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WASHINGTON-The Federal Financial Institutions Examination Council-which includes NCUA and the other four banking regulatory agencies-in conjunction with Treasury, has published a proposed interagency advisory on the use of limitation of liability and certain alternative dispute resolution provisions in external audits. FFIEC is requesting comment on the proposal, which advises credit unions and other financial institutions’ boards of directors, audit committees, and management that they should ensure that they do not enter any agreement that contains external auditor limitation of liability provisions with respect to financial statement audits. The FFIEC agencies referred to these provisions as “unsafe and unsound.” While the provisions are not in the majority of external audit engagement letters, they are becoming more prevalent, FFIEC noted in its request. “Agreements by financial institutions to limit their external auditors’ liability or to submit to certain alternative dispute resolution (ADR) provisions that also limit the external auditors’ liability may weaken the external auditors’ objectivity, impartiality, and performance and thus, reduce the Agencies’ ability to rely on external audits,” the proposed language read. “Therefore, such agreements raise safety and soundness concerns, and entering into such agreements is generally considered to be an unsafe and unsound practice. In addition, such provisions may not be consistent with the auditor independence standards of the U.S. Securities and Exchange Commission (SEC), the Public Company Accounting Oversight Board (PCAOB), and the American Institute of Certified Public Accountants (AICPA),” it read The agencies said that while the provisions vary, they are typically an agreement by a client financial institution to: * Indemnify the external auditor against claims made by third parties; * Hold harmless or release the external auditor from liability for claims or potential claims that might be asserted by the client financial institution; or * Limit the remedies available to the client financial institution. Banks, thrifts and credit unions over $500 million in assets are required to have annual independent audits. Comments are due to the FFIEC by June 9.

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