the SEC, PCAOB, or AICPA is
considered an unsafe and unsound practice for financial
[[Page 6849]]
institutions. Provisions not clearly addressed by authoritative
guidance may also raise safety and soundness concerns when there is a
potential impairment of the external auditors' independence,
objectivity, impartiality, or performance.
The AICPA's Professional Standards, AU Section 110:
Responsibilities and Functions of the Independent Auditor state: ``The
auditor has a responsibility to plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement, whether caused by error or fraud.'' The Agencies
believe that including an indemnification or limitation of liability
provision for the client's knowing misrepresentations, willful
misconduct, or fraudulent behavior in an Audit engagement letter may
not be viewed as consistent with the auditor's duty and obligation to
comply with auditing standards.
The Agencies acknowledge that management bears the responsibility
for its conduct and representations. Nevertheless, the auditor has a
responsibility to obtain reasonable assurance that the financial
statements are free from material misstatements, including
misstatements caused by management fraud. A limitation of liability
provision in external Audit engagement letters for management's knowing
misrepresentations, willful misconduct, or fraudulent behavior could
act to reduce the auditor's professional skepticism. Limited liability
could lead to inadvertent consequences such as an auditor not fully
considering the possibility that management fraud exists. This might
result in less robust challenges to and over-reliance on management's
representations rather than performance of appropriate audit procedures
to corroborate them.
The Agencies believe that the auditor's potential liability related
to material misstatements due to management's misrepresentations should
be decided by a trier of fact in a legal or other proceeding and should
not be predetermined in the engagement letter. The trier of fact would
take into account whether the Audit was properly conducted in
accordance with applicable auditing standards.
D. Auditor Independence and Performance Standards
Many auditors contended that various limitation of liability
provisions addressed in the proposed Advisory would not impair their
independence. For example, a large accounting firm stated, ``* * * the
Proposal goes far beyond the independence standards established by the
SEC, PCAOB, and AICPA.'' Another large accounting firm stated, ``Of the
specific contractual terms identified for criticism in the proposal,
some are already prohibited by the SEC for those entities subject to
SEC regulation. Other contractual terms, however, are fully permissible
and widely in use as tools to allocate risk.''
In contrast, other commenters contended that all of the provisions
in the proposal impair an auditor's independence. This view was most
clearly expressed in the comment letter from an independent proxy and
financial research firm, which stated, ``We believe audit engagement
letters containing liability limitations impair the auditor's
independence and reduce audit quality to an unacceptable level.'' They
further stated, ``We believe it is inappropriate for an audit contract
between a company and its auditor to limit the auditor's liability
including (1) Any limitations on rights to trial, (2) limits on
compensatory or punitive damages, or (3) limits on discovery, including
in arbitration.''
A number of commenters discussed the auditor's requirement to
comply with auditing standards and stated that the failure to comply
with such standards would result in the violation of the requirements
of the SEC, PCAOB, AICPA, and/or state licensing authorities. Some
commenters stated that adherence to professional auditing standards is
further assured by periodic peer reviews and by PCAOB inspections.
Commenters noted that auditors are subject to possible disciplinary
action by state boards of accountancy, the SEC, the PCAOB, and the
AICPA. These commenters concluded that the auditor's performance is
controlled by professional standards and is not influenced by
provisions in audit engagement letters that limit the auditor's
liability. Consequently, they believed that the Advisory is
unnecessary.
The Agencies' observations lead them to conclude otherwise. Their
concern is that limitation of liability provisions may adversely impact
the reliability of Audits whether related to disincentives for auditor
performance or impairment of auditor independence in fact or
appearance. The Agencies have not attempted to categorize limitation of
liability provisions that adversely affect safety and soundness as
either matters of performance or independence.
The Agencies acknowledge that the SEC, PCAOB, and AICPA set
independence and performance standards for auditors. The Advisory does
not purport to affect those standards. Regardless of whether limitation
of liability provisions are permissible under auditor independence
standards, the Agencies have a separate obligation to evaluate their
impact on the safety and soundness of financial institutions.
Some commenters questioned whether the Agencies have adequate
evidence that limitation of liability provisions adversely affect
auditor independence, objectivity, and performance. The Agencies
acknowledge that it is inherently difficult to prove links from
circumstances to states of mind and from there to performance.
Nevertheless, the Agencies cannot wait for proof of harm before
establishing guidance to ensure the safety and soundness of financial
institutions. The Agencies must make judgments about circumstances that
may render Audits less reliable. The Agencies' concern with the
potential impact of such provisions is not only that an auditor might
intentionally act less than appropriately, but might unconsciously do
so.
A reasonable person may believe that limitation of liability
provisions create circumstances that may adversely affect Audit
reliability. For example, a reasonable person may conclude that if the
auditor faces less potential liability for the Audit, the auditor may
be less thorough. Further, that knowledge may erode the auditor's
independence of mind.
The Agencies observe that the SEC has addressed limitations of
liability in its independence rulings for more than 50 years. The AICPA
also addresses limitations of liability in its independence standards
and related interpretations. Additionally, many commenters stated that
limitations of liability impair an auditor's independence.
Auditors, in their comments, expressed inconsistent interpretations
of the meaning and scope of the SEC, PCAOB, and AICPA auditing
standards relating to limitations of liability. The Agencies have
concluded that supervisory guidance in addition to the existing
auditing standards is necessary to carry out their safety and soundness
mandate. Because the Agencies rely on Audits to help ensure the safety
and soundness of financial institutions, they are necessarily concerned
with provisions that could affect the auditor's judgment and
professional skepticism. Thus, the Agencies have concluded that since
the limitation of liability provisions may adversely affect Audit
reliability, such provisions are considered unsafe and unsound.
[[Page 6850]]
E. Waivers of Punitive Damages
The comment letters included much discussion on punitive damage
waivers. Some commenters stated that the Advisory should not prohibit
these waivers. The AICPA's comment letter typified the views of the
commenters advocating punitive damage waivers. The AICPA asserted, ``*
* * limiting an auditor's liability to the client for punitive damage
claims will not impair independence or objectivity, provided the
auditor remains liable for actual damages--that is, the auditor remains
exposed to clients, and also to lenders, shareholders, and other non-
clients, for damages for any actual harm caused.'' Others noted that a
waiver of punitive damages by the client has no bearing on punitive
damages that may be sought by a third party. Several commenters stated
that a financial institution's agreement to not seek punitive damages
has no effect on the safety and soundness of a financial institution.
Due in part to the extensive comments regarding client agreements
not to seek punitive damages from their auditors, the Agencies have
decided to take the issue under advisement. Accordingly, at this time,
provisions that waive the right of financial institutions to seek
punitive damages from their external auditor are not treated as unsafe
and unsound under the Advisory. Nevertheless, the Agencies have
concluded that agreements by financial institutions to indemnify their
auditors for third party punitive damage awards are deemed unsafe and
unsound.
To enhance transparency and market discipline, public financial
institutions that agree to waive claims for punitive damages against
their external auditors may want to disclose annually the nature of
these arrangements in their proxy statements or other public reports.
F. Alternative Dispute Resolution Agreements and Waiver of Jury Trials
The Advisory encourages all financial institutions to review
proposed Audit engagement letters presented by audit firms and
understand any limitations imposed by mandatory pre-dispute alternative
dispute resolution agreements (ADR) (including arbitration agreements)
or jury trial waivers on the institution's ability to recover damages
from an audit firm in any future litigation. The Advisory also directs
financial institutions to review rules of procedure referenced in ADR
agreements to ensure that the potential consequences of such procedures
are acceptable to the institution and to recognize that ADR agreements
may themselves incorporate limitation of liability provisions.
A number of commenters stated that the Advisory addresses mandatory
ADR mechanisms and the waiver of jury trials in a way that will
discourage financial institutions from agreeing in advance with their
auditors to use these widely accepted, efficient, and cost effective
means of resolving disputes. A few commenters noted that ADR and waiver
of jury trial provisions do not take away rights; they merely reflect
the parties' choice of a method for resolving a dispute. Further,
commenters stated that the Agencies have previously issued
pronouncements that recognize and even encourage the use of ADR, for
example, the FDIC's Statement of Policy on Use of Binding Arbitration
(66 FR 18632 (April 10, 2001)). The Interagency Policy Statement on the
Internal Audit Function and its Outsourcing (issued by the OTS, Board,
FDIC, and OCC in March 2003) provides that all written contracts
between vendors and financial institutions shall prescribe a process
(arbitration, mediation, or other means) for resolving disputes and for
determining who bears the costs of consequential damages arising from
errors, omissions, and negligence. Commenters also stated that ADR is
commercially reasonable because it creates certainty and reduces
litigation-related costs and, therefore, should be encouraged.
The Agencies observed that limitation of liability provisions
frequently accompanied ADR or waiver of jury trial agreements contained
in or referenced by Audit engagement letters. The Agencies do not
oppose ADR or waiver of jury trial agreements. However, the Agencies do
object to the practice of including unsafe and unsound limitation of
liability provisions in these agreements.
In response to the comments received, the Agencies clarified that
ADR or waiver of jury trial provisions in Audit engagement letters do
not present safety and soundness concerns, provided the agreements do
not incorporate limitation of liability provisions. Institutions should
carefully review ADR and jury trial provisions in engagement letters,
as well as any agreements regarding rules of procedure. ADR agreements
should not include any unsafe and unsound limitation of liability
provisions. The Advisory does not change or affect previously issued
policies referencing ADR and does not encourage or discourage the use
of ADR in Audit engagement letters.
G. Legal Considerations
Four commenters addressed legal aspects of the proposed Advisory.
Two of the four commented that state and Federal laws explicitly permit
limitation of liability or indemnification provisions. They indicated
that these clauses are a common feature in many business and consumer
contracts in wide use today. The Agencies note that Audits by their
nature require a uniquely high level of objectivity and impartiality as
compared to other types of business arrangements. Therefore, some
commonly used limitation of liability provisions that may be acceptable
for other business contracts are inappropriate for Audits of financial
institutions.
Another commenter stated that certain jurisdictions prohibit claims
against auditors where management fraud is imputable to the client. The
Advisory is not intended to override existing state or Federal laws
that govern the types of damages that may be awarded by the courts. It
advises financial institutions' boards of directors, audit committees,
and management that they should not agree to any Audit engagement
letters that may present safety and soundness concerns, including
provisions that may violate the auditor independence standards of the
SEC, PCAOB, or AICPA, as applicable.
One commenter stated that the Agencies have not complied with the
legal constraints on Federal agency rulemaking (e.g., the
Administrative Procedures Act (APA) and Executive Order 12866) with the
Advisory. The APA prohibits agency action that is, among other things,
arbitrary and capricious. Executive Order 12866 provides that when a
Federal agency engages in rulemaking, it must first determine whether a
rule is necessary.
The Agencies have authority to issue safety and soundness guidance
without engaging in a formal rulemaking procedure. Under 12 U.S.C.
1831p-1(d)(1), the Agencies issue standards for safety and soundness by
regulation or by guideline. The Advisory is issued under that authority
and the supervisory authority vested in each of the Agencies. The
Agencies have determined that there is a significant need for guidance
based on their review of actual auditor engagement letters, the
comments from financial institutions that strongly expressed a need for
guidance, and the likely benefits as compared to the possible costs.
[[Page 6851]]
H. Other Considerations
Several commenters expressed concern that, since the Advisory does
not apply to other industries, financial institutions will not have a
level playing field with other audit clients when negotiating audit
engagement terms. In the Agencies' judgment, any concerns about
potential increased costs or restrictions on the ability of financial
institutions, as compared to other audit clients, to negotiate Audit
engagement terms do not outweigh the need to protect financial
institutions from safety and soundness concerns posed by limitation of
liability provisions.
Other commenters stated that auditors should only be liable for
audits they perform. The commenters believed that a financial
institution's engagement letter covers only the period under audit and
that auditors should not be held responsible for losses arising in
subsequent periods in which the auditor was not engaged. Further,
losses that arise in subsequent periods that may be related to matters
that existed during periods previously audited by another audit firm
should not result in a liability to the successor audit firm.
The Agencies concur with the concept that auditors are not
responsible for the work of others. The Agencies object to provisions
that are worded in a way that may not only preclude collection of
consequential damages for harm in later years, but that may also
preclude any recovery at all. For example, the Agencies observed
provisions where no claim of liability could be brought against an
auditor until the audit report is actually delivered, and then these
provisions limited any liability thereafter to claims raised during the
period covered by the audit. In other words, the auditor's liability
may be limited to claims raised during the period before there could be
any liability. Read more broadly, the auditor would be liable for
losses that arise in subsequent years only if the auditor continued to
audit subsequent periods.
Several commenters asked the Agencies to provide examples of losses
sustained by financial institutions as a result of limitation of
liability provisions discussed in the Advisory. The Agencies' charge is
to identify and mitigate the risk of loss to financial institutions,
not merely to react after losses occur. Therefore, the appropriate
standard to be applied in the Advisory is the risk of loss created by
limitation of liability provisions, and not losses sustained by reason
of such provisions.
I. Questions, Comments, and Responses
1. The Advisory, as written, indicates that limitation of liability
provisions are inappropriate for all financial institution external
audits.
a. Is the scope appropriate? If not, to which financial
institutions should the Advisory apply and why?
b. Should the Advisory apply to financial institution audits that
are not required by law, regulation, or order?
Comments and Responses: The vast majority of commenters stated that
the Advisory should apply uniformly to audits of financial statements
for all financial institutions. A few commenters stated that voluntary
audits should not be subject to the provisions in the Advisory. Several
commenters stated that the Advisory should apply to audits of all
entities, not just financial institutions.
Since the Agencies are concerned with the safety and soundness of
all financial institutions, the Advisory applies to all Audits of
financial institutions including voluntary Audits. Regarding the
comments relative to the broader application of the Advisory, the
Agencies do not have the authority to apply the Advisory to entities
other than financial institutions.
2. What effects would the issuance of this Advisory have on
financial institutions' ability to negotiate the terms of audit
engagements?
Comments and Responses: Several commenters stated that the Advisory
will harm financial institutions' ability to negotiate the terms of
audit engagements and therefore either result in higher audit costs or
a lessened ability to negotiate on usual business terms. Other
commenters stated that negotiations would be easier because auditors
would not be able to force undesirable terms into engagement letters.
The Agencies believe that the Advisory does not unduly affect the
negotiating positions of the parties or pose undue burdens on auditors
because these clauses did not exist in the majority of the engagement
letters reviewed by the Agencies.
3. Would the Advisory on limitation of liability provisions result
in an increase in external audit fees?
a. If yes, would the increase be significant?
b. Would it discourage financial institutions that voluntarily
obtain audits from continuing to be audited?
c. Would it result in fewer audit firms being willing to provide
external audit services to financial institutions?
Comments and Responses: The majority of commenters stated that
audit fees would increase; however, the range of increase was judged to
be anywhere from ``insignificant'' to ``dramatic.'' A few commenters
stated that fees would remain the same because many auditors have
performed audits without limitation of liability provisions for a very
long period of time. Most commenters stated that an increase in audit
fees would not discourage financial institutions from engaging auditors
because Audits represent best business practices and because the
benefits of Audits would continue to outweigh the costs.
A few commenters said that the increase in fees would reduce the
number of financial institutions that voluntarily obtain audits. More
than half of the commenters expressed concern about the number of
auditors willing to perform audits of financial institutions because of
the inability to include limitation of liability provisions in the
engagement letters.
Several commenters noted that the use of such clauses furthers the
public interest in reducing dispute resolution costs and ensures the
availability of reasonably affordable audit services and the equitable
distribution of financial risk. Commenters also noted that audit fees
are determined by a variety of factors and engagement risk is a
significant component.
In the Agencies' judgment, any concerns about potential increased
costs or restrictions on the ability of the parties to an Audit
engagement letter to allocate risk do not outweigh the need to protect
financial institutions from safety and soundness concerns posed by
limitation of liability provisions. Furthermore, any disincentive for
financial institutions to obtain Audits when not required should be
limited because Audits represent best practices and are strongly
encouraged by the Agencies.
The Agencies do not believe that the Advisory would significantly
affect the number of audit firms willing to provide external Audit
services to financial institutions because limitation of liability
provisions were not present in the majority of the engagement letters
reviewed by the Agencies.
4. The Advisory describes three general categories of limitation of
liability provisions.
a. Is the description complete and accurate?
b. Is there any aspect of the Advisory or terminology that needs
clarification?
Comments and Responses: The vast majority of commenters found the
three general categories of limitation of liability provisions complete
and accurate and did not express a need for
[[Page 6852]]
the Advisory or terminology to be clarified. It was apparent from the
comments received that the discussion of ADR was unclear; the Agencies
have clarified their position in the Advisory.
5. Appendix A of the Advisory contains examples of limitation of
liability provisions.
a. Do the examples clearly and sufficiently illustrate the types of
provisions that are inappropriate?
b. Are there other inappropriate limitation of liability provisions
that should be included in the Advisory? If so, please provide
examples.
Comments and Responses: The vast majority of commenters found the
examples of limitation of liability provisions to clearly and
sufficiently illustrate the types of provisions that are inappropriate.
A number of commenters stated that permitting an auditor and a client
to agree to a release from or indemnification for claims resulting from
knowing misrepresentations by management is fundamentally fair to the
client and is a significant deterrent to management fraud. As discussed
in section C. Management's Knowing Misrepresentations, the Agencies are
not persuaded by the commenters' arguments.
6. Is there a valid business purpose for financial institutions to
agree to any limitation of liability provision? If so, please describe
the limitation of liability provision and its business purpose.
Comments and Responses: Very few commenters directly responded to
this question. Those commenters indicated there is not a valid business
purpose for financial institutions to agree to any limitation of
liability provision in audit engagements.
7. The Advisory strongly recommends that financial institutions
take appropriate action to nullify limitation of liability provisions
in 2005 audit engagement letters that have already been accepted. Is
this recommendation appropriate? If not, please explain your rationale
(including burden and cost).
Comments and Responses: The vast majority of commenters stated that
accepted audit engagement letters containing limitation of liability
provisions should not require nullification for a number of reasons,
including the fact that a contract negotiated in good faith should not
be subject to renegotiation.
The Agencies agreed with these comments. The Advisory applies to
Audit engagement letters executed on or after February 9, 2006.
Financial institutions are not required to nullify Audit engagement
letters executed prior to February 9, 2006. If a financial institution
has executed a multi-year Audit engagement letter prior to February 9,
2006 (e.g., covering years ending in 2007 or later), the Agencies
encourage financial institutions to seek to amend the engagement letter
to be consistent with the Advisory for any Audit periods ending in 2007
or later.
IV. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
Chapter 35), the Agencies have reviewed the Advisory and determined
that it does not contain a collection of information pursuant to the
Act.
Text of Interagency Advisory
The text of the Interagency Advisory on the Unsafe and Unsound Use
of Limitation of Liability Provisions in External Audit Engagement
Letters follows:
Interagency Advisory on the Unsafe and Unsound Use of Limitation of
Liability Provisions in External Audit Engagement Letters
Purpose
This Advisory, issued jointly by the Office of Thrift Supervision
(OTS), the Board of Governors of the Federal Reserve System (Board),
the Federal Deposit Insurance Corporation (FDIC), the National Credit
Union Administration (NCUA), and the Office of the Comptroller of the
Currency (OCC) (collectively, the ``Agencies''), alerts financial
institutions' \1\ boards of directors, audit committees, management,
and external auditors to the safety and soundness implications of
provisions that limit external auditors' liability in audit
engagements.
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\1\ As used in this document, the term financial institutions
includes banks, bank holding companies, savings associations,
savings and loan holding companies, and credit unions.
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Limits on external auditors' liability may weaken the external
auditors' objectivity, impartiality, and performance and, thus, reduce
the Agencies' ability to rely on Audits. Therefore, certain limitation
of liability provisions (described in this Advisory and Appendix A) are
unsafe and unsound. In addition, such provisions may not be consistent
with the auditor independence standards of the U.S. Securities and
Exchange Commission (SEC), the Public Company Accounting Oversight
Board (PCAOB), and the American Institute of Certified Public
Accountants (AICPA).
Scope
This Advisory applies to engagement letters between financial
institutions and external auditors with respect to financial statement
audits, audits of internal control over financial reporting, and
attestations on management's assessment of internal control over
financial reporting (collectively, ``Audit'' or ``Audits'').
This Advisory does not apply to:
Non-Audit services that may be performed by financial
institutions' external auditors;
Audits of financial institutions' 401K plans, pension
plans, and other similar audits;
Services performed by accountants who are not engaged to
perform financial institutions' Audits (e.g., outsourced internal
audits, loan reviews); and
Other service providers (e.g., software consultants, legal
advisors).
While the Agencies have observed several types of limitation of
liability provisions in external Audit engagement letters, this
Advisory applies to any agreement that a financial institution enters
into with its external auditor that limits the external auditor's
liability with respect to Audits in an unsafe and unsound manner.
Background
A properly conducted audit provides an independent and objective
view of the reliability of a financial institution's financial
statements. The external auditor's objective in an audit is to form an
opinion on the financial statements taken as a whole. When planning and
performing the audit, the external auditor considers the financial
institution's internal control over financial reporting. Generally, the
external auditor communicates any identified deficiencies in internal
control to management, which enables management to take appropriate
corrective action. In addition, certain financial institutions are
required to file audited financial statements and internal control
audit/attestation reports with one or more of the Agencies. The
Agencies encourage financial institutions not subject to mandatory
audit requirements to voluntarily obtain audits of their financial
statements. The Federal Financial Institutions Examination Council's
(FFIEC) Interagency Policy Statement on External Auditing Programs of
Banks and Savings Associations \2\ notes, ``[a]n institution's internal
and external audit programs are critical to its safety and soundness.''
The Policy also states that an effective external auditing program
``can improve the safety and soundness
[[Page 6853]]
of an institution substantially and lessen the risk the institution
poses to the insurance funds administered by the Federal Deposit
Insurance Corporation (FDIC).''
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\2\ Published in the Federal Register on September 28, 1999 (64
FR 52319). The NCUA, a member of the FFIEC, has not adopted the
policy statement.
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Typically, a written engagement letter is used to establish an
understanding between the external auditor and the financial
institution regarding the services to be performed in connection with
the financial institution's audit. The engagement letter commonly
describes the objective of the audit, the reports to be prepared, the
responsibilities of management and the external auditor, and other
significant arrangements (e.g., fees and billing). The Agencies
encourage boards of directors, audit committees, and management to
closely review all of the provisions in the audit engagement letter
before agreeing to sign. As with all agreements that affect a financial
institution's legal rights, legal counsel should carefully review audit
engagement letters to help ensure that those charged with engaging the
external auditor make a fully informed decision.
While the Agencies have not observed provisions that limit an
external auditor's liability in the majority of external audit
engagement letters reviewed, they have observed a significant increase
in the types and frequency of these provisions. These provisions take
many forms, making it impractical to provide an all-inclusive list.
This Advisory describes the types of objectionable limitation of
liability provisions and provides examples.\3\
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\3\ Examples of auditor limitation of liability provisions are
illustrated in Appendix A.
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Financial institutions' boards of directors, audit committees, and
management should also be aware that certain insurance policies (such
as error and omission policies and director and officer liability
policies) might not cover losses arising from claims that are precluded
by limitation of liability provisions.
Limitation of Liability Provisions
The provisions the Agencies deem unsafe and unsound can be
generally categorized as an agreement by a financial institution that
is a client of an external auditor to:
Indemnify the external auditor against claims made by
third parties;
Hold harmless or release the external auditor from
liability for claims or potential claims that might be asserted by the
client financial institution, other than claims for punitive damages;
or
Limit the remedies available to the client financial
institution, other than punitive damages.
Collectively, these categories of provisions are referred to in
this Advisory as ``limitation of liability provisions.''
Provisions that waive the right of financial institutions to seek
punitive damages from their external auditor are not treated as unsafe
and unsound under this Advisory. Nevertheless, agreements by clients to
indemnify their auditors against any third party damage awards,
including punitive damages, are deemed unsafe and unsound under this
Advisory. To enhance transparency and market discipline, public
financial institutions that agree to waive claims for punitive damages
against their external auditors may want to disclose annually the
nature of these arrangements in their proxy statements or other public
reports.
Many financial institutions are required to have their financial
statements audited while others voluntarily choose to undergo such
audits. For example, banks, savings associations, and credit unions
with $500 million or more in total assets are required to have annual
independent audits.\4\ Certain savings associations (for example, those
with a CAMELS rating of 3, 4, or 5) and savings and loan holding
companies are also required by OTS regulations to have annual
independent audits.\5\ Furthermore, financial institutions that are
public companies \6\ must have annual independent audits. The Agencies
rely on the results of Audits as part of their assessment of the safety
and soundness of a financial institution.
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\4\ For banks and savings associations, see Section 36 of the
Federal Deposit Insurance Act (FDI Act) (12 U.S.C. 1831m) and Part
363 of the FDIC's regulations (12 CFR Part 363). For credit unions,
see Section 202(a)(6) of the Federal Credit Union Act (12 U.S.C.
1782(a)(6)) and Part 715 of the NCUA's regulations (12 CFR Part
715).
\5\ See OTS regulation at 12 CFR 562.4.
\6\ Public companies are companies subject to the reporting
requirements of the Securities Exchange Act of 1934.
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In order for Audits to be effective, the external auditors must be
independent in both fact and appearance, and must perform all necessary
procedures to comply with auditing and attestation standards
established by either the AICPA or, if applicable, the PCAOB. When
financial institutions execute agreements that limit the external
auditors' liability, the external auditors' objectivity, impartiality,
and performance may be weakened or compromised, and the usefulness of
the Audits for safety and soundness purposes may be diminished.
By their very nature, limitation of liability provisions can remove
or greatly weaken external auditors' objective and unbiased
consideration of problems encountered in audit engagements and may
diminish auditors' adherence to the standards of objectivity and
impartiality required in the performance of Audits. The existence of
such provisions in external audit engagement letters may lead to the
use of less extensive or less thorough procedures than would otherwise
be followed, thereby reducing the reliability of Audits. Accordingly,
financial institutions should not enter into external audit
arrangements that include unsafe and unsound limitation of liability
provisions identified in this Advisory, regardless of (1) The size of
the financial institution, (2) whether the financial institution is
public or not, or (3) whether the external audit is required or
voluntary.
Auditor Independence
Currently, auditor independence standard-setters include the SEC,
PCAOB, and AICPA. Depending upon the audit client, an external auditor
is subject to the independence standards issued by one or more of these
standard-setters. For all credit unions under the NCUA's regulations,
and for other non-public financial institutions that are not required
to have annual independent audits pursuant to either Part 363 of the
FDIC's regulations or Sec. 562.4 of the OTS's regulations, the
Agencies' rules require only that an external auditor meet the AICPA
independence standards; they do not require the financial institution's
external auditor to comply with the independence standards of the SEC
and the PCAOB.
In contrast, for financial institutions subject to the audit
requirements either in Part 363 of the FDIC's regulations or in Sec.
562.4 of the OTS's regulations, the external auditor should be in
compliance with the AICPA's Code of Professional Conduct and meet the
independence requirements and interpretations of the SEC and its
staff.\7\ In this regard, in a December 13, 2004, Frequently Asked
Question (FAQ) on the application of the SEC's auditor independence
rules, the SEC staff reiterated its long-standing position that when an
accountant and his or her client enter into an agreement which seeks to
provide the accountant immunity from liability for his or her
[[Page 6854]]
own negligent acts, the accountant is not independent. The FAQ also
states that including in engagement letters a clause that would
release, indemnify, or hold the auditor harmless from any liability and
costs resulting from knowing misrepresentations by management would
impair the auditor's independence.\8\ The SEC's FAQ is consistent with
Section 602.02.f.i. (Indemnification by Client) of the SEC's
Codification of Financial Reporting Policies. (Section 602.02.f.i. and
the FAQ are included in Appendix B.)
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\7\ See FDIC Regulation 12 CFR Part 363, Appendix A--Guidelines
and Interpretations; Guideline 14, Role of the Independent Public
Accountant--Independence; and OTS Regulation 12 CFR 562.4(d)(3)(i),
Qualifications for independent public accountants.
\8\ In contrast to the SEC's position, AICPA Ethics Ruling 94
(ET Sec. 191.188-189) currently concludes that indemnification for
``knowing misrepresentations by management'' does not impair
independence. On September 15, 2005, the AICPA published for comment
its proposed interpretation of its auditor independence standards.
In that proposal the AICPA specifically identified limitation of
liability provisions that impair auditor independence under the
AICPA's standards. Most of the provisions cited in this Advisory
were deemed to impair independence in the AICPA's proposed
interpretation. At this writing, the AICPA has not issued a final
interpretation.
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Based on this SEC guidance and the Agencies' existing regulations,
certain limits on auditors' liability are already inappropriate in
audit engagement letters entered into by:
Public financial institutions that file reports with the
SEC or with the Agencies;
Financial institutions subject to Part 363; and
Certain other financial institutions that OTS regulations
(12 CFR 562.4) require to have annual independent audits.
In addition, certain of these limits on auditors' liability may
violate the AICPA independence standards. Notwithstanding the potential
applicability of auditor independence standards, the limitation of
liability provisions discussed in this Advisory present safety and
soundness concerns for all financial institution Audits.
Alternative Dispute Resolution Agreements and Jury Trial Waivers
The Agencies have observed that some financial institutions have
agreed in engagement letters to submit disputes over external audit
services to mandatory and binding alternative dispute resolution,
binding arbitration, other binding non-judicial dispute resolution
processes (collectively, ``mandatory ADR'') or to waive the right to a
jury trial. By agreeing in advance to submit disputes to mandatory ADR,
financial institutions may waive the right to full discovery, limit
appellate review, or limit or waive other rights and protections
available in ordinary litigation proceedings.
The Agencies recognize that mandatory ADR procedures and jury trial
waivers may be efficient and cost-effective tools for resolving
disputes in some cases. Accordingly, the Agencies believe that
mandatory ADR or waiver of jury trial provisions in external Audit
engagement letters do not present safety and soundness concerns,
provided that the engagement letters do not also incorporate limitation
of liability provisions. The Agencies encourage institutions to
carefully review mandatory ADR and jury trial provisions in engagement
letters, as well as any agreements regarding rules of procedure, and to
fully comprehend the ramifications of any agreement to waive any
available remedies. Financial institutions should ensure that any
mandatory ADR provisions in Audit engagement letters are commercially
reasonable and:
Apply equally to all parties;
Provide a fair process (e.g., neutral decision-makers and
appropriate hearing procedures); and
Are not imposed in a coercive manner.
Conclusion
Financial institutions' boards of directors, audit committees, and
management should not enter into any agreement that incorporates
limitation of liability provisions with respect to Audits. In addition,
financial institutions should document their business rationale for
agreeing to any other provisions that limit their legal rights.
This Advisory applies to engagement letters executed on or after
February 9, 2006. The inclusion of limitation of liability provisions
in external Audit engagement letters and other agreements that are
inconsistent with this Advisory will generally be considered an unsafe
and unsound practice. The Agencies' examiners will consider the
policies, processes, and personnel surrounding a financial
institution's external auditing program in determining whether (1) the
engagement letter covering external auditing activities raises any
safety and soundness concerns, and (2) the external auditor maintains
appropriate independence regarding relationships with the financial
institution under relevant professional standards. The Agencies may
take appropriate supervisory action if unsafe and unsound limitation of
liability provisions are included in external Audit engagement letters
or other agreements related to Audits that are executed (accepted or
agreed to by the financial institution) on or after February 9, 2006.
Appendix A
Examples of Unsafe and Unsound Limitation of Liability Provisions
Presented below are some of the types of limitation of liability
provisions (with an illustrative example of each type) that the
Agencies observed in financial institutions' external audit
engagement letters. The inclusion in external Audit engagement
letters or agreements related to Audits of any of the illustrative
provisions (which do not represent an all-inclusive list) or any
other language that would produce similar effects is considered an
unsafe and unsound practice.
1. ``Release From Liability for Auditor Negligence'' Provision
In this type of provision, the financial institution agrees not
to hold the audit firm liable for any damages, except to the extent
determined to have resulted from willful misconduct or fraudulent
behavior by the audit firm.
Example: In no event shall [the audit firm] be liable to the
Financial Institution, whether a claim be in tort, contract or
otherwise, for any consequential, indirect, lost profit, or similar
damages relating to [the audit firm's] services provided under this
engagement letter, except to the extent finally determined to have
resulted from the willful misconduct or fraudulent behavior of [the
audit firm] relating to such services.
2. ``No Damages'' Provision
In this type of provision, the financial institution agrees that
in no event will the external audit firm's liability include
responsibility for any compensatory (incidental or consequential)
damages claimed by the financial institution.
Example: In no event will [the audit firm's] liability under the
terms of this Agreement include responsibility for any claimed
incidental or consequential damages.
3. ``Limitation of Period To File Claim'' Provision
In this type of provision, the financial institution agrees that
no claim will be asserted after a fixed period of time that is
shorter than the applicable statute of limitations, effectively
agreeing to limit the financial institution's rights in filing a
claim.
Example: It is agreed by the Financial Institution and [the
audit firm] or any successors in interest that no claim arising out
of services rendered pursuant to this agreement by, or on behalf of,
the Financial Institution shall be asserted more than two years
after the date of the last audit report issued by [the audit firm].
4. ``Losses Occurring During Periods Audited'' Provision
In this type of provision, the financial institution agrees that
the external audit firm's liability will be limited to any losses
occurring during periods covered by the external audit, and will not
include any losses occurring in later periods for which the external
audit firm is not engaged. This provision may not only preclude the
collection of consequential damages for harm in later years, but
could preclude any recovery at all. It appears that no claim of
[[Page 6855]]
liability could be brought against the external audit firm until the
external audit report is actually delivered. Under such a clause,
any claim for liability thereafter might be precluded because the
losses did not occur during the period covered by the external
audit. In other words, it might limit the external audit firm's
liability to a period before there could be any liability. Read more
broadly, the external audit firm might be liable for losses that
arise in subsequent years only if the firm continues to be engaged
to audit the client's financial statements in those years.
Example: In the event the Financial Institution is dissatisfied
with [the audit firm's] services, it is understood that [the audit
firm's] liability, if any, arising from this engagement will be
limited to any losses occurring during the periods covered by [the
audit firm's] audit, and shall not include any losses occurring in
later periods for which [the audit firm] is not engaged as auditors.
5. ``No Assignment or Transfer'' Provision
In this type of provision, the financial institution agrees that
it will not assign or transfer any claim against the external audit
firm to another party. This provision could limit the ability of
another party to pursue a claim against the external auditor in a
sale or merger of the financial institution, in a sale of certain
assets or a line of business of the financial institution, or in a
supervisory merger or receivership of the financial institution.
This provision may also prevent the financial institution from
subrogating a claim against its external auditor to the financial
institution's insurer under its directors' and officers' liability
or other insurance coverage.
Example: The Financial Institution agrees that it will not,
directly or indirectly, agree to assign or transfer any claim
against [the audit firm] arising out of this engagement to anyone.
6. ``Knowing Misrepresentations by Management'' Provision
In this type of provision, the financial institution releases
and indemnifies the external audit firm from any claims,
liabilities, and costs attributable to any knowing misrepresentation
by management.
Example: Because of the importance of oral and written
management representations to an effective audit, the Financial
Institution releases and indemnifies [the audit firm] and its
personnel from any and all claims, liabilities, costs, and expenses
attributable to any knowing misrepresentation by management.
7. ``Indemnification for Management Negligence'' Provision
In this type of provision, the financial institution agrees to
protect the external auditor from third party claims arising from
the external audit firm's failure to discover negligent conduct by
management. It would also reinforce the defense of contributory
negligence in cases in which the financial institution brings an
action against its external auditor. In either case, the contractual
defense would insulate the external audit firm from claims for
damages even if the reason the external auditor failed to discover
the negligent conduct was a failure to conduct the external audit in
accordance with generally accepted auditing standards or other
applicable professional standards.
Example: The Financial Institution shall indemnify, hold
harmless and defend [the audit firm] and its authorized agents,
partners and employees from and against any and all claims, damages,
demands, actions, costs and charges arising out of, or by reason of,
the Financial Institution's negligent acts or failure to act
hereunder.
8. ``Damages Not to Exceed Fees Paid'' Provision
In this type of provision, the financial institution agrees to
limit the external auditor's liability to the amount of audit fees
the financial institution paid the external auditor, regardless of
the extent of damages. This may result in a substantial
unrecoverable loss or cost to the financial institution.
Example: [The audit firm] shall not be liable for any claim for
damages arising out of or in connection with any services provided
herein to the Financial Institution in an amount greater than the
amount of fees actually paid to [the audit firm] with respect to the
services directly relating to and forming the basis of such claim.
Note: The Agencies also observed a similar provision that
limited damages to a predetermined amount not related to fees paid.
Appendix B
SEC's Codification of Financial Reporting Policies, Section
602.02.f.i and the SEC's December 13, 2004, FAQ on Auditor
Independence
Section 602.02.f.i--Indemnification by Client, 3 Fed. Sec. L. (CCH) ]
38,335, at 38,603-17 (2003)
Inquiry was made as to whether an accountant who certifies
financial statements included in a registration statement or annual
report filed with the Commission under the Securities Act or the
Exchange Act would be considered independent if he had entered into
an indemnity agreement with the registrant. In the particular
illustration cited, the board of directors of the registrant
formally approved the filing of a registration statement with the
Commission and agreed to indemnify and save harmless each and every
accountant who certified any part of such statement, ``from any and
all losses, claims, damages or liabilities arising out of such act
or acts to which they or any of them may become subject under the
Securities Act, as amended, or at `common law,' other than for their
willful misstatements or omissions.''
When an accountant and his client, directly or through an
affiliate, have entered into an agreement of indemnity which seeks
to assure to the accountant immunity from liability for his own
negligent acts, whether of omission or commission, one of the major
stimuli to objective and unbiased consideration of the problems
encountered in a particular engagement is removed or greatly
weakened. Such condition must frequently induce a departure from the
standards of objectivity and impartiality which the concept of
independence implies. In such difficult matters, for example, as the
determination of the scope of audit necessary, existence of such an
agreement may easily lead to the use of less extensive or thorough
procedures than would otherwise be followed. In other cases it may
result in a failure to appraise with professional acumen the
information disclosed by the examination. Consequently, the
accountant cannot be recognized as independent for the purpose of
certifying the financial statements of the corporation. (Emphasis
added.)
U.S. Securities and Exchange Commission; Office of the Chief
Accountant: Application of the Commission's Rules on Auditor
Independence Frequently Asked Questions; Other Matters--Question 4
(issued December 13, 2004)
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 that
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. (Emphasis added.)
Dated: February 1, 2006.
By the Office of Thrift Supervision,
John M. Reich,
Director.
By order of the Board of Governors of the Federal Reserve
System, February 1, 2006.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, the 2nd day of February, 2006.
By order of the Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
By the National Credit Union Administration Board on January 31,
2006.
Mary F. Rupp,
Secretary of the Board.
Dated: February 1, 2006.
John C. Dugan,
Comptroller of the Currency.
[FR Doc. 06-1189 Filed 2-8-06; 8:45 am]
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