Limiting Accountants' Liability Through Engagement Letters

A Comparison of U.S. and European Policies

Alan Reinstein, DBA, CPA, and Patricia G. Lobingier, PhD, and Brian Patrick Green, PhD, CPA

Many CPA firms use engagement letters containing clauses that seek to minimize their exposure to legal liabilities for audits, reviews, compilations, and other professional services. Auditors have specifically used indemnification and liability limitation clauses and alternative dispute resolution (ADR) agreements to help control their insurance and other costs, especially for clients operating in high-risk business environments. While firms may view risk mitigation clauses from a cost standpoint, financial statement users and regulators have voiced concerns over impaired independence, auditor quality, and objectivity (Tim Bush, Shyam Sunder, and Stella Fearnley, “Auditor Liability Reforms in the U.K. and the U.S.: A Comparative Review,” working paper, August 2007).