Proposed Auditor Independence Rules: Extent of Indemnification

The AICPA has proposed new independence rules for outside auditors. The Exposure Draft is open for comments until November 8. The proposed revisions were motivated in part by the Professional Ethics Executive Committee's ethics interpretation regarding Indemnification, Limitation of Liability, and ADR Clauses in Engagement Letters which generated several comment letters. The PEEC had addressed the extent to which liability limiting agreements undermined independence.

In the exposure draft, the PEEC stated that it was proposing an underlying principle that independence would be considered 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."