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WASHINGTON-NCUA, in concert with the other federal financial regulatory agencies, recently issued an advisory expressing their concerns over financial institutions’ agreements to limit the liability of their external auditors. The regulators’ primary concern is that limiting the liability of external auditors in their engagement letters could result in less reliable audits. The advisory tells financial institutions that they should not agree to external audit engagement letters that use “unsafe and unsound limitation of liability provisions.” The joint advisory covers language in engagement letters that shelter the external auditor from third-party claims, including punitive damages; relieve external auditor liability for claims or potential claims by its client; or limit the remedies available to the client. However, provisions waiving the institution’s right to seek punitive damages against external auditors are acceptable. The letter covers all engagement letters after publication in the Federal Register, which is expected shortly. “Nevertheless, the agencies encourage any financial institution subject to a multi-year audit engagement letter containing unsafe and unsound limitation of liability provisions to seek to amend its engagement letter to be consistent with the advisory for periods ending in 2007 or later,” the agencies recommended.

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