2020 BDO AUDIT QUALITY REPORT CONTINUING TO BUILD TRUST Events of 2020 have forever changed our society and global economy. A Message Capital markets continue to be significantly impacted by the pandemic and resulting economic downturn. The extreme measures taken by governments, markets, industries and corporations to protect and preserve human life during a global pandemic have had significant impact. A further driver of transformation has been the rising demand for to Our meaningful social and ethical change to achieve real equality. Throughout this truly momentous time in our history, we have witnessed a growing need for resilience and underlying Stakeholders trust—within our firm, among our clients and within the broader ecosystem in which we all operate. The agility to respond and adapt to change has been a distinguishing factor within the capital markets. This, combined with timely information and communication, has for many months been the lifeblood that has allowed our firm and the companies we serve to navigate the impacts of crisis and make informed decisions about near-term and longer-term next steps.
For BDO USA, LLP1, our core values and reliance on a strong system of quality management have strategically and tactically allowed our over 8,0002 professionals to aptly respond in real-time to unanticipated stressors posed by significant changes in regulations, physical working conditions and pressing needs of our clients. At the same time, these values and underlying quality controls have allowed our professionals to remain focused on our alignment with professional standards and innovations for the audit of the future.
As both organizations and individuals continue on the road to recovery—economically, financially, culturally and personally—trust in the financial reporting on the health of organizations has taken on greater significance. Uncertainty, along with increasingly complex judgment in forecasting and analyzing corporate risk and liquidity, underscore the need for continued high-quality audits.
We take our auditor responsibilities and the reliance that is placed on them by our stakeholders very seriously.
WE BELIEVE AUDIT QUALITY INCLUDES...
effective, efficient, highly valued and skilled professionals technology-enabled that relied upon by performed doing evaluative, and technically are intended users of by insightful and compliant audits financial statements impactful work.
1 BDO USA, LLP is the U.S. member firm of BDO International Limited, a U.K. Company limited by guarantee, and forms part of the international BDO network of independent member firms. Throughout the report, we refer to the U.S. member firm as “BDO” or “we” or “our.” 2 Note: Metrics included in this report are based on data as of April 30, 2020 unless otherwise indicated.
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 2 In our 2019 report, we publicly defined our view of audit quality. We have aligned that view with investments and The Resilience Agenda: activities in our delivery of independent audits to emphasize ethical behavior and excellence from our people, quality in engagement execution and precision in our monitoring activities. BDO’s Recovery Framework
In 2020, we have taken the time to reflect upon the global events impacting our firm’s culture and audit work. We Given the vast economic and business are proud to share our continued efforts in excellence in service, expansion of technology, honed methodologies and impacts from the global pandemic, BDO enhancements in monitoring and quality management. developed a four-stage recovery framework Even in a time of great uncertainty, our audit quality framework3 and seven underlying commitments position us to to help organizations plan with precision even acutely address emerging complexities of our clients’ businesses, ensure compliance with rapidly evolving regulatory amidst uncertainty. rules and requirements and satisfy the expectations of all of our stakeholders for the delivery of high-quality audits and This framework also guides our approach to exceptional client experience. resilience and continuity of service. We are We invite you to learn more from this report about our resilience and the trust it fosters as we continue to focus on proud of how our professionals and clients high-quality audits. are persevering to complete audits on time in unprecedented circumstances. BDO’s prior investments in technology and continuing commitment to technical insight, quality management and oversight are being tested WAYNE BERSON throughout the pandemic response and have Chief Executive Officer proven strong, agile and secure. This has given clients continued confidence in their audits in a volatile climate allowing them to focus on moving their business more quickly and effectively through the recovery process. BILL EISIG National Assurance Managing Partner and Practice Leader
CHRISTOPHER TOWER National Assurance Managing Partner, Audit Quality & Professional Practice
3 BDO’s audit quality framework referenced in this report aligns with the Center for Audit Quality’s (CAQ) Audit Quality Disclosure Framework developed by the audit profession and released in 2019.
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 3 SUSTAINING AUDIT QUALITY 2020 BDO Audit Assurance professionals believe they are 96% personally responsible for audit quality Quality Highlights
OUR AUDIT PRACTICE
CLIENT-FACING STAFFING LEVERAGE RATIOS
Assurance remains the greatest 1 to 8.3 1 to 1.9 1 to 2.8 46% percentage of firm revenues Partner to Staff Partner to Manager Manager to Staff Public company audit revenues
as a percentage of Assurance 30% Annual percentage of partners retained practice revenues 98% Engagement leaders below partner who choose ~9 out of 10 to remain with BDO
OUR ASSURANCE PRACTICE COMPOSITION
Partners & 19% Directors Senior Managers our Assurance Assurance 21% & Managers 55% practice 46% professionals composed of women and as a percentage of BDO’s client Black, Indigenous and Other serving professionals 31% Seniors People of Color
29% Staff
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 4 TECHNICAL AND SUBJECT MATTER SUPPORT
Partner / 63 hours 1 to 23 240,000+ Directors / 63 hours Ratio of National Assurance professionals National Assurance hours to Assurance Practice professionals contributed to enhancing Senior Manager / 57 hours audit quality Manager / 59 hours 1 to 7 ANNUAL AVERAGE Senior / 53 hours Ratio of Audit Quality Network professionals NUMBER OF CPE HOURS Staff / 66 hours to Assurance professionals EARNED BY LEVEL:
INNOVATING OUR AUDITS AND PROFESSIONAL ENGAGEMENT
100% 100,000+ 250+ 33% 15% New client engagements that Clients worldwide who use the Opportunities for continuing Percentage of our National Percentage of experienced BDO leverage our Next Gen Global BDO Global Portal education provided to those Assurance leaders who actively professionals serving as directors Audit Process Tool charged with governance and contribute to audit quality or officers of charitable and financial reporting initiatives of significant nonprofit organizations professional organizations
MONITORING OUR QUALITY
Number of Percentage of current Aggregate 136 engagements 93% inspection cycle private 9 out of 10 current internally inspected in FY20 company inspections conforming year inspection cycle inspections (private without a material defect and public) considered conforming
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 5 Audit Quality Commitment and Indicators
Governing the Tone of Our Culture and Leadership OUR SEVEN UNDERLYING COMMITMENTS Leveraging the Audit Quality Disclosure Framework 3 Assume individual and collective responsibility for every audit Addressing need for resilience 3
Lead in field: Make appropriate judgments in real time and support 10-11, Living our Core Values our people in pursuit of audit quality 22
Pursue continuing education—our own and our clients: Explain, Ensuring national resources in support of our Assurance Practice 12-15 guide and explore with curiosity what we need to achieve Achieving positive trends in Assurance Audit Quality and 16-18 Operational Excellence Survey Know and apply professional standards and all firm guidance effectively in delivering our work Fully deploying our Professional Judgment Framework 17
Approach with the mindset of an evaluator: Seek out facts, Achieving positive trends in firmwide Pulse Survey 19 consider applicable literature, evaluate alternatives and present Forward investing by our Board in technology and technical persuasive judgments 20 specialization to enhance audit quality
Seek and implement change and not become attached to the Aligning audit quality with strategic priorities of the Board 20 status quo or old orthodoxies: Transform what we do every day, in every way Cultivating diversity, inclusion and equality 21-23
Involve others—when required and when not: Collaborate and Being recognized as a top destination for talent 23 strengthen judgment, find and seek the right answers and be better professionals Leading in and leveraging our global network 24
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 6 Developing and Managing High Caliber People and Teams
Enhancing recruitment of Assurance professionals 38-39
Promoting Ethics and Independence Supporting and holding professionals accountable to goals and 38 performance metrics Promoting ethical actions 26 Focusing on retaining exceptional talent 38-39 Advancing independence priorities and education 26-27 Maintaining staff levels during pandemic and honoring 38-39 internship commitment Enhancing real-time access to independence information 26-27 Expanding capacity through use of BDO Service Centers 40 Encouraging independence consultations - globally 26-27 and domestically Providing a robust, modern and continuous curriculum designed 41-43 Focusing on the prevention and detection of to inform, demonstrate and apply 27 independence issues Leveraging investment in digital learning platforms to 41-42 immediately adapt to learning in a virtual environment Ensuring the Right Fit – Client Acceptance and Continuance Responding to evolving accounting and auditing standards as 41-43 well as the increased regulatory requirements due to COVID-19 Formalizing and expanding firmwide risk management team 29 Offering secondee opportunities domestically 42-43 and internationally Providing careful consideration to emerging risk management 30-31 issues impacting client acceptance and continuance decisions Emphasizing relationship and project management education for 44-45 exceptional client experience Increasing focus on risk in acceptance related to emerging 30 industry engagements Leveraging proprietary technologies, data mining and analytic 31, 32 capabilities to aid in evaluating client risk profiles Enhancing working relationships with and providing continuing “I strongly agree with the 33-34 education to those charged with governance underlying commitments and Recognizing the distinct challenges of small- and mid-cap 35 find great personal drive to company boards deliver on them.” Serving a rich tapestry of private and public entities, domestically 36 and globally, across broad industry sectors ASSURANCE MANAGER Respondent to 2020 BDO Audit Quality and Operational Excellence Survey
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 7 “I think these seven commitments are well summarized and imperative to strive for audit quality and for us all to grow as professionals.”
ASSURANCE SENIOR MANAGER Respondent to 2020 BDO Audit Quality and Operational Excellence Survey
Ensuring High Quality Engagement Performance Engaging securely and in real time with clients via our 47-49 Global Portal Monitoring Audit Quality Deploying a robust digital suite of audit tools 48 Enhancing our firm system of quality controls 63-64 Executing full rollout of APT Next Generation as a key audit 50 quality driver Designing a continuous quality improvement framework 65 Working smarter, not harder via engagement integration of 51 Audit Data Analytics (ADA) solutions Performing focused internal inspections 66-67 Driving audit quality from the top down through supervision 52-55 and review Achieving compliance with internal Quality Assurance Reviews 67 and contributing resources internationally Accrediting for specialized roles 56 Receiving positive external AICPA Peer Review results 68 Centrally assigning engagement team composition and 57 monitoring of workloads Factoring in external PCAOB inspection findings 68-70 Establishing risk-based formal and informal consultation policies 58 Encouraging behaviors that drive audit quality 71 Engaging in external collaboration with stakeholder communities 59 Performing ongoing monitoring and remediation activities 72-74 Leading in the community 59 Planning ahead for the future of audit 76 Providing timely resources and insights 60
Approaching private company audits efficiently and effectively 61
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 8 Governing the Tone of Our Culture and Leadership
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 9 Putting People First and Remaining Committed
People are the core of everything we do. From our leadership to our staff and the clients we serve across the world—our core purpose is helping people thrive every day. Furthermore, our culture has been built upon shared values that drive us to:
PUT PEOPLE FIRST
BE EXCEPTIONAL EVERY DAY, EVERY WAY
EMBRACE CHANGE “I believe culture plays a large part in defining an organization. With over one year at BDO, I have found a very positive culture. I appreciate the fact that EMPOWER THROUGH KNOWLEDGE PEOPLE FIRST is not just a phrase that is printed out on paper or painted on the walls…My leadership always demonstrates Audit Quality principles.”
CHOOSE ACCOUNTABILITY ASSURANCE SENIOR MANAGER Respondent to 2020 BDO Audit Quality and Operational Excellence Survey
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 10 These values, combined with well-defined and aligned audit quality commitments, guide our professionals in doing the right thing.
In times of crisis, commitments to quality are even more critical. Making our immediate priorities clear at the onset of the pandemic provided our professionals the support and confidence to best serve our clients:
X Immediately shifting our professionals to remote work
X Discontinuing client visits and travel for the health of our clients and our staff Safety +
X Leveraging our existing tools and technology, including our global client portal, to ensure continuation of service
X Transparently and promptly communicating on evolving risks and responses to GAAP, GAAS and business issues Continuity X Making executive decisions to avoid furloughing staff and stressing
+ engagement teams “Resilience doesn’t build character;
X Keeping a strong focus on independence and quality control it defines it. Our commitment
X Centering around our Professional Judgment Framework to achieving quality without compromise during crisis, coupled X Taking a long-term view to planning and risk management Integrity with a central focus on audit quality, X Consistently emphasizing “doing the right thing”
+ have positioned BDO and our professionals to emerge stronger and X Developing innovative ways to communicate timely with clients and provide more unified in mission and method.” uninterrupted service
X Embracing change while providing resources and training to clients and teams CHRIS ORELLA to aid in change management and technical support for remote work Assurance Managing Partner, Operations Flexibility X Promoting BDO Flex and communication programs to better support individual and engagement team needs
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 11 Structured for Success
Quality must be built, directed and overseen by a committed team of leaders guided by the right governance structure.
Our executive, business and technical Assurance leaders are aligned around a common set of goals and priorities to drive audit excellence. In 2019, CEO we redefined our organizational structure to better support high-quality audit outcomes. This has involved building a true partnership between our executive team and our operational, technical and quality management leaders. As a result, a regular cadence “Strong collaboration between of meetings and defined actions has provided a clear operational and technical leadership path to executing on our audit priorities. This has been cascaded through the organization from the CEO around identified audit quality through the Executive Team. Our Executive Team, EXECUTIVE TEAM priorities is informing the nature which consists of the leaders of each of the firm’s business lines, is responsible for the firm’s strategic and scale our continued investment plan and setting direction for its execution. The in cultivating high performing Regional and Office Managing Partners along with the professionals, providing them with National Assurance technical, quality management, independence, risk management and monitoring increased capacity to do meaningful functions provide oversight of operations and a focus work and timely serve a wide variety on audit quality in the execution of our firm’s strategy. OPERATIONAL/TECHNICAL LEADERS of clients, across multiple industries As an example, all Assurance regional leaders meet in the private, public and nonprofit regularly with National Assurance leaders to discuss issues and opportunities to drive consistent processes sectors. The result is a consistent and and protocols. We believe that it requires thorough exceptional client experience.” collaboration and consistent adoption to produce high quality results. As such, we set an appropriate BILL EISIG tone throughout the top and the middle management National Assurance Managing layers to exhibit and direct the behaviors we expect Partner and Practice Leader from all professionals through consistent examples QUALITY MANAGEMENT and clear practice communications.
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 12 EXECUTIVE TEAM
WAYNE BERSON Chief Executive Officer
STEVE FERRARA CATHY MOY Chief Operating Officer Chief People Officer
BILL EISIG CHRISTOPHER TOWER National Assurance Managing Partner National Assurance Managing Partner, and Practice Leader Audit Quality and Professional Practice
MATT BECKER JAY DUKE National Tax Managing Partner National Advisory Managing Partner
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 13 ASSURANCE PRACTICE LEADERSHIP TEAM
WAYNE BERSON Chief Executive Officer
BILL EISIG National Assurance Managing Partner and Practice Leader
CHRISTOPHER ORELLA Assurance Operations National Managing Partner
JEFF WARD MICHAEL STEVENSON Third Party Attestation/SOC Accounting & Reporting Advisory National Managing Partner Services National Assurance Partner
STEVE ALBERT MARK ELLENBOGEN DEMETRIOS FRANGISKATOS Southwest Assurance Atlantic Assurance Regional Northeast Assurance Regional Managing Partner Managing Partner Regional Managing Partner
BETH GARNER KEVIN KARO TONY LAWRENCE Employee Benefit Plan West Assurance Regional Central Assurance Regional National Practice Leader Managing Partner Managing Partner
MIKE MUSICK Southeast Assurance Regional Managing Partner
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 14 NATIONAL ASSURANCE LEADERSHIP TEAM BDO’s National Assurance department is led by Christopher Tower, National Assurance Managing Partner – Audit Quality & Professional Practice, and Phillip Austin, National Assurance Managing Partner – Auditing. National Assurance is responsible for a broad CHRISTOPHER TOWER variety of activities outlined in our Assurance Quality National Assurance Managing Partner, Audit Quality and Professional Practice Control Manual designed to support and promote audit quality throughout the audit practice. The firm has invested heavily in recruiting experienced talent into this department and believes our team members strike the right balance between oversight of technical JENNIFER PUTERMAN PHILLIP AUSTIN application and risk management, consultation and Assurance Risk Auditing collaboration on tools, templates, guidance and Management engagement with our professionals and our clients.
Ratio of National Assurance Professional to Assurance Practice Professionals ADAM BROWN TIM KVIZ Accounting SEC Services 1:23 1:23 1:26 FY 2020 FY 2019 FY 2018
National Assurance Contributed over AMY ROJIK NANDA GOPAL Governance & External Regional Technical & Industry 240,000 hours in activities to enhance Communications Technical Group Partner audit quality in FY2020, up from 200,000 hours in FY2019.
“We have excellent resources BLAKE WILSON LISA SNYDER Quality Control Independence available in National Assurance, and they are very helpful in assisting our teams in providing quality audits.”
ASSURANCE PARTNER MIKE FAWLEY Respondent to the BDO 2020 Audit Quality and Inspections Operational Excellence Survey
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 15 Perspectives on Audit Quality
HOW OUR ASSURANCE PROFESSIONALS VIEW ACCOUNTABILITY AND COMMITMENT TO AUDIT QUALITY
We recently completed our fourth annual survey of Assurance professionals, capturing their views on delivering exceptional client service and high-quality audits as reflected in their daily work. We are pleased with the trendlines and underlying themes conveyed in more than 800 written comments that reflect a thoughtful perspective on where we are as a firm and valuable suggestions for continual improvements and innovations to enhance our audit methodology, policies, tools, templates and guidance.
“It is clear to me that audit quality is a significant priority for the firm from my experience with National Assurance.”
ASSURANCE SENIOR MANAGER Respondent to the BDO 2020 Audit Quality and Operational Excellence Survey
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 16 OUR PROFESSIONALS RATE BDO AS “VERY GOOD” TO “EXCELLENT” ON THE FOLLOWING:
2020 2019 2018 2017
I believe I am personally responsible for our delivery of audit quality. 4.8 4.7 4.7 4.7
I believe my most direct supervisor demonstrates an effective commitment to audit quality. 4.6 4.5 4.6 4.5
I believe I personally can have impact on executing on our audit quality commitments. 4.6 4.5 4.6 – I am familiar with the Professional Judgment Framework.* 4.6 4.4 – – I understand what is expected of me with respect to audit quality. 4.5 4.5 4.5 4.4 I am well-versed with auditing standards. 4.4 4.4 4.4 4.3 I believe the teams I supervise demonstrate an effective commitment to audit quality. 4.4 4.4 4.4 4.3
Results are based on a 5.0 scale.
*In 2018, we fully deployed our BDO proprietary Professional Judgment Framework used to help guide our behaviors as we evaluate complex matters and make well- “I exercise the Professional Judgment Framework reasoned judgments. The framework is based on interconnected elements, which when effectively in place, maximize our likelihood of consistently exercising high- throughout all my audits and with all my audit/tax/ quality professional judgment. valuation team members.” PROFESSIONAL Define 1 6 Reflect the Matter JUDGMENT ASSURANCE PARTNER 2 5
COACH Specify 3 4 Reach COMMUNICATE Objectives Conclusion
Identify Gather and “The firm has done a great job making its methodology and Possibilities Analyze Info audit quality initiatives well known in the practice.” T E
C H IT S N ERATIVE ACTION N IC E A CONSULT DOCUMENT M L U ASSURANCE SENIOR MANAGER K C N A O S W ES L N E SI D U GE B AVOID TRAPS AND BIASES
Respondents to 2020 BDO Audit Quality and Operational Excellence Survey BAS ES ELINE ATTRIBUT
APPROPRIATE MINDSET
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 17 OUR PROFESSIONALS RATE BDO AS “VERY GOOD” TO “EXCELLENT” ON THE FOLLOWING:
2020 2019 2018 2017
I have clarity of the firm’s audit policies. 4.3 4.3 4.3 4.1
I am supportive of the direction we are heading with respect to audit quality and effective audits. 4.3 4.3 4.3 4.1
Our CEO is aligned with audit quality being a significant priority of our firm. 4.6 4.5 4.5 4.3
My Office Managing Partner is aligned with my executing audits with audit quality being a significant priority of the firm. 4.5 4.4 4.4 4.4
My Regional Managing Partner is aligned with my executive audits with audit quality being a significant priority of the firm. 4.5 4.4 4.4 4.3
Our National Practice Operational Leaders are aligned with Audit Quality being a significant priority of our firm.** 4.6 – – –
Results are based on a 5.0 scale.
**In 2018, we re-aligned our leadership structure to drive better support and collaboration around audit quality. In this spirit, we have recently added questions to our survey to gauge the impact of these critical actions.
“Regional and national quality support has been timely, responsive and sensitive to specific client situations.”
ASSURANCE PARTNER Respondent to 2020 BDO Audit Quality and Operational Excellence Survey
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 18 HOW OUR PROFESSIONALS SEE FIRMWIDE ALIGNMENT WITH QUALITY
Annually, we conduct a pulse survey of our professionals firmwide to recognize their views on areas that drive audit quality: leadership, communication, development, empowerment and team engagement:
2019* 2018 2017
I understand how my role contributes to “My Office Managing Partner the firm’s success. 4.8 4.8 4.8 does an excellent job with being At least one of the leaders in my practice or transparent with where the firm is department cares about my development. 4.7 4.7 4.7 going and puts a lot of emphasis on audit quality, which is in line with With rare exception, my coworkers perform their jobs at a high level. 4.7 4.7 4.7 what the firm as a whole has been working towards. Therefore, I feel Engagement teams and leaders clearly very in-line with our CEO/ Regional communicate their expectations and commitment 4.7 4.6 4.6 to executing high quality work for our clients. Managing Partner and the message of the importance of audit quality.” I am empowered to use my own judgment to make decisions. 4.7 4.6 4.6 ASSURANCE SENIOR MANAGER Respondent to 2020 BDO Audit Quality and Firm and office leadership communicate Operational Excellence Survey clearly and often to our staff about BDO’s 4.6 4.6 4.5 commitment to quality.
Results are based on a 5.0 scale. *The 2020 pulse survey is expected to occur in later Fall 2020.
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 19 Future-Focused Board
BDO’s Board of Directors provides oversight of the BDO Board Composition Overlapping Strategic Priorities of BDO Board firm’s strategic growth, innovation, risk management of Directors & Assurance Practice and culture. The Board and the Assurance practice are Gender aligned in their audit priorities. Over the past several Risk years, the Board has supported significant investment Management to build out the National Assurance practice and 36% 64% capabilities—from recruitment of top talent with Women Men Audit Quality diverse skillsets to up-scaling technology, innovation, training, tools and templates. The Board believes Technology that these substantial investments yield a strong Background Innovation foundation for continued growth and serve as risk mitigation against audit failure that help protect the 64% 18% 18% Regulatory firm and its stakeholders. Guidance Assurance Tax Advisory Industry Over the past several years, the Board’s support of Insight investment in technology and the digital deployment World Class of audit, tax and advisory services, coupled with Location 9% Talent expansion of our BDO Digital services and Crisis Development Management & Business Continuity practices, 18% 27% 18% 18% have proved both prescient and essential to our Growth firm’s resilience and ability to serve all of our clients effectively. While remaining true to our audit practice, West Sustainability Central the investments made in continuing to build out Atlantic Northeast specialization gives our auditors direct access to Southwest Southeast & skilled technicians who provide consultation on time- sensitive, complex issues that arise during our audit engagements allowing us to provide well-informed “Further unity of purpose and deeper collaboration has been a silver lining of responses to our clients. recent events. At the Board and leadership level, values continue to drive our decisions and help us make principled judgments in executing on our priorities even in uncertain times.”
MARIA KARALIS Assurance Office Managing Partner and BDO Board Director
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 20 Focus on Diversity of Perspective
At every level of our profession, progress requires Taking Action on Advancing Racial Equity and Inclusion diversity of thought, experience and perspective. Quality and excellence are promoted by diversity, OUR OBJECTIVES… equity and inclusion.
Our inclusion strategy focuses on building the Enhancing a culture of candid dialogue and inclusive people and leaders workforce we need to serve a changing market and capture emerging opportunities. Diversity of all kinds Building a more diverse pipeline of accounting and professional service talent from our supports and ensures effective judgment and the staff to our partners incorporation of broad and evolving skillsets required to deliver the audit of the future. As such, we are Promoting a more diverse and inclusive culture in the local communities where putting significant time and thought into developing a BDO has a presence more impactful and sustainable strategy for our long- term culture of inclusion that incorporates input from BDO professionals and involves leadership at the firm’s WHAT WE ARE DOING IN THE NEAR-TERM… highest levels. “Day to Recharge & Reflect” as a firm closure day intended to recognize the systemic history of 2020 Data injustices facing the Black community and provide our professionals with a “pause” to learn and reflect on how they may contribute to lasting positive change Generation Combined Assurance % Unconscious bias/inclusive leader training for all professionals Baby Boomers (Born: 1946-1964) 4% Gen X (Born: 1965-1981) 21% Educational resources and tools that can be used by individuals, teams and offices Millennials (Born: 1982-1996) 72% Gen Z (Born: 1997-2002) 3% Peer mentoring for employees of color by race (Black, Latinx, Asian-American)
Mentoring and sponsorship to support the advancement of employees of color Assurance Client-Facing Women:
Diversity recruiting plan, including expanded efforts at historically black colleges 41% FY 2020 41% FY 2019 and universities
Assurance Client-Facing Black, Indigenous and Diversity partnership enhancement, including active engagement with the Center for Audit Other People of Color: Quality Diversity Steering Committee, Howard Center for Accounting Education Advisory Board, National Association of Black Accountants, Association of Latino Professionals for 29% FY 2020 32% FY 2019 America, Ascend and the CEO Action for Diversity & Inclusion
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 21 Reaffirming Our Purpose and our Corporate Culture
BDO stands with the Black community and is committed to do our part to end racial injustice.
As our CEO, Wayne Berson, wrote in a June letter to employees, “The issues we face as a nation are deep and profound, but we must work together to make a difference. At BDO, we have always been a community with zero tolerance for discrimination and racism. We are anchored in our core purpose — helping people thrive every day. It is this foundation, along with our core values, that we must turn to in order to help us address the ongoing challenges we face. They are particularly poignant in times of uncertainty and unrest…
We are a firm, a culture and a community that is not content to sit still — when we see things are broken, we want to fix them. Change starts in our own offices, in our own homes and in our communities. Small changes can lead to sweeping change that transforms our world. We must do this together. Living our purpose demands we choose humanity over hatred and empathy over apathy.”
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 22 We are proud to continue to be recognized as a top destination for talent. As the workforce evolves, BDO is BDO’S BOARD CHAIR committed to building an inclusive, flexible, welcoming culture where all can find equal opportunity and come In November 2019, BDO announced the unanimous appointment of Kelly Johnson to work as their true and best self. as BDO’s board chair. Kelly leads the firm’s Business Service & Outsourcing practice, has served on the board since 2017 and was re-elected in 2020 for a BDO’s Workplace Awards second term. Women represent 40% of the elected members of BDO’s FY 21 Board of Directors. Top Entry Level Employers “BDO is a firm that provides opportunity for all professionals to rise. As board chair, CollegeGrad.com I look forward to continuing to support our firm’s growth, including the advancement and support of our diversity and inclusion programs.” – Kelly Johnson, National Leader Business Services & Outsourcing and Chair of BDO Board of Directors Working Mother 2020’s 100 Best Companies, Best Places to Work for Dads “As the first elected woman board chair, Kelly’s appointment marks an important milestone Working Mother Media for our firm. This is something I’m particularly proud of, as I strongly believe inclusive leadership leads to better business outcomes.” – Wayne Berson, Chief Executive Officer 2020 NAFE Top Companies for Executive Women National Association for Female Executives
BDO NATIONAL INDUSTRY LEADER Vault Accounting 50, Best Internships Vault.com In July 2020, BDO appointed Assurance Partner and Retail & Consumer Products national leader Natalie Kotlyar to assume the role of National Managing Best Places to Work For, Partner - Industry Groups in the coming year. This is a testament to her deep Best and Brightest in Wellness client experience and vast industry knowledge. Natalie will succeed Joe Johnson, National Association for senior leader and former BDO Board Member upon his anticipated retirement in Business Resources 2021. Natalie was also elected to the BDO Board of Directors with her term to begin in fall 2020.
“Industry knowledge and awareness of the client’s operating environment is critical Tax Adviser of the Year to delivering audit quality. Natalie’s business acumen will serve her well in overseeing International Accounting Bulletin a continued firmwide focus on industry-specific insight and alignment of industry considerations in the execution of our audits.” – Joe Johnson, National Managing Partner - Industry Groups
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 23 Global Importance
As the largest member firm of BDO’s extensive global organization, we view global BDO BDO Global collaboration and leadership as an imperative to excellence in client service. 2020 STATISTICS BDO USA, LLP Alliance, USA Network Our U.S. firm has invested significant resources and talent to help lead the creation and deployment of mission critical technology and enablement tools used across OFFICE 65+ 740+ 1,600+ our global organization. These include the BDO Global Portal for Clients along with in 167 countries LOCATIONS (U.S.) (U.S.) our shared Audit Process Tool (APT) and audit methodology. Our contributions help and territories ensure a more consistent experience for clients—anywhere in the world they work with us—and prioritize compliance with U.S. authoritative standards and rules. TOTAL PERSONNEL 8,063 17,524 88,000+ In collaboration with our global counterparts, we continue to learn from each other and use global board and leadership meetings to share best practices, insights on PARTNERS/ emerging issues and opportunities for further development and enhancements in our OWNERS 670 2,328 6,738 audit approach. REVENUE In addition, BDO USA leads or participates meaningfully in global initiatives related $1.80b $2.77b $9.6b to all significant industry sectors. U.S. financial statistics for the 12 months ended April 30, 2020 to align with fiscal year, and International statistics for year ended September 30, 2019.
Our Global Leadership Audit Contributions
X Wayne Berson serves as the Chairman of the X Patricia Bottomly and Bryan Martin participate X Steve Ferrara, our COO, serves on the Global Board of Directors of BDO International Ltd. in development of the next generation of our Global Board Advisory Group and the BDO Global Audit Methodology Americas Board X Bill Eisig and Christopher Tower serve on the Global Audit Leadership Committee, raising and X Albert Lopez serves as the Chief Executive Officer X Lisa Snyder serves on the Global Independence discussing audit issues throughout the network of the Americas of BDO International Steering Committee
X Cathy Moy serves on the Global People and X Brian Miller leads strategy and technical X Julie Valpey serves on the Global Cross-Border Culture Committee development of the BDO Global Client Portal Gatekeeping Services Working Group and leads a team of reviewers who perform these reviews X Phillip Austin leads the Global Audit Steering X Mike Poulos, our General Counsel, participates on Committee, which recommends audit requirements the Global Risk Management Committee and policy changes to the global board
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 24 Promoting Independence and Ethics
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 25 Accounting is not always clear-cut and often is filled Ethics in Action with judgment areas that test systems, controls and decision-making. This is why the capital markets and business stakeholders rely so significantly on a high- quality audit, conducted by professionals with the highest standards for ethics and independence. We recognize the integrity and credibility of the financial reporting process depends on our firm and the rest of the public accounting profession complying with all Maintaining a robust Code of Demonstrating tone at the Providing continuing ethics ethics and independence rules and regulations. Ethics & Business Conduct top and zero tolerance policy and independence learning and Compliance Policy for misdeeds for firm professionals At BDO, our ethics and independence programs start with our core values and mission. We provide trusted solutions, powered by professionals who choose accountability and integrity, seek empowerment through knowledge and target nothing less than delivering exceptional service. These values provide a baseline for compliant and appropriate decision- making, consultation and actions. Providing continual communication Ensuring our monitoring and Chief Compliance & Ethics Officer Blake on importance of closely monitoring compliance systems are designed and Wilson and National Assurance Managing client relationships operating effectively Partner – Independence Lisa Snyder oversee dedicated teams who provide effective oversight and monitoring, as part of our system of quality management. These teams establish and monitor the robust policies and procedures that hold BDO professionals accountable in understanding their independence and ethical obligations and performing their duties in full compliance with firm policies, procedures and applicable laws, regulations and professional standards. Maintaining Providing an anonymous Encouraging a culture professional licensure Ethics & Compliance Hotline of consultation Ethics and independence compliance training remains a top priority, and we ensure accountability and continuous monitoring through our professional review processes.
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 26 Independence New Standards, New Initiatives
Imperative Independence is fundamental to the profession and standards of the AICPA, the PCAOB, the SEC, the International Ethics Standards Board for Accountants (IESBA) and other independence standard-setting organizations.
Objectivity and skepticism are the bedrock of a quality Domestically, we are closely monitoring emerging and expected rules on independence impacting our issuer clients audit that can be relied on by the capital markets. and meeting regularly with the SEC to consult on issues, proposals and requested feedback. Additionally, Lisa Snyder serves on the AICPA’s Professional Ethics Executive Committee, where she is involved in helping to advance As auditors, BDO must remain free of relationships independence standards contemplated for the private sector. Internationally, BDO’s independence professionals and actions that could appear to compromise our assist with independence resources, policies and monitoring for BDO’s global organization as well as enhancing our ability to exercise professional, objective judgment. own firm policies and practices related to our U.S.-based clients who have global operations. Independence and the avoidance of conflicts of interest remain the focus of regulators. Our firm Independence & Ethical Practice Priorities and Sample Activities has taken proactive steps to further build resources, bolster our independence and compliance teams, and INDEPENDENCE PRIORITIES SAMPLE ACTIVITIES ADVANCED IN FY2020 enhance related processes and systems. Firm Compliance with Professional Independence Updates to policies and controls responsive to evolving regulations Our mature compliance and independence & Ethics Standards functions also position BDO to effectively manage existing and emerging risks. This includes the Enhancements to the online BDO Investment Tracking System (BITS) Personal Independence timely identification of services that may violate and automatic Broker Feeds to track personal investments and Compliance our independence or services that would require ensure independence of our clients heightened controls or safeguards to counter external pressures or short timelines for critical decisions. It Independence Expansion of real-time access to information on restricted entities also includes consideration of emerging industry or Conflict Checks prior to client acceptance market events that require additional experience or Guidance and support to domestic and international engagement knowledge capabilities. Consultations teams for existing or potential client engagements
Private Equity Enhanced monitoring and controls for private equity clients and for Reviews reviewing evolving portfolios of the firm’s private equity fund clients
Firm Expansion Enhanced due diligence processes for clients of firms joining BDO Reviews USA through expansion for independence, restricted entities and risk
Updated annual firmwide independence training for current and new Continuous professionals, inclusive of practical examples of emerging risks and Education evolving technical standards, rules and regulations
Communications Periodic dialogue, guidance and publications for BDO professionals and Resources highlighting independence matters as top of mind issues
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 27 Ensuring the Right Fit – Client Acceptance and Continuance
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 28 Our Risk Management Oversight
At BDO, we are guided by responsibilities to our stakeholders and the community at At the firm level, we have a Risk Management Committee, chaired by our General large. We are considerate of who we work with and how we work with them to ensure Counsel, composed of the Risk Management partners and operational leaders from independence, efficacy and achievement of goals that support sustainability and each business line, the National Managing Partner of Professional Practice & Audit security within our organization and the markets that depend on us. Quality and the Chief Operating Officer. The primary duties of the Committee are to:
These goals inform our risk management strategy as well as our holistic approach for X Perform a firm-wide risk assessment to identify, assess and respond to material client acceptance, review and continuance. In 2020, we formalized and expanded our risks, such as strategic, operational, financial, regulatory, legal, IT, brand, risk management team, identifying dedicated leaders to oversee the risk exposure and reputational and other risks that may be identified activities across our Assurance, Tax and Advisory services. X Evaluate matters identified at the business line level which may have a broader, Each of the firm’s business lines has a designated Risk Management Partner and firmwide impact function who oversee risk management activities. Our Assurance Risk Management function reports to the National Managing Partner, Professional Practice and Audit X Evaluate and provide recommended courses of action to the CEO Quality. Duties, respective of the business line, include: X Monitor compliance with the BDO Global Risk Management Policy
X Identify and assess the material risks of existing and new service renderings
X Oversee client acceptance and continuance processes
X Review and approve policies and procedures designed to mitigate risk
X Discuss matters of risk with the business line National Managing Partner and/or “Our risk management oversight function, whose members General Counsel (or their designees) have a deep understanding of not only our audit practice
X Recommend enhancements to existing risk-related programs and practices but our full business line capabilities, allows us to
X Monitor the functioning of the risk management programs continually evaluate and make informed decisions about our clients and businesses—both existing and emerging— X Manage active risk management matters we choose to serve and support.” X Elevate to the Risk Management Committee matters for consideration that are highly material in nature and have cross business-line impact to the firm JENNIFER PUTERMAN X Bring unresolved disagreements with respect to client acceptance and National Assurance Partner, Assurance Risk Management continuance matters to the CEO or the Risk Management Committee, as established by firm policy
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 29 Emerging Issues
Each year brings change to current and prospective clients’ risk management profiles and subsequent acceptance policies. Here are several emerging risk management issues on our radar for 2020 and beyond:
Evolving Industries COVID-19 Impact
As new industries and services emerge and business continues to While nearly every industry has been impacted by COVID-19, the evolve (e.g., cannabis and cryptocurrency), the ability for companies negative financial realities and long-term risks and challenges for certain to assess related risks and uncertainties and demonstrate capabilities industries, particularly retail, hospitality and energy, are considerable. for mitigating those risks take on greater significance. BDO Considerations: BDO Considerations: X Recognition of emerging X Risk of going concern X Experience and knowledge requirements for the risk factors X Restructuring needs engagement team X Access to capital X M&A opportunities X Maturity and experience of management team and liquidity under consideration X X Adjustments to auditing approach and procedures Long-term viability of X Strength of management X Quality control matters and related laws and regulations the business estimates
Non-GAAP Metrics Changing Workplace
Many companies believe that GAAP metrics may not provide a The rapid evolution to a virtual work environment has redefined full picture of their opportunities or valuation. However, non-GAAP the who, where and how work is done, and there is unlikely to be a metrics need appropriate clarity and context to add real value widespread snap back to previous norms. to stakeholders. BDO Considerations: BDO Considerations: X Data governance and security protocols X Evaluation as to whether non-GAAP information may be X Access to secure platforms for information transfer misleading to investors X Changing skillset needs and training requirements of employees X Comparability and reconciliation to GAAP within financial statement presentation X Supervision and oversight risks X Ability to communicate and engage X Consistency in measurement and avoidance of “cherry picking” of more favorable metrics
Note: Not an all-inclusive list
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 30 Technology Evolution Total Tax Liability
From robotic process automation (RPA), to artificial intelligence (AI), Almost every business risk or opportunity has added implications to the rise of 5G technology, accelerated digital transformation is from a tax liability standpoint. Taxation is an area that can have enabling digital business and enhancing the speed of communication significant impacts on financial reporting across a broad variety of and delivery. transactions and activities.
BDO Considerations: BDO Considerations: X Data governance and security protocols X Quality of taxation expertise within an organization X Oversight and controls over automation and AI, including risks of X Proliferation of tax laws and regulations at the state and local, potential bias federal and international levels X Emerging laws and regulations X Complexity of business transactions and ability to scenario plan X Evolving audit procedures and approaches to estimate tax ramifications
Cybersecurity & Data Privacy ESG & Investor Priorities
Data privacy regulations continue to be issued world-wide, making Institutional investors have thrown down the gauntlet on issues like information governance a priority area. Cyber-attacks continue to rise, climate change and diversity, and management teams and boards while the threats and vulnerabilities are constantly evolving and may need guidance on how to respond and change. significantly impact both corporate financial and reputational risks. BDO Considerations: BDO Considerations: X Strength of corporate governance X Allocation of adequate resources and management’s X Significance of ESG and sustainability within a client’s understanding of the nature of cybersecurity risk value proposition X Robustness of cybersecurity strategy to prevent, detect and X Level of knowledge related to sustainability frameworks mitigate risk and reporting X Information governance and data ethics policies X Responsiveness to breaches
Note: Not an all-inclusive list
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 31 BDO leverages proprietary technologies in evaluating risk profiles to aid in acceptance and continuance decisions for our existing client base. We use data mining and analytics to assess economic, quality and viability risk to help us evaluate potential issues so that they can be quickly addressed. Features are continually being added, providing real-time views of workload and assignments to help determine and manage audit engagement capacity.
BDO’S CLIENT ACCEPTANCE AND CONTINUANCE PROCESS
Acceptance / Client Re-Evaluation Background of Clients for Investigation Continuance
Formal Ability Acceptance to Serve Approvals the Client
Independence & Other Financial Reporting Considerations
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 32 Enhancing Working Relationships with Those Charged With Governance
CENTER FOR CORPORATE GOVERNANCE AND FINANCIAL REPORTING
From issues ranging from corporate purpose to composition, the importance of board governance has taken center stage, and stakeholders have significant expectations for both management teams and boards. While key oversight issues like risk management remain a priority, board committees, along with financial management, are facing never-before-seen challenges. In the wake of the recent issuances of significant accounting and auditing standards, coupled with the complexities in accounting and reporting related COVID-19 impacts and regulatory and government relief efforts, there is a very real and powerful need by the capital markets for reliance on sound financial reporting and disclosure.
In times of change, we remain committed to ensuring the continuing education of our clients and providing timely resources for boards to navigate and plan with greater precision. We are particularly proud of the guidance and resources we were able to provide through the first three quarters of 2020. We have stayed highly connected to our client management teams and those charged with governance and continue to reach out to take the pulse of public company board directors through virtual forums, programming and survey opportunities. This engagement will provide a benchmark on perspectives and actions to be taken on the issues ahead.
“From diversity of perspective to broad and emerging issues of sustainability and risk, corporate governance is an essential function. We are proud to engage with and support our clients’ critical areas of oversight with customized insights, resources and programming throughout the year.”
AMY ROJIK National Assurance Partner, Governance & External Communications
2019 Financial Times Outstanding Director Exchange (ODX) Event
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 33 Sampling of Corporate Governance Achievements in FY 2020
Two BDO partners are among the Have over 70 available alerts and first individuals to become National thought papers related to financial Association of Corporate Directors accounting and reporting issues Directorship Certified and developments
Launched the first 20 episodes Issued 12 publications related to of the BDO in the Boardroom evolving governance issues Podcast Series and developments
Participation and sponsorship in Surveyed over 280 public company various national governance directors to get their pulse on top-of- events, including: mind boardroom issues X NACD Global Board Leaders’ Summit Presented national office custom educational sessions to over 40 client X Corporate Board Member Annual Summit boards and audit committees X Financial Times Outstanding Director Exchange Hosted ten local board forums designed to promote learning, X Association of Audit Committee mentoring and networking among Members Inc. Annual Meeting corporate directors X AICPA Conference on SEC and PCAOB Developments Appeared in two Center for Audit Quality Profession in Focus Hosted 25+ webinars focused on a video segments variety of corporate governance and financial reporting topics
Maintained robust on-demand learning: X Nearly 30 Corporate Governance Primers LEARN MORE ABOUT X Over 25 Emerging THE BDO CENTER FOR CORPORATE GOVERNANCE u Governance Issues X Over 50 Accounting and Reporting Hot Topics
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 34 SPOTLIGHT ON The Needs of Smaller Cap Companies
At BDO, we recognize that companies vary greatly in complexity and access to resources. This is particularly true for smaller issuers with market capitalization ranging from $200M to $2B and even smaller micro- and nano-cap issuers. These companies face real challenges in accessibility to capital as well as experienced resources needed to navigate a myriad of operational, financial and reporting complexities. Annually, BDO participates in the National Association of Corporate Directors (NACD) Global Board Leaders’ Summit by hosting the Small Cap Symposium designed to engage directors of smaller public companies on a variety of governance and reporting topics specific to the risks and opportunities these companies, who make up the majority of publicly listed exchanges, must confront.
“As a panelist/attendee in the BDO-led NACD Small Cap Symposiums and participant in BDO’s Director Roundtable series, you are able to hear from today’s thought leaders and network and learn from your peers with real practical experiences that contribute to being a great board member focused on delivering value to all stakeholders. I always walk away with new questions to ask management, internal audit and our external auditors that make me a better Committee Chair of Audit, Governance and HR Compensation.”
EVELYN DILSAVER Independent Board Director Tempur Sealy, Health Equity, Blue Shield of CA, Bailard Real Estate Fund
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 35 BDO Assurance Client Concentrations
Our client base forms a rich tapestry of private and public entities, from development stage companies to accelerated filers with multi-national operations, across both broad-based and concentrated industries:
Domestic Corporation Joint Venture Pre-IPO 23%
Partnership / Non-Accelerated Multi-National Privatization FY20 Proprietorship Filer 46% Revenues
Start-Up / Venture Capital- Accelerated Filer 31% Entrepreneurial Backed
Large Private Equity- Family Owned Accelerated Backed Filer 17% Financial Asset Government Institutions & Healthcare Management Contracting Specialty Finance FY19 49% Revenues Natural Insurance Life Sciences Manufacturing 34% Resources
Nonprofit Professional Private Equity Public Sector & Education Services
Restaurants, Retail & Real Estate Advisory Assurance Tax Hospitality Consumer Technology & Construction & Leisure Products
Our public company Assurance client engagements represent approximately 30% of the Assurance practice revenues, which has remained consistent over the past three fiscal years.
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 36 Developing and Managing High Caliber People and Teams
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 37 Investing in the recruitment, development and retention of highly engaged and technically proficient people is one of our highest priorities as a firm. Goals for our over 3,000 Assurance professionals include:
RECRUIT: Bolster access to talent across broad skillsets X Expand access to talent through digital recruitment strategy X Expand schools we recruit from, with a focus on ensuring diverse candidates X Keep commitments to our interns as a key component of our X Increase focus on recruiting experienced professionals with needed talent pipeline skills—from data analytics, technology, cybersecurity and crisis management experience to leadership ability and industry knowledge
REVIEW: Stay connected and supportive while holding professionals accountable to goals and performance metrics X Establish more touchpoints with supervisors, including regular strategic X Align performance with total compensation “one-on-one” meetings to ensure professionals understand how X Continue to enhance annual partner assessments based on our partner they contribute to audit quality and are working toward personal competencies and goals aligned with our strategic priorities development goals X Ensure goal setting is meaningful and is directly supportive of audit quality
RETAIN: Focus on professional development and training rooted in collaboration, flexibility, professional judgment and problem solving X Avoid undue stress on system of quality management by maintaining X Intensify focus on workplace flexibility strategies and programs to staffing levels during a pandemic ensure professionals have the support they need to continue to deliver X Transition to digital continuous learning to optimize resources and high quality work minimize disruption X Leverage use of shared business service centers to add capacity and X Expand training and curriculum to address emerging issues and allow professionals to focus on analytical work up-skilling needs including accounting, analytics, impairment and X Promote incorporation of the firm’s Professional Judgment Framework estimates, income taxes and best practices for communication
“In response to the pandemic, our intentional and strategic decision to preserve our capacity of talented professionals and not put undue stress on our system of quality management allowed BDO to honor our client obligations while ensuring support of an agile and high caliber workforce.”
CATHERINE MOY Chief People Officer and Executive Team Member
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 38 Assurance Recruitment Assurance Retention 2019 2018 2017 98% 423 Partner 91% 91% 26 2019 442 15 86% Director 86% 410 92% 85% 388 Manager 79% 82%
34 2018 336 83% 11 Staff 73% 348 78%
Interns Partner Hires Creating a productive and proficient workforce is an important driver of quality. The investments we make in our New Staff Hires Partner Promotions human capital are designed to attract and retain top talent. This is accomplished through a diverse and collaborative working environment that provides work-life flexibility, access to advanced technology and tools, and a broad variety Experienced Hires of experiential challenges to hone valued skillsets.
“I am very grateful that BDO chose to honor their commitment in offering audit internships during the pandemic. The time that BDO put into this virtual program was extremely beneficial and showed me how much they care about their current and future employees.”
CHRISTINE CUTTING Incoming BDO Assurance Class of 2021
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 39 SPOTLIGHT ON Building Capacity: BDO RISE
As we continue to support growing client needs and deliver on the audit of the future, we are creative about our service delivery model, while maintaining the highest standard for quality. Increasing complexities of our clients’ operations and evolving technical standards and regulations require increased capacity to effectively exercise professional judgment. As one way to create that capacity, we have continued to invest in our business service centers, both domestically in our Columbus, OH center as well as our more recent BDO RISE center launched in India. These service centers have been staffed and designed around standardization of process for the execution of higher volume, routine audit processes and procedures as a bolster to efficiencies in serving our private client practice. When we create such capacity, it allows more time for our audit professionals to focus on emerging risks, critical matters and areas that require professional judgment and skepticism. Over the next three years, we plan to add more than 3,500 highly qualified accountants, auditors and valuation professionals in our shared service centers to support our client engagements in the delivery of high- quality audits.
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 40 Learning Transformation
Our dedicated National Assurance Learning Team In 2020, we are focusing significant time and attention on the adaptability of our continuous learning platform in response works directly with operational and technical leaders to and in anticipation of a continued virtual workplace and leveraging technology to simulate in-person and practical along with the firm’s Learning & Development examples for our professionals. By focusing on intended learning objectives rather than method of delivery, we were able to team to create level-specific learning pathways and reimagine scheduled in-person trainings in a variety of formats to positively affect time-sensitive audit decisions: coursework aimed at optimizing broad skillsets for our staff through partners across core and emerging issues and identified accounting and auditing practice matters. Large Smaller Virtual Functional Interactive Scale Webinars Classrooms Break-Out Sessions On-Demand Courses Creating a dedicated and highly skilled workforce requires continuous learning to inform, demonstrate and allow our people to apply learning enabling:
TECHNICAL PROFICIENCY Job Aids Guided Materials Learning Bytes Messaging X honing accounting, auditing and business acumen The platforms and technologies that we have been investing in for the past decade are providing us with seamless X effective project management capabilities solutions to meet all of our current and future learning needs.
X deepening industry acumen The emerging issues portion of this year’s curriculum has included a variety of planned learning related to evolving auditing standards – e.g., estimates and use of specialists4 - as well as accounting standards – e.g., reference rate X transactional experience reform, credit losses, derivatives and hedging. Additionally, our National Assurance practice and learning teams PROFESSIONAL PROFICIENCY were called on to pivot and produce timely education for both our professionals and our clients to address the complexities around accounting and reporting for COVID-19 developments related to government assistance X exercising skepticism, reasoning and judgment programs, significant industry impacts and the continual stream of regulatory guidance from the SEC, PCAOB and FASB. We are extremely proud of our responsiveness to the market during this time and our Assurance practice X building and maintaining relationships contributions to our internal and external Crisis Response Resource Center. X strong leadership and accountability 4 PCAOB Auditing Standards: Auditing Accounting Estimates, Including Fair Value Measurements and Amendments to Auditing Standards for Auditor’s Use of X teaming and collaboration the Work of Specialists are effective for audits of financial statements for fiscal years ending on or after December 15, 2020.
“We have transformed over 50,000 hours of in person learning to immersive virtual instructed programming. This transformation preserves small group professional development and supports the in-depth knowledge transfer that live learning achieves.”
MICHAEL BECKER National Assurance Partner - Assurance Learning
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 41 Continued Learning and Engagement BDO professionals treat every day and every interaction as a learning opportunity. We leverage each other, as well as internal and external resources, to satisfy both required and recommended training and explore new areas of interest. Examples include:
ROBUST FIRM DEVELOPED CURRICULUM ASSURANCE LEARNING PROCESS RESPONSE Consists of accounting, auditing, reporting, industry-specific Thoughtful adaptation of learning curriculum to achieve learning and independence courses objectives while transitioning to virtual platforms
DEGREED APT NEXT GEN LEARNING Learning platform for skills from audit data analytics, to industry Planned modules to introduce the next generation of our enhanced trends, to engagement management tips global Audit Process Tool
PROFESSIONAL CERTIFICATION PROGRAMS AUDIT METHODOLOGY CHANGES Specified blend of required learnings along with satisfaction of Suite of learning and messaging intentionally aligned with minimum experience requirements for: Issuer Engagements, the sequencing of our audit fieldwork and the availability of Engagement Quality Review Control, Information Systems enabling tools and resources to guide the planning and Assurance as well as ASC 740 Income Tax. execution of our audits
FIRM COVID-19 POLICIES DESIGN-THINKING WORKSHOPS Firm policy changes to introduce increased levels of supervision and Firm-sponsored innovation workshops and listening programs review of client-related disclosures for COVID-19 impacts designed to create state-of-the art audit methods, processes as well as intentional adjustments to performing audit procedures and tools in a virtual environment
ENGAGEMENT WITH ACADEMIA FORMAL MENTOR / COACHING PROGRAMS Hosted by the University of Alabama and Brigham Young University Career advice and strategic leadership coaching workshops to present BDO’s Professional Judgment Framework throughout a professional’s tenure with the firm, further enabled in learning programs as part of practical curricula being through visibility to readily accessible online Learning Paths delivered to the next generation of auditors
NATIONAL OFFICE AND INTERNATIONAL SECONDMENTS ENGAGEMENT WITH THE PROFESSION We have well over 100 BDO practice professionals working in AICPA, FASB and CAQ Task Force participation and leadership short-term and long-term technical roles within the BDO National by numerous professionals, helping shape the future of the audit Assurance Office (25%) or as International Secondees across 24 and our profession countries (75%) subsequently returning to practice offices to share knowledge gained
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 42 “Rotations with National Assurance and other secondment roles across the BDO organization provide our professionals with ample opportunities for developing and enhancing critical audit skills—from professional judgment to project management. With this additional exposure comes more experience that I am able to apply to audit engagements and share with my colleagues in our practice office and across the firm.”
PATRICK AHR Assurance Senior Manager
Learning by the Numbers: Assurance Professionals Average Annual CPE Hours* 2019 2018
63 63 66 68 65 65 57 59 61 59 53 8 26 25 24 23 21 19 17 58 15 50 9 11 10 50 46 42 42 44 42 44 37 38 38 40
20 hour minimum 20 hour minimum
Partners Directors Senior Managers Seniors Staff Partners Directors Senior Managers Seniors Staff Managers Managers
Average CPE Hours Field of study: Accounting & Auditing Field of study: Non A&A
The averages above reflect learning subject to continuing professional education (CPE) requirements and do not include numerous non-CPE learning that our professionals participate in throughout the year, nor any firm onboarding training for newly hired professionals. Non-A&A fields of study include specialized knowledge (e.g., industry, technology, etc.) and other business skills.
*The American Institute of Certified Public Accountants (ACIPA) requires CPAs to complete a minimum of 20 hours or its equivalent of continuing professional education (CPE) per year or 120 CPE hours over a three year reporting period.
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 43 EXCELLENCE THROUGH RELATIONSHIP GUIDING PRINCIPLES AND RELATED BEHAVIORS & PROJECT MANAGEMENT
Exceptional Client Experience is one of the pillars of Approach to Relationship Management Approach to Project Management BDO’s strategic plan being championed by Executive Team member Christopher Tower. We believe that to be exceptional requires the right talent empowered Identify key internal and Communicate effectively to build to build strong relationships with clients and manage external influencers relationships and achieve results those client engagements by providing rigorous project management, technology and insight, as well as commitment to continuous improvement. Our focus in 2020 is on creating a common BDO approach Invest in and develop Lead and empower teams (do not for both relationship and project management. strategic relationships simply manage teams) With respect to relationship management, we have established guiding principles for developing and maintaining relationships with our clients, our Demonstrate behaviors that peers and the business community. With respect to Deliver sustained quality project management, we have focused on identifying create trust principles and behaviors that are essential to managing the process and workflows to deliver high quality work products to our clients. Both initiatives are being Leverage relationships to drive Demonstrate and deliver supported by enhanced training and resources with value and quality maximum value to the client the goal of building upon our professional skillsets and making them adaptable across each of our firm’s business lines and our core business services teams.
Enhance market presence Embrace change and prominence
Utilize effective personal Use tools selectively and digital networking and and effectively communication strategies
Model, lead and coach to create Mind the bottom line long-term relationships
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 44 Expected Benefits of BDO’s Approach to Project and Relationship Management “At BDO, delivering an exceptional client experience is a cornerstone of our firm’s strategic plan. Building relationships, establishing open communications with those who are influential to the work we perform, and focusing on how effectively and efficiently we conduct our work through sound engagement management are Consistency Risk Higher keys to performing and delivering high-quality audits. Across the Firm Management Quality While seemingly fundamental, executing on both of these skillsets has proven extremely impactful on the trust our clients and colleagues continue to place in us.”
CHRISTOPHER TOWER National Assurance Managing Partner, Audit Quality & Professional Practice Profitability Foundation Scalable & Efficiency for Training
Improved Client Deeper Strategic Market Experience Relationships Prominence
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 45 Ensuring High Quality Engagement Performance
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 46 A high-quality audit demands excellence in professional judgment coupled with effective tools and technology to ensure an efficient and insightful process. We are proud of the continuing investment in our globally adapted audit methodology and digital enablers that not only ensure a consistent approach to delivering quality but also allow our clients and our professionals secure means to share critical and timely information specific to industries and across geographies.
Fast Facts
100% of new BDO USA audit engagements leverage our Next Gen global audit process tool
BDO supports more than 100,000 customized client portals throughout the world
Our platform is supporting increased demand and security needs brought on by the pandemic
Clients indicate BDO’s digital suite of audit tools helps save time
BDO professionals report high satisfaction with our technology as an enabler of their job
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 47 Digital Audit Suite
BDO GLOBAL PORTAL KEY PORTAL TOOLS & FEATURES
Our Global Portal is a customizable, secure, cloud- based view into our clients’ business and scope of work with BDO. It is a gateway to essential insight— from client company data and emerging risks to project status and timelines—and a seamless, personal platform for communication and collaboration.
BDO EXCHANGE BDO ORGANISE BDO HARMONY BDO INSIGHTS “We are tremendously proud of Secure document Robust project Advanced data Insights and the way our global portal and exchange & management, aligned analytics publications tailored supporting technology passed project readiness with our Audit to client Process Tool the stress test of additional capacity and demand, nearly overnight. We remain focused on iterative innovation and enhanced features to further improve the client experience and access to timely insight.”
BRIAN MILLER National Assurance Partner, Audit Transformation & Innovation
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 48 “The Skechers audit engagement team has seen greatly increased efficiency throughout the execution of the audit since implementing the BDO Global Portal as it allows us to manage requests from various client professionals, including in Europe and Asia, all in one place. With the ability to assign users and due dates to each request and view progress in the dashboard, there is a clear line of accountability, which is helpful to both the team and the client in managing the engagement.”
MAGGIE SEIBERT Assurance Senior, BDO USA
“BDO’s forward leaning embrace of technology, including the practical and relevant implementation of the BDO Global Portal, has greatly improved our audit experience by making the document request process—which is often one of the most time-consuming components of an audit—more transparent, less cumbersome and more efficient than in past audits. This has allowed us to better collaborate and focus beyond traditional compliance to improving our processes to take them to the next level.”
DAVID BISHOP Chief Information Security Officer, Trustwave
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 49 APT NEXT GEN
Our phased rollout of APT Next Gen, the next generation of our global, integrated audit process tool, is now fully operational in 2020, with immediate implementation for all new clients and rapid transition for our existing client base with the assistance of innovative BOT technology and our Columbus Business Service Center. The overall goal: auditing smarter. By deploying common approaches, data analytics and industry specificity to identify risk for each of our clients, our teams can better focus work and judgment where it matters most. In the coming year, we will continue to refresh our related global audit methodology to align with forthcoming auditing and quality control standards and continue the transformation of our digital audit suite.
Insightful Global
Efficient “Our thoughtful process considers key audit milestones and directs the intentional sequencing of risk assessment and KEY FEATURES OF APT Scalable audit procedures to be completed throughout the year. NEXT GEN THAT DRIVE AUDIT QUALITY This ensures the right work is done at the right time, by the right professionals and helps teams avoid constrained timelines. As part of the refreshed platform, we have built Automated in significant industry knowledge within our audit libraries while further enhancing cross-border collaboration Secure capabilities within our internal and global network.”
Integrated BRYAN MARTIN Compliant National Assurance Partner, Audit Tools, Technology, Templates & Approaches
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 50 DATA ANALYTICS – WORKING SMARTER, NOT HARDER
Over the past several years, BDO has continued to embed audit data analytics (ADA) into all aspects of our audits.
Benefits to clients include:
X Performing audits with supported ADA methodology, rooted in AICPA and PCAOB guidance
X Delivering enhanced risk assessment enabled by focus on unusual activity
X Beginning audits with highly relevant operational insights driving meaningful dialogue with management and the board
X Reducing documentation requests to the client
X Shifting from traditional audit procedures to ADA procedures to increase efficiency and effectiveness
Traditional Audit Audit Data Analytic Procedures Procedures
X Extensive sampling and X Allows for testing of 100% manual vouching to supporting of a population documentation X Biases approach to those items X Inherent elements that matter most of randomness X Automates calculations and X Traditional analytics often audit procedures present low levels of assurance with difficult-to- X Visualizes data to simplify investigate differences the identification of unusual items X Often time intensive and require extensive manual X Allows for a disaggregated data manipulation and visual review of unusual items, simplifying the X Less emphasis on data investigation process reliability and integrity
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 51 SPOTLIGHT ON Accounting, Reporting and Auditing Resources in Action
ACCOUNTING REPORTING AUDITING RESOURCES
The National Accounting department The National SEC department has the responsibility The National Audit department is responsible oversees the technical accounting consultations of coordinating and reviewing the firm’s SEC practice for developing how BDO performs audit and and development of the firm’s positions with with a view toward providing effective service to our attestation services. Our professionals oversee respect to accounting matters. offices and liaising with the SEC. the continual refreshment of our audit strategy, Specific activities include: Specific activities include: leading transformation of our approach, enhancing consultations with the practice and developing the X Developing and communicating accounting X Considering the formal requirements of the SEC’s reach and depth of global and IFRS services. guidance to our audit practice rules, regulations and administrative practices for Specific activities revolve around: X Implementing new accounting standards within each issuer audit the firm X Performing pre-filing/release reviews of certain X Developing and providing auditing training programs X Providing timely and insightful educational SEC filings X Providing technical support for auditing matters materials for our clients X Consulting on SEC disclosure and reporting matters X Providing review and approval of certain auditing X Aligning National Accounting consultations by X Maintaining professional relations with the and reporting matters identified subject matter leads and facilitating SEC through a cooperative approach with the X Acting as an audit technical consultant to complex information sharing and trend analysis for both the Commission and its staff audit engagements, including active support of practice and our clients X Developing continuing education and the engagement team and providing proactive X Staffing the department with seasoned communications pertaining to SEC practice matters guidance with respect to emerging technical audit professionals who share a commitment to and accounting issues excellence and quality X Providing on-the-job training to engagement teams related to research and analysis on technical audit questions X Developing and maintaining a high overall level of awareness and knowledge on a broad range of technical audit topics X Assessing and developing responses to emerging matters identified by the quality control function, and other sources X Developing a state-of-the-art audit methodology for both the U.S. and the Global organization
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 52 Layers of Audit Supervision and Review National Assurance has established various QUALITY COMM UDIT ITTEE mechanisms and dedicated resources to drive A audit quality from the top down that includes OL BDO’s Audit Quality Committee and Audit Quality TR CO ON NS Y C UL Network, our Regional Technical Partners (RTPs), IT L TECHNICAL PA TA AL NA RTN T Engagement Quality Control Reviewers (EQCRs) U GIO ER IO Q RE S N E R and SEC Reviewers. These groups are represented by C QUALITY NETW E N DIT OR S A AU K O professionals from across the country and help review, R U U R recommend and execute measures that contribute to S CONSULTA C S SED NT E U S S A C AN quality in real-time throughout the audit process. L O D , F A S ATTER A S They are further complemented by subject matter R M N E N CT D C E E T O J A R I W B X E leads in support of our engagement teams. U T E S V I S P , A V E I Y E We remain dedicated to ensuring the right people E C . N R I W R T A with the required skillsets are deployed appropriately S L E C I R U ENGAGEMENT TEAMS S Q S D T to address emerging issues and topics in their E S N identified specialty areas of focus. I ENGAGEMENT PARTNERS
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 53 EQCR and RTP Contributions to Audit Quality
The EQCR and RTP functions are distinct yet complementary to helping teams deliver on audit quality:
EQCRs – The RTP and RMP approve the assignment of the EQCR and subsequent changes therein to ensure the individual has the appropriate capabilities, competence, authority and time to perform the role.
RTPs – RTPs are selected by National Assurance leadership, with input from operational leadership, based on consideration of specific competencies, knowledge, experience and leadership skillsets
EQCR OVERSIGHT RTP QUALITY Independent objective Review and propose EQCR oversight to the audit RESPONSIVE Consultative to audit team Requisite industry, COMMUNICATION accounting, auditing and Issues identification RISK MITIGATION reporting knowledge Perform certain risk ISSUES MANAGEMENT Required by management oversight procedures professional standards INSIGHT
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 54 SPOTLIGHT ON AUDIT QUALITY NETWORK
The Audit Quality We have assembled an Audit Quality Network Committee comprised of National Assurance technical leaders who work together with local office audit professionals, at the senior through partner levels, The Audit Quality Committee (“AQC”) was and with local and regional Audit Quality Directors established for the purpose of evaluating and to clearly and efficiently share best practices, concluding as to: address questions and cascade enhancements and 1 to 7 changes in our audit approach across our client Ratio of AQN Professionals to Assurance engagements firmwide. Practice Professionals has remained consistent An individual audit partner’s annual audit quality rating
Firm internal inspection ratings and related audit quality ratings “Our AQN members do a great job of ensuring we are distributing information and actively bringing up trainings or tools teams should be using.” Audit quality ratings for all other positive and ASSURANCE SENIOR MANAGER negative events that occur Respondent to 2020 BDO Audit Quality and Operational Excellence Survey
Other matters that the National Assurance Managing Partner, Audit “My office has a high level of communication with the AQN and routinely involves Quality and Professional national advisors for complex areas.” Practice deems appropriate to bring to the AQC to ASSURANCE SENIOR MANAGER address. Respondent to 2020 BDO Audit Quality and Operational Excellence Survey
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 55 Accreditation and Qualifications of Specialized Roles To ensure that we are appropriately addressing risk on our audit engagements, we are heavily focused on assigning experienced professionals to not only staff our engagements, but perform critical review functions based on specified areas of risk. As part of BDO’s system of quality management, we are establishing several different accreditation or designation requirements for certain professionals serving audit engagements that include:
ISSUER AUDIT ENGAGEMENTS
Issuer Accreditation: Implemented in 2017, this accreditation is earned by completing a specific blend of initial and annual required learning geared toward public company audits along with the satisfaction of minimum experience requirements for professionals at the senior manager level and above.
ENGAGEMENT QUALITY CONTROL REVIEWER FOR AUDIT ENGAGEMENTS
EQCR Accreditation: Planned implementation in 2021, this accreditation is earned by completing initial and annually designated learning, satisfying certain minimum experience requirements (including, for Issuer EQCR assignments, being Issuer Certified) and meeting certain quality criteria.
ASC 740 TAX SPECIALISTS FOR AUDIT ENGAGEMENTS
ASC 740 Accreditation: Planned implementation in 2021, this accreditation is earned by completing initial and annual designated learning, satisfying certain minimum experience requirements and meeting certain quality criteria.
QUALIFIED INFORMATION SYSTEMS AUDIT (ISA) REVIEWER FOR AUDIT ENGAGEMENTS
Qualified ISA Reviewers: BDO maintains a group of dedicated IS Assurance specialists who focus on evaluating and/or relying on general IT controls, as well as automated application controls. These professionals are required to be a Certified Information Systems Auditor (CISA) or hold another applicable certification.
For each of the above accreditations, there are established measurable criteria for maintaining an ability to serve clients which are regularly monitored by the National Assurance Quality Management Group.
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 56 Audit Team Composition
Technical ability, industry knowledge, experience and capacity are keys to assembling Client-Facing Staffing Leverage Ratios the right engagement team to serve our clients. Executing high-quality audits is FY2020 FY2019 FY2018 enabled by the building blocks of tools, processes and training along with proper staffing and supervision. Partner to Manager 1 : 1.9 1 : 1.8 1 : 1.7 Centrally assigning engagements and monitoring of workloads is critical to ensure Partner to Staff adequate bandwidth and due care in our audits. 1 : 8.3 1 : 7.6 1 : 7.6 Manager to Staff 1 : 2.8 1 : 2.8 1 : 3.2
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 57 Consultative and Collaborative Nature
Empowerment through knowledge is one of our core values, and collaboration with our colleagues and peers inside and outside the firm is one way we improve Since inception of a formal consultation log in 2017 and adjustments to and deliver quality insight. Sharing insights is a sign of strength and testament to consultation policies, formal consultations continue to increase annually: auditors’ due professional care. We believe in embedding needed subject matter, FY19 FY20 technology and technical knowledge within engagement teams on the front end and complementing that with identified consultative resources external to the audit 30% increase 15% increase team. This gives our professionals direct access to on-demand, responsive insight and also allows for quick resolution to questions or issues to share with clients. We have clear guidelines for when informal consultations of matters are appropriate Consultation Survey Responses*: and when, due to a variety of factors, matters may require a more rigorous, formal consultation process. FY20 FY19 FY18
Consultation is one of the key elements within our Professional Judgment I have confidence that the Framework. Our engagement teams are encouraged and expected to collaborate consultation process achieved and consult on accounting, auditing, reporting and independence matters with our a well-considered and 4.7 4.7 4.4 RTPs, SEC Reviewers and EQCRs and/or our diverse group of national subject matter technically sound outcome. leaders to ensure emphasis on quality and compliance. As part of our on-going dialogue within our practice, National Assurance monitors our formal consultation Based on your experience of log and also considers informal consultations to ensure that expected dialogue the consultation process, how around complex auditing and accounting issues are being brought up by the likely are you to recommend 4.7 4.7 4.1 practice and to raise emerging issues where we see trends for consideration for this process to a colleague? National Assurance and operational leaders to provide additional guidance, policies, communications and training. The consultation improved In 2020, our most frequent areas of noted formal and informal consultations were: my personal knowledge and 4.7 4.4 4.1 understanding of the issue. X Independence X Consolidation X Going concern
X Distinguishing X Income taxes X Debt classification The consultation liabilities from equity improved my personal knowledge of how the 4.4 4.4 4.1 To better manage risk and disclosure expectations related to COVID-19, we judgments were reached. established certain consultation policies whereby our engagement teams informally consult with National Assurance on various matters that require specific consideration *Based on a five-point scale with regard to management’s estimates and judgments. Such review processes were enacted immediately and expeditiously beginning in April 2020 to promote high quality financial reporting and disclosure during this period of significant uncertainty.
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 58 We continue to believe it is essential to collaborate SPOTLIGHT ON with external associations and regulatory bodies to work together toward a common goal of increased BDO Leaders Guiding the Future of Auditing and Accounting quality. Meeting regularly with standard-setters and regulators to solicit and provide feedback on current and future standard-setting impactful to the profession and to our clients is critical to driving audit quality and informing our overall audit planning and considerations. Equally as important is encouraging our professionals to take on responsibilities within our global working groups as well as in organizations external to our firm involving leadership and task PATRICIA BOTTOMLY PAULA HAMRIC force member contributions. These contributions help formulate the profession’s response to emerging Member of Auditing Standards Board Chair of the 2020 AICPA Conference on Current areas of risk, complexity, disruption and opportunity. SEC and PCAOB Developments and Member of the A third prong of our collaborative spirit involves SEC Regulations Committee encouraging our people to assume service roles within their communities in the form of board of director and advisory roles, to industry and professional association participation and other thought leadership roles to help our people draw on and deepen their professional experiences and strengths in the service of others .
Regularly scheduled engagement by BRYAN MARTIN ANGELA NEWELL National Assurance leadership with the Member of the Anti-Fraud Collaboration and Chair of the AICPA’s Financial Reporting Executive leaders and staff of the SEC, PCAOB, the AICPA’s Assurance Services Executive Committee (FinREC) AICPA, FASB and CAQ includes biweekly, Committee (ASEC) monthly, quarterly, semi-annual and annual meetings. Additionally, BDO professionals participate throughout the year in a broad variety of professional organization technical of experienced BDO professionals serve as directors or officers for charitable committees and working groups to further 15% or nonprofit organizations in their communities. audit quality within the profession.
Assurance partners and professionals participate in significant activities 35+ championed by external professional organizations that have a direct impact on advancing audit quality.
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 59 ESSENTIAL INSIGHT, IMMEDIATELY
From new accounting and reporting standard updates to evolving tax guidance and areas of emerging risk, BDO continues to commit to providing timely resources and insight to help our clients navigate both opportunities and challenges.
This speed to support was never more evident than in the wake of the significant financial and operational impacts of the COVID-19 pandemic and opportunities to apply for time-sensitive government assistance programs. BDO professionals—from our technical resources and client service teams to our core business services teams—immediately took action to prioritize informational guidance needs while still ensuring audits were completed on time.
Leaders across our Assurance, Tax and Advisory practices continue to provide the market with timely guidance on crisis response, accounting and reporting considerations, CARES Act opportunities and application assistance, as well as expected disclosures related to accounting, auditing and income tax impacts.
MAY 2020
BDO’S CORPORATE GOVERNANCE ALERT AUDIT COMMITTEE
CONSIDERATIONS: COVID-19
GUIDANCE FROM SEC AND PCAOB
APRIL 2020 / www.bdo.com
As audit committees, management and auditors continue to wrestle with practical
challenges of accounting, reporting and disclosing impacts of COVID-19, the SEC staff CONTENTS and PCAOB have issued recent guidance based on their observations and engagement. We have summarized some of the significant takeaways and provided such guidance Recent Regulatory Guidance and our insights as a series of questions for audit committees to consider in executing Covered in This Alert 1 financial reporting responsibilities and ensure audit quality. PCAOB COVID-19: The SEC and PCAOB are both closely monitoring the issues raised by COVID-19 Audit Reminders 2 as they relate to on-going audits of financial statements and timely reporting by
public companies and impacts on investors and global capital markets. In response, SEC COVID-19 Relief and they have each begun to issue various guidance and, in certain circumstances, relief Reporting Guidance 3 to both public companies and auditors with the goal of continuing to provide high Corporation Finance quality financial statements that investors and capital markets can rely on. Much COVID-19 BORROWER of this guidance has been captured by recent BDO publications and programming, Disclosure Guidance 4 including but not limited to BDO’s COVID-19 – Accounting, Reporting and Other
Related Considerations publication along with our April 2020 webinar COVID-19: Questions for Audit ACCOUNTING Accounting, Reporting and Other Considerations for Boards. Below we highlight Committees the significant takeaways for consideration as companies and their auditors address in Contemplating uncertain and unique challenges to annual and interim financial accounting and COVID-19 Impacts 6 FOR PAYCHECK reporting. These are further complemented by specific questions we suggest audit Next Steps 8 committees give consideration to in their oversight roles. For evolving information and insights, we encourage you to check in often to BDO’s COVID-19 Resource Center. 8 PROTECTION BDO KNOWS RECENT REGULATORY GUIDANCE COVERED IN THIS ALERT COVID-19 – Accounting, Reporting PROGRAM LOANS X 4/3/2020 – SEC Chief Accountant Statement on the Importance of High- Quality Financial Reporting in Light of Significant Impacts of COVID-19
X 4/2/2020 – PCAOB COVID-19: Reminders for Audits Nearing and Other Related Considerations Completion Spotlight X 4/2/2020 – SEC Chair Clayton’s Statement – Investors Remain Front of Mind
at the SEC…
X 3/31/2020 – SEC CD&Is on COVID-19 Filing Relief
X 3/25/2020 – SEC Extension of Conditional Exemptions from Reporting and Proxy Delivery Requirements MARCH 2020
X 3/25/2020 – SEC Corporation Finance Disclosure Guidance: Topic No. 9
“National Assurance’s response to COVID-19, and the associated resources that were produced in a very short period of time, really impressed me. This level of reactiveness to the practice was great and is critical.”
ASSURANCE SENIOR MANAGER Respondent to 2020 BDO Audit Quality and Operational Excellence Survey
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 60 “Audits of private companies require PRIVATE COMPANY AUDIT INNOVATIONS a distinctive focus on what’s Our private company clients make up the largest segment of our Assurance practice – representing important to the primary users of entrepreneurial, middle market and large global enterprises across multiple industries. As such, BDO continues to focus on our priority of making private company audits more efficient and effective, while ensuring appropriate their financial statements. The audit levels of rigor and precision in our work. This includes re-examining our global audit methodology and approaches approach needs to be tailored to to address existing and evolving auditing and accounting standards.
reduce efforts in areas of low risk so National Assurance has a dedicated team that deploys enhanced Private Company Audit Innovation (PCAI) that the more important financial technology, tools, practical use training and templates to our professionals with the goal of delivering a statement areas receive the highest more meaningful, higher quality audit distinct from the differing regulatory requirements and considerations of a public company audit. We intentionally build in accountability in driving to PCAI adoption by tracking usage level of audit quality by our most across offices and audit teams to help ensure a more consistent experience for our teams and our private experienced professionals.” company clients. Examples of how we are modifying our approach to private company engagements which allows for more JIM GERACE concentrated time to be spent on critical thinking and decision-making include: National Assurance Partner, Private Company Approach X Incorporating methodology X Updating our changes related to risk sampling guidance assessment, scoping, materiality and substantive X Increasing use of BDO procedure considerations Service Centers for more “I think rolling out milestones on routine auditing procedures private engagements is a good X Enhancing use of our data analytics tools X Re-designing our suite of step…The idea of executing our audit tools for simplicity and audits in a way to pull work out of X Incorporating milestones consistency in execution throughout the audit busy season and to keep important cycle for larger private X Developing training decisions from being made right engagements for proper modules tailored to private company engagements at the end of the audit is the most sequencing of work and streamlining use of resources important factor to improving audit quality in a way that is not overly stressful and burdensome”
ASSURANCE PARTNER Respondent to 2020 BDO Audit Quality and Operational Excellence Survey
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 61 Monitoring Audit Quality
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 62 The purpose of our firm’s system of quality management is to provide reasonable assurance that (a) the firm and our personnel comply with professional standard responsibilities and applicable legal and regulatory requirements and (b) reports issued by the firm are appropriate in the circumstances.
To achieve its intended purpose, a system of quality management cannot be static. Controls must be reviewed, tested and continually improved. Quality management must consider a broad variety of factors including evolving complexities brought on by enhanced use of technology, changing regulatory standards and the engagement of global network professionals, business services centers and others within the audit. As a firm, we engage in a concerted effort to evaluate the strength of our integrated system of quality management in relation to an evolving environment and make meaningful changes and improvements to honor our commitment to delivering consistent and high audit quality.
Quality is a Consequence of Deliberate Action
Invest in quality management leadership, professional practice resources and systems
Define quality and audit quality indicators, and measure those
Identify the core elements of quality and execute relentlessly
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 63 Enhancing Our System of Quality Management
New International and U.S. standards for quality management are close to being QUALITY OUTCOMES OF OUR REVIEW AND finalized5, and our goal is to be thoroughly prepared in advance of the effective date. MONITORING PROGRAMS Over the past 18 months, we conducted a comprehensive review of our system of quality management resulting in a specific mapping of the overall system for a X Documented and refined systems of quality controls, policies and procedures clearer identification of risk and our related control response. This has enabled a X Addition of new full-time professionals to our Quality Management team more precise refinement and documentation of risks, controls, mapping controls to risk, assessment of the severity level and likelihood of occurrence for each risk and X Formalized and bolstered monitoring program to review effectiveness of evaluating our approach to testing and monitoring of these controls. policies and procedures, incorporating lessons learned from remediation of inspection findings Elements of Our System of Quality Management X Enhanced engagement-level monitoring
Monitoring and Governance X Launched EQCR Accreditation Program defined by specific engagement quality Remediation & Leadership review criteria and requirements
X Enhanced office and regional quality accountability program
X Continued partner audit quality reviews and annual quality assessments Information & Risk Assessment Communication X Continued adoption of BDO enhanced data mining and analytic capabilities QUALITY X Increased communication and collaboration with regulators, including the PCAOB CONTROL Board and the SEC Office of the Chief Accountant and Corporation Finance SYSTEM X Increased inbound inquiries from regulators for BDO’s views Human, Ethical X Enhanced U.S.-led Foreign Private Issuer training and gatekeeping Technological Requirements & Intellectual X Adjusted human capital workload assignments, performance management Resources and compensation
Engagement Acceptance X Enhanced Regional Technical Partner office visits and one-on-one meetings with Performance & Continuation engagement partners and EQCRs of Clients X Delivered enhanced, timely messaging on audit quality imperatives
5 The International Auditing and Accounting Standards Board (IAASB) has issued a Proposed International Standard on Quality Management 1 (ISQM1) while the PCAOB has issued a Potential Approach to Revisions to PCAOB Quality Control Standards, largely based on ISQM1, with certain differences as appropriate for firms that are subject to U.S. federal securities law, SEC rules and other PCAOB standards and rules. Refer to respective sites for further information on finalization of standard setting.
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 64 CONTINUOUS IMPROVEMENT FRAMEWORK
We have designed a set of activities and iterative processes for constant quality improvement within our system of quality management to be applied at any level – engagement, office, regional, component element or firm:
Ongoing Assessment / Improvement Inflight Monitoring X Routine reviews X Leadership X Focused coaching X Surveys X Surveys interactions X Data mining X Focused consultant (Regional Technical reviews X Focus groups Partner meetings, X Inflight reviews X Leadership X Interviews office visits) X Interviews interactions X Data mining X Audit quality X Consultation records (Regional Technical indicators Partner meetings)
Identify Areas for Improvement X Monitoring source: inflight, post-implementation Assess Responsive Actions or ongoing assessment X Why is it going to work? (relevance and adequacy) X Context: standards, industry, recurring X Intended impact (define what would be effective) audit failures X Test and prove (identify adjustments needed): X Causal factor to address • Pilot team/retrospective use • Subject Matter Team outreach Post Implementation Assessment • Desktop reviews/interviews X Internal inspection X Thematic reviews results X Causal factor analysis
“Our strong focus on a high-functioning system of quality management starts with the right leadership team and continues with advancing the critical building blocks of our people, process and technology. Our goals of excellence and exceptional client service depend on these systems functioning properly, and we will continue to invest our time, resources and attention to achieve further improvement.”
BLAKE WILSON National Assurance Managing Partner, Quality Management
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 65 Inspection Insights
Inspections – both internal and external – to which our firm is subject are viewed as an essential part of our process to gather insights and inform our continuous improvement efforts with respect to our Quality Management system.
INTERNAL INSPECTION
Annually, our dedicated National Quality Management inspection team led by Mike Our Audit Quality Committee evaluates and concludes on both the engagement Fawley, National Assurance Partner - Inspections, performs a risk-based selection partner and EQCR quality event rating related to the inspection findings and the process of partners and engagements. Annual quality control reviews consist of overall engagement performance rating. Audit Quality Event (AQE) ratings are engagement reviews and functional reviews. Our engagement reviews are designed to assessed using a seven-point scale from a “high-positive” to a “high-negative” quality allow the inspection teams to conclude whether: finding. The Audit Quality Committee reviews the inspection findings and engages in X The engagement was performed in accordance with applicable auditing and robust discussion with the lead inspector to conclude on an appropriate AQE rating regulatory (where applicable) standards. for each partner. X The financial statements were presented, in all material respects, in conformity With respect to engagement performance ratings for issuer audits, inspected with generally accepted accounting principles (GAAP) or when applicable, a engagements are given a scaled quality rating along a continuum of nonconforming comprehensive basis of accounting other than GAAP. to conforming based on the significance of audit deficiencies identified, if any. For X The report was appropriate in the circumstances. non-issuer audits, inspected engagements are rated: (1) unsatisfactory, (2) areas for improvement needed or (3) satisfactory based on the significance of audit X The partner in charge of the engagement had the knowledge, skills deficiencies identified, if any. and competency to perform the engagement in accordance with professional standards. X The engagement was performed in accordance with the firm’s policies SPOTLIGHT ON and procedures. Audit Quality Events Engagement inspections are bifurcated between issuers and non-issuers and designed to address specific associated risks. AQEs focus on appropriate demonstration/consideration of:
Functional area reviews examine certain key areas of the Assurance practice that X Exhibition of appropriate tone X Adherence to independence, pertain to and can influence audit quality including ethical requirements, human X Technical knowledge and focus risk management and other resources, client acceptance and continuance and other matters. This type of testing firm policies X Engagement of appropriate is performed for approximately one-third of the practice offices each year on a resources throughout the audit X Adherence to audit rotating basis. Focus groups are conducted to gain insight on the office’s attitude engagement milestones and emphasis on audit quality as well as understanding of the firm’s policies and X Execution of audits in line with X Internal and external procedures. Testing is also performed on a national level for certain areas. professional standards inspection findings X Audit restatements All Assurance partners have the potential to be subject to inspection each year based on a risk-based selection process and generally will be inspected at least once within a three-year period.
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 66 Quality Assurance and Gatekeeping Reviews During 2019, we inspected of partners across all six regions As a member of BDO International, each 42% member firm undergoes Quality Assurance Reviews (QARs) performed by a BDO International member firm inspection team to provide assurance that the BDO representing including member firm adheres to, and complies with, applicable professional standards, as well as BDO International’s standards. Our 136 engagements 20 employee benefit plan audits latest report reflects an acceptable level of performance in all functional areas. BDO USA further contributes to the global QAR 27 issuer clients 15 SSAR engagements system by providing seven members of National Assurance who perform QARs of BDO International member firms. 109 non-issuer clients 2 Third Party Assurance engagements Our international quality assurance also includes “gatekeeper” reviews of our BDO member firm audit engagements where the covering related financial statements are filed with the SEC. We are currently involved in nearly 70 of these reviews. In addition, during the past year, Over 16 industry groups 67% of our Assurance practice offices we have enhanced the quality of our foreign private issuer practice through additional training, accreditation and consultation policies, guidance for client acceptance and thorough gatekeeping reviews performed by BDO USA professionals with in-depth knowledge of SEC and PCAOB rules, along with This represented approximately 4.2% Notable areas identified by internal inspection relevant specialized industry experience. of all Assurance hours for the year ended teams are used, in conjunction with findings and March 31, 2020. experience with external inspections, to inform not only remediation actions for individual engagements but also to further enhance our system of quality Reviews of functional areas were conducted management, including our messaging, continuous in 15 offices. education, tools, processes and guidance.
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 67 EXTERNAL INSPECTIONS
AICPA Peer Review The redesigned report7 streamlines content and provides an easy to digest executive As a member of the AICPA, we participate in a triennial external peer review of our summary and three-year comparative graphics while removing certain boilerplate accounting and auditing practice. Our last review report was issued in 2018 and language. The report provides content related to deficiencies that were of such included an examination of 68 audits by a peer firm. The report concluded the system significance to indicate an audit firm had not obtained sufficient appropriate audit of quality for our firm was suitably designed, and we had complied with our own evidence to support its opinion(s) on the issuer’s financial statement and/or ICFR quality guidelines. The peer reviewer also concluded the system provided our firm (“Part I.A”) and newer content relate to instances of non-compliance with PCAOB with reasonable assurance of performing and reporting in conformity with applicable standards or rules (“Part I.B”). The PCAOB continues to provide Part II criticisms professional standards in all material respects. The peer review report and the related of, and potential defects in, the firm’s system of quality management. These AICPA Acceptance Letter can be found here. observations are not made public unless the PCAOB concludes that they have not been satisfactorily addressed by the firm within 12 months after issuance of the PCAOB’s related Part 1 report. PCAOB Review We value the PCAOB inspection process as an independent assessment of our As a firm who audits well over 300 issuer clients6, BDO USA is subject to annual performance and effectiveness of our approach to enhancing audit quality. Each inspection by the PCAOB. In light of disruptions related to the COVID-19 pandemic, year our leadership team reviews comments promptly and then collaborates with the PCAOB shifted to a completely virtual inspection process. Additionally, in late appropriate Assurance leaders to improve, enhance and iterate our processes, tools March the PCAOB granted a brief 45-day relief period from inspections to audit firms. and communication to make further progress. We are confident that our efforts are BDO had opted to take this deferral for five engagements under inspection in 2020 working, as the scope of PCAOB comments in key areas have narrowed. based on careful consideration of resources available within the engagement team and the client as well as other client-specific factors. However, with regard to both of PCAOB inspection reports consist of two parts: these changes to the inspection cycle as of the publication of this report, we note that all of our engagements selected by the PCAOB for the current inspection cycle are Part 1: Public Portion current and progressing along the expected timeline. Similar to how we approached This section reports findings relating to specific audit engagements in which audit the shift virtually for our internal inspections, our enabling response to the PCAOB’s deficiencies may affect a firm’s ability to support its audit opinion. In addressing these shift was in providing more structured communications between our National findings, a firm takes appropriate corrective actions, including possible additional Assurance resources and engagement teams under inspection and rigorous project documentation or audit procedures (known as engagement remediation), and/or in management to both prepare for and respond to PCAOB requests for information. We rare cases, revises its report. believe strongly that the virtual nature of the inspection process has not impacted the quality of communication and engagement among the PCAOB inspectors and our The focus of the majority of the audit execution findings relate to testing of internal professionals, and the resulting inspection observations and dialogue continues to controls over financial reporting and/or substantive testing of revenue and related lead to informed discussion and appropriate firm actions to drive high audit quality. accounts, income taxes, allowance for loan losses and deposit liabilities.
In April 2020, the PCAOB issued the six largest U.S. firm inspection reports, including BDO’s In connection with the 2018 PCAOB inspections, there were no related restatements report, in a new user-friendly format that covered the 2018 inspections of 2017 audits. of issuer financial statements, or re-issuances of or modifications to our firm’s audit opinions on the financial statements and ICFR.
6 This includes approximately 60 Form 11-K benefit plan audits as of 12/31/2019. 7 Refer to the Guide to Reading the PCAOB’s New Inspection Report.
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 68 Most frequently identified deficiencies noted by the PCAOB related to: Part II: Observations Related to Quality Control
This portion of the report includes the PCAOB’s observations relating to a firm’s audit FINANCIAL INTERNAL CONTROLS OVER quality controls where improvements are recommended. In evaluating a firm’s quality STATEMENTS FINANCIAL REPORTING control, the PCAOB assesses the following areas as part of that inspection:
Identification and testing of the X Management structure and processes, including tone at the top Sufficient testing to address design and/or operating effectiveness X Practices for partner management, including allocation of partner resources and identified risk of certain controls partner evaluation, compensation, admission, and disciplinary actions X Policies and procedures for considering and addressing the risks involved in Identification and testing controls Performing substantive procedures to accepting and retaining clients related to a significant account or obtain sufficient evidence relevant assertion X Processes related to the firm’s use of audit work that the firm’s foreign affiliates perform on the foreign operations of the firm’s U.S. issuer audit clients Sufficient evaluation of significant Identification and/or sufficient testing X The firm’s processes for monitoring audit performance, including processes assumptions or data used in of controls over the accuracy and for identifying and assessing indicators of deficiencies in audit performance, developing estimates completeness of data and reports independence policies and procedures, and processes for responding to weaknesses in quality control Testing sufficient sample of transactions The PCAOB has completed their assessments of the 2015 inspection of 2014 audits and all prior inspections. The one-year open period for the 2016 and 2017 inspections have passed, but the PCAOB has not issued their final determinations on the firm’s Audit areas most frequently reviewed included: remedial activities related to those inspection reports.
X Revenue and related accounts X Investment securities We diligently review, consider and act on all inspection comments as well as listen X Inventory X Long-lived assets and engage in proactive dialogue with the PCAOB during our regularly scheduled discussions throughout the year done outside of the inspection process. These are X Income taxes factored into both normal audit quality considerations as well as remediation and Deficiencies identified in Part 1.B that do not relate directly to the sufficiency or monitoring activities and priorities that are set and measured by our leadership team. appropriateness of evidence the firm obtained to support its opinion related to retention of audit documentation and the documentation of certain discussions with the audit committee.
The nature of our PCAOB inspection findings are consistent with the audit profession findings as a whole. Our most recent inspection report, which covers the 2018 inspection of 2017 audits, and our response can be found here.
The 2019 audit inspection findings are currently under review and the PCAOB is anticipated to release this report in early 2021.
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 69 COMMUNICATION OF INSPECTION FINDINGS
As part of our continuous learning and communication plans, our 2019 inspection findings were included in each of the following programs during the period August 2019 through February 2020:
One-Day Issuer Training – 12+ sessions held across all six regions for managers and above serving issuer clients to reinforce frequent inspection findings through examples and interactive discussion
2019 Audit Quality Imperatives Webinar Series – Three mandatory programs for managers and above featuring National Assurance and Operational leadership conveying audit quality messaging in the execution of our audits, including inspection findings, themes, causal factors and audit execution response
Audit Quality Matters Publication – National Quality Management team publication release to the audit practice highlighting areas of frequent deficiency from inspections of non-issuer audits including paths for success and resources
Regional Inspection Communications – Calls held in Fall 2019 to discuss final inspection reporting among national, regional and office managing partners, RTPs and the National Managing Partner – Audit Quality & Professional Practice
Office Inspection Closing Meetings – In person meetings conducted with the OMP and RMP and National Quality Management lead to discuss findings related to engagement inspections, functional areas and focus group sessions
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 70 Audit Quality Behaviors and Monitoring Activities
We continue to learn from our Continuous Improvement Framework, client engagement, internal and external inspection findings, our review of our own system of quality management and emerging regulatory priorities. Based on those learnings, our National Assurance leadership team, in collaboration with our Executive Leadership team, continue to reinforce the following identified behaviors that drive audit quality.
ENCOURAGING BEHAVIORS THAT DRIVE AUDIT QUALITY
Appropriate level of Appropriate level Appropriate exercise Obtaining good Appropriate Sufficient time Reliance on use audit knowledge of supervision and of professional understanding of partner mindset allocation for of firm guidance and experience review in alignment skepticism and processes, including project management and applicable with perceived risk application of our identifying what and appropriate professional standards Professional could go wrong and work sequencing Judgment Framework related controls and timing
Performance of robust Appropriate re- Thorough completion Evidence appropriate Appropriate focus Adequate integration Focus on emerging risk assessment evaluation/challenge of firm templates review controls and on workload and review/ areas of risk – e.g., and understanding of certain legacy and application of control design management supervision of revenue recognition, of significant assumptions required practice information system liquidity, going risk of material and conclusions aids & tools and tax professionals concern, taxation, etc. misstatements and flow of transactions
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 71 In consideration of expected audit quality behaviors and desired performance outcomes, our National Quality Management team determines the nature, timing and extent of our monitoring activities.
Our ongoing monitoring activities include*:
X Milestone Monitoring – applicable to issuers as a systemic approach to audit cycle sequencing of work requiring completion of certain activities and distribution of hours throughout the audit process
X Issuer Certification Monitoring – ensuring individuals working on issuer audit engagements have the required training and experience specific to issuer audits
X Regional Technical Partner Practice Office Visits – regional visits to assess engagement team competence; monitor personnel assignments and mandatory rotation plans; assess progress on quality matters or inspection remediation plans; assess training needs and ensure consistency in application of firm policy and methodology; facilitate and approve client continuance decisions; and encourage consultation
X Regional Technical Partner One-On-Ones – RTPs conduct two deep interactions with each issuer engagement partner and EQCR to address areas related to client acceptance and continuance; milestones; significant risks; client-specific accounting, auditing and reporting matters; use of firm tools, compliance with firm policies, remedial activities; engagement partner workload, and EQCR availability
X Monitoring of BDO Member Firms, BDO Alliance and Other Non-BDO Firms When Utilized for Component Audit Work – Review of adherence to firm policies including how U.S. engagement teams gained comfort on the qualifications of other auditors and nature and extent of audit work performed and whether it was performed in compliance with U.S. generally accepted auditing standards (GAAS) and BDO firm policy
X Performance Management Monitoring – Includes cyclical goal-setting and review of performance for all employees and partners on an annual basis
*Refer elsewhere in this report for additional ongoing-monitoring activities related to consultations, independence, CPE and licensing as well as periodic monitoring activities including inspections and reviews of SEC filings by foreign BDO firms.
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 72 CURRENT AREAS OF FOCUS FOR ENGAGEMENT MONITORING IMPACTING ALL AUDITS
Monitoring activities are conducted on a representative sample of our issuer practice to evaluate engagement team application of firm guidance for areas of critical remediation action for the current year.
We are currently monitoring the effectiveness of over 40 action items related to usage of audit tools, adherence to guidance and observations of audit execution along anticipated milestones. Following are examples of primary actions taken related to key audit areas, based on monitoring and other quality management activities including on-going considerations related to COVID-19:
MONITORING ACTIVITY EXAMPLE OF PRIMARY AUDIT QUALITY ACTIONS TAKEN FIRMWIDE
X X Audit Quality Imperatives webinars focused on performance 2020 design enhancements to ICFR forms of robust risk assessment procedures, including assessment X Topically addressed in Regional Techinical Partners one-on- Risk Assessment of inherent risk and evaluation of risk one discussions
X Issuance of timely reminders X Planned module for inclusion in Mandatory Issuer Training
X Audit Quality Imperatives webinars focused on key inputs Use of Estimates and critical judgments relative to material X Planned module for inclusion in Mandatory Issuer Training client estimates
Management Review Controls X Planned module for inclusion in Mandatory Issuer Training (MRCs)
X Design enhancements to templates to encourage better Evaluation of Control Deficiencies linkage between evaluation of deficiencies and impact on X Planned module for inclusion in Mandatory Issuer Training the audit
ASC 842 Lease Accounting X Audit Quality Imperatives webinars focused on both X Topically addressed in Regional Technical Partner Adoption – Substantive Procedures substantive procedures and ICFR considerations one-on-one discussions
Information Systems X While no specific actions required, monitors noted effective use of ISA tools by engagement teams Assurance Integration
X Issuance of timely reminders Business Process Walkthroughs X Planned module for inclusion in Mandatory Issuer Training X Design enhancements to ICFR forms and templates
Revenue Recognition X Issuance of timely reminders
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 73 MONITORING ACTIVITY EXAMPLE OF PRIMARY AUDIT QUALITY ACTIONS TAKEN FIRMWIDE
X Monitors noted effective use of Income Tax MRC practice aid and integration of tax professionals within the testing of income Income Taxes tax controls
Required Communications with X Monitors noted effective use of the Audit Committee Required Communications Checklist Audit Committees
Allowance for Loan Losses, Goodwill Impairments and Journal X Monitors noted effective use of various, topical guidance and practice aids by engagement teams Entry Testing
Application of the Professional X Monitors noted effective adoption and use of BDO’s proprietary Professional Judgment Framework by engagement teams Judgment Framework (PJF )
Note: As secondary actions, learning modules will incorporate targeted interactions with engagement teams to allow application to specific client circumstances.
The firm monitors key topical areas through the informal and formal consultation process discussed elsewhere in this publication. Based on the consultations performed, National Assurance observes certain patterns regarding the nature, frequency and significance of the matters consulted on. These patterns often result in actionable steps taken by National Assurance in developing training, guidance and tools to assist the practice in responding to these issues.
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 74 What’s Next for BDO Audit
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 75 BDO is focused on continuous innovation and improvement to meet the changing needs of our clients and optimize our purpose-driven professionals and processes to provide the highest quality audit and service. In pursuit of that, the actions we have taken in building resilience and capacity while remaining agile and adaptable have set us up for success in the future.
TECHNOLOGY AND RESOURCES:
X Professional and resource optimization
X Enhanced digital-enabled audit
X AI and robotics integration within process automation, optimization and data analytics
X Full deployment of a re-envisioned audit suite of tools and planned enhancements
RISK
X Remaining vigilant to changing industry, domestic and global risk factors
X Enhanced system of quality management
X Increased focus on financial reporting fraud and data governance “The rules of business have been reinvented again. At the OPPORTUNITIES same time, it’s essential to provide accurate, relevant X Focus on strategic relationships and project management and timely information so that the users of financial statements can act with confidence, and so that X Investment in complementary services and capabilities businesses can plan with precision.”
X Increased focus on sustainability and non-financial reporting PHILLIP AUSTIN National Assurance Partner, Audit X Continuing accounting, auditing, reporting and governance education for all stakeholders
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 76 People who know, know BDO.SM
2020 BDO AUDIT QUALITY REPORT / CONTINUING TO BUILD TRUST 77 CONTACT
PHILLIP AUSTIN CHRIS ORELLA National Assurance Managing Partner, Auditing National Assurance Managing Partner, Operations 312-730-1273 / [email protected] 212-885-8310 / [email protected]
WAYNE BERSON JENNIFER PUTERMAN CEO National Assurance Partner, Assurance Risk Management 301-354-2519 / [email protected] 301-354-2561 / [email protected]
ADAM BROWN AMY ROJIK National Assurance Managing Partner, Accounting National Assurance Partner, Governance & External Communications 214-665-0673 / [email protected] 617-239-7005 / [email protected]
BILL EISIG LISA SNYDER National Assurance Managing Partner and Practice Leader National Assurance Partner, Independence 301-354-2532 / [email protected] 732-734-3052 / [email protected]
MIKE FAWLEY CHRISTOPHER TOWER National Assurance Partner, Inspections National Assurance Managing Partner, 404-979-7194 / [email protected] Audit Quality and Professional Practice 714-668-7320 / [email protected] NANDA GOPAL National Assurance Partner, Regional & Industry Technical BLAKE WILSON Partner Leader Chief Compliance & Ethics Officer 714-668-7332 / [email protected] 214-259-1497 / [email protected]
TIM KVIZ National Assurance Managing Partner, SEC Services 703-245-8685 / [email protected]
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