Using Engagement Letters to Limit Liability

Source: Of Mutual Interest

In December 2007 the AICPA issued an exposure draft making the use of certain limited liability and indemnification provisions “discreditable acts” under AICPA Rule 501. Other state and federal rules limit or prohibit such provisions.

This does not mean, however, that an accountant is prohibited from using language in engagement letters that might permit the CPA firm to later hold the client accountable for breaking its promises.

Here is an example of the type of language that might be used:

[Client] hereby promises that it will make every diligent effort to maintain proper books and records that accurately reflect its business activities, that it will be completely truthful with [Audit Firm] and that [Audit Firm] may rely upon both oral and written statements and responses to questions. [Client] further promises to immediately advise [Audit Firm] if it becomes aware of any inaccuracy in its record-keeping or dishonesty in any of its business dealings, including its statements to [Audit Firm]. [Client] acknowledges that the promises are the cornerstone of its relationship with [Audit Firm] and are made to induce [Audit Firm] to accept this audit engagement, and that [Audit Firm] would not accept this audit engagement without such promises.

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From Of Mutual Interest, CPA Mutual Insurance Company of America, Alachua, Florida (www.cpamutual.com), September 2008.

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