Last month, several large accounting firms began adding disclaimers to their audit opinions for UK clients in an effort to ward off lawsuits. Observers say these opinions will provide a real test of the tolerance of the U.S. Securities and Exchange Commission for non-U.S. customs and laws.

The disclaimers read: "To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body [the shareholders] for our audit work, for this report, or for the opinions we have formed." In effect, this phrase says that only shareholders can rely on the auditor's work. To the extent it holds up under local laws, the added wording will limit the audit firm's exposure to lawsuits from third parties, such as banks.

According to the Financial Times, the disclaimers were adopted on the advice of the Institute of Chartered Accountants in England and Wales (ICAEW). The UK arms of PricewaterhouseCoopers and Ernst & Young have already started using the wording for UK clients, and they appear to be considering its application in other countries as well.

The FT also reports that the disclaimers have already caught the SEC's attention. The Commission is concerned about the inherent conflict with the basic U.S. regulatory principle that an audit firm is not engaged by a company for the sole purpose of current shareholders. ("SEC studies disclaimers on UK accounts," Feb. 2, 2003.)

For the UK companies affected by this (approximately half the largest UK companies also trade on U.S. exchanges), the bottom line could be a troublesome conflict between U.S. and UK rules. For the SEC, this could prove a real test of the U.S.'s commitment to international harmonization and convergence. On the one hand, the ICAEW has no authority to alter the rules for U.S. capital markets. On the other hand, if the SEC decides to outlaw the disclaimers in the U.S., the ICAEW's well-intentioned advice would be negated for the many UK companies whose shares are traded in the U.S. and who file regular financial reports with the SEC.