February 2018
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Clarification on Alternative Dispute...
Our article in the December 2017 issue of the Journal, “Alternative Dispute Resolution for Accounting and Related Services Disputes,” makes the following statement that needs to be clarified:
If a client files financial statements with the SEC, CPAs should understand the SEC's and PCAOB's independence requirements before inserting an ADR or limitation of damages clause into an engagement letter. Normally, the inclusion of ADR clauses will not affect CPAs' independence; however, SEC registrants and certain other governmental regulated enterprises are precluded from including an indemnification or liability limitation provision in an engagement letter, other than one related to a knowing misrepresentation by management.
There is different guidance in the literature concerning the use of an indemnification clause related to misrepresentations by management in an SEC or other regulatory filing. The SEC staff takes the position that this and other types of indemnification clauses are not allowed in engagement letters, because they are considered to impair independence and may lead to the use of less thorough or extensive audit procedures than the auditor might otherwise use.
The authors thank the alert reader who brought this to our attention.
Vincent J. Love, CPA/CFF, CFE. VJL Consulting, New York, N.Y.
Thomas R. Manisero, JD. Wilson Elser Moskowitz Edelman & Dicker LLP, White Plains, N.Y.