The real meat of Proposed Interpretation 501-8, “Failure to Follow Requirements of Governmental Bodies, Commissions, or Other Regulatory Agencies on Indemnification and Limitation of Liability Agreements with a Client,” by the AICPA Professional Ethics Division isn’t in the text of the proposed interpretation, but rather in what was specifically avoided.

Certain governmental bodies, commissions or other regulatory agencies prohibit indemnification and limitation of liability agreements in connection with an audit or other attest services that they required or provide that the existence of such agreements disqualifies a firm from providing such services. The proposal states, “A member who enters into an agreement with a client that would place the client or member in violation of such requirements or that would cause the member to be disqualified from providing such services to the client would be considered to have committed an act discreditable to the profession.”
The official explanation accompanying the proposal points out that in September, 2005, and September, 2006, exposure drafts were issued containing proposed ethics interpretations under Rule 101, Independence, addressing the impact that certain indemnification and limitation of liability provisions in client engagement letters would have on a member’s independence. As a result of feedback received, research and auditor liability reform initiatives in both the U.S. and abroad, including the U.S. Treasury Department’s new Advisory Committee on the Auditing Profession, the decision was made not to issue a revised proposal under Rule 101, Independence, at this time.

Most telling was the following statement at the end of the explanation: “Once the legislative efforts concerning auditor liability reform are concluded, the committee [Professional Ethics Executive Committee] will continue to monitor events on this subject both nationally and internationally and consider what, if any, additional guidance may be appropriate.”

More and more firms are using indemnification and limitation of liability agreements in their engagement letters. As the proposal indicates, for the most part, the jury is still out. But my guess is, probably not for long.

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