WASHINGTON — Federal regulators are considering whether to ban an increasingly popular liability clause in banks’ contracts with their auditors.
Officials at the Federal Deposit Insurance Corp. said examiners have noticed clauses in many engagement letters between banks and their outside auditors that limit the auditors’ liability in case the bank is accused of accounting violations.
John Lane, the agency’s deputy director for risk management, said at a media briefing last week that one reason the clauses have become so popular is that the FDIC and others are increasingly suing auditing firms to recoup losses suffered by their clients as a result of accounting problems.
“I think that that they’ve seeing an increase in their litigation, and risk of lawsuits, and they’re saying how do we limit that,” Mr. Lane said. “We see that as a risk to our ability to recover, as receiver, for the insurance fund, for creditors” when a bank fails as a result of such problems.
For example, the FDIC has sued Ernst & Young for $2.2 billion in connection with the failure of Superior Bank FSB of Illinois. A court ruled this year that the FDIC was bound by arbitration clauses in Superior’s contract with its auditor.
Steven Fritts, the FDIC’s associate director for risk management policy, said the banking and thrift agencies had informally surveyed examiners about the clauses.
“We’ve seen that there’s enough of this, that it’s not one isolated thing,” he said. “It’s occurring with some frequency.”
The agencies found about a dozen examples, he said.
One reads: “In no event shall the audit firm be liable for the company … for their claim via tort, contract, or otherwise for any consequential, indirect, loss of profit, or similar damages relating to the audit firm’s services, except to the extent filing the determined resulted from the willful misconduct or fraudulent behavior of the audit firm.”
Mr. Fritts said the FDIC has raised concerns about whether the clauses violate auditor independence requirements of the Securities and Exchange Commission and the Public Company Accounting Oversight Board.
The SEC and the oversight board may issue guidance that would affect contracts between public companies and auditors, he said.
In addition, banking and thrift agencies may issue a letter early next year to all insured financial institutions that could go so far as to say the clauses are unacceptable from a safety-and-soundness standpoint, Mr. Fritts said.
Donna Fisher, the American Bankers Association’s director of tax and accounting, said the clauses had become more prevalent this year.
In some situations, she said, banks had renegotiated contracts with auditors after auditing standards for the Sarbanes-Oxley Act were issued. “The accounting firms were just, kind of, creating an environment that forced the bank to sign,” she said.
Relations were already tense between banking companies and their auditors, experts said. “Our members have been very vocal in the frustrations with the auditors,” said Dennis Hild, an accounting expert for America’s Community Bankers. “This one could be a back-breaker for some of the already strained relationships.”
Mr. Fritts said that if the accounting regulators issued guidance on the clauses, no burden would fall directly on one industry.
