APPROACH to AUDIT QUALITY CEO Perspective Audit Quality and the Culture Connection

APPROACH TO AUDIT QUALITY CEO Perspective Audit quality and the culture connection

Over the past four years, BDO USA has experienced a period of phenomenal growth. In this short time, we have doubled in size, exceeding $1.29 billion in annual revenue, and gained more Securities and Exchange Commission (SEC) clients than any other public accounting firm. As part of this expansion strategy, we have added more than 2,400 partners and professionals. Yet, throughout this time, we’ve been careful to remember who we are and why we are here.

Our firm’s core purpose is helping people thrive every day, acting in the public interest. We believe that when we help our people, our clients, and our communities to thrive, each of us individually — and BDO collectively — will succeed. Our commitment to this central purpose is evident in our culture, our values and our relationships, as well as in how we conduct our audit engagements.

Public accounting firms serve a unique and valuable role in enhancing the integrity of the financial reporting systems that underpins the smooth functioning of the capital markets. Central to this role is a committed focus on audit quality. Audit quality is not measured at a specific point in time, nor is it the result of narrowly scoped initiatives. Rather, it is best demonstrated by a framework that encapsulates how we as a firm align attention to audit quality with the environments in which we conduct our audit engagements. In environments characterized by mounting complexity, audit quality requires a holistic perspective that encompasses the firm’s culture as a key driver.

BDO’s approach to audit quality is rooted in the five pillars of our strategy that we refer to as CLIMB: Culture and unity, Leadership and accountability, Innovation, Market prominence and Best in class. These pillars, and our foundational values and purpose, direct the way we maintain and uphold audit quality—from shaping our tone, infrastructure, and actions to how we evaluate our success.

In this report, we invite you to get to know BDO, as we share the insights that reflect our firm’s core values, people, and framework for embedding quality in all that we do. As we look toward the future of our firm and the evolving audit profession, we are confident that our commitment to our purpose and creating an environment where people thrive on excellence and doing the right things, are the keys to continuing to deliver quality audits to our clients.

Wayne Berson Chief Executive Officer of BDO USA, LLP Chairman of the Global Board of BDO International Ltd. BDO’S APPROACH TO AUDIT QUALITY

BDO Audit Quality Framework

BDO’s approach to audit quality is captured in a contextual framework vation Busin nno ess & I En that is influenced by external y vir ilit on ab m factors including: in e a CULTURE & nt st u UNITY: u the business and regulatory S Learning & Professional environment in which we and our Development A c c clients operate BEST IN CLASS: o u Consultation, LEADERSHIP & C n o t i Supervision, ACCOUNTABILITY: m n u accounting and reporting complexities n g o Quality Control & p i Independence & l & t e i Monitoring Ethics t x R e i u oversight of those charged with t e p y p

m o

r governance o AUDIT t

n g u expectations of investors and other QUALITY

stakeholders BEST IN CLASS: INNOVATION: Engagement Audit I Performance & u n Methodology, market competition v Judgment e Tools & Policies s t t o n r e u innovation and sustainability needs s m & MARKET n S o that support capital markets PROMINENCE: ir h v a Growth, n re h E How our firm readies and positions our o Collaboration & ry ld Specialization to er la professionals to respond appropriately, s gu Re timely, and in a high-quality manner Corp to these external influences depends orate Governance on internal factors embodied in our CLIMB strategy.

The following sections highlight how we are executing on each component of our CLIMB strategy within the framework of audit quality.

1 BDO’S APPROACH TO AUDIT QUALITY

Culture and Unity Keys to recruiting, developing, and cultivating top talent

Our people National Career Social CULTURE & are the most Conferences Learning Learning UNITY: important Learning & single factor in Professional our ability to Development provide quality BDO’S CONTINUOUS LEARNING MODEL professional services. When talented people come together, united Local Professional On by a common culture and purpose, and Office Development Meetings Demand supported by core values that reward excellence, the result is a high potential Figure 1 for success. In 2014, we named our first Chief People Officer (CPO) to emphasize Developing Our Professionals developments. We continue to invest in the importance of our people, bring about and enhance our training offerings with cultural integration across all aspects of the Continuous Learning Model and blended learning techniques, practical firm, and foster an environment where all BDO University case studies and scenario-based learning BDO partners and employees can thrive. We demonstrate our commitment modules that require staff to consider and Such activity begins with a focus on: to our professionals’ growth through address issues by applying professional u Recruiting and onboarding our Continuous Learning Model—our skepticism, judgment, and objectivity. We u Developing our professionals framework for learning and development. also participate in the American Institute u Assigning personnel to engagements This model encapsulates a level/role-based of Certified Public Accountants (AICPA) u Evaluating performance curriculum that offers both technical and Educational Management Exchange u Retaining and cultivating our next leadership skills training for professionals (EDMAX), a forum for sharing education generation of leaders throughout their careers. Delivered ideas and innovations with our peers and through BDO University (“BDOU”), integrating new concepts or approaches our training includes formal sessions into our Continuous Learning Model. Recruiting and Onboarding at national, regional, and local office locations, complemented by self-paced, We are growing our audit practice at all Learning and CPE Requirements on-demand learning, social learning (e.g., We monitor compliance with regulatory levels, adding professionals with vast on-the-job training), guidance on policies and firm continuing professional education industry, international, and specialty and procedures, and access to specialized (CPE) requirements. At a minimum, the service capabilities. technical knowledge (see Figure 1). firm requires each professional to: Our onboarding activities are designed Within the audit practice, the National u Participate in qualifying CPE programs to integrate new employees into the Audit & Accounting (A&A) Learning Team that result in at least 120 hours every fabric and culture of our firm, underscore continually monitors critical accounting, three years, but not less than 20 hours in expectations about living our core values, auditing, and financial reporting topics to each of the three years and introduce our methodologies and determine what needs to be incorporated u Comply with mandatory CPE for practices. Enhanced communications, into our content. Our National A&A regulatory and state licensing direct access to people and information, Learning online portal provides requirements and emphasis on relationships and personal professionals direct access to the firm’s u Comply with mandatory training as connections are also important aspects of technical training expectations, as well as determined by our National A&A leaders our onboarding process. We continually to self-directed courses and content. adapt new ideas and best practices, gained All professionals are responsible for keeping from our recent expansion experience, into The National A&A Learning Team up to date with the knowledge and skills our onboarding approach. regularly reviews our curriculum to align they need to carry out their assigned roles with professional competencies and beyond these minimum requirements. We

2 BDO’S APPROACH TO AUDIT QUALITY

“Culture is the foundation on which our actions and decisions are based. When the culture is right, it helps us recruit, retain, and develop top talent to best serve our clients.”

Tony Lawrence, Assurance Office Managing Partner , Grand Rapids, MI

provide a growing library of mandatory, BDO ASSURANCE PRACTICE highly recommended, and suggested training modules covering auditing and 208 As of 6/30/2014 accounting, industry-specific issues, and PARTNERS 240 As of 12/31/2015 264 leadership and professional skills, along As of 6/30/2016 with other emerging areas that reflect the 98 evolving nature of our clients’ business DIRECTORS 142 166 environments. This gives professionals the flexibility to customize learning plans to fit SENIOR MANAGERS/ 388 460 their needs and level of development. MANAGERS 498 550 SENIORS 694 Assigning Personnel to Totals 743 Audit Engagements 1,874 630 2,310 STAFF 774 As of the end of 2016, our audit practice 2,590 919 constituted approximately 51% of the firm’s total professional staff of over ratio is approximately one to nine, which that supports our refreshed professional 5,000 employees. reflects the relatively high level of partner competencies and performance We staff our audit engagements to achieve involvement in client engagements. management expectations. the proper blend of technical skills, supervision, staff utilization, and on-the-job Evaluating Performance Retaining and Cultivating Our learning. For each engagement we consider: All professionals receive formal Next Generation of Leaders u Required knowledge of the client’s performance evaluations, engagement- Success and adaptability depend not only business and industry specific reviews, and counseling with career on recruiting and developing the most u Nature of the work to be performed, advisors and mentors in order to evaluate talented professionals, but also on creating including engagement size and their level of competence, monitor their an environment where they can thrive complexity development, and assist them in reaching personally and professionally. We prepare u Nature and extent of supervision needed their full potential. professionals at all levels for leadership u Workload constraints roles through our National Training u Staff development Employees set performance goals annually Conferences, as well as through such multi- with their career advisors and supervisors. module programs as the BDO Leadership Because teams have on-line accessibility to We evaluate all client service professionals Institute for senior managers and directors, working papers via our Audit Process Tool on a range of factors, including the New Partner Workshop, and the (APT) and our Global Audit Methodology, demonstrated technical excellence, Positive Leadership Approach for regional we can be less office-centric and deploy professional skepticism, embodiment of and office managing partners. our professionals to engagements based core values, and support for firm strategies. on appropriate skill sets versus solely on Additionally, partners, directors, and Additionally, BDO has a long history geographic location. managers participate in upward and lateral of programs and strategies to promote reviews in which direct reports and peers Audit engagement partner designations flexibility and predictability, inclusion, provide feedback on their engagement corporate responsibility and sustainability, and changes are approved by local and management and supervisory abilities. regional leadership, as well as by national and community outreach. These, combined with emphasis on leadership office professionals. This helps ensure Finally, as part of our continuing and professional skills training underscores that we assign an individual with the right investment in our people, we are the value our firm places on retaining high abilities and availability needed to capably currently implementing a new Human performers to be our leaders of tomorrow. perform the role. Our audit partner-to-staff Resources Information System (HRIS)

3 BDO’S APPROACH TO AUDIT QUALITY

Leadership and Accountability Drivers of audit quality

BDO is experienced partners and directors, all u Training: Overseeing the firm’s committed to formerly of the Public Company Accounting accounting, auditing, and other LEADERSHIP & exceptional Oversight Board (PCAOB), to lead our Audit professional training programs ACCOUNTABILITY: client service Quality Team and focus on the regulatory Independence & consistent aspects of audit quality. This allows us to u Assurance policies: Formulating Ethics with the public continue to identify best practices to apply policies regarding assurance matters interest. This to our public company engagements. u Thought leadership: Participating demands a in industry dialogues and expressing mindset and actions centered on personal Our National A&A professionals are the firm’s position on proposals from and professional accountability, objectivity, geographically dispersed within local accounting and auditing standards and applied skepticism. Ensuring our practice offices. This not only gives local setters and regulators professionals are led by those who promote engagement teams direct access to national this objective, embrace our culture, and resources, but also creates a feedback loop embody our core values is critical to driving for the national leadership team regarding Independence and Ethics audit quality throughout our organization. audit quality practice issues that help inform coaching, communications, and as Cornerstones of BDO is governed by a Board of Directors education. Accountability (the Board), who set the tone for our organization and demand the Audit quality calls for audit firms to be same emphasis on values and quality General National Office independent from their clients and to from professionals at all levels. These Responsibilities demonstrate integrity and objectivity when expectations are cascaded through the it comes to performing audits. Our firm The National A&A practice is leadership for each of our business lines, culture demands that each professional responsible for: our regions, our offices, and ultimately to be: (a) well-informed about independence our engagement teams. requirements and applicable firm policies u Accounting and auditing guidance: and procedures; and (b) sensitive to Developing accounting and auditing activities and relationships that might Audit Practice Leadership and as well as industry-specific application create other conflicts of interest that might guidance, maintaining the firm’s impair independence in fact or appearance. Oversight Structure technical manuals, and communicating Our National Audit & Accounting (A&A) guidance to the firm’s professionals and The firm’s policies and procedures, available leadership oversees both public and private information to our clients to each employee electronically, summarize company audit engagements. The National the rules of the SEC, PCAOB, AICPA, u Engagement performance: A&A practice is led by the National Department of Labor, and Government Coordinating the professional Accounting & Assurance Professional Accountability Office. They cover, among performance of engagements by Practice Leader (NAAPPL), who reports to other things, prohibited investments in, and local offices and achieving in each of the CEO. relationships with, audit clients, rotation them standards that meet the firm’s of audit partners, fees, and the provision of National A&A has invested a great deal professional objectives non-audit services to audit clients. in the quality and depth of our resources, u Quality control: Evaluating the firm’s particularly in light of our rapid growth Independence quality control policies and procedures and the increasing scrutiny of the audit The National Director of Independence, and monitoring their implementation profession. Over the past several years, our along with dedicated professionals, national office practice has expanded to u Technical advice: Consulting with local oversees the development and over 70 experienced professionals, half of office partners and other professionals communications of the firm’s independence whom are partners. To support our public seeking technical advice and guidance policies, procedures, and independence company practice, we have added several training and also monitors compliance.

4 BDO’S APPROACH TO AUDIT QUALITY

“We are proud of the pace at which our business is expanding. However, we would never have achieved such a level of success without the unwavering commitment by our leaders and our professionals and the ethical foundation that our policies and procedures provide.”

Steve Ferrara, BDO Chief Operating Officer

Key features of the National Independence that is tainted by even the appearance of To develop greater accountability for monitoring system include: impropriety. employees and partners to comply with firm policies and expectations, we u A Restricted Entities Database, a Both partners and staff are expected established our Compliance Policy. This continually updated listing of all entities to adhere to all applicable provisions policy defines: with which firm personnel are prohibited of the AICPA Code of Conduct and the from owning, having a financial requirements of the PCAOB and the state u Specific sanctions for noncompliance, interest, or having a business/personal boards of accountancy. This understanding including mandatory training relationship. is captured in BDO’s Code of Ethics and u Partner performance management u Annual online independence Business Conduct (the Code). Compliance evaluations and goals confirmation that all professionals are with the Code is a condition of employment u Adherence to professional licensing required to complete and partnership in BDO, and failure to requirements u Annual testing of independence adhere to its provisions may result in u Required annual acknowledgements of confirmations of selected partners and disciplinary action, including termination. compliance managers u Monitoring of compliance with partner Our Compliance & Ethics Office is The Compliance & Ethics Office actively rotation rules established by the SEC responsible for ensuring the firm continues monitors compliance with the Code and u Disciplinary structure to determine to uphold the highest ethical standards. other conduct policies and procedures. the appropriate sanction(s) for This includes maintaining compliance Since their inception in 2013, annual any professional who violates the with internal policies and external laws internal assessments of compliance with independence rules and firm policies and regulations, reinforcing the firm’s these conduct policies have concluded u Annual confirmation of U.S. core values, providing guidance on the that the firm’s compliance program is Independence Rules and Regulations by application of ethical standards, and operating effectively, and have increased international BDO member firms monitoring compliance with the Code. professionals’ awareness of reporting u Completion of independence BDO’s Board has established a Compliance options for potential non-compliance. questionnaires for all audit engagements & Ethics Committee to oversee the efforts of the Compliance & Ethics Office. Independence checks are an integral part of Compliance and ethics training programs the engagement process both domestically are offered on an annual basis and and internationally. National Independence compliance is monitored in accordance is consulted when independence with firm policies. issues are noted, and all client service professionals are subject to mandatory Our Anonymous Ethics & Compliance independence training. Hotline (available both telephonically and online) enables personnel and those who Ethics and Code of Conduct conduct business with BDO to report a We recognize that we are retained by violation of the Code or non-compliance clients based on the strength of our with any laws. The Hotline is staffed by an reputation, knowledge, experience, independent third party. All contacts to the integrity, and professionalism. We also Hotline are kept anonymous, if so desired, recognize that we are charged with an and the nature of the concern is routed to important duty to the public and will not the firm’s Office of General Counsel and the compromise our standards for any client Chief Compliance Officer for investigation. or purpose. We will not tolerate conduct

5 BDO’S APPROACH TO AUDIT QUALITY

Innovation Methodologies, tools, and policies

Our firm, both domestically INNOVATION: and within BDO Audit International Methodology, Limited (“BDO Tools & Policies International”), 1 is committed to innovation and investment in tools, methodologies, policies, and national-level resources. We believe this focus is critical in order to adapt and scale our audits and to be responsive to the complex challenges of our clients.

BDO Audit Methodology and Tools BDO’s audit policies and engagement procedures are designed to ensure that our audits meet all applicable professional standards and regulatory requirements, as well as our own quality control standards. Our Assurance Quality Control Manual describes the high standards established for our audit practice. Our audit methodology PCAOB auditing standards. In 2015, we APT is an essential part of our audit and related policies and procedures are migrated our firm’s related audit and methodology. Our professionals use more fully addressed in the BDO USA Audit accounting practice aids, forms, and other it to devise proper audit procedures Manual (“Audit Manual”). In 2016, we audit-specific content to a new, searchable, and testing based upon applicable U.S. updated the Audit Manual to differentiate web-based platform known as the BDO auditing standards, as well as to factor in content applicable to audits conducted in Assurance Knowledge Base. In addition, the engagement- and industry-specific facts accordance with U.S. generally accepted firm provides each employee with access and circumstances for all types and sizes auditing standards (GAAS) for private- to the Accounting Research Manager© of audit engagements. During the past few entity engagements from content tool for researching accounting, financial years, we have allocated significant time applicable to audits conducted under the reporting, auditing, and SEC matters. and resources to expanding our APT audit libraries to include additional industry- standards of the PCAOB for public-entity We firmly believe that using a consistent engagements. specific content, and to designing a version approach on every domestic and of the tool for smaller, less complex audit To ensure consistency in our audit approach international engagement across all engagements. This helps our engagement and engagement performance, we use industries contributes to high-quality teams focus on risk and audit execution, the worldwide BDO Audit Methodology, audits. In 2010, BDO International and has resulted in more informed choices and tailor the approach as appropriate revised its global audit methodology, regarding alternative audit strategies for audits performed under U.S. GAAS and developed a new audit software and and the types of testing that are most and those performed in compliance with documentation tool referred to as APT. appropriate to a client’s specific facts and circumstances.

1 BDO is the U.S. member firm of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

6 BDO’S APPROACH TO AUDIT QUALITY

As our firm grows, we continue to place significant emphasis on audit quality and BDO Advantage is our new data analytics audit quality indicators. Data analytics audit tool. It combines collaborative is critical to enhancing both our practice and our client service delivery, and we technology with knowledge of our clients’ continually explore ways to access and business to deliver in-depth information leverage engagement-related data through via graphics. This visualization aids in the APT to identify and assess risk criteria. exploration and understanding of large sets Data analytics also offers our audit quality of data and make it easier to spot patterns control teams a means of monitoring and trends and identify anomalies on a timely basis. BDO Advantage engagements in real time and assessing the overall level of quality of our audits. improves engagement awareness, provides valuable insights, and helps improve audit quality.

National A&A Practice Functional Areas Our National A&A practice provides traditional Accounting, Auditing, Employee Benefit Plans, Independence & Ethics, and National Training functional areas. Additionally, we have further aligned our national office resources in support of the increasing needs of our audit engagement teams (see Figure 2).

Accounting

Responsible for periodically Assurance Committee evaluating the relevance Ensure compliance with and adequacy of the firm’s Assurance Quality Control professional standards and quality control policies and firm policies procedures Auditing Technical and service Corporate Governance & External education and matter assistance for communications to boards, Communications smaller, entrepreneurial audit committees, and engagements, with a focus financial executives Employee Benefit Plans on audit support for newer expansion practices Entrepreneurial Services Assist domestic and foreign engagement teams with Global Offerings & Support Technical partners assigned cross-boarder offerings Services to one of six U.S. regions to and U.S. filings by foreign help maintain firm standards member firm clients Independence & Ethics of technical competence

National Training Responsible for coordination and review of the firm’s compliance with SEC Regional Technical Directors practice, rules, and (RTDs) regulations SEC

Figure 2 7 BDO’S APPROACH TO AUDIT QUALITY

“Our Audit Quality Directors are our ‘first line of defense’ when it comes to delivering quality audits. Doubling down with our Audit Quality Network, we have provided the practice with timely and locally accessible resources on the nuts and bolts of auditing.” Christopher Tower, BDO Managing Partner – West Region

Assurance Quality Control technical matters are understood locally. The Audit Quality Team also provides These resources are charged with executing coaching and other support to issuer Audit quality has always been a top priority our Quality Matters Process. This process engagement teams; designs and for BDO. To ensure compliance with includes guidelines for the evaluation of implements quality control initiatives, professional standards and firm policies, engagement-level quality-related events, including assigning and monitoring we have established the Assurance Quality including identifying their root causes and effectiveness of corrective actions; Compliance Department to complement designing actions to reduce the likelihood develops, implements and responds to our existing comprehensive and objective of a re-occurrence. issues raised in internal and external practice office inspection program. inspection reports. As part of this process, certain individuals, Audit Quality Team offices, or regions are held accountable for Audit Quality Directors and the The public accounting profession is specific actions identified and designed to Audit Quality Network becoming increasingly regulated, and the improve audit quality where necessary, and In 2015, we extended our national complexity of transactions and accounting these actions are considered during the resources to include regional AQDs. The and auditing rules continues to grow. In partner performance management process. AQDs are individuals who demonstrate response, we have established a national- Furthermore, engagement-level events are a high aptitude for technical auditing in level Audit Quality Team to oversee our aggregated with other audit-execution or addition to accounting skills. They are public company practice. We have also quality-control-related observations to assigned to work under the supervision of introduced the regional Audit Quality gain a better understanding of developing the Regional Technical Directors (RTDs) to Directors (AQDs) that serve at the direction trends or systemic events. This information enhance audit quality at the regional and of our Regional Technical Directors. is used to identify additional steps that local-office levels. AQDs oversee audit Finally, we have expanded and enhanced will enhance a culture dedicated to policy implementation and provide support our local office Audit Quality Network audit quality. in a number of areas: (AQN) professionals to ensure significant u Researching and resolving technical audit questions u Internal and external inspection processes u Preparing technical audit training u Developing communications, tools, and templates

AQDs are further charged with helping to both set and maintain an overall tone within their regions with respect to audit quality.

The role of the AQD complements the existing local office AQN. The AQN consists of designated local office individuals at the senior staff, manager, and partner levels who serve as local points of contact regarding audit quality.

8 BDO’S APPROACH TO AUDIT QUALITY

Market Prominence Growth and Depth of Experience

As part of our firm’s growth 8% 2% 10% MARKET Annual Revenue Growth strategy, we PROMINENCE: $1.29B Growth, actively seek to 30% 60% 32% 58% Collaboration & add firms and $1.05B Specialization services that $833M Audit complement our $683M 2013 2014 Tax current offerings Consulting and align with our culture. The candidate’s 16% 17% Other practice must be of both high quality and 52% 50% technical proficiency, as determined by 32% 33% appropriate partners and directors under the direction of the National Director of 2013 2014 2015 2016 2015 2016 Assurance Quality Control and approved by the firm’s leadership and Board. Over the past several years, we have completed practice. These individuals participate in and external to the auditing profession more than 10 expansions that have added consultations on SEC reporting matters and have joined our firm, providing audit to our geographic footprint within the U.S. perform pre-reviews of filings. While certain engagement teams with a deeper pool of and strengthened our skillsets in several of these resources choose to remain within consultative resources. our national practice, others return to their industry areas, including healthcare, There are numerous examples of how local or international office practices, which government contracting, financial services, synergies among our multiple business enhances the capabilities of those practices. and hospitality. lines provide additional value for our We have also increased training on internal auditors and our clients, within the control over financial reporting and other confines of independence rules. These Growth of Our Public matters specific to public companies. Company Practice include the establishment of a dedicated BDO has made it a priority to be very ASC 740 (income tax accounting) team “As it has for the past three years, over the active in external professional task forces in and other specialty tax services dealing course of 2015 BDO USA led the large firm order to remain abreast of developments with domestic and international taxation pack in new SEC audit clients...” in, and be an advocate for, the profession. issues; the alignment of advisory practices – Accounting Today 3-8-2016 In addition, we continue to respond that provide a host of services across risk, transaction, and internal controls The growth of our firm has been fueled to requests for comment from various consulting; and the increase in professionals both organically (13.9% in FY2016) and regulatory bodies on proposed standard experienced in forensics, data analytics, and through expansion-led activity (9% in setting related to audit quality indicators cyber security. FY2016). Our audit practice constitutes and audit committee disclosures, along 50% of our revenues. In particular, over the with other topics aimed at enhancing past five years, our SEC public company financial reporting and audit quality. Industry Experience audit practice has increased significantly. We have aligned our national industry At the end of calendar year 2015, we were Enhancement of Our serving over 380 public companies, which practices across each of our business lines represented approximately 35% of total Business Lines and have identified specified roles for experienced professionals in audit, tax, audit revenues. While BDO has historically had strong consulting, and advisory as direct points of practices in advisory, tax, and consulting, Throughout this period of expansion, we contact to serve our engagement teams. over the past several years the firm has seen have strengthened our public company Our goal is to expose professional staff significant transformation in both the hiring national resources using approaches such to a variety of industry engagements and of seasoned professionals and the vertical as secondments of highly technical senior training opportunities so that they can integration of services. Professionals from managers and directors to our national SEC begin to specialize early in their careers a broad variety of backgrounds both within

9 BDO’S APPROACH TO AUDIT QUALITY

“BDO views establishing and maintaining market prominence as actively seeking out and cultivating networks of professionals with deep skillsets.” “We continue to align and evolve our service offerings to keep pace with the expanding needs of our public and private company clients.”

Mark Ellenbogen, Assurance Regional Managing Partner, Atlantic and Amy Rojik, National Assurance Partner, BDO Center for Corporate Governance and Financial Reporting

and gain the depth of knowledge and (BRN) firm members. The BRN members national laws, business customs, and local experience that our clients expect. Our include technology and information and international business methods. As our audit tools contain nationally developed, systems, management, operations, finance clients expand globally, their access to our customized industry content that we and treasury, and other more traditional international network can help them better continually update to reflect developments consulting services. reach their business and financial goals. within individual industries. This network also gives us the flexibility Membership in the Alliance is currently to draw on technical knowledge around The strategy of our firm’s industry limited to U.S.-based firms. Although they the globe so that we can serve cross- leadership team continues to evolve as we remain independent, they are held to high border clients. International engagement grow. For this reason, our CEO recently standards for integrity, collaboration, and teams are subject to strict policies and announced the establishment of six caliber of work product. BDO performs in- procedures and must adhere to stringent managing partners who will have specific depth screening of all potential members, compliance requirements. responsibilities in overseeing our 16 primary including examining peer review reports industry groups. and conducting extensive background Our CEO chairs BDO International’s Global checks on equity partners. Board of Directors. Many of our BDO national practice leaders participate in a Collaboration through variety of joint international committees Our Networks BDO International and initiatives aimed at enhancing the BDO Audit Methodology and tools utilized by The BDO Alliance USA (Alliance) comprises As a member firm of BDO International, all member firms. Creating these linkages over 400 peer-reviewed accounting firms BDO serves multi-national clients by across the international network helps forming a nationwide association of leveraging a global network of over 1,400 promote consistency in the culture, values, independently owned local and regional offices in over 150 countries and a pool and vision for all member firms. For further firms with similar client service goals of talent that includes more than 64,000 information regarding the governance of across accounting and tax services. total staff. BDO International, refer to its most recent Alliance membership consists of two In each country, BDO member firms Annual Statement available here. primary categories: CPA firm members comprise people knowledgeable about and non-CPA Business Resource Network

Office Locations Total Personnel Partners/Owners Revenue

BDO USA, LLP >60 (U.S.) 6,057 483 $1.29B

BDO ALLIANCE, USA >500 (U.S.) 12,029 1,719 $1.91B

BDO GLOBAL NETWORK >1,400 64,403 5,413 $7.3B in 154 countries

U.S. and International financial and personnel statistics as of and for the years ended 6/30/2016 and 9/15/2015, respectively. 10 BDO’S APPROACH TO AUDIT QUALITY

Best in Class Calibrating Audit Quality

Our primary Engagement Performance At critical points during certain audit goal is to engagements, members of the national provide best-in- Supervision and Review Audit Quality Team provide engagement BEST IN CLASS: We require all professional work to be Engagement class service in staff with real-time feedback and coaching. supervised by individuals who have the Performance & accordance with Judgement the standards appropriate knowledge and experience. Use of Specialists of the public The audit engagement partner has full BDO’s business line structure provides accounting authority and responsibility for the audit professionals ready access to profession and in recognition of the public audit engagement being carried out in technical specialists. There are a number of interest. To accomplish this, we have accordance with professional standards situations in which audit teams bring in the developed a system of internal quality and the firm’s policies and procedures. firm’s specialists: controls that ensures work is performed This involves ensuring that (1) the related u Advisory information system at a uniformly high level. An integrated risks are identified; (2) sufficient evidence specialists: Help evaluate the system of quality control includes many has been obtained to provide reasonable effectiveness of IT controls and the elements, from accepting and retaining assurance that the financial statements are degree of assurance to be placed on clients, to assessing performance, to free from material misstatement; and (3) those controls re-calibrating policies and procedures for issues raised during the audit have been u Income tax specialists: Review aspects continuous improvement. satisfactorily resolved. of the audit that involve complex The audit engagement partner, in income tax provisions and accruals Client Acceptance and coordination with directors and managers, u Consulting valuation specialists: supervises and directs all phases of the Review fair value calculations associated Continuance audit and is responsible for ensuring the with significant business combinations, Audit quality relies on ensuring that work is planned, executed, and reviewed in investments, goodwill, stock options, we associate only with highly ethical accordance with firm policies. and complex valuations. clients to whom we can provide excellent service. Our objective is to be selective Our policies stipulate several levels of Filings of SEC issuers undergo additional in our professional relationships. Our review by someone other than the preparer review by our National SEC Department policies and procedures also provide the of all reports, financial statements, and professionals. For engagements with firm with reasonable assurance that we supporting working papers. An engagement specific industry or other audit and will undertake or continue only those quality control (EQC) review is performed accounting complexities, we have engagements where the firm: (1) has the by designated partners for audits of SEC consultative partners who focus on such competencies to perform the engagement issuers and other engagements meeting issues to further assist teams. and has the capabilities, including time and certain criteria. This EQC review entails: resources, to do so; (2) can comply with Professional Skepticism and Judgment u discussion of significant matters with legal and ethical requirements; and (3) Approaching audit engagements with a the audit engagement partner has considered the risks associated with questioning mind and subjecting audit u review of the financial statements providing professional services in particular evidence to a critical assessment are at (including disclosures) and the auditor’s circumstances, including the integrity of the core of the BDO Audit Methodology. report the client. We teach our staff, both in the classroom u review of selected working papers and on the job, the essential aspects of Acceptance of all new audit clients requires related to significant risk areas conducting a high-quality audit including: approval by firm leadership. All continuing u evaluation of the conclusions reached by how to exercise professional skepticism relationships with clients are also evaluated the engagement team in formulating the and judgment; how to be satisfied only annually (or more frequently when certain auditor’s report with persuasive audit evidence; and conditions exist). how to properly analyze disconfirming

11 BDO’S APPROACH TO AUDIT QUALITY

“Being a best-in-class audit service provider means placing an emphasis on extensive industry knowledge, thorough planning, focused execution, and the continuing education of both our personnel and our clients. A critical backstop to the entire process is our continuous quality control review function which allows us to re-challenge the effectiveness of our audit approach each year.”

Brian Eccleston, BDO Managing Partner – Northeast and BDO Core Values Ambassador

evidence. Furthermore, we require any our extensive network of BDO International The purpose of these reviews is threefold: staff responding to assessed risks of member firms. material misstatements due to fraud to u Determine the quality of work demonstrate an increased sensitivity in performed determining the nature and extent of Internal and External u Confirm that our work complies with documentation to be examined in support Inspections professional standards and firm policies of material transactions. and procedures BDO is focused on continually improving u Identify root causes of, and correct, any We tailor our audit procedures to address all aspects of our audit practice. The results deficiencies encountered and provide identified risks, and our working papers are of our internal and external inspections are recommendations for improvements prepared to clearly document our thought important to identifying areas where we processes, procedures performed, evidence can improve audit quality. The team reviews the working papers and gathered, and conclusions reached. reports of selected assurance engagements. Internal Inspection and Monitoring It also reviews documentation of Consultation Processes compliance with our quality control policies Consultation and collaboration are Our audit quality control system includes and procedures in other areas, such as deeply rooted in the culture of BDO. Our the following monitoring procedures: ethical requirements, client acceptance policies and procedures for consultation and continuance, consultations, and other are designed to provide reasonable u Inspection of selected engagements to human resources policies. These reviews assurance that auditors will seek assistance provide reasonable assurance that the also involve focus group sessions with on accounting and auditing questions, firm’s policies and procedures for quality professional staff to ensure the firm’s to the extent required, from persons control are suitably designed and being quality control procedures are properly having appropriate levels of knowledge, effectively applied understood. competence, judgment, and authority. It is u Determination of any corrective actions essential that our personnel consult with to be taken and improvements to be At the conclusion of the inspection, experienced partners and other technical made on specific engagements and in the inspectors are responsible for: (a) specialists within the firm when problems the overall quality control system discussing the results of the review with the or novel situations arise. The vertical u Communication to appropriate firm engagement teams and (b) summarizing structuring of our national, regional, and professionals of any weaknesses any deficiencies noted. Deficiencies are local office A&A resources is fundamental identified in the quality control system reviewed by National A&A and evaluated to this process. We are also positioned u Follow-up to ensure that corrective to determine whether: (a) existing quality horizontally across our industry groups and actions are implemented on a control policies and procedures should be business lines with identified networks of timely basis changed; (b) additional guidance should industry and other service line specialists be provided in specific audit areas; and A formal inspection of the firm’s assurance determine what remedial actions, if any, are who are readily accessible and willing to practice is conducted, under the direction assist on matters of complexity. required to address the deficiencies. For the of the National Director of Assurance partners and managers with unsatisfactory For clients that operate globally, BDO Quality Control, by a review team generally inspection results, local and regional supports engagement teams serving such consisting of firm partners, directors, leadership, along with the RTD, develop clients through consultative resources at senior managers, managers, and recently action plans approved at the national the national office level Global Offerings retired BDO audit partners who possess level. Regional Managing Partners, Office & Support Services team and via our the requisite technical knowledge and Managing Partners, along with RTDs, are BDO USA country desk professionals, our experience. Each office and assurance also responsible for implementation and international tax practice specialists, and partner is generally subject to review at monitoring of the plans. least once every three years.

12 BDO’S APPROACH TO AUDIT QUALITY

As part of BDO’s Quality Matters Process, Part I: Public Portion and processes for responding to the Audit Quality Team has implemented This section reports findings relating to weaknesses in quality control a specific requirement for the completion specific audit engagements in which audit of a Quality Matters Report (QMR) deficiencies may affect a firm’s ability to In November 2015, the PCAOB made public for any public company engagement support its audit opinion. In addressing portions of Part II of our 2011 and 2012 that receives an unsatisfactory internal these findings, a firm takes appropriate PCAOB inspection reports: http://pcaobus. inspection rating. These reports are used corrective actions, including possible org/Inspections/Reports/Documents/2014_ to identify root causes of deficiencies and additional documentation or audit BDO_USA_LLP.pdf. to design corrective action plans that are procedures, and/or in rare cases, revising We consider the PCAOB inspection process administered by regional leadership and its report. to be a valuable component of our firm’s overseen by National A&A. In evaluating the matters described in the overall approach to enhancing audit National A&A professionals are advised on PCAOB’s report on its 2014 inspection, we quality. Accordingly, we take the inspection inspection findings, as well as the results concluded that none of them, or the results comments with the utmost seriousness, of focus group discussions. They work of procedures we subsequently performed, giving them prompt consideration. throughout the year to deliver enhanced impacted our previously issued reports on We have made, and continue to make, messaging, training, and tools to our audit the financial statements. The inspection significant enhancements to our audit professionals. report and our response to the report can quality process, including investments be found at: in appropriate national resources, tools, During 2015, we inspected over 100 http://pcaobus.org/Inspections/Reports/ training, and communication, as well as engagements across 85% of audit practice Documents/2014-BDO-USA.PDF offices. This represented approximately 5% in the design of specific action plans and of the firm’s total assurance hours, inclusive Key findings in BDO’s report align with monitoring of such plans. We are confident of engagements from recent expansions. findings across the profession and center that these improvements are addressing primarily on testing of internal controls all matters raised in the inspection reports. Quality Assurance Reviews over financial reporting, management’s We expect our increased diligence and We are subject to periodic Quality estimates, sampling, use of substantive attention to audit quality on our current Assurance Reviews (QARs) on behalf of analytical procedures, and journal entries. year-end audits will lead to further BDO International. The objective of these improvement in 2016. QARs is to provide assurance that BDO Part II: Non-Public Portion member firms adhere to, and comply with, This portion includes the PCAOB’s Peer Review applicable professional standards, as well observations relating to a firm’s audit As a member of the AICPA, we are also as BDO International’s standards. QARs performance and quality controls where subject to triennial external peer reviews are carried out by a team of dedicated improvements are recommended. In of the portion of our auditing practice reviewers who go through a special training evaluating a firm’s quality controls, the applicable to non-SEC issuers. Our peer process. QARs cover the major services PCAOB assesses the following areas as part review in 2015 concluded that the system supplied by the member firm, as well as of that inspection: of quality for the firm’s accounting and the member firm’s overall quality and risk auditing practice applicable to non-SEC management framework. Member firms u Management structure and processes, issuers was suitably designed, and the undergo these international reviews on a including tone at the top firm had complied with its own quality rotational basis. The last review took place u Practices for partner management, guidelines. The peer review also concluded in May 2014. Of all the files inspected all including allocation of partner resources the system provided the firm with were determined to be satisfactory. and partner evaluation, compensation, reasonable assurance of performing and admission, and disciplinary actions reporting in conformity with applicable External Inspection Process, Findings, u Policies and procedures for considering professional standards in all material and Action Plans and addressing the risks involved in respects. Firms can receive a rating of PCAOB Inspection accepting and retaining clients pass, pass with deficiency(ies), or fail. BDO Due to our large number of issuer audit u Processes related to the firm’s use received a rating of pass. The peer review clients, we are subject to an annual of audit work that the firm’s foreign report and the related AICPA Acceptance inspection of our public company audits affiliates perform on the foreign Letter can be found at https://peerreview. by the PCAOB. The most recent Inspection operations of the firm’s U.S. issuer audit aicpa.org/publicfile/PublicFileSearch.aspx. Report the PCAOB issued is from 2014. clients The PCAOB’s reports on inspections of u The firm’s processes for monitoring registered public accounting firms consist audit performance, including processes of two parts: for identifying and assessing indicators of deficiencies in audit performance, independence policies and procedures,

13 BDO’S APPROACH TO AUDIT QUALITY

“Our professionals are committed to building a culture that values technical ability, leadership, and relationships, both internally and externally, grounded in our relentless commitment to our core values, including being “exceptional every day, every way”. I am proud to serve in an organization of individuals who choose accountability and empower one another by sharing our knowledge. These are the catalysts of excellence.”

Cathy M. Moy, Chief People Officer

Communications and poised to unveil a powerful web-based keeping his unwavering ideals and integrity home for our Center later this year that part of the firm’s culture. Development for Those will increase access to our governance Charged with Governance community resources for our clients and We have been recognized by respected local and national organizations and Both our audit professionals and those board member contacts. received a variety of awards for our charged with governance of the companies accomplishments in establishing an we serve are responsible for ensuring Actively Promoting Audit environment that is as supportive to our the integrity of the financial information people as it is professionally rewarding. relied upon by capital market investors. Quality to the Profession and We continue to strive to be a leader and This is a responsibility that requires the Community contributor to our profession, as well as ongoing attention and focus. We value The firm’s leadership is actively committed a valuable member of the communities the opportunity to provide continuing to providing funding and resources to we serve. education and resources to board directors promote audit quality initiatives through and financial executives. such activities as the AICPA’s industry Work-Life 2016 Seal of Distinction – WorldatWork Internally, our National A&A professionals groups and its data analytics and CPE exam provide up-to-date firm-wide tools and task forces; the FASB Practice Fellowship NAFE Top Companies for communication templates that enable our program; and the SEC Professional Executive Women Accounting Fellowship program. We are engagement teams to share insights on the – National Association for Female Executives quality of our clients’ financial statements also active in the Center for Audit Quality with client audit committees and others (CAQ), including board membership, firm 25 Best Places to Work for charged with governance. liaison roles, and task force and committee Recent Grads participation. – Symplicity Through BDO’s Center for Corporate Governance and Financial Reporting, In December 2015, BDO professionals Working Mother 100 Best Companies National A&A leads the development and took an active role in supporting the CAQ’s – Working Mothers Magazine presentation of a series of external BDO social media campaign “#Auditor Proud,” Knowledge webinars, self-study courses, directed at younger generations and 2016 When Work Works and thought leadership. We deliver timely designed to support and highlight the – When Work Works discussions on emerging topical issues benefits of a career in auditing and Vault Top 50 Accounting Firms in accounting, financial reporting, and the important role auditors play in – Vault.com corporate governance to our clients and capital markets. contacts, along with our professionals, We are extremely proud of our culture and including colleagues within our Alliance and the success we have had in building our BDO International networks. practice for over 100 years. Annually, the In addition, we partner with external prestigious Ben Neuhausen award is given organizations like the National Association to an individual in our audit practice who of Corporate Directors, Financial Executives demonstrates outstanding commitment International, Association of Audit to professionalism. The award is named Committee Members, Inc., the Association in memory of the late Ben Neuhausen, for Corporate Growth, and others in BDO’s national director of accounting until delivering education and guidance to his untimely passing in 2009, as a way of boards and financial executives. We are

14 Our Commitment to Audit Quality

Public accounting firms play an important role in the U.S. capital markets by conducting audits that support the reliability of companies’ financial statements. BDO takes its position of public trust very seriously and strives to deliver high-quality audits for each and every client. In this report, we have demonstrated how our firm’s overarching audit quality framework, our leadership, our culture, and our operations all contribute to this critical objective.

Our culture, as well as the strategic plan that is embedded within our audit quality framework, underpin how we hire and train our people, how we choose to grow our practice, how we execute our engagements, and how we view our role in the audit profession.

As a firm, we place a particular emphasis on accepting and retaining high-caliber clients in the industries where we have chosen to practice. We continue to devote significant resources to designing and enhancing tools and methodologies to meet the changing needs of our profession, as well as to expanding our technical resources to match the growth of our firm, the diversity of our client base, and the increasing complexity of the business environment. Finally, as part of our effort to enhance audit quality, we continually monitor and review the risk environment to pinpoint new and emerging risks that will impact our clients.

Yet ultimately, ensuring audit quality is about hiring the best-qualified people whose values dovetail with those of our firm and then creating an environment that not only allows them to perform independent, high-quality work, but that demands they do so.

Being accountable for audit quality is an ongoing effort that requires constant vigilance and attention—to our people, our methodologies, our tools, our training, and our culture. It is a process of continuous improvement in which the bar is always being raised. And for us, that’s as it should be.

Chris Smith National Accounting & Auditing Professional Practice Leader of BDO USA, LLP ABOUT BDO BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through more than 60 offices and over 500 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,408 offices in 154 countries.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information please visit: www.bdo.com.