Four Audit Firms Joint Forum “The Mission Required for Audit Firms Today”

For the Future of a Globalizing and Digitizing Economy and Society

Forum Report Four Audit Firms Joint Forum “The Mission Required for Audit Firms Today” For the Future of a Globalizing and Digitizing Economy and Society

On Thursday, January 24, 2019, audit firms, KPMG AZSA LLC, Ernst & Young ShinNihon LLC, Deloitte Touche Tohmatsu LLC, PwC Aarata LLC, and Nikkei Inc. jointly organized the Four Audit Firms Joint Forum. The globalization and digitalization of the corporate environments are accelerating. In addition, the “Key Audit Matters” will soon begin and be included in audit reports. The capital markets continue to increase expectations of audit firms, which play a part in the supply chain of financial reporting. We have held a forum cooperating with Nikkei Inc. to share with our stakeholders our mission to develop capital markets and the future of the national economy. In the first session, CEO’s from four audit firms and external experts have discussed on the roles audit firms will play in the future. In the second session, objectives and benefit on Key Audit Matters are discussed. At the conclusion of this forum, four audit firms issued a joint statement.

Overview of the Forum

Program

Panel Discussion Part 1 The Roles of Audit Firms for the Development of Capital Markets

Panelists Guest panelist Hiroyuki Sakai Mr. Tomoyuki Furusawa Managing Partner, KPMG AZSA LLC Deputy Director-General, Koichi Tsuji Policy and Markets Bureau, Financial Services Agency Chairman & CEO, Ernst & Young ShinNihon LLC Facilitator Taisei Kunii Mr. Akiyoshi Oba CEO, Deloitte Touche Tohmatsu LLC Chairman, Japan Investment Advisers Association Koichiro Kimura Executive Director, Japan Institute of Certified Public Accountants CEO, PwC Aarata LLC

Panel Discussion Part 2 The Roles of Audit Firms in Financial Reporting Supply Chain and Implementation of KAM

Panelists Facilitator Takuji Kanai Kazuaki Fujita Senior Executive Board Member, KPMG AZSA LLC Senior Writer, Editorial Writer, Nikkei Inc. Takao Kamiya Professional Practice Director, Ernst & Young ShinNihon LLC Yasuyoshi Ichikawa Managing Partner, Deloitte Touche Tohmatsu LLC Hitoshi Kiuchi COO / Assurance Leader, PwC Aarata LLC Four audit firms Joint Statement

Introduction We have been undertaking efforts to reform our organizational culture and governance and to continuously improve audit quality, as professionals who are responsible for audit that is increasingly gaining importance in the today’s rapidly changing and complex economic society. We believe that these are endless efforts, and will continue to implement initiatives in a manner to respond to changes in our society, while further engaging in a dialogue with our stakeholders, including investors.

Mission of Audit firms and Discussion in the forum Article 1 of the Certified Public Accountants Act (the “Act”) sets forth that the mission of certified public accountants is to contribute to the sound development of the national economy. Part 1 of the four audit firms joint forum (the “Foru m”) held today has discussed how we can keep up with the globalization and digitalization in a situation where the business environment surrounding corporations is rapidly moving toward the globalization and digitalization and their significant management challenges are to adapt to such changes, and how we can enhance confidence placed in us through leading initiatives including giving assurance over fair business conducts of corporations as well as securing confidence of investors and creditors, and ultimately contribute to the sound development of the national economy. At Part 2 of the Forum, we acknowledge that it is essential for us to work organically with the many stakeholders that comprise the capital market and financial reporting supply chain to ensure the relia bility and usefulness of corporate disclosures.

Four Commitments ① Initiatives to enhance the reliability of financial reporting and audit To address the market’s needs and expectations on financial reporting and audit, we, as a key link in the financial reporting supply chain, will undertake appropriate initiatives to report “Key Audit Matters (KAM)” and to provide our information related to audit, in light of the objective of the Audit Firm Governance Code in Japan. In addition, we will promote organic collaboration through meaningful dialogue with the many stakeholders that comprise the capital market and financial reporting supply chain to enhance the reliability and usefulness of corporate disclosures.

② Active investments in information technology Given the environment in which the digitalization of all information has been generating new values and giving rise to threats at an accelerated pace, we will actively invest in information technology, and work on the development of advanced auditing techniques to ensure higher audit quality. Moreover, we will explore the possibility of any new framework with other audit firms, corporations that are subject to audit, and their business partners, and will seek to increase the effectiveness and efficiency of audit.

③ Various investments in accounting talent with global mindset and talent with sufficient skills required in the digital society We will undertake efforts to enhance the development of accounting talent with global mindset who can demonstrate leadership and maximize benefit of the global networks of member firms to which we belong when performing audit and other engagements for corporations that operate globally. To adapt to the digital society, we will seek to develop and enhance our capabilities at an organization level by means such as recruiting diverse talent, investing in talent and collaborating external insights, so as to perform analyses based on wider and relevant information with sound business understanding in order to make more advanced professional judgement. We will provide our insights we have accumulated widely to the society.

④ Contribution to the sound development of the national economy We will strictly maintain our independence as independent auditors, and pursue our mission defined in Article 1 of the Act through engagements we perform. In addition to our commitment to pursue audit quality, we would like to contribute to the sound development of the national economy by providing advices based on our insights gained from audit in order to propose solutions to current issues corporations have been facing, including corporate governance, internal controls and risk management.

Conclusion In order to continuously remain relevant to society, we will relentlessly pursue self-improvement both as professionals and as a part of the social infrastructure to contribute a public interest. We are committed to contribute for promoting active capital market and securing market integrity and transparency, bringing value to society and contributing to the future of the national economy.

*The above represents a translation, for convenience only, of the original statement issued in the Japanese language. Panel Discussion Part 1 The Roles of Audit Firms for the Development of Capital Markets

The four audit firms, KPMG AZSA, EY Shin-Nihon, Deloitte Touche self-verification of audit quality through periodic inspections by Invest in accounting professionals with an Kimura： I think there is no era than now when trust has been more Tohmatsu, PwC Aarata and Nikkei held a joint forum called “The taking into account global risk information and other factors. international perspective and human resources demanded by society. For example, virtual currencies cannot be Mission Required for Audit Firms Today - For the Future of the Another issue discussed in the report is that through our People handled in the form of traditional financial statement audits. Globalizing and Digitalizing Economy and Society-” in Tokyo. In the Satisfaction Survey, we discovered that employees felt they had to respond the digital society While we have provided confidence in the audit of financial first part of the panel discussion, CEOs from the four audit firms and too large of a workload, and therefore they were not satisfied Sakai： At KPMG AZSA we statements, we must play a role in creating a new trust framework external experts discussed the status of audit firms in the future. with their professional pride. believe that in the near future as well. It must also play a role in building platforms to maintain Our firm is increasing its the career path of the majority data quality. human resource and of our accountants will include Kunii： We would like to strengthen the accountant’s advisory Introduction accelerating the use of robotics experience on an overseas functions which show ways to solving the various challenges of and artificial intelligence (AI) Oba： In discussing the role auditors should play in the development of assignment. I would like for the company by utilizing insight from our audit experiences. One to help address this issue. capital markets, we look at the five major global equity markets 80% of our partners and 60% of our missions is to successfully implement a virtuous cycle in over the past 30 years. The Japanese TOPIX is not as vibrant as it Oba： What do you think from the of our managers to have which internal controls, such as corporate risk management and was thirty years ago, and the standard stock price has remained perspective of the Financial overseas experience. In terms governance, are being developed and the quality of audits is unchanged from that of thirty years ago. Japan’s competitiveness Services Agency? of digitalization, the being improved. is deteriorating in the world. In addition, gross domestic product development of talent is an Furusawa： For companies, the Tsuji： Long-term perspective is (GDP) per person has declined considerably over the past 30 urgent issue, so our firm has auditors are counterpart who needed to encourage an audit years. Companies generate cash flow, and audit firms also strengthened hiring of know global business well. I Companies should utilize client to feel that their audit guarantee financial metrics in the capital markets, and how to specialists other than would like companies to use audit firms, which know firm is good. After thinking make Japan a growing capital market through continuous accountants. People who have audit firms more often, as they global business practices. about how to communicate improvement of Japanese companies’ value. studied theoretical physics and can provide advice for mathematics at university have joined our firm and are doing a this, I say, “We should become Mr. Tomoyuki Furusawa improvements to the Board of variety of research. By mixing these people together with our a client’s family doctor.” This Corporate Auditors and the Deputy Director-General, statement were given by Efforts to improve the reliability of financial Policy and Markets Bureau, accountants, we aim to foster the development of hundreds of Audit Committee. Financial Services Agency external advisors. The reporting and audits digital professionals. In the future, we plan to build diverse teams that consist of half accountants and half professionals from attending physicians have long Oba： The three themes of the audit different fields, such as data scientists. been familiar with the patient’s firm’s function for the Active investment in information technology growth process, lifestyle, and Kimura： Globalization and development of the capital family environment so they Oba： How are you utilizing artificial intelligence (AI) and digitalization are at the center market are: 1) improving can say, “Take this medicine.” globalization in your business practices? of talent development, but I reliability, 2) digitalization / Audit firms have to tell think we should use the word globalization and related Kunii： Tohmatsu has introduced companies to take bitter “international sense” carefully. human resource development, “Audit Analytics” in our medicine when companies need it. A trust relationship between Looking at the world, it is and 3) how to contribute to the practices, and it is important to companies and audit firms is important to say “Take the bitter becoming fragmented and there sound development of the develop an infrastructure that medicine.” allows people of the audited are many conflicts. Therefore, Japanese economy. Firstly, Sakai： New hires generally join audit firms in their early twenties. company to understand the it is necessary to understand what needs to be done to Key factors are reliability, From the start they are exposed to a variety of corporate tools and provide efficient and respect different cultures, improve the reliability of digital and globalization. information, from minutes of the board of directors and data. While the adoption of cooperate with each other, and financial reporting? management meeting materials to documents related to M&A tools in which areas still move forward with each other. I and formulation of medium-term plans, thus allowing them to Sakai： With accounting frauds Mr. Akiyoshi Oba requires human judgment and Build a common electronic think it is true that the observe a variety of business activities. We believe that it is the occurring around the world, Chairman, experience, the availability of confirmation system and “international sense” should Japan Investment Advisers Association responsibility of the audit firm to use this valuable experience we are required to deliver high tools has also provided easier establish a joint company also mean we can change and quality audits. We redefined Executive Director, by four audit firms. not stick with our own way of and knowledge to give back to the economy and society. The Japanese Institute of discovery of signs of any “high quality audits” to mean Certified Public Accountants fraudulent transactions. doing things only. It also requires fundamental efforts, through Furusawa： The early adoption of KAM (Key Audit Matters) will begin those that provide credibility Taisei Kunii utilizing global common audit methodology and tools. We are Efficiency and security are CEO, Deloitte Touche Tohmatsu next year, and disclosure of the activities of corporate auditors will to disclosed financial information in line with public also important. In order to working to develop top-class professionals in each country, to begin. I would like you to conduct considering today’s message. expectations. We therefore reviewed our audit procedures with digitize confirmation letters of account receivables and payables, allow our people to gain experience in the global network, and to Oba： Capital markets do not develop without the trust of audit firms. this goal in mind. a called “Balance Gateway” system was developed, and a joint create respectful people anywhere in the world. I expect that audit firms will continue to play a more important company by four audit firms was also established in November of Tsuji： Japanese companies are encouraged to enter untapped areas, Furusawa： Respected audit firms, respected auditors, respected role going into the future. including overseas, and as such are facing a variety of risks. The last year in order to uniform the electric confirmation tools. corporate managements and respected investors should not operate first is financial risk. The mission of audit firms is to provide Tsuji： Japan is the only country in the world to have four competing apart. I think it is important to consider what should be done assurance over financial information. firms jointly build a common platform. AI and information together. It is important for the authorities to collaborate with each other in order to raise the level of these activities. It’s also Kunii： Tohmatsu is trying to quickly respond to changes in events technology (IT) have begun with the automation of routine work, necessary to invest resources where corporate needs exist, such as digitalization and globalization. It is also important to but it is difficult to make a clear boundary between the routine especially in Asia. Improvement of audit levels in Asia is one consider whether or not our firm is responding to the needs of the work that we can automate and the work where more human of challenge. A major challenge is how to improve economic society, and efforts are being made to obtain advice judgement is needed. The basis of AI decisions must be communication among auditors and authorities. from Independent Non-Executive to discuss if needs are being developed by humans. Accounting is a social science that met. changes as people and businesses change their behavior. It’s still a long way for machines to do everything. IT is always about Contributing to the sound development Kimura： PwC Aarata is striving to build trust by focusing on investing in tools, but how can we increase the motivation of of the Japanese economy disseminating information through issuance of our annual audit people who use these new tools? That’s the largest challenge. It’s ： quality report. In the report, we evaluate our approach for not just about investing in tools, but about how we use tools. Oba Now, I would like to ask you about the mission of contributing to the sound development of the Japanese economy. The four audit firms, KPMG AZSA, EY Shin-Nihon, Deloitte Touche self-verification of audit quality through periodic inspections by Invest in accounting professionals with an Kimura： I think there is no era than now when trust has been more Tohmatsu, PwC Aarata and Nikkei held a joint forum called “The taking into account global risk information and other factors. international perspective and human resources demanded by society. For example, virtual currencies cannot be Mission Required for Audit Firms Today - For the Future of the Another issue discussed in the report is that through our People handled in the form of traditional financial statement audits. Globalizing and Digitalizing Economy and Society-” in Tokyo. In the Satisfaction Survey, we discovered that employees felt they had to respond the digital society While we have provided confidence in the audit of financial first part of the panel discussion, CEOs from the four audit firms and too large of a workload, and therefore they were not satisfied Sakai： At KPMG AZSA we statements, we must play a role in creating a new trust framework external experts discussed the status of audit firms in the future. with their professional pride. believe that in the near future as well. It must also play a role in building platforms to maintain Our firm is increasing its the career path of the majority data quality. human resource and of our accountants will include Kunii： We would like to strengthen the accountant’s advisory Introduction accelerating the use of robotics experience on an overseas functions which show ways to solving the various challenges of and artificial intelligence (AI) Oba： In discussing the role auditors should play in the development of assignment. I would like for the company by utilizing insight from our audit experiences. One to help address this issue. capital markets, we look at the five major global equity markets 80% of our partners and 60% of our missions is to successfully implement a virtuous cycle in over the past 30 years. The Japanese TOPIX is not as vibrant as it Oba： What do you think from the of our managers to have which internal controls, such as corporate risk management and overseas experience. In terms was thirty years ago, and the standard stock price has remained perspective of the Financial Recruiting talent from governance, are being developed and the quality of audits is of digitalization, the unchanged from that of thirty years ago. Japan’s competitiveness Services Agency? fields other than accounting being improved. is deteriorating in the world. In addition, gross domestic product development of talent is an Furusawa： For companies, the to prepare hundreds of Tsuji： Long-term perspective is (GDP) per person has declined considerably over the past 30 urgent issue, so our firm has auditors are counterpart who digital professionals. needed to encourage an audit years. Companies generate cash flow, and audit firms also strengthened hiring of know global business well. I client to feel that their audit guarantee financial metrics in the capital markets, and how to specialists other than would like companies to use Hiroyuki Sakai firm is good. After thinking make Japan a growing capital market through continuous accountants. People who have Managing Partner, KPMG AZSA audit firms more often, as they about how to communicate improvement of Japanese companies’ value. studied theoretical physics and can provide advice for mathematics at university have joined our firm and are doing a this, I say, “We should become improvements to the Board of variety of research. By mixing these people together with our a client’s family doctor.” This Efforts to improve the reliability of financial Corporate Auditors and the accountants, we aim to foster the development of hundreds of statement were given by Audit Committee. external advisors. The reporting and audits digital professionals. In the future, we plan to build diverse teams that consist of half accountants and half professionals from attending physicians have long Oba： The three themes of the audit different fields, such as data scientists. been familiar with the patient’s Audit firm aims to be a firm’s function for the Active investment in information technology growth process, lifestyle, and “family doctor”. Kimura： Globalization and development of the capital family environment so they Oba： How are you utilizing artificial intelligence (AI) and digitalization are at the center market are: 1) improving can say, “Take this medicine.” globalization in your business practices? of talent development, but I Koichi Tsuji reliability, 2) digitalization / Audit firms have to tell think we should use the word Chairman & CEO, EY ShinNihon globalization and related Kunii： Tohmatsu has introduced companies to take bitter “international sense” carefully. human resource development, “Audit Analytics” in our medicine when companies need it. A trust relationship between Looking at the world, it is and 3) how to contribute to the practices, and it is important to companies and audit firms is important to say “Take the bitter becoming fragmented and there sound development of the develop an infrastructure that medicine.” allows people of the audited are many conflicts. Therefore, Japanese economy. Firstly, Sakai： New hires generally join audit firms in their early twenties. company to understand the it is necessary to understand what needs to be done to From the start they are exposed to a variety of corporate tools and provide efficient and respect different cultures, improve the reliability of information, from minutes of the board of directors and data. While the adoption of cooperate with each other, and Play a role in creating financial reporting? management meeting materials to documents related to M&A tools in which areas still move forward with each other. I a new system of trust. and formulation of medium-term plans, thus allowing them to Sakai： With accounting frauds requires human judgment and think it is true that the observe a variety of business activities. We believe that it is the occurring around the world, experience, the availability of “international sense” should Koichiro Kimura responsibility of the audit firm to use this valuable experience we are required to deliver high tools has also provided easier also mean we can change and CEO, PwC Aarata and knowledge to give back to the economy and society. quality audits. We redefined discovery of signs of any not stick with our own way of “high quality audits” to mean fraudulent transactions. doing things only. It also requires fundamental efforts, through Furusawa： The early adoption of KAM (Key Audit Matters) will begin those that provide credibility Efficiency and security are utilizing global common audit methodology and tools. We are next year, and disclosure of the activities of corporate auditors will to disclosed financial information in line with public also important. In order to working to develop top-class professionals in each country, to begin. I would like you to conduct considering today’s message. expectations. We therefore reviewed our audit procedures with digitize confirmation letters of account receivables and payables, allow our people to gain experience in the global network, and to Oba： Capital markets do not develop without the trust of audit firms. this goal in mind. a called “Balance Gateway” system was developed, and a joint create respectful people anywhere in the world. I expect that audit firms will continue to play a more important company by four audit firms was also established in November of Tsuji： Japanese companies are encouraged to enter untapped areas, Furusawa： Respected audit firms, respected auditors, respected role going into the future. including overseas, and as such are facing a variety of risks. The last year in order to uniform the electric confirmation tools. corporate managements and respected investors should not operate first is financial risk. The mission of audit firms is to provide Tsuji： Japan is the only country in the world to have four competing apart. I think it is important to consider what should be done assurance over financial information. firms jointly build a common platform. AI and information together. It is important for the authorities to collaborate with each other in order to raise the level of these activities. It’s also Kunii： Tohmatsu is trying to quickly respond to changes in events technology (IT) have begun with the automation of routine work, necessary to invest resources where corporate needs exist, such as digitalization and globalization. It is also important to but it is difficult to make a clear boundary between the routine especially in Asia. Improvement of audit levels in Asia is one consider whether or not our firm is responding to the needs of the work that we can automate and the work where more human of challenge. A major challenge is how to improve economic society, and efforts are being made to obtain advice judgement is needed. The basis of AI decisions must be communication among auditors and authorities. from Independent Non-Executive to discuss if needs are being developed by humans. Accounting is a social science that met. changes as people and businesses change their behavior. It’s still a long way for machines to do everything. IT is always about Contributing to the sound development Kimura： PwC Aarata is striving to build trust by focusing on investing in tools, but how can we increase the motivation of of the Japanese economy disseminating information through issuance of our annual audit people who use these new tools? That’s the largest challenge. It’s ： quality report. In the report, we evaluate our approach for not just about investing in tools, but about how we use tools. Oba Now, I would like to ask you about the mission of contributing to the sound development of the Japanese economy. Panel Discussion Part 2 Roles of Audit Firms in the Supply Chain of Financial Reporting and Implementation of KAM

In the second part of the panel discussion, the adoption of the audit Meeting. The challenge is to develop professionals who can lead Kiuchi： Improving the transparency of the auditing process and the Ichikawa： The key points are first report of KAM (Key Audit Matters) is discussed and the four audit in an era of globalization and digitalization. Particularly in reliability of the auditing process are important factors for the avoiding the use of boiler firms exchanged opinions on the significance and benefits of globalization, we think that not only English language skills are implementation of KAM. However, KAM is not the goal, but is plates (general clauses), introducing KAM. important, but the mindset is the most important, and we are positioned in the context of improving the supply chain for secondly encouraging early working to foster people with a global mindset. financial reporting for the development of capital markets. adoption, and thirdly making Investors expand investments using corporate information them visualized in audit Kanai： In July 2016, prior to the Introduction disclosure and audit reports, and the incorporation of KAM from reports. A considerable amount issue of the Audit Firm the company, auditor and investor will lead to the enhancement of trial and error is required to Fujita： When I was in New York from 2003 to 2007, I interviewed Governance Code, we of the supply chain and the development of capital markets. We avoid the use of boiler plates. It and wrote articles about accounting scandals at large companies established a body with four expect that the amendment of Cabinet Office Ordinance will is the means that audit firms such as Enron and WorldCom. Accounting problems are a global independent third-party include more information on uncertainties in accounting can explain how different issue, but auditors are not the only ones that are required to solve members to supervise and estimates and disclosure impact on business performance. management systems of each these issues. Thus, the concept of a financial reporting supply evaluate the execution side of As for the benefits of companies, an environment in which company are designed with the chain emerged. I believe that the roles played by regulators and our firm. We’ve also held investors can invest with confidence leads to a long-term, stable unique audit procedures, or security exchange markets, in addition to companies that prepare stakeholder dialogues that increase in shareholders. We also heard from a corporate how we improve audit quality financial statements, audit firms, and investors who use them, included the participation of Focused on the public management that it would be good for management to increase by utilizing internal experts in will lead to improved reliability of financial information. In institutional investors, rating interest mindset and disclosures, because it would then be necessary to explain it as a situation of the audit particular, audit firms with appropriate ethics, knowledge, and agencies, university professors, communications. company, and therefore it would strengthen awareness of the engagement which can not resolve without experts such as IT extensive experience play a key role in this process. security exchange officials, company’s issues to address. A combination of corporate specialist. On the other hand, there may be movements to unify regulatory agencies, and others Takuji Kanai information disclosure and KAM could lead to the enhancement and streamline the management system. In the process of participants. The first key Senior Executive Board Member, of the financial reporting supply chain and contribute to the preventing the use of boiler plates, there is a possibility of Audit firm’s current efforts in the supply chain point of our efforts is mindset. KPMG AZSA development of capital markets. improvement in substance. KAM will be required in FY March It is important that all of financial reporting 2021, but given its early adoption, companies have to start members of our firm maintain an awareness that audits preparation just after the close of this year’s annual shareholders’ Fujita： We would like to discuss initiatives for dialogue with contribute to the public interest. The second important point is Issues, approaches and initiatives for meeting. In the fiscal year ending March 31, 2020, the timing of shareholders to ensure that the supply chain for financial fostering an organizational culture that makes this possible. Next early adoption of KAM is in line with the timing of disclosing reporting works well. is communications. We are focusing on these three areas. introducing KAM the status of the activities of the Board of Corporate Auditors. In ： Kiuchi We need to understand Kanai： Over the past 30 years, we have made significant progress in the process of reviewing the status of the activities of Corporate what stakeholders think about financial reporting, including the voluntary adoption of IFRS and Auditors, KAM will be discussed, and the development of the audit quality, and operate the Transparency in the audit of individual companies the internal control reporting system. In July last year, a working management system will be carried out together to see the actual firm. In meetings of investors Significance and benefits of introducing KAM group of the Financial System Council submitted a proposal that effects. The disclosure of KAM will increase the value of the and analysts commenced 2009 included disclosure of risk information and the reliability of information in the audit report, enhance the content of disclosure and after, they have taught us Fujita： How do you prepare to audit report reforms that incorporate information in preparing financial information. This is a great through amendments to the Cabinet Office Order on Disclosure the areas they were looking at KAM? initiative. The key will be how to introduce it in an effective of Corporate Affairs, and improve the overall level by within financial statements and manner. It is important to consider the role of the auditor, not Kamiya： I participated as a temporary member in discussions by the establishing a substantive management system and improve the what they thought was most only for KAM, but also by keeping in mind the overall trend Thinking from the Business Accounting Council on the revision of auditing standards, quality of audits. I think it is prudent not only to enhance the important. It was not the same toward more robust corporate information disclosures. We perspective of shareholders, including the implementation of KAM. Among them, transparency disclosure but also to take early action, with an awareness of the as what we had considered believe that accountants can contribute to the market by and continue to make in the auditing processes was cited as a significant reason for the real effects. important. We are doing our disclosing important matters that arose in discussions with the the best effort. introduction of KAM. This means increasing the transparency of best while trying to ensure we client’s board of corporate auditors and having investors use this Fujita： The implementation of KAM is a major change. I hope that audits conducted by audit firms and increasing the value of audit maintain quality to consider information with confidence. The number of early adoptions is an attitude of understanding and actively tackling the Hitoshi Kiuchi reports. In introducing KAM, we believe that a common the perspective of our not the primary goal, but it is important to accumulate good significance and benefits will be the driving force for the COO/Assurance Leader, PwC Aarata understanding between companies that prepare financial shareholders and other outside practices. We are making the necessary preparations to ensure system’s real functioning. statements, investors who use financial statements, and auditors is parties, and not just focus that KAM are effective disclosures by engaging in substantive extremely important. In August 2006 our firm held a briefing for solely on our perspective. discussion with management. corporate auditors and persons in charge in the accounting Ichikawa： We believe it is essential to strengthen communications department on the quality with investors, which tend to be insufficient. Last year, our firm control system for the clients of interviewed mainly investors and shared the summarized our firm. Pilot tests were opinions, and disclosed them externally. I felt that the audit performed to simulate industry is facing interests and expectations regarding preparing KAM, and they were governance changes that drive sustainable growth of the insightful. In communicating company. An easy-to-understand explanation of the audit process with investors, we received a is required. As the audit industry, we need to communicate more number of comments, including closely with management than ever before. a clear indication of what we felt to be a risk as an auditor Kamiya： The Audit Firm Governance Code was issued in March Common understanding on without writing a lengthy letter, 2017, and we adopted it in April. Strengthening management was KAM among companies, and writing from the investor’s effective. Deep involvement of the firm’s management in audit investors, and auditors is perspective as much as possible. quality is important, and the Audit Quality Oversight Board was essential. I have very high expectations established to show this direction. We strengthened the function for KAM. We would like to to supervise and evaluate the effectiveness of our management. Takao Kamiya build a KAM quality control Three external advisors attended Executive Board meetings, Professional Practice Director, system based on these results. EY ShinNihon Audit Committee, Public Interest Committee, and Compensation In the second part of the panel discussion, the adoption of the audit Meeting. The challenge is to develop professionals who can lead Kiuchi： Improving the transparency of the auditing process and the Ichikawa： The key points are first report of KAM (Key Audit Matters) is discussed and the four audit in an era of globalization and digitalization. Particularly in reliability of the auditing process are important factors for the avoiding the use of boiler firms exchanged opinions on the significance and benefits of globalization, we think that not only English language skills are implementation of KAM. However, KAM is not the goal, but is plates (general clauses), introducing KAM. important, but the mindset is the most important, and we are positioned in the context of improving the supply chain for secondly encouraging early working to foster people with a global mindset. financial reporting for the development of capital markets. adoption, and thirdly making Investors expand investments using corporate information them visualized in audit Kanai： In July 2016, prior to the Introduction disclosure and audit reports, and the incorporation of KAM from reports. A considerable amount issue of the Audit Firm the company, auditor and investor will lead to the enhancement of trial and error is required to Fujita： When I was in New York from 2003 to 2007, I interviewed Governance Code, we of the supply chain and the development of capital markets. We avoid the use of boiler plates. It and wrote articles about accounting scandals at large companies established a body with four expect that the amendment of Cabinet Office Ordinance will is the means that audit firms such as Enron and WorldCom. Accounting problems are a global independent third-party Start early after this include more information on uncertainties in accounting can explain how different issue, but auditors are not the only ones that are required to solve members to supervise and year’s stakeholder’s estimates and disclosure impact on business performance. management systems of each these issues. Thus, the concept of a financial reporting supply evaluate the execution side of meeting is prudent. As for the benefits of companies, an environment in which company are designed with the chain emerged. I believe that the roles played by regulators and our firm. We’ve also held investors can invest with confidence leads to a long-term, stable unique audit procedures, or security exchange markets, in addition to companies that prepare stakeholder dialogues that Yasuyoshi Ichikawa increase in shareholders. We also heard from a corporate how we improve audit quality financial statements, audit firms, and investors who use them, included the participation of Managing Partner, management that it would be good for management to increase by utilizing internal experts in Deloitte Touche Tohmatsu will lead to improved reliability of financial information. In institutional investors, rating disclosures, because it would then be necessary to explain it as a situation of the audit particular, audit firms with appropriate ethics, knowledge, and agencies, university professors, company, and therefore it would strengthen awareness of the engagement which can not resolve without experts such as IT extensive experience play a key role in this process. security exchange officials, company’s issues to address. A combination of corporate specialist. On the other hand, there may be movements to unify regulatory agencies, and others information disclosure and KAM could lead to the enhancement and streamline the management system. In the process of participants. The first key of the financial reporting supply chain and contribute to the preventing the use of boiler plates, there is a possibility of Audit firm’s current efforts in the supply chain point of our efforts is mindset. development of capital markets. improvement in substance. KAM will be required in FY March It is important that all of financial reporting 2021, but given its early adoption, companies have to start members of our firm maintain an awareness that audits preparation just after the close of this year’s annual shareholders’ Fujita： We would like to discuss initiatives for dialogue with contribute to the public interest. The second important point is Issues, approaches and initiatives for meeting. In the fiscal year ending March 31, 2020, the timing of shareholders to ensure that the supply chain for financial fostering an organizational culture that makes this possible. Next early adoption of KAM is in line with the timing of disclosing reporting works well. is communications. We are focusing on these three areas. introducing KAM the status of the activities of the Board of Corporate Auditors. In ： Kiuchi We need to understand Kanai： Over the past 30 years, we have made significant progress in the process of reviewing the status of the activities of Corporate what stakeholders think about financial reporting, including the voluntary adoption of IFRS and Auditors, KAM will be discussed, and the development of the audit quality, and operate the Transparency in the audit of individual companies the internal control reporting system. In July last year, a working management system will be carried out together to see the actual firm. In meetings of investors Significance and benefits of introducing KAM group of the Financial System Council submitted a proposal that effects. The disclosure of KAM will increase the value of the and analysts commenced 2009 included disclosure of risk information and the reliability of information in the audit report, enhance the content of disclosure and after, they have taught us Fujita： How do you prepare to audit report reforms that incorporate information in preparing financial information. This is a great through amendments to the Cabinet Office Order on Disclosure the areas they were looking at KAM? initiative. The key will be how to introduce it in an effective of Corporate Affairs, and improve the overall level by within financial statements and manner. It is important to consider the role of the auditor, not Kamiya： I participated as a temporary member in discussions by the establishing a substantive management system and improve the what they thought was most only for KAM, but also by keeping in mind the overall trend Business Accounting Council on the revision of auditing standards, quality of audits. I think it is prudent not only to enhance the important. It was not the same toward more robust corporate information disclosures. We including the implementation of KAM. Among them, transparency disclosure but also to take early action, with an awareness of the as what we had considered believe that accountants can contribute to the market by in the auditing processes was cited as a significant reason for the real effects. important. We are doing our disclosing important matters that arose in discussions with the introduction of KAM. This means increasing the transparency of best while trying to ensure we client’s board of corporate auditors and having investors use this Fujita： The implementation of KAM is a major change. I hope that audits conducted by audit firms and increasing the value of audit maintain quality to consider information with confidence. The number of early adoptions is an attitude of understanding and actively tackling the reports. In introducing KAM, we believe that a common the perspective of our not the primary goal, but it is important to accumulate good significance and benefits will be the driving force for the understanding between companies that prepare financial shareholders and other outside practices. We are making the necessary preparations to ensure system’s real functioning. statements, investors who use financial statements, and auditors is parties, and not just focus that KAM are effective disclosures by engaging in substantive extremely important. In August 2006 our firm held a briefing for solely on our perspective. discussion with management. corporate auditors and persons in charge in the accounting Ichikawa： We believe it is essential to strengthen communications department on the quality with investors, which tend to be insufficient. Last year, our firm control system for the clients of interviewed mainly investors and shared the summarized our firm. Pilot tests were opinions, and disclosed them externally. I felt that the audit performed to simulate industry is facing interests and expectations regarding preparing KAM, and they were governance changes that drive sustainable growth of the insightful. In communicating company. An easy-to-understand explanation of the audit process with investors, we received a is required. As the audit industry, we need to communicate more number of comments, including closely with management than ever before. a clear indication of what we felt to be a risk as an auditor Kamiya： The Audit Firm Governance Code was issued in March without writing a lengthy letter, 2017, and we adopted it in April. Strengthening management was and writing from the investor’s effective. Deep involvement of the firm’s management in audit perspective as much as possible. quality is important, and the Audit Quality Oversight Board was I have very high expectations established to show this direction. We strengthened the function for KAM. We would like to to supervise and evaluate the effectiveness of our management. build a KAM quality control Three external advisors attended Executive Board meetings, system based on these results. Audit Committee, Public Interest Committee, and Compensation KPMG AZSA LLC

KPMG AZSA LLC hold approximately 6,000 people in major cities in Japan, providing audit, attestation, and advisory services such as financial advisory services and preparation for initial public offerings. We also offer professional services in specialized fields including financials, manufacturing, retail, IT, media, government, and healthcare. As a member of KPMG International, KPMG AZSA LLC provides clients with a consistent set of professional services globally through a network in 153 countries. www.kpmg.com/jp/azsa

Ernst & Young ShinNihon LLC

Ernst & Young ShinNihon LLC is an EY member firm in Japan. We provide audit and assurance services as well as advisory and other services. For more information, please visit www.shinnihon.or.jp. EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In doing so, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

Deloitte Touche Tohmatsu LLC

Deloitte Touche Tohmatsu LLC is one of the entities of the Japan member firm group of Deloitte Touche Tohmatsu Limited (DTTL), a UK private company limited by guarantee. Deloitte Touche Tohmatsu LLC is one of the nation’s leading audit firms and provides audit & assurance and risk advisory services. These services are delivered to many clients including multinational enterprises and major Japanese business entities through over 6,500 professionals, including about 3,400 Certified Public Accountants, in nearly 40 cities in Japan. For more information, please visit our website at www.deloitte.com/jp/en.

PricewaterhouseCoopers Aarata LLC

Our mission is to provide an unrivaled level of service and we provide PwC’s methodology and practice in appropriate way to fit market environment of our country. We support clients broadly by providing IFRS implementation, financial reporting internal control services and advises on initial public offering. At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 158 countries with more than 250,000 people who are committed to delivering quality in assurance, advisory and tax services. www.pwc.com/jp/assurance

This is reprint of an ad feature article published in the Nikkei Online Edition on February 26th 2019 (Tuesday), Four Audit Firms Joint Forum, “The Mission Require Audit Firm - For the Future of a Global and Digitized Economy and Society -”. This English version was prepared by the four audit firms that acted as the sponsors of the forum.

© 2019 KPMG AZSA LLC, a limited liability audit corporation incorporated under the Japanese Certified Public Accountants Law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2019 Ernst & Young ShinNihon LLC. All Rights Reserved. © 2019. For information, contact Deloitte Touche Tohmatsu LLC. © 2019 PricewaterhouseCoopers Aarata LLC. All rights reserved. PwC refers to the PwC network member firms and/or their specified subsidiaries in Japan, and may sometimes refer to the PwC network. Each of such firms and subsidiaries is a separate legal entity. Please see www.pwc.com/structure for further details.