Looking for some certainty in an often-uncertain field, public companies are increasingly disclosing auditor agreements that place a monetary cap on any liabilities that may arise from accounting problems.
According to published reports, since the start of 2006 more than 90 companies have disclosed such liability agreements with their auditors, which would limit the companies' ability to hold outside auditing firms responsible for any problems with the books. Prior to this year, that number was closer to a handful.
According to an article in The Wall Street Journal, the majority of the 90 companies with cap provisions in their auditor engagement agreements are clients of Big Four firms Ernst & Young and KPMG. Most of the provisions rule out a company seeking punitive damages from their auditor, or require that any accounting disagreement travel through arbitration or mediation, not the courts.
The caps don't limit the rights of third parties, such as shareholders, to sue an auditor.
Opponents of such provisions say that such restrictions could compromise an auditor's performance or independence -- a charge denied by accounting firms, who say that such caps are a standard part of client agreements.
Previously on WebCPA:
Inside View: Put a Cap On It (June 26, 2006)
U.K. Considers Limiting Auditor Liability (Nov. 8, 2005)
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