Interagency advisory issued on use of limitation of liability provisions in external audit engagement letters, as AICPA urged.

• Position: News update

The Federal Financial Institutions Examination Council, on behalf of the five major banking regulatory agencies, has issued a Final Advisory informing financial institutions not to enter into external audit engagement letters that incorporate "unsafe and unsound" limitation of liability provisions with respect to audits of financial statements and internal control over financial reporting. The Advisory includes examples of limitation of liability provisions that are considered to be unsafe and unsound.

In June 2005, the AICPA submitted comments to the FFIEC's Proposed Advisory urging the FFIEC to permit provisions limiting an auditor's liability to the client for punitive damage claims, provided the auditor remained liable for actual damages. The Institute also requested that the Final Advisory make clear that the inclusion of alternative dispute resolution (ADR) and waiver of jury trial provisions would not impair independence or constitute an unsafe and unsound practice. We are pleased to report that the Final Advisory states provisions that waive the right of...