More on Audit Engagement Letter Limitation of Liability Provisions

Cite this Article
Bill Sjostrom, More on Audit Engagement Letter Limitation of Liability Provisions, Truth on the Market (March 06, 2006),

Today’s W$J has another article on limitation of liability provisions in auditor engagement letters (click here).  This is a subject on which I’ve blogged before (see here and here).  Because of the attention given the issue, it looks like more companies are disclosing in their proxy statements the existence of the provisions.  I remain slightly baffled by why this issue is getting so much attention.  It’s not like the provisions triggered the downfall of Enron or have been at the center of any high profile litigation.  The whole controversy seems to have arisen out of Sun Microsystems’ disclosure last fall of some of these provisions in its auditor engagement letter of the provisions.  As the W$J article indicates, Ernst & Young has been including these provisions in its letters for “more than 10 years.�  As I’ve said before, these are standard provisions routinely included in contracts between sophisticated parties.

Arkansas Best Corp. disclosed last week that its engagement letter with E&Y includes some of the provisions at issue.  According to the W$J article:

Arkansas Best didn’t think it “had a lot of leverage to remove the language” requested by Ernst & Young, Ms. McReynolds added.  The company isn’t necessarily opposed to such limitations, she said, but “right now, I don’t know that we have the ability to say no.”

If Arkansas Best is really concerned about the provisions, I suggest it dump E&Y for PWC which, according to the article, doesn’t include such limitations in its engagement letters.  My point is that competition among accounting firms is likely to take care of the “problem,� so no need for further regulation.