Proposed New Interpretation
Interpretation 101-16 under Rule 101: Indemnification, Limitation of Liability, and ADR Clauses in Engagement Letters
Proposed Deletion of Rulings
Ethics Ruling No. 94 under Rule 101:
Indemnification Clause in Engagement Letters
Ethics Ruling No. 95 under Rule 101:
Agreement With Attest Client to Use ADR Techniques
Proposed Revision to Interpretation
Interpretation 101-3 under Rule 101: Performance of Nonattest Services: Forensic Accounting Services and Tax Compliance Services
On September 8, 2006, the Professional Ethics Executive Committee (PEEC) issued an omnibus exposure draft that proposes one new and one revised interpretation under Rule 101, Independence. Based on comments received on the PEEC’s September 15, 2005, omnibus exposure draft containing proposed guidance regarding independence and the use of indemnification and limitation of liability provisions and the performance of forensic accounting services, the PEEC agreed to revise and re-expose such guidance, which is included in the September 8, 2006, exposure draft.
The first proposal would provide guidance to members on the impact that certain indemnification and limitation of liability provisions may have on a member’s independence when included in engagement letters or other agreements entered into with a client. Under the proposal, certain types of indemnification and limitation of liability provisions in connection with an attest engagement are considered to pose an unacceptable threat to a member’s independence because they may result in a member’s performance of insufficient attest procedures in reliance on the belief that the member is protected through the indemnification or limitation of liability provision. However, this threat could be sufficiently mitigated provided the limitation of liability or indemnification agreement was contingent on the member’s attest services being performed in compliance with professional standards. Accordingly, the PEEC is proposing ethics guidance that adopts an underlying principle whereby independence would be considered to be impaired if a member entered into an agreement with a client that included an indemnification or limitation of liability provision regarding a member’s exposure to actual damages unless such provision was contingent on the member’s attest services being performed in compliance with professional standards, in all material respects. The proposed interpretation also provides guidance on arrangements whereby a member and client agree to use arbitration, mediation or other alternative dispute resolution (ADR) methods to resolve a dispute between them, or an agreement to waive a jury trial.
The second proposal would revise Ethics Interpretation 101-3, Performance of Nonattest Services, to incorporate guidance on how the provision of forensic accounting services and tax compliance services would affect a member’s independence. Under the proposal, forensic accounting services consist of (1) litigation services and (2) investigative services, and litigation services are further categorized as expert witness services, litigation consulting services, and other services such as serving as a court-appointed expert, special master, trier of fact, or arbitrator. The proposed interpretation also provides guidance on the provision of fact witness testimony. With regard to tax compliance services, the services included under the proposal are (1) preparation of a tax return; (2) transmittal of a tax return, and transmittal of the related tax payment to the taxing authority; (3) signing and filing of a tax return; and (4) authorized representation of clients before a taxing authority.
Members and other interested parties are encouraged to comment on this proposal. Comments on the proposal dealing with Interpretation 101-16 are due December 8, 2006 while comments on the remaining portions of the exposure draft will be accepted through November 8, 2006. All comments should be sent to Lisa A. Snyder, Director, Professional Ethics Division, at firstname.lastname@example.org.