AZSA Quality 2020/21 Initiatives for Enhancing Audit Quality

October 2020 home.kpmg/jp/azsa AZSA Quality Overview

Overview of Initiatives for Enhancing AZSA’s Audit Quality

Message from Our CEO P. 2

Responsiveness to change With a global pandemic, developments in digital society and reforms in the way corporate information is disclosed, our society is changing at an unprecedented speed and becoming more complex. KPMG AZSA will continue to fulfil our unchanging mission as an audit firm, while we Expectations of market participants respond to these kinds of changes in a timely Auditing is an infrastructure that supports and flexible manner. the capital markets, and audit firms have a responsibility to respond to the expectations of market participants. KPMG AZSA continuously Responsiveness to change: pursues audit quality in order to respond to Topics Environmental changes 1 such expectations and to be the Clear Choice 02 KPMG AZSA’s initiatives for for our people, clients and the2 public. Review Boards addressing COVID-19

3 P. 10 4

CEO x Public Interest Oversight Responsiveness to change: Topics Committee Online Dialogue Topics Technological innovations 01 Evaluation of initiatives for 03 Digital audit platforms enhancing audit quality by supporting audits in the New the Public Interest Normal era Oversight Committee P. 14

P. 4 Responsiveness to change: Topics Legal amendments 04 Addressing the mandatory application of Key Audit Matters (KAM) P. 20

Message from the Deputy Managing Partner (Head of Quality Assurance) P. 24

Our Initiatives for Audit Quality Viewed from AQI P. 26

Structure and Initiatives Supporting Audit Quality Audit firms have the responsibility to protect a sound market economy through audits. KPMG AZSA has established a system and is undertaking initiatives for realizing high-quality audits that ensure that no matters arise that may surprise the market.

KPMG AZSA’s audit quality is founded on shared 1

Organizational Review basic principles, an open corporate culture, a strong 2 Boards governance structure and the firm’s four defense lines P. 28 3 I. Foundation (Organizational Quality Control System). 4

1 2 Review KPMG AZSA’s initiatives aimed at maintaining Boards 2 Review System of and enhancing audit quality are based on our Boards 3 P. 42 3 Quality Control organizational quality control structure of the four 4 II. 4 defense lines

At KPMG AZSA, we have prepared an environment in Human Resource which our people can acquire professional knowledge 1

2 Review and skills for providing high-quality services, based on Boards P. 6 8 III. Development an understanding that the basis of audit quality is the 3 quality of our people. 4

KPMG AZSA provides services with value through KPMG Network utilizing the KPMG global network with offices in IV. approximately 150 countries nationwide and its broad P. 78 industry knowledge.

Corporate Overview P. 8 5

Compliance with the Audit Firm Governance Code P. 9 0

Addressing the New Normal era Proactively addressing future risks Fostering true professional As the COVID-19 pandemic There are concerns that restrictions The foundation for improving audit continued to spread across the on corporate activities due to COVID- services, providing high value-added world, Japan faced the challenge of 19 as well as the impact of the services and continuously responding approaching a full-scale peak season recent rapidly deteriorating US-China to the expectations of society, is our for closing audits ahead of the rest of relationship may lead to people. While remote working is now the world. further lack of transparency in becoming the norm, the fact remains corporate performance. Therefore, that ultimately, the trust between Despite this situation, we were able in addition to the reliability of financial people and between organizations is to complete year-end audits without information, the importance of non- most important. any major confusion, thanks to the financial information is expected to understanding and cooperation of We will continue to foster true grow significantly. our audit clients, for which we are professionals who are worthy of deeply grateful. With the disclosure of Key Audit trust through maintaining a high Matters (KAM) becoming obligatory, standard of ethics and integrity, We expect the impact of COVID-19 to having an accurate understanding of and who can think and make continue for some time, and foresee key matters based on more in-depth judgements for themselves as the entering a “New Normal era” in which conversations with the management specialists that they are. KPMG we co-exist with the virus. and relevant parties of audit clients, AZSA aims to become a firm that At KPMG AZSA we will continue to and discussing any risks that may can respond to your expectations work on reducing infection risks, and arise at an appropriate timing, based on a flat and open corporate cooperate as citizens on bringing will be increasingly important. culture that encourages the the pandemic to an end. At the As a firm that is worthy of public acceptance of diversity. same time, we consider protecting trust, we will proactively address the health and safety of our people such issues while focusing on and our clients as a top priority at To be the Clear Choice – future risks in a drastically changing now and in the future all times. With this in mind, KPMG economic environment. AZSA is committed as before to In accordance with the Certified dependably and effectively fulfilling Promoting digital audits Public Accountants Act, CPAs the responsibility of protecting a The ongoing pandemic has brought are obligated to continuously sound market economy through rigorous restrictions on direct complete training programs and audits entrusted to us by encounters between people, which acquire required credits. Recently, the public. have led to limitations on the physical it became evident that some of our handling of certain tasks both for firm’s partners and professionals The pursuit of audit quality is internal control within companies and were involved in inappropriate our top priority for our audits. Therefore, an effective conduct relating to the completion management utilizing data analysis of e-Learning programs within the Maintaining and improving audit and a digitalized progressive audit firm, and consequently did not satisfy quality is our top priority as we is more important than ever before. credit requirements. We sincerely continue to commit ourselves to Our firm will work as one with other apologize for the inconvenience and audit services in order to fulfill this KPMG group entities in addressing concerns caused to our clients and all responsibility entrusted to us by the innovations in the digital field from relevant parties in this regard. public, and thereby gain the implicit all angles. We unreservedly acknowledge trust of all concerned. In particular, we will utilize our new that such conduct lacked the As always, we are committed to audit platform “KPMG Clara” and ethics required of professional realizing effective audits that ensure provide value-added insights in order accountants, and furthermore that that no matters arise that may to promote the digital transformation insufficiencies in the functioning surprise the market. (DX) of audits. of our internal control system

led to this incident. We will take initiatives to prevent a recurrence of such conduct by strengthening our internal control system while thoroughly implementing compliance education. At KPMG AZSA, our Vision is to be the “Clear Choice”, trusted by all stakeholders, now and in the future, through the provision of first-rate services. We have reaffirmed that such trust is gained based on the integrity of each and every one of our members, and all of our partners and employees will practice self-discipline while working to regain this trust. In addition, COVID-19 has presented us with challenging issues. We are committed to responding to the expectations of all those who place their trust in us by transforming ourselves in line with the drastic changes occurring in our environment, and continuously fulfilling our unchanging mission. We have published this brochure for the purpose of introducing KPMG AZSA’s recent initiatives, organizational foundation and quality control system for enhancing audit quality, and the development of talent supporting these aspects of our firm. I hope this will help you gain a clearer understanding of KPMG AZSA’s initiatives for enhancing audit quality.

KPMG AZSA LLC CEO Hiroyuki Takanami

CEO×Public Interest Oversight Committee Members Online Dialogue Evaluation of initiatives for enhancing audit quality by the Public Interest Oversight Committee

An audit firm is said to be a watchdog for the capital markets. In recent years, audits are not only expected to provide assurance of financial statements, which is the essence of an audit, but also identify any window-dressing and fraud. This has resulted in a trend of expanding scope of audits. How are audit firms securing and improving audit quality against the backdrop of continuously expanding expectations of audits? Members of the Public Interest Oversight Committee evaluated the initiatives of KPMG AZSA from an objective viewpoint.

Communicating our purpose Uehara: One reason why audit firms of audit firms, and help gain the as an audit firm seem like distant entities to general understanding of the public. investors is that corporations select Takanami: Audit firms have a Ishida: The reason the independence or dismiss auditors, and investors are special organizational form, and of an audit firm is ensured also lies in unable to select auditors themselves. we are often told that it is difficult its organizational form. to understand the work of auditing However, this is precisely why the For an organization like KPMG AZSA when looking at it from the outside. social responsibility of audit firms is with over 600 partners, even in the How do we appear to all of you, with important, and individual auditors are event that someone hypothetically your diverse backgrounds? Please expected to keep this in mind when tries to prioritize the interests of a share your frank thoughts. going about their daily tasks. specific client, many other partners Urano: Audits are essential for society Sakata: Although audit firms serve whose personal economic interests as a part of the capital markets the public interest, they are not might be threatened would certainly infrastructure. However, usually we selected by investors, and they not permit this kind of misconduct. are not particularly conscious of them. receive fees from the companies that In other words, independence is they audit and work for companies We just have a vague impression of ensured not only thanks to the ethics that are clients. I have always felt them, where the only connection of individual accountants, but also on some doubt regarding this point. with audits is an indirect one through the basis of economic rationality. I the stock market, and unless there However, in getting to know the think it is important to make this fact are issues that arise, we don’t really actual conditions of KPMG AZSA more widely known among those notice their existence. as a Public Oversight Committee who may have doubts regarding the member, I have come to understand independence of audit firms. In order to reduce this dissociation, that such institutional contradictions it’s important that you make an have been overcome through effort to consciously communicate the pride, ethics and professional Audit quality is being information to the outside world on a skepticism held by auditors. questioned precisely because regular basis, more so now than ever of the current environment before. What is auditing? What are At the same time, an organizational the responsibilities that audit firms structure has been established to Uehara: The “corona shock” is having fulfill? I feel that it would be useful confirm the independence of auditors an enormous impact on corporate to increase the opportunities for from clients. As Urano-san has performance across all industries, explaining such points in a way that is stated, broadly communicating these more so even than the so-called easy for everyone to understand. facts will further clarify the purpose “Lehman shock” that caused the global financial crisis.

It is a completely unprecedented is that such trust is not based on need to have a core principle as situation, and the market is also a system of accumulating points. to what the corporation’s social focusing on how audit firms will Trust is not gradually acquired, but responsibility is. Otherwise, there are assure the appropriateness of granted from the outset as a major sure to be inconsistencies in areas financial information. premise for an audit firm’s existence. ranging from product development to Takanami: 2020 will be a year in Conversely, this trust is immediately customer service. which audit quality will be more lost when a problem occurs and Conversely, as long as the organization strictly scrutinized than ever. is hard to win back. It is precisely remains true to this core principle, it because we are in a challenging Due to the impact of the “corona can proceed without hesitation by economic environment that we are making sure that the non-negotiable shock” there are concerns regarding being asked to face again the issue of the business continuity of companies points are adhered to and not getting the essential nature of the assurance caught up in the details. as a result of unexpected risks provided by audits. surfacing, and we cannot dismiss This is also true for audit firms. I such signs. Sakata: While I am sure that all audit believe firms continued to carry out firms are working hard on initiatives Trust in the capital markets is a top their work conscientiously even during to improve audit quality, those efforts the COVID-19 pandemic because priority for KPMG AZSA, and we will ultimately be evaluated based on have come up with “conducting they had a common understanding whether or not a critical audit problem within the organization as to what audits that do not lead to significant has occurred. deficiencies that may surprise audit quality is, and how it should be the market” as the basic principle Having been able to survive the pursued. And I value this highly. underpinning the audit quality year ended March 2020 in the Sakata: I also think that efficiency is necessary to achieve this priority. I midst of the COVID-19 pandemic an important quality. KPMG AZSA think we are at a time where the true without any major issues is, I think, a has been putting a lot of work into value of this approach will be tested. testament to having clearly defined the digitalization of audits, but I feel audit quality and having conducted Ishida: The job of an audit firm is to it is important to promote this to consistent management based on a still greater extent and work on provide assurance. Such assurance that definition. services are only possible on the improving productivity. basis of trust, and if this trust is lost, Uehara: I have been a part of the Ishida: I agree. The expanding scope the audit firm itself will not be able to financial industry for a long time and of audits and increasing difficulties function. What we must not forget have observed many corporations, in carrying them out in recent years and I believe that all organizations

Outside Committee Members (In alphabetical order)

Koji Ishida Haruya Uehara Mitsudo Urano Masahiro Sakata Former Councilor, Policy Senior Advisor, Mitsubishi UFJ Former Representative Director Attorney-at-Law, Advisor, Committee, Bank of Japan Trust & Banking Corporation and President, Nichirei Corp. Anderson Mori & Tomotsune LPC, Former Director-General, Cabinet Legislation Bureau

have also led to a rise in audit costs, and I am sure many firms are feeling the burden of this trend. I think that clients will tend to opt for audit firms that implement initiatives for improving efficiency, for example by increasing audit accuracy and reducing man-hours, and can share the fruits of these initiatives with their clients. At a time when companies are facing a major transition in work style, I hope they continue digital investments with an eye on the future.

Linking diversity to the opportunity to get a feel of the sure to contribute to strengthening value creation atmosphere at your firm’s working an organization. sites. I felt that a culture of mutual Ishida: However, there remains an Takanami: It is said that an respect is rooted there, in which organization follows a strategy, while issue from the viewpoint of inclusion opinions are exchanged freely and and diversity. at the same time, it is also said that openly throughout the firm. a strategy follows an organization. The current situation in which In either case, companies cannot This is true not only within the firm there is not a single female Senior expect to differentiate from but also for relationships with clients, Executive Board member suggests competitors without their own and I think this is due to your corporate the need for a drastic change in organizational capabilities, and a culture of being a good listener. performance evaluation and job corporate culture as this foundation. Uehara: I think the origins of the assignment standards. At KPMG AZSA, we recognize that firm also affect this. Through Takanami: While we have been audit quality significantly depends the numerous organizational implementing initiatives to promote on the conduct of each individual restructurings that the firm has the success of women, it is true that comprising the organization, so we undergone, I think a culture of we have not been able to produce have adopted a set of values to guide listening to and incorporating results in terms of appointing our conduct including Integrity – We opinions from members with women executives, and we take do what is right, Excellence – We different views and backgrounds this issue seriously. In order to stay never stop learning and improving, and was formed. And this has led to relevant in an era where uncertainties Courage – We think and act boldly. the attitude of listening to the only keep increasing, the ability to opinions of third parties including our I myself talk about our values at respond to changes in a speedy and committee, and reflecting them in flexible manner as an organization every opportunity. At the same time, your firm’s governance. I am constantly aware of the issue of is essential. Diverse characteristics whether our values have really been Sakata: A friendly work environment such as gender, age and nationality disseminated to every corner of where employees can freely express are of course important, but the organization. This is because it their views is extremely important what is more important is having can be hard to see from the inside. for employees to maintain high multifaceted, unique viewpoints, motivation. This in turn leads to the creating an environment in which Please give an objective evaluation of delivery of outstanding and high- anybody can freely express their our firm’s corporate culture. quality services. opinions, and seeking to make the most of these as an organization. Urano: In addition to having A culture of diversity in which discussions with your firm’s different opinions are respected, is executives, we have had on occasion

We are committed to paving the way listening and allow one to draw out partner, as long as you are a CPA you for a new era of reform through linking the true issues and hints to solutions are all equals. truly diverse talent to value creation. based on this understanding, are We have absolute confidence that extremely important not only for all of our professionals have an gaining trust within the firm but also awareness of and pride in being The software and hardware winning the trust of clients. supporting quality enhancement a professional, and collaborate Ishida: Within audit teams, we based on mutual respect. We are Takanami: The reason why we value can see that partners from various committed to improving audit our corporate culture is because it backgrounds working together as one quality by approaching it from two is linked directly to our audit quality. team strike a good balance between directions—that of a mechanism, However, it is not enough to simply maintaining a flat relationship and which is visible, and that of our entrust this to the awareness and an appropriate distance. Thanks to corporate culture, which is not visible. ethics of each individual. In addition to this, I feel that the check and support the “software” of a corporate culture, Ishida: I feel that for audits, there is functions based on the four defense a tendency for the audit teams at there needs to be the “hardware” lines operate smoothly. of organizational structure and the front line to be emphasized. In business operations for sustainable Urano: In order for principles to that respect, I think it is necessary improvement to become possible. thoroughly permeate an organization, to further increase cross-checking a continual cascade of educational capabilities by fostering quality The foundation for this is the quality training is essential. control professionals through control structure which we call our Having management led by CEO increasing the relative position of “four defense lines.” Each of the four quality control departments within layers of firm management, quality Takanami-san repeatedly iterate the importance of basic principles and the firm and establishing a career control departments, audit divisions plan accordingly. and audit teams are committed to audit quality results in the principles ensuring audit quality through fulfilling truly resonating with and being put We are in an era in which initiatives their respective responsibilities into practice by employees. for pursuing audit quality should be and building a comprehensive Takanami: Performing an audit based on the collective strength of organizational controls system. requires each individual involved an organization. Our audit teams at the front lines are in the audit being able to assert able to have confidence in our quality that they are right. In that respect, because such an organizational regardless of whether you’re a mechanism and support system have member of the audit team or a been established. Urano: The starting point of everything is indeed at the front line. This is the same for manufacturers, where quality cannot be guaranteed without the backing of the high standards of ethics, expertise and communication skills in the field. And of these, the key factor is communication skills. In this respect, I feel that the ability to be a good listener that KPMG AZSA has rooted in its culture is a strength. The communication skills that enable a deep understanding of others’ views and circumstances through careful

Confronting the expectations the audited entity as a whole had any Management feeling the pressure to of society issues based on sampling. address challenging issues at a time of high uncertainty are in need of Takanami: For a long time, the audit In addition, big data analysis allows someone with whom they can have industry took the stance that the the detection of frauds that are eye-to-eye discussions. This is where purpose of audits is not to detect hard to predict using the traditional I feel there is potential for audits to fraud but to provide assurance that risk approach. With the right offer a new level of value. there are no material misstatements environment, all data subject to an in financial statements prepared by audit can be analyzed in real time, If impacts on performance and companies. However, due to the contributing to the detection of business issues based on not successive occurrence of fraudulent fraud at an early stage or prevention only past or present but also accounting, the expectations of of fraud. Fraud detection is now future risks can be understood in society extended to the detection undeniably included in the purpose of advance, audits can respond to the of fraud. an audit. expectations not only of management but also of the market. And the scope of audits has Sakata: Even if the responsibility expanded in order to resolve this gap of an audit to provide “assurance” The checking of financial in expectations. does not change, there is now a statements is not the only role demand to explain the process of expected of audit firms. With the adopted in 2008 of the how the checking and assessment Japanese version of the Sarbanes- Uehara: There are many in were performed and from what Oxley Act, the audit of internal management who want to hear the perspective. The implementation of controls was introduced, assessing opinions of third parties regarding KAM (Key Audit Matters) is simply not only financial statements but also their decisions. one opportunity for achieving this, the processes through which they and how we address the new I think it will be reassuring for were created, or in other words, the request of the public to provide management if they are able to effectiveness of internal controls. audit transparency will likely hear the objective opinions of In addition, the techniques and become a part of audit quality trusted partners who have a deep technologies used for audits have demanded in the future. understanding of their business. also evolved. In recent years, it Urano: We can also see changes in I hope you will take initiatives toward has become possible to perform a the expectations that companies building such relationships. comprehensive audit covering all have of audits. Japanese companies items and transactions, rather than Takanami: Some things will never currently face the issue of COVID-19 an audit that only confirmed whether change no matter how much measures in addition to globalization technology evolves, such as and digitalization. maintaining a fair and unbiased

Scope of usiness

rom evaluation of accuracy to evaluation of framewor based on confirmation urther epansion of of internal controls scope of assurance rom manual wor to computers etecting fraud and anomalies based on data analysis ime 1960s 2000s 2020 Institutionalization of audit firms in response Introduction of uarterly reporting Introduction of KAM, uture information to emergence of largescale corporations system and JS promotion of digital audits onfinancial information 1970s 2010s eginning of audits of interim financial Introduction of standards statements and consolidated financial addressing fraud ris 1990s Implementation of fair value accounting under the Accounting ig ang

attitude from an independent In other words, partners are owners Takanami: In a way, up to now, position, giving a critical evaluation of a business both in name and in auditors have been protected by as a professional and not accepting reality. However, at the major audit a system. We ourselves drew a audit evidence without skepticism. firms, as a result of expanding the line marking the limitations of our We intend to protect what must be scope of responsibilities in order audits, in such a way that even if protected and drastically change to respond to the expectations of we performed audits according to what must be changed. society, the firms have far exceeded predetermined rules, there was a the scale that was originally possibility that we would not be able envisaged by the partnership system. to detect material misstatements. Our partners who pave the way to future audits In order to address this situation However, we at KPMG AZSA at our firm we have implemented decided that we would not tolerate Takanami: We had all committee a management system beginning “significant deficiencies that may members share their ideas on what with human resource policies, but I surprise the market,” because we audits should be and what KPMG feel that it will be difficult to pave the believe this is the only way to respond AZSA needs to do in order to always way to the future of audit without to the trust placed in us by society. be the Clear Choice. The key to each partner changing his or her own If specialists are people who correctly achieving this is our people, and in mindset and conduct. particular our partners who are the handle their tasks in accordance foundation of audit quality. Urano: The work of management is with the rules, then professionals the job of a professional, in the same are people who earnestly face their The history of partnerships is said way as CPAs and lawyers. work without ignoring the reality to go back to the Roman period, Particularly given the current of a changing world and changing and in terms of constituents having demands of society. executive rights while also bearing social conditions, the existence of unlimited or limited responsibility professional management who can And this evolution includes the skill to toward third parties regarding address the changes occurring in the sincerely confront management and liabilities, nothing has changed up to world is indispensable. the market through the process of the present day. When considering that competent constructive discussion. auditors do not necessarily excel I too have resolved to demonstrate as management, I think that strong leadership in order to acquire a there is a need to foster experts new mindset and skillset. in management, through HR While the essence of assurance in an evaluations, career designs and audit will never change, the process succession planning. through which we provide assurance Ishida: What I seek from a partner and how this is explained to the is communication skills. Audit firms outside world will likely continue to have a wide variety of stakeholders change in the future. in addition to the audited companies. As long as this contributes to securing These include investors, regulatory trust in the capital markets, we will not authorities, academics, media outlets hesitate for a moment in continuing to and industry peers, each of which has evolve as a group of professionals. different points of interest. Having talent who are capable of appropriate We are committed to leading communication with various reforms at the forefront of the stakeholders is extremely important. changing audit environment while taking serious note of the objective In addition to their traditional role of opinions of others beginning with accounting specialists, auditors are the members of the Public Interest now being asked to acquire new Oversight Committee as well as the knowledge, experience and skills. expectations of society.

Responsiveness to change: Environmental changes KPMG AZSA’s initiatives for addressing COVID-19

Introduction In Japan, COVID-19 began to spread in early 2020, We implemented COVID-19 measures at an early and the government issued a state of emergency stage by having our people work remotely as a rule, and declaration in April. implementing split team arrangements. As a result, companies with a March financial year- We were able to complete the year-end audits without end faced the challenge of closing their books and any major issues by responding to the individual undergoing the year-end audit at a time when restrictions circumstances and needs of clients in a flexible manner. were imposed due to the state of emergency. We would not have been able to do this without the At an early stage, KPMG AZSA narrowed down our understanding and cooperation of our clients, and we focus to the following three points as matters for would like to express our sincere gratitude once again. compliance under such circumstances, and thoroughly disseminated them throughout our firm.

KPMG AZSA’s three priorities under COVID-19

The firm’s three priorities under COVID-19

1. Protecting our employees from infection risk

2. Responding to government requirements and cooperating to prevent further spread of the pandemic

3. Fulfilling our stewardship responsibilities as auditors and a professional firm

March 2020 year-end audits Due to outbreak of COVID-19, the year-end audits After an analysis of the impact these factors would have (conducted April to June) for the year ended March on audit quality, we planned measures, including a review 2020 were significantly impacted by two factors – new of our audit plans, and proceeded to implement them. business risks and limitations on site visits and going to the office.

Impact and response

Impact of COVID-19 Impact on audit Response

New business risks such as deterioration of business All audit teams conduct team meetings to performance in some industries Revise of audit plans including discuss audit issues and understand which audit risks areas of the audit plan require revision; team also conduct data-based risk assessments

Limitations on attendance of Use real-time video and image data as an alternative physical inventory count to physical attendance of inventory count

Limitations on client site visits and working from the office Limitations on exchange of audit Send and receive data on KPMG Central documentation and data (Audit platform)

Limitations on face to face Gather information through GJP professionals communications with foreign on secondment; utilize Group Reporting Portal subsidiaries and audit teams (Engagement Site)

Use of balance confirmation control system, Limitations on arrangement and including work from office while taking every receipt of confirmation letters precaution to prevent infection

We were able to complete audits without major delays we had built up to that time, and we recognize that the while ensuring audit quality by implementing the procedures were only a short-term response in a state alternative procedures described in the column titled of emergency. “Measures” above. The impacts of COVID-19 are still ongoing. From We feel that these kinds of alternative procedures the viewpoint of maintaining mid-to-long term audit functioned effectively because the evaluation of the quality, there are significant matters that need to be effectiveness of internal control had been completed addressed in the future. These include how to change during the interim audit which was completed our approach to observation of physical inventory before COVID-19 emerged, and also because of taking and vouching of supporting documentation, the accumulation of understanding and evidence both of which have always been considered important from audits in prior years. We understand that such substantive procedures, as well as face-to-face alternative procedures were only possible as a result communication. Alternatively, we need to consider how of our clients’ cooperation and the mutual trust that we can proceed without changing our approach.

Audits in the “With/After Corona” era The impacts COVID-19 has on corporate performance While we cannot avoid the restrictions on the and the speed of recovery will vary by industry and performance of audit procedures for some time, we company. In order to carry out audits under such will schedule our audit to include a degree of leeway, circumstances, it is important to understand and address move audit procedures forward, and review the audit audit risks based on an understanding of such factors in a plans in accordance with changes in the situation. We timely manner. will conduct our procedures at the appropriate time At KPMG AZSA, we have organized the impact giving consideration to whether COVID-19 cases are on companies, the steps to recovery, and the rising or falling. challenges companies face at each step together with Furthermore, we will share common audit risks or corresponding measures according to the industry. We matters of concern identified for certain industries obtain a timely understanding of audit risks by having with the entire firm, and proactively provide any useful our audit teams evaluate the impact on management insights gained thereby to our clients and to the public. estimates and fraud risk taking into account our analyses by industry.

Recovery steps for companies under COVID-19 Foursteps to recovery proposed by KPMG (Time scale varies by country/industry) by varies scale (Time

Stage1 Stage2 Stage3 Stage4

Reaction Resilience Recovery New Reality

Ensuring Maintaining and Restoration of normality Addressing safety and security continuing operations after COVID-19 has peaked a New Reality Ensuring physical safety Amid ongoing impacts of Initiatives to return to ebuilding business and and fostering a sense of CI1, measures and normal state as obs are organization where social security among management initiatives for sustaining created, investments are and economic changes and employees, clients business and improved and concerns brought by CI1 are and other staeholders organizational operations are eased taen as a given. Issues and measures of companies (examples) companies emote handling of estriction of business trips eform of business Automation and outsourcing regular operationsconsideration evacuation of epatriates profit structure of operations of alternative methods

Strengthening uarantine ptimization and streamlining Smart factories and measures and Cash flow management of supply chains automated factories hygiene management

CP activation and formation Supplementing resources, econstructing a global crisis uilding a digital crisis of crisis management dealing with management structure management system tas force alternative suppliers

Introduction of remote Security and personnel eview of evaluation policy or style reform suited woring, staggered woring management in line with on the premise introduction of fullscale to the ew eality hours and team system remote woring of remote woring

Responding to changes in expectations in the “With/After Corona” era While COVID-19 has led to irreversible changes in Specifically, we will proceed with the implementation of every aspect of society, KPMG AZSA’s Vision to be audit procedures that focus on the quality of face-to-face the Clear Choice and our principle mission “to ensure communication by clarifying the relationship of changes in that no matters arise that may surprise the market” work style to service objectives. At the same time, we will have not changed. accelerate the implementation of a digital audit platform We recognize that in order to realize our Vision and which was previously in the process of roll-out in order to fulfill our mission, we need to understand the changes achieve an even more effective and efficient audit. in society as well as the accompanying changes in the Through such new measures, KPMG AZSA will realize expectations of stakeholders, and continue to respond to the provision of assurance with a high degree of such changes through new initiatives. reliability to the public, audit services with added value At KPMG AZSA, our Quality Assurance Headquarters to our clients, and a safe environment and ideal career and a working group which we have named the “New for our people, and aim to always be the Clear Choice Normal Project” collaborated to formulate a new model regardless of the times we are living in. for responding to the changing expectations of the public, our clients and our people, and we have begun to execute measures accordingly.

Location of activity according to the purpose of audit services

KPMG Digital audit platform KPMG Clara/KPMG Central

Audit Client

● Listening and talking deeply, sharing Insights

● Confirming source documents

● Exercising professional skepticism

● Face-to-face discussions on important issues

Office Remote work

● Face-to-face discussions

with team members ● Confirming and verifying electronic

● Group training such as source documents

Off-JT ● Creating working papers and reports

● Concentrating and thinking deeply

Responsiveness to change: Technological innovations Digital audit platform supporting audits in the New Normal era

Digital audits envisioned by KPMG AZSA KPMG AZSA is putting efforts into promoting the digital transformation of audits (DX), utilizing the digital audit platform KPMG Clara. We are also proceeding with investments focusing on the digital field to a greater extent than before in order to support audits in the New Normal era due to COVID-19, and will continue to Appro. 22 billion yen respond to the expectations of the public and our clients by realizing KPMG AZSA’s digital strategy of “3C x Impacts & Insights (3C x1).” orecast for ending June 2021 billion billion 3C Audits 13 yen yen KPMG AZSA aims to realize audits based on the 3C’s igures are for KPMG Japan and include (Comprehensive, Centralized and Continuous) in line I systemrelated costs with the digitalization of society and companies. In particular, we will realize centralized and continuous audits at greater speed in anticipation of rapid digitalization of companies in the New Normal era.

Provision of Impacts and Insights KPMG AZSA will realize the Impacts of smart audits and more effective and visualized audits, and provide value- added Insights to our clients through implementing 3C Audits on KPMG Clara.

KPMG Clara – A platform supporting remote audits In the New Normal era, we will be required to implement KPMG Clara is a platform intended not only for the use more areas of the audit process remotely due to site of auditors but also of our clients. KPMG Clara is an visit restrictions. important platform supporting digital audits in a remote- At KPMG AZSA, we will realize remote audits by utilizing working environment. our digital audit platform – KPMG Clara.

A collaboration portal platform for online communication with clients This platform allows the timely transmission of documents and data, sharing of analysis KCCC results, and progress management of tasks and audits with audit clients. It has been implemented mainly among listed companies as a portal platform for audit clients and KPMG Clara Client respective audit teams. Collaboration Through providing smartphones to audit clients and utilizing OCR tools, we have developed a system for receiving and sending data in remote-working environments capable of handling even source documents for which electronic processing has been lagging.

A one-stop integrated data analysis platform for data extraction through analysis KCA We have developed a system for automatically extracting data and generating analyses by KPMG Clara Analytics accessing the Enterprise Resource Planning (ERP) system of audit clients at all times.

KCwKPMG A platform for audit working papers based on a new audit methodology with a more Clara workflow advanced risk approach

In responding to the new business risks and restrictions on site visits and office visits resulting from the outbreak of COVID-19, the effective utilization and analysis of data now Improving has more meaning than ever. By analyzing the broad data aggregated on the digital audit quality platform KPMG Clara from all directions, we can detect frauds and abnormal figures in a timely manner, thereby enhancing audit quality.

Application rate of data analysis 100 if including standard Listed companies 3 ournal analysis ear ended June 2020

Automation and sophistication of data extraction and analysis We have developed a system for automatic bulk extraction of data from our audit clients’ ERP systems. We aim to realize smart audits by accumulating and utilizing the diverse data extracted from ERP systems, and automizing analyses while also carrying out multifaceted analyses at the same time. We will continue expanding this initiative in the future with the aim of realizing real-time audits.

Fraud risk detection model Based on fraud cases and restatements that have occurred in the past, we have developed a tool for expressing the risk of accounting fraud occurring in a company in numerical form. This tool is utilized by audit engagement teams to support the identification of fraud risks. We have also utilized AI/machine learning to develop a model for detecting fraudulent accounting at the account level as a joint research initiative with Hitotsubashi University, and acquired a patent for the model in February 2020. We can expect the utilization of this technology to lead to early detection of and response to fraud risks.

Subsidiary risk scoring We objectively reveal any signs of fraud or abnormal movements by analyzing the entirety of financial data of subsidiaries using statistical methodologies and calculating risk in numerical terms (scoring). This enables a comprehensive assessment of risks including those of small-scale subsidiaries that are not included in a consolidated group audit, and contributes to smart audits and enhanced governance by our audit clients. We implement this analysis for audit clients with a certain number of subsidiaries, and it is currently used by over 300 companies.

Process mining This too enables the detection of high-risk work flows and processes that deviate from the rule by visualizing work flows and gaining a comprehensive and objective understanding of unexpected processes or transactions. Through sharing analysis results, we can also review the task processes of our audit clients and provide advanced support for their management.

Detection of anomalies in journal entries (lift analysis) Based on an algorithm utilizing analytical indicators such as lift, we can detect entries that deviate from normal entry patterns (combination of accounts, combination of the person making entries and person approving them, etc.). This allows the comprehensive and objective extraction of high-risk entries and transactions that may lead to fraud or errors.

At KPMG AZSA, we aim to improve the efficiency of audit tasks themselves while reducing Streamlining the audit burden on our clients through automation and consolidation of audit related tasks.

Automation and centralization of tasks Accounting and audit Q&A system using AI (KOMEI) We aim to improve efficiency in our audit and audit- Since July 2018, we have been operating KOMEI, related tasks through the proactive promotion of an accounting and audit Q&A system that we standardizations and systemizations utilizing RPA independently developed that accumulates and shares (Robotic Process Automation). Specifically, we are insights within the firm regarding audits, fraud cases proceeding with the automation of routine work such as and the like through AI technology (natural language the creation of audit working papers, delivery of e-mails processing and machine learning technologies). We regarding the inspection status of audit working papers, receive approximately 300 to 400 inquiries from users and anomaly detections in electronic files. on a daily basis, and in addition to expanding knowledge, The AZSA Delivery Center (ADC) (see P.49) also carries response accuracy has also been improving as the out balance confirmation procedures centrally as a part of system learns. our audit work, and we utilize digital technologies such as Automatic calculation check tool OCR to simultaneously drive the streamlining of tasks. KPMG AZSA and KPMG Ignition Tokyo, a group Audit confirmation center company, jointly developed an automatic calculation Together with Ernst & Young Shinnihon LLC, Deloitte check tool which automatically carries out calculation Touche Tohmatsu LLC and PricewaterhouseCoopers checks of securities reports and their notes, and has Arata LLC, we established the Audit Confirmation Center been in operation since May 2020. GK (ACC) with the purpose of centralizing and digitizing We are continuously implementing feature expansions, confirmation letters, contributing to the transformation of and aiming to improve task accuracy and efficiency. balance confirmation work, and reducing the administrative burden on society as a whole.

KPMG AZSA realizes the visualization of progress status regarding audit procedures and Visualization topics through a shared platform that can be accessed by both our clients and audit teams even in a remote-working environment.

KPMG Clara Client Collaboration (KCCC) The exchange of necessary information for audits between audit clients and Number of KCCC users (including KPMG Central) audit teams has previously been carried out by implementing a web-based communication tool called KPMG Central. KCCC is a more advanced version of KPMG Central with additional functions that realizes the visualization of tasks by showing the exchange status of information in real time. ver 00 companies ear ended June 2020

Management of audit related documents PBC (Prepared by client) Summary Documents and data can be exchanged between audit clients and audit teams, enabling a comprehensive understanding of whether data has been received and the status of submission deadlines and tasks, etc.

Task management Detailed information regarding audit issues and the audit status of subsidiaries is shared with audit clients in a timely manner. Appropriate progress management of operations is possible by constantly monitoring role allocations and progress status according to tasks.

Centralized management of report documents Documents such as reports for clients are shared and centrally managed on KCCC, allowing two-way communication.

Column

Digital Talent Development Program “Azsa Digital Academy” for Realizing 3C×I We have established a digital talent development There are requirements of business experience in program “Azsa Digital Academy (ADA)” with the addition to the completion of specific training programs purpose of realizing 3C x I at audit sites utilizing rapidly for the certification of digital talent. advancing technologies and data. In the business year ending June 2021, we expect all At the ADA, the future audit team image and the classes professionals involved in audit services to clear the of digital talent and their respective roles are defined, requirements of a Digital Assistant. In the next three and after clarifying the roles and required skillset of years, we aim to designate over 3,500 professionals as each class, an environment is established to implement “Digital Meisters” or higher, people who will be at the organizational training or OJT. core of our digital transformation.

Class and roles of digital talent Audit Divisions DI Division IT Audit Division ・

Presentation Digital leader Digital fellow Leads firmwide digitalization and relevant proects Leads all technological fields

Audit clients Certificate Leadership Consultation Digital meister Digital core evelops tools and provides solutions Consultation Capable of problemsolving and maing proposals clients Advise nderstanding of Certificate data tools Algorithm beginner Digital assistant Capable of analysis and output using tools

Creating New Impacts & Insights through Collaboration with KIT At KPMG AZSA we launched the Digital Innovation Division (DI Division) for promoting DX of audits in July 2019, and at the same time established KPMG Ignition Tokyo (KIT) as an organization comprising experts and developers in the field of cutting-edge technologies such as AI and blockchain. The DI Division and KIT work together as one in the same working space on the transformation of audit task processes and the development of audit platforms and solutions.

Sophistication of Data Analysis and Extension to Advisory Services At KPMG AZSA, we will expand our data analysis services based on technologies and insights obtained through the DX of audit services to our advisory services. As a first step in this process, we launched the provision of our Financial Data Analytics (FDA) service as SaaS (Software as a Service) in July 2020. We will work on further advancing our audit services by expanding functions that meet the diverse needs of companies using these services while accumulating various insights through mutual cooperation.

Responsiveness to change: Legal amendments Addressing the mandatory application of Key Audit Matters (KAM)

Enhancing descriptions in audit reports based on expectations of market participants Based on the “Opinion on the Revision of the Auditing further improvements in the quality of audits and financial Standards” published by the FSA’s Corporate reports are expected as a result of an understanding of key Accounting Council in July 2018, the inclusion of Key audit topics and measures being shared and appropriate Audit Matters (KAM) in Financial Instrument and discussions being held between management, those Exchange Act audit reports is mandatory for audits for charged with governance, and auditors. the year ending March 2021. KAM was introduced in In line with the introduction of KAM, improvements are response to indications from market participants that also being made to the content of securities reports. audit processes were like a black box and that the work In addition to an expansion in narrative information of auditors was hard to understand. beginning from the year ended March 2020, the The inclusion of KAM is intended to increase the Accounting Standard for Disclosure of Accounting transparency of audits and the information value of audit Estimates will be newly applied from the year ending reports for market participants. Stemming from this, March 2021.

KAM overview ecision Process

Audit issues

Matters discussed with those charged Matters for consideration with governance in the audit process

● Areas with significant ris or ris of material misstatements

● Auditors udgment related to financial statement areas reuiring Matters that required managements material udgment including accounting estimates particular attention identified as having high uncertainty

● Impacts of significant events or transactions in the current year on audits

Key Audit KAM definition Matters KAM hose matters that, in the auditors professional udgment, were of most significance in the audit of the financial statements of the current period.

Adoption schedule of KAM

Revisions of Audit Standards Early adoption of KAM Mandatory application of KAM July 2018 FY ended March 2020 FY ended March 2021

Early adoption status of KAM for year ended March 2020 The FSA’s Corporate Accounting Council initially However, many companies were forced to address released a comment stating that they had significant changes to their normal account closing expectations for the early adoption of KAM for the and audit procedures due to the COVID-19 outbreak, audits of companies listed on the first section of the resulting in a much lower number of companies adopting Tokyo Stock Exchange. KAM for the year ended March 2020 than was expected.

Cases of early adoption for the year ended March 2020 Summary of early adoption cases

Case Detail 1. Early adopters were mainly financial institutions, big corporations and SEC registered companies. Number of early 47 companies (listed companies 44, non- adopters listed companies 3) 2. All descriptions of KAM chiefly related to accounting

- 2.1 cases of consolidated financial estimates (impairment of fixed assets and goodwill, Average number statement audit report valuation of allowance for doubtful accounts). of KAM - 1 case of individual financial statement audit 3. For KAM content regarding the necessity of recording impairment loss for fixed assets or goodwill, there were many cases in which the assessment of the Cases of early adoption for the year ended March 2020 (by audit firms) reasonability of assumptions used for formulating the business plan which serves as the basis for Average Average Number of Number of estimations was a focus of the audit. Audit firm number of KAM number of KAM companies companies (consolidated) (individual) with no KAM 4. Cas es reporting “no KAM” were extremely limited KPMG 13 2.4 1.1 3 AZSA even for audit reports of non-consolidated financial EY statements, and applied only to holding companies. 14 2.1 0.8 6 Shinnihon 5. There were cases of KAM included in Companies Act DTT 12 2.0 1.2 0 Tohmatsu audit reports.

PwC Arata 4 1.8 1.0 0

Others 4 2.3 0.8 1

Total 47 2.1 1.0 10

KAM contents (number of cases)

Consolidated Individual KAM contents financial statement financial statement audit audit

1. Impairment of fixed assets 20 5

2. Valuation of stocks of affili- - 15 ated companies

3. Impairment of goodwill 16 -

4. Valuation of allowance for 10 3 doubtful accounts

5. Revenue recognition 9 8

6. Valuation of deferred 6 1 tax assets

Initiatives in 2019 toward the early adoption of KAM by KPMG AZSA - We created internal guidelines and examples regarding KAM content based on audit standards and KPMG policies. - We held workshops regarding the inclusion of KAM content based on preceding cases of adoption overseas. - Responsible headquarters personnel carried out a multifaceted review of all KAM drafts several times.

What we learned through early adoptions of KAM – Four keys for a successful KAM introduction Key to success 1 Early preparations Key to Confirming consistency with other success 3 disclosure of information KAM content will be seen by many both within the audit firm (audit teams, headquarters) and the audited While the inclusion of KAM is for auditors to describe company (e.g. those charged with governance, CFO, matters that were of most significance in an audit based finance and accounting department). In examples of on the auditor’s professional judgment, normally, many early adoption, there was a flood of various opinions KAM concern accounting estimations regarding future regarding the understanding of business risks and the events (e.g. necessity of recording impairment loss), and appropriate way to express such risks, and considerable relate to other disclosed information in securities reports time may be required for exchanging opinions before (notes to the financial statements, business risks, MD&A they are finalized. (Management Discussion & Analysis)). Therefore, given the likelihood that the account closing Strategic consideration is necessary for disclosures and audits for the year ending March 2021 will need to with regard to how and where information is disclosed, be addressed again under the impacts of COVID-19, recognizing the trend towards enhancing disclosed KAM content should be considered as early as possible information as a feature of corporate governance reform. rather than waiting until a date nearer to the period end. Recent media articles have also shown an awareness of relevance to other disclosed information, and such viewpoints need to be considered when including KAM. There were early adoption cases in which discussions on detailed drafts began a year prior to the period end. In early adoption cases, ensuring consistency between KAM content and disclosures was viewed as the most important issue.

Key to Further discussions regarding success 2 audit topics Key to Preparing for questions at the There is a viewpoint that the inclusion of KAM is success 4 shareholders’ meeting only meant to visualize audit procedures that have A high level of interest is expected regarding KAM already been completed, and this is not necessarily a content from people in the media and market participants, mistaken opinion. particularly in the first year of adoption, and it is possible However, in early adoption cases, discussions that there may be questions at the shareholders’ meeting. regarding KAM provided an opportunity to have deeper In cases of early adoption, there were not many cases conversations on how to address important audit topics, where questions regarding KAM were directly asked at the consequently leading to improved handling of audits. shareholders’ meeting, but preparations should be made It is therefore important that consideration regarding based on the possibility that questions will be asked at the KAM is given not only to which matters to include, but shareholders’ meeting. also to discussions on how to address such matters. While there were not many cases of questions Early adoption cases clearly demonstrated that regarding KAM being asked at shareholders’ the inclusion of KAM contributed to enhanced meetings for early adopters of KAM, preparations audit quality. are necessary.

Establishment of Office for Column Promotion of Advanced Disclosures

At KPMG AZSA, we established the Office for Promotion of Advanced Disclosures within the Quality Assurance Initiatives in 2020 toward a meaningful inclusion Headquarters with the purpose of supporting the quality of KAM by KPMG AZSA improvement of company disclosures. From the year ending March 2021, the full-scale inclusion KPMG AZSA believes that the inclusion of KAM not only of KAM in audit reports will be introduced. Based on the enhances the information value of audit reports, but also experience of early adoptions, it has become evident that leads to enhancing the value of an audit itself. a certain level of enhancement of corporate disclosures We therefore will not simply implement the inclusion will be necessary due to the introduction of KAM. More of KAM as a formality, but will engage in an exchange detailed explanations regarding accounting estimations of opinions with market participants using financial including judgments regarding the recording of impairment statements to a greater extent than before to losses in corporate disclosures are also being demanded as a result of the introduction of new accounting standards. ensure that we can provide meaningful results that Furthermore, in addition to the ongoing enhancement of meet expectations. “narrative information” disclosures in securities reports, We will address this matter while communicating with the audit standards were amended resulting in greater the management and those charged with governance, responsibility of auditors for narrative information from the and gaining the understanding of our audit clients. year ended March 2022. At KPMG AZSA, we will address KAM as follows based Initiatives toward increasing the quality of disclosed information are also being rapidly promoted internationally. on the lessons learnt from cases of early adoption. This is particularly true in Europe, where there have been • We will proceed with necessary considerations for ongoing discussions towards reviewing financial reporting finalizing KAM content, while providing information policies in UK, and a revision has been made to the Non- regarding KAM in advance to allow appropriate Financial Reporting Directive by the European Commission. responses to any questions there may be from There are now stronger demands for the strengthening relevant parties outside of the company. of information disclosure regarding the contributions of companies to the sustainability of society and the global • We will provide detailed explanations regarding environment, in addition to information disclosures for the matters that may qualify as KAM and the audit evaluation of corporate value which had traditionally been procedures that will be implemented to address any the focus. Against this backdrop, a proposal was made in relevant risks. September 2020 to establish with the IFRS Foundation a standard-setting body other than the IASB that would be • In the event that additional disclosures in securities concerned with sustainability. reports are required due to KAM content, we will discuss how they should be reflected in the financial The Office for Promotion of Advanced Disclosures will statements or narrative information. focus on the following initiatives based on the knowledge accumulated by KPMG Japan, and actual case examples Through such initiatives, KPMG AZSA will improve utilizing the KPMG global network. audit quality and the usefulness of financial reports, and respond to expectations placed in us. • Provision of advice contributing to the enhancement of quality in narrative information included in securities reports • Investigation and research regarding the provision of assurance services for non-financial information • Provision of advice to the government and other parties regarding policy design

Quality Assurance Headquarters, Department of Professional Practice Head of the Office for Promotion of Advanced Disclosures

Tomokazu Sekiguchi

Continuous initiatives towards the enhancement of audit quality as firmwide measures

Responding to expectations Management’s approach to Addressing changing for audits addressing risks audit needs At KPMG AZSA, we have been COVID-19 has not only had With the acceleration of borderless promoting the “audit quality significant impacts on the business and digitalized businesses, there enhancement project” with the environment for companies, but has are never-ceasing cases of fraud purpose of continuously pursuing also brought about major changes by companies, and the demands audit quality that can respond to in our social structure. In addition to required of audits are increasing. the expectations of the public, and potential risks that had previously We will promote the digitalization of we are constantly implementing been acknowledged, companies are audits, and work on providing audits improvements based on an analysis now required to address new risks. with Insights that identify at the of root causes of issues relating to We will perform audits taking into earliest stage not only accounting enhanced audit quality. We will work consideration how management risks but also business risks and to ensure that our audits are based assesses the impacts of such risks on issues relating to internal control on each and every one of our team the future of the company. by utilizing our knowledge and members thinking for themselves as As an initiative to enhance the experience gained as accounting and the professionals that they are, and transparency of audit processes, audit professionals. constantly ensure audit quality that the inclusion of Key Audit Matters is trusted by the public through each (KAM) in audit reports is mandatory of our four defense lines addressing from the year ending March 2021. audit risks in an appropriate and We will disclose our audit processes timely manner. as a narrative of the implementation of appropriate audit procedures based on an understanding of how management judged and addressed material risks through deepening our communication with management.

Below, I will introduce KPMG AZSA’s initiatives to realize high- quality audits that ensure that no matters arise that may surprise the market, from the viewpoints of our organizational foundation, system of quality control, human resource development and KPMG network.

Deputy Managing Partner (Head of Quality Control) Takuji Kanai

Satisfaction and Willingness to contribute to KPMG AZSA Partners and Average years of irectors eperience Application rate of data analysis

12 2 20 12 hours 0 ostering igital Assistants ear ended June 2020 ear ended June 2020 or all professionals involved in audit Percentage of respondents P.49 P.77 engagements to clear reuirements Average years of who answered positively Managers eperience Appro. billion yen 22 Goal of ending June 2021 3 Listed companies％ 22 123 12 ostering igital Meisters 100 if including standard ournal analysis udget for ther Average years of ending June 2021 Subsidiary professionals eperience 20 4 ris scoring ver 300companies billion billion 4 32 4 . as a percent of total professionals 13 yen yen ver KCCC including as of June 0, 2020 ear ended June 2020 KPMG Central ver 00companies as of June 0, 2020 P.70 P.51 P.49 Goal until ending June 202 igures are for KPMG Japan and include ear ended June 2020 I systemrelated costs P.14 P.19 P.16,18

Average Score People transferred People on eternal within KPMG AZSA secondments

1 raining hours 44 31 ear ended June 2020 ear ended June 2020 ear ended June 2020 as of June 0, 2020 P.72 P.72 P.73

otal people Partners and managers with overseas eperience one in four

nsatisfactory Administrative sanctions from the inancial Services Agency Action reuired based on JICPA review results Mainly deficiencies Asia Americas Pacific in audit procedures 10 Satisfactory In the past five years Appro. Aprro. Aprro. one of the review 0 Performance P.65 Improvement results included cases 0 400 300 that reuired a revision ecessary of the audit opinion. as of June 0, 2020 as of June 0, 2020 as of June 0, 2020 Mainly deficiencies in documentation ear ended June 2020 1 one of the review results included cases that reuired 100 a revision of the audit opinion. P.74 P.75 P.55 P.64 ear ended June 2020 P.57

KPMG AZSA continually strives to enhance audit uality. As a part of our effort to establish policies and measure outcomes, we refer to certain Audit uality Indicator AI, uantitative information related to factors that are thought to have an impact on audit uality.

Satisfaction and Willingness to contribute to KPMG AZSA Partners and Average years of irectors eperience Application rate of data analysis

Average Score People transferred People on eternal within KPMG AZSA secondments

1 raining hours 44 31 ear ended June 2020 ear ended June 2020 ear ended June 2020 as of June 0, 2020 P.72 P.72 P.73

otal people Partners and managers with overseas eperience one in four

1. Basic Principles and Corporate Culture...... 30

2. Organization and Governance Framework...... 32

3. Quality Control Based on Our Four Defense Lines...... 40

1. Basic Principles and Corporate Culture

Our shared basic principles and open corporate culture serve as the cornerstone for the foundation of audit quality at KPMG AZSA.

1-1. Shared Basic Principles That Are the Foundation of Our Audit Quality

Purpose – This is why we are here “Inspire Confidence, Empower Change.”

Through our audit and accounting services, we will ensure the reliability of information while driving positive transformations and contributing to the realization of a fair society and sound economy.

Values : This is what we believe in Vision : This is what we want to be Integrity The Clear Choice We do what is right KPMG AZSA aims to become The Clear Choice for Excellence the public, our clients, and our people by relentlessly pursuing quality in our services We never stop learning and improving Courage We think and act boldly Together We respect each other and draw strength from our differences. For Better We do what matters

1-2. Management from Diverse Backgrounds 1-3. A Corporate Culture Encouraging Free and At KPMG AZSA, we have a history of people with Open Communication diverse experience and knowledge and from various At KPMG AZSA,we have a corporate culture of corporate cultures coming together through repeated encouraging free and open communication. mergers with various audit firms. As previously mentioned, in addition to our background Our current management comprise people from of merging with a number of firms to become the firm several different firms who make use of their diverse that we are today, at KPMG AZSA we follow the conduct backgrounds in executing management tasks. guidelines of Courage (we think and act boldly) and We have been implementing regular and continuous Together (we respect each other and draw strength from structural reforms over the past ten years in order our differences) as a member firm of KPMG International. to allow our management themselves to exemplify diversity, while providing an environment that allows our people with various backgrounds to come together and exert their full potential.

History of Organizational Reforms

present.

efore reorganization eorganization to pen organizational Collection of small eorganization to homogenize audit uality culture based on accounting firms divisional structure and adapt to globalization our basic principles

epartment A

ivision A ivision A ivision A

epartment

ivision ivision ivision epartment C

epartment ivision C ivision C ivision C

2. Organization and Governance Framework

KPMG AZSA is a limited liability audit corporation managed by partners who are shareholders with authority over operational execution. Our governance framework comprises the Partners Meeting as the supreme decision-making body, the Senior Executive and Executive boards, and a supervisory and evaluation body.

Partners Meeting KPMG AZSA LLC Organizational Chart (as of July 1, 2020) Partner Committee

Supervision and Evaluation Management/ CEO Execution Public and Interest Management Oversight P.34 Oversight Committee Committee Internal Control Senior Review Board P.37 omination Committee Senior Executive Board Office of Senior Audit P.34 Review Board Committee Compliance Committee Divisional Review Boards Compensation Committee Executive Board P.59 Review Structure P.34 P.36 P. 61

Center of Ecellence

Corporate Governance CoE ・

Headquarters Divisions

uality Assuance inancial Service is Management S Audit 1 GJP S Audit 2 Clients Marets S Audit Planning S Advisory Accounting Advisory Services inance AAS Administration Tokyo IS ivision 1 Sapporo igital Innovatioin iroshima inancial Service uuoa ivision 2 Publice Service ivision ouriu Middle Maret evelopment ivision Advisory ivision Sendai KitaKanto ivision oohama oyo I Audit ...... Nagoya agoya ffice agoya S agoya AAS ...... saa ivision 1 saa S Kobe saa ivision 2 Osaka saa ivision Kyoto saa AAS saa I Audit saa Administration

2-1. Management/Execution, Supervision 2-2. The Partners Meeting as the Supreme and Evaluation Decision-making Body KPMG AZSA is a limited liability audit corporation The Partners Meeting comprises all partners and adopts managed by partners who are shareholders with resolutions on important firm matters in addition to authority over operational execution. matters set forth in laws and regulations and the articles KPMG’s governance framework comprises the Partners of incorporation, as the supreme decision-making body. Meeting as the supreme decision-making body; the Senior Executive Board, as a decision-making body for management affairs; the Executive Board, as the body responsible for the execution of matters decided Nomination Committee by the Senior Executive Board; and, the Management The Nomination Committee is composed of the Oversight Committee, as a supervisory and evaluation CEO, Senior Executive Board members, and organization. Additionally, there is the Public Interest Chairman of the Senior Review Board. It is tasked Oversight Committee, an independent supervisory with reviewing partner appointments and with body, which supervises management from the drafting disciplinary actions. standpoint of the public interest. Furthermore, we have audit and advisory divisions Partner Compensation providing professional services, which are supported by Compensation for each partner is decided based headquarter operations. on a band according to their job title, role, skills and other factors as determined by the Senior Executive Board. Each applicable band has an associated range of points. Each year, points to be granted to each partner are determined based on the results of the performance evaluation, which is conducted according to the firm’s partner performance evaluation policy, as well as the results of a competence assessment and other factors. Partner compensation is determined by multiplying the points granted by a monetary value per point. The Compensation Committee, a subcommittee of the Management Oversight Committee, reviews the processes for determining the compensation for the CEO, Senior Executive Board and Senior Review Board.

Election System In order to ensure fair organizational operation, the CEO, Senior Executive Board members and Executive Board members, all of whom are responsible at various levels for firm management/execution, as well as the members of the Management Oversight Committee, who are responsible for supervision and evaluation, are appointed through direct election by all partners.

2-3. Decision-making Management and Execution CEO KPMG AZSA operates as a firm with Hiroyuki Takanami clarity about the respective roles Head of Digital Innovation of the Senior Executive Board, a 1984 Joined Arthur Young & Company (currently KPMG AZSA LLC) decision-making body for corporate 1992-1997 Seconded to the New York office management affairs, and the 2002 Promoted to partner Executive Board, an executive body. 2008 Appointed as Executive Board member (current appointment) Chief Executive Officer (CEO) 2012 Appointed as Senior Executive Board member The Managing Partner is the CEO 2019 Appointed as CEO of KPMG AZSA and presides over the Senior Executive Board and Executive Board. Senior Executive Board Deputy Managing Partner Takuji Kanai The Senior Executive Board is Head of Quality Control, Head of Risk Management composed of the CEO and senior 1981 Joined Asahi & Co. (currently KPMG AZSA LLC) executives. It makes decisions on 1985-1990 Seconded to the New York office firm management policies and other 2001 Promoted to partner significant matters, and instructs 2008 Appointed as Executive Board member Executive Board members on the (current appointment) 2015 Appointed as Senior Executive Board member execution of corporate affairs. It 2016 Appointed as KPMG Asia Pacific Head of also prepares draft candidate lists Audit & Assurance for members of the Management 2019 Appointed as Deputy Managing Partner Oversight Committee and Public Interest Oversight Committee, as well as for the Chairman of the Senior Review Board. Deputy Managing Partner (The Senior Executive Board Toshiya Mori comprises the CEO and 9 Senior KPMG Japan Chairman, Chairman of GJP Executive Board members as of 1986 Joined KPMG Minato Audit Corporation September 1, 2020) 1990-1993 Seconded to the Honolulu office 1999 Promoted to partner at KPMG Shinnihon Executive Board 2004 Joined newly established KPMG AZSA as partner The Executive Board is composed of 2010 Appointed as Executive Board member the CEO, a Senior Executive (Chief (current appointment) Operating Officer) and Executives. 2015 Appointed as Senior Executive Board member It is chaired by the CEO in order to 2018 Appointed as KPMG Japan Chairman execute decision-making matters 2019 Appointed as Deputy Managing Partner of the Senior Executive Board appropriately. (The Executive Board comprises the CEO, 9 Senior Executive Board members, and 18 Executive Board members as of September 1, 2020)

Senior Executive Board Member Senior Executive Board Member Toshihiro Otsuka Daisuke Harada Chief Operating Officer, Tokyo Head of Kansai District, Osaka Office Managing Partner, Office Managing Partner Chief Financial Officer Head of 1987 Joined Asahi Shinwa & Co. Corporate Governance CoE (currently KPMG AZSA) 1987 Joined KPMG Minato 1997-1998 Seconded to Audit Corporation Chicago office 1991-1995 Seconded to the 2008 Promoted to partner London office 2017 Appointed as Executive Board 2003 Promoted to partner at KPMG member (current appointment) Shinnihon 2019 Appointed as Senior Executive 2004 Joined newly established Board member KPMG AZSA as partner Senior Executive Board Member 2012 Appointed as Executive Board member (current appointment) Michitaka Shishido 2017 Appointed as Senior Executive Head of Tokai District, Head of Board member Diversity 1986 Joined Asahi Shinwa & Co. (currently KPMG AZSA) Senior Executive Board Member 1991-1996 Seconded to New York office Masahiko Chino 2007 Promoted to partner Head of Advisory, Head of Public 2015 Appointed as Executive Board Sector, Head of IPO Support, Head member (current appointment) of Clients & Markets 2019 Appointed as Senior Executive 1988 Joined KPMG Minato Board member Audit Corporation Senior Executive Board Member 1993 Seconded to the Honolulu office Hiroyuki Yamada 1994-1997 Seconded to the Los Head of Planning, Head of HR Angeles office 1991 Joined Asahi Shinwa & Co. 2001 Appointed as Representative (currently KPMG AZSA) Director at the time of KPMG 2004-2005 Seconded to FAS establishment London office 2018 Joined KPMG AZSA, appointed 2004 Promoted to partner as Partner and Senior 2015 Appointed as Executive Board Executive Board member member (current appointment) 2019 Appointed as Senior Executive Board member Senior Executive Board Member Senior Executive Board Member Yutaka Terasawa Mitsugu Doi Head of Financial Services Head of General Affairs, Head 1986 Joined Asahi Shinwa & Co. of ITS, Deputy Head of Digital (currently KPMG AZSA) Innovation 1991-1992 Seconded to 1998 Joined Asahi & Co. (currently Nashville office KPMG AZSA) after 15 years’ 2002-2003 Seconded to experience at a domestic London office financial institution and foreign 2006 Promoted to partner system consulting company 2017 Appointed as Executive Board 2009 Promoted to partner member (current appointment) 2013 Appointed as Executive Board 2019 Appointed as Senior Executive member (current appointment) Board member 2019 Appointed as Senior Executive Board member

2-4. Supervision and Evaluation of Management Oversight Committee Members Effectiveness of Management Functions Chairman Yoshiaki The Management Oversight Committee supervises and Junshi Uesaka evaluates the firm’s management. At the same time, the Ono Public Interest Oversight Committee, whose members also include independent outside members, supervises management from the standpoint of the public interest. The firm has established an environment that enables the smooth conduct of the committees’ work, which Vice Hirofumi includes a secretariat to assist the Management Chairman Kubota Oversight Committee and Public Interest Oversight Ayumu Committee and ensure they have necessary information Nakajima required for their role.

Management Oversight Committee The Management Oversight Committee is composed Manabu of members who are not engaged in management Matsumoto or execution, and is tasked with evaluating the effectiveness of initiatives to enhance audit quality. The Management Oversight Committee has three subcommittees, as described below, and supervises processes such as the election of members of management and determination of their compensation. > Compensation Committee The committee members also attend meetings of Evaluates whether the compensation of the CEO, Senior management and executive bodies to present their Executive Board and the Chairman of the Senior Review opinions and periodically report to and exchange Board is decided appropriately in accordance with the opinions with the Public Interest Oversight Committee. firm’s system for determining partner compensation. The committee members are also vested with the authority to express their opinions to the Partners > Conduct of Management Oversight Committee Meeting and also to request that the Chairman of the Meetings (including subcommittees) Partners Meeting convenes such meetings. Held at least twice a month (The Management Oversight Committee comprises five > Attendance of Senior Executive Board and committee members as of September 1, 2020) Other Meetings • Attendance of major meetings including the Senior Executive Board, Executive Board and KPMG Japan > Nomination Committee Management Committee Screens candidates for the Senior Executive Board, • Attendance of meetings such as the Partner the Executive Board, the Chairman of the Senior Committee, National Division Head Meeting, Review Board, members of the Management National Quality Control Partner Council, HR Partner Oversight Committee and members of the Public Meeting, Compliance Committee meetings Interest Oversight Committee. > Other Activities of the Management > Audit Committee Oversight Committee Performs audits of the firm’s operations and finances • Reporting to and exchange of opinions with the (including subsidiaries), liaising with the firm’s external Public Interest Oversight Committee auditors and Office of Internal Control • Interviewing the CEO, Senior Executive Board members, Chairman of the Senior Review Board, etc. • Visiting relevant headquarter departments, audit divisions, and regional offices

Public Interest Oversight Committee Outside Committee Members (In alphabetical order) Independent outside and internal members who oversee Koji Ishida firm management for its sound operation from the standpoint of the public interest. Former Councilor, Policy Committee, An outside member chairs committee meetings. The Bank of Japan committee receives reports from the CEO, Senior Executive Board members and Management Oversight Committee regarding the firm’s important activities and management matters, while outside committee Haruya Uehara members also choose themes for consideration and proactively hold discussions with the CEO and Senior Senior Advisor, Mitsubishi UFJ Trust & Executive Board members. Banking Corporation The committee also monitors the supervision and evaluation processes carried out by the Management Oversight Committee including those of the Nomination Committee, Audit Committee and Mitsudo Urano Compensation Committee. Former Representative Director and (The Public Oversight Committee comprises four President, Nichirei Corp. outside members and two internal members (Management Oversight Committee Chair and Vice Chair) as of 1 September) Masahiro Sakata > Conduct of Public Interest Oversight Attorney-at-Law, Advisor, Committee Meetings Anderson Mori & Tomotsune LPC, • Meetings held once a month in principle Former Director-General, Cabinet • Makes inquiries concerning management issues Legislation Bureau as appropriate, receives reports from the CEO and Senior Executive Board members and holds discussions

> Other Activities of Outside Committee Members • Attending meetings for exchanging opinions with market participants Policy for appointing outside • Participating in Audit Committee visits to some committee members regional offices KPMG AZSA believes that we can strengthen • Attending regular Partner Meetings our governance and increase our management transparency by receiving various opinions based on a broad outlook. As outside committee members, we appoint diverse people who understand the viewpoints of capital market participants, who have experience in organizational operations in a company, and/or who have experience as a legal expert.

2-5. Assessment of the Effectiveness of Activities Intended to Enhance Audit Quality The Management Oversight Committee members and Senior Executive Board members. Results of the attend meetings of the Senior Executive Board and the supervision and evaluation are shared at the Partners Executive Board to present their opinions and Meeting, and the management and executive bodies will conduct interviews with the CEO and Senior consider improvement measures going forward. Executive Board members. Moreover, they are responsible for supervising and evaluating the management and execution by the CEO

Effectiveness evaluation by the Management Oversight Committee for the year ended June 2020

The Committee concluded that KPMG AZSA’s initiatives are working effectively.

Status of important matters in the supervision and evaluation by the Management Oversight Committee and status of initiatives by management and executive bodies

• Management engaged in active discussions regarding KPMG AZSA’s operations • More expansive information provided to support appropriate judgments by Status of compliance management in Partners Meetings with the Audit Firm • Recommendations were made to the management by the Public Interest 1 Governance Code Oversight Committee and the Management Oversight Committee • Group governance strengthened • Addressing various issues arising due to COVID-19

• Launched the Audit Quality Enhancement Project and formulated improvement measures regarding issues identified Status of continuous • Strengthened the organizational quality control structure based on the four initiatives for enhancing defense lines audit quality such as the • Established more in-depth audit procedures in line with risk 2 four defense lines and digital audits • Intensively appointed resources for important audit areas • Upgraded audit technologies through the implementation and wider use of digital audit technologies and provision of audit support tools utilizing AI

Status of establishing • Implemented various projects relating to the utilization of talent and an environment enabling talent development the growth of employees • Initiatives related to diversity 3 with confidence, such as • Established and executed preventive measures after investigating the work style reforms and circumstances surrounding the inappropriate conduct relating to e-Learning talent development and analyzing the root causes

Management issues focused on by the Management Oversight Committee

While the Management Oversight Committee assesses management initiatives as effective, it recommends that the firm tackle the following issues:

• Addressing the New Normal era in relation to COVID-19 Addressing COVID-19 and preparing for • Reviewing policies on handling crisis management in advance, in preparing 1 future contingencies for potential contingency events in the future such as large scale disasters and new pandemics

• Thoroughly building awareness regarding the Code of Ethics for each and every member of the firm, and having them reaffirm that maintaining a high standard of ethics and unwavering efforts for self-improvement are the basis for earning trust as professionals Compliance with Code of Ethics • Steadily executing various measures for compliance with the code of 2 ethics established by the firm. In particular, executing preventive measures including strengthening the internal control system regarding inappropriate completion of e-Learning courses, and conscientiously implementing initiatives to prevent recurrences

• Incorporating issues identified in the Audit Quality Enhancement Project Continuous initiatives for and the related improvement measures into firm-wide initiatives, and enhancing audit quality 3 executing them

• Speedily identifying specific tasks and a schedule for realizing the future vision (3C x I) of digital audits • Monitoring the status of digital audits for all audit engagements and making improvements as necessary Audit digitalization • Making efforts to further expand the digital knowledge of partners and 4 employees in order to respond to the advanced digitalization of society and the audit environment • Continuing to establish an IT infrastructure to address the increase in remote-working environments resulting from COVID-19

• Being open to diverse values, and promoting the success of women while further encouraging diversity from various viewpoints, including job type, Promoting diversity 5 nationality and age in order to increase our competitiveness by utilizing a wide pool of talent

3. Quality Control Based on Our Four Defense Lines

Our organizational quality control structure, which we call our four defense lines, serves as the foundation for KPMG AZSA’s initiatives for enhancing audit quality.

Four Defense Lines

3-1. A Comprehensive Organizational Control Framework The four defense lines refer to a system in which the four layers- management (CEO and Senior Executive Board members), quality control, departments, audit divisions and audit teams each fulfil their respective duties in regard to audit quality. We can ensure audit quality by building a comprehensive organizational control system, and consequently, effectively realize high-quality audits that ensure that no matters arise that may surprise the market. The Four Defense Lines also serve the purpose of disseminating the management policies of the CEO and Senior Executive Board members down to the audit teams and ensuring information from audit work sites is shared with management.

• Creating a culture in which individuals take the initiative to enhance audit quality, and ensuring this Firm culture permeates audit teams Management • Maintenance, operation, and continuous improvement of the system of quality controls and the system for assigning and evaluating human resources Defense • Identification of significant audit risks to be dealt with as a firm and providing instructions for timely Line and appropriate actions

• Maintenance, operation and continuous improvement of quality control and support systems to Quality Control address audit risks Departments • Development of measures and tools for enhancing audit quality in cooperation with audit divisions • Evaluation of risk assessments made by audit teams in the audit divisions and firm-wide Defense Line assessment of monitoring activities

• Assigning the right people according to the audit risk assessment Audit Divisions • Ensuring audit teams are thoroughly aware of the measures and tools for enhancing audit quality • Understanding the material audit risks and status of measures taken through monitoring activities, Defense and organizational response Line

• Identification of critical audit risks by exhibiting professional skepticism and implementation of Audit audit procedures Teams • Review of guidance on audit work papers and human resource development by supervisors Defense • Timely communication with reviewers Line

eview oards

1. Responsibility for Quality Control...... 44

2. Audit Contracts...... 46

3. Communication with Stakeholders...... 47

4. Audit Methodology and Audit Team Formation...... 48

5. Pursuing a High Level of Expertise and Providing High-quality Services...... 50

6. Audit Structure for Addressing the Globalization of Clients...... 54

7. Actions to Address Fraud and Fraud Risk...... 56

8. Independence, Integrity, Ethics and Objectivity...... 57

9. Initiatives for Compliance and Information Security...... 59

10. Review Structure...... 61

11. Continual Improvement...... 64

eview oards

1. Responsibility for Quality Control

Management at the highest rank of the four defense lines is responsible for KPMG AZSA’s audit quality

1-1. The CEO Bears Responsibility for 1-2. Maintenance and Operation of Audit Quality Organizational Quality Control Structure The final responsibility for quality control rests with the In order for our organizational quality control structure CEO. The Senior Executive Board member appointed based on our four defense lines to function effectively, by the CEO to oversee quality control is responsible our CEO and Senior Executive Board member in charge for developing overall quality control policies and for of quality control will be responsible for the development monitoring how such quality control policies are followed. and operation of the necessary structure. Strong messages on the following four points are • Responding to changes P.10 repeatedly sent by the CEO and other members of • Maintaining and operating our management to all partners and staff in order to emphasize organizational foundation P.28 that audit quality is the firm’s number one priority. • Maintaining and operating our quality • Reliability of financial information in the capital control system P.42 markets is indispensable to the sound growth of Japanese corporations and the sustainable • Promoting talent development P.68 development of the economy. • Utilizing the KPMG network P.78 • Providing confidence in the financial information of our clients is our mission as certified public accountants 1-3. Continuous Initiatives for • Our top priority is to accurately identify risks based Audit Quality Enhancement on a deep understanding of our client’s business At KPMG AZSA, we continuously implement activities and management environment, and to ensure our for enhancing audit quality through an analysis of audits do not result in matters that take the market by root causes regarding issues identified in the course surprise. of Communication with Stakeholders (see P.47) and • To accomplish this goal, necessary and adequate Continual Improvement (See P.64) under the leadership audit procedures focusing on key audit issues must be of our CEO and other management. devised and implemented. If any new and important KPMG AZSA aims to be an organization in which audit issues or problems are detected, we are each member can develop through engaging in responsible for conveying them to client management “thinking audits.” This refers to audits in in an accurate and thorough manner. which we think autonomously, which have a story, and also provide Insights. In recent years, initiatives for work style reforms have been promoted robustly as a national initiative, and the proliferation of borderless and digitalized businesses is accelerating. Moreover, due to an international demand for audit quality enhancement, the standards expected Number of CEO’s message as of June 30, 2020. of audits are ever-increasing. However, corporate fraud 12 year continues unabated, and pursuing audit quality that meets the expectations of the public and clients at a time when distrust in audit firms is increasing has become a top priority management issue for audit firms.

Against this backdrop, KPMG AZSA launched the Meanwhile, over 90% of respondents gave particular Audit Quality Enhancement Project in August 2019. emphasis to “whether plans took risk into account,” We subsequently carried out an analysis of root causes “information sharing at the time of contract renewal,” relating to audit quality as a firm-wide initiative over a “communication with those charged with governance” period of six months, and reclarified the roles of the and “timing of audit result reports,” and while the level of four defense lines. We further formulated the following importance of the evaluation item regarding “information improvement measures with the aim of thoroughly sharing” was low, we will work on improvements as a promulgating the initiatives of “thinking audits.” firm to provide further information of value in the future. • Clarifying and visualizing audit risks • Clarifying policies regarding new audit contracts or Flow of ACCESS Activity contract renewals, and reallocating audit tasks and CC Committee s actions resources of divisions • Share and analyze issues • Provide feedback to related divisions • Clarifying the roles and responsibilities of partners, and • Implement and monitor action plans reflecting them in evaluations Improve • Creating an environment for continued promotion of

“thinking audits” and monitoring various measures ddress ein ddress We plan to prioritize and incorporate these measures in Issues udit Issues our firmwide initiatives. LLC udit Client

Complete eedback 1-4. Improvement through Feedback from eedback udit Clients (ACCESS) The firm has established the ACCESS (AZSA Client nale Relationship Continuous Enhancement Process) program, which seeks feedback from a client’s management and udit eam s actions other personnel on the quality of services provided. • Share and analyze issues • Draft action plan ACCESS is intended to provide an understanding of the client’s expectations and any areas of dissatisfaction, as well as areas in need of improvement, all with the objective of enhancing audit quality. Replies to ACCESS were received from 601 clients for the year ended June 2018 and from 636 clients for the year ended June 2019. A comparison of average scores over the three years since 2017 did not show major changes. However, where an individual item ranked lower, audit teams are analyzing details and discussing a concrete action plan for continuous improvement. To further facilitate communication with those charged with governance, the firm initiated an ACCESS program for receiving evaluations directly from them beginning in the year ended June 2016, and received 634 replies in the year ended June 2019. While evaluations regarding audits were positive, evaluations regarding “information sharing” scored lower than the overall average.

2. Audit Contracts

At KPMG AZSA, we will thoroughly assess risks at the time of contracting, while establishing a structure for providing high-quality audits through an appropriate assignment of partners.

2-1. Thorough Risk Assessment in Engagement 2-2. Appropriate Assignment of Partners Acceptance and Continuance At KPMG AZSA, we appoint engagement partners For the acceptance or continuance of audit contracts, with the capabilities, qualities, time and authority compliance with independence requirements is verified required for appropriately fulfilling their assigned before proceeding with contract procedures. The risk roles in engagements. assessment of a prospective client is made by examining To ensure high-quality audits are provided to all of our management’s integrity; the status of governance; clients, the division head holds discussions with all performing background checks, including verification engagement partners at least once a year, and verifies that officers and other key figures do not belong to anti- client portfolios of respective clients. social forces; and assessing the risks associated with key accounting and audit matters. After completing The capabilities, qualities and qualifications of an risk assessment, contracts are concluded through an engagement partner, and the industry, characteristics appropriate approval process according to the risks. and risks of clients, are taken into account in the verification process. Risk assessments are reviewed at least once a year in order to ensure a constant understanding of the most recent risk status. Reassessment is promptly made if 2-3. Change of Auditors there are signs of change in the risk factors of a client, When there is a change of audit firm, departments such as a change in management or shareholders or the responsible for quality control will issue instructions emergence of a material incident. and attend meetings between the predecessor and Information related to risk assessment is centrally successor auditors, as necessary, to reasonably ensure managed in a database to ensure that significant that the transfer of audit work is appropriately conducted audit issues, including fraud risk, are communicated for both the predecessor auditor and successor auditor. to successor partners when there is a change in engagement partners.

3. Communication with Stakeholders

At KPMG AZSA, we implement appropriate risk assessments through communication with our clients’ management and auditors. We are also committed to maintaining and enhancing audit quality through engaging in dialogue with capital market participants.

3-1. Promotion of Understanding through Two-Way Communication with Those Charged Communication with Management with Governance We communicate with management to understand • An explanation of the audit plan the client’s business operations and then conduct • Results of quarterly reviews appropriate assessments of the risk of material misstatement whether due to fraud or error. • Companies Act audit results Such discussions can also be used to understand the • Financial Instruments and Exchange Act audit results contents and background of judgments and decisions • Compliance status of laws and regulations, and made by management, which may have a serious impact discussions regarding material misstatement risks on financial statements. including fraud We share any issues regarding key matters with clients • Discussions when fraud is identified or there is in a timely manner so as to prevent any unexpected suspicion of fraud issues arising. • Discussions when material deficiencies are identified Furthermore, we promptly discuss with clients what in internal control actions are appropriate or are required to deal with any situations that are identified, including where material 3-3. Proactive Dialogue with Market misstatements are identified during audits, where Participants misstatements due to suspected fraud are identified or where a significant deficiency in internal controls needs Sharing information more broadly with the public to be disclosed. regarding the activities and initiatives of audit firms is one of important issues as an audit firm. We also feel it is necessary to have an appropriate understanding of 3-2. Two-Way Communication with Those the societal changes and needs, and perform audits that Charged with Governance meet such standards of expectation. In order to strengthen corporate governance, cooperation KPMG AZSA therefore takes every opportunity to between those charged with governance and external exchange opinions with investors or those involved in auditors is essential. KPMG AZSA engages in two-way the operation of the capital markets. In explaining our communication through reporting to those charged with initiatives for enhancing audit quality and deepening the governance and through continuous consultations in understanding of audits, we will listen to the opinions of order to share issues that have arisen during audits and all those concerned and utilize them to achieve further other information that is useful to those charged with improvements in organizational operations. governance. Specifically, if a client is a listed company, reports and briefings are made periodically through formal correspondence, interviews and other means depending on the status of the audit or quarterly review. For situations requiring timely action, communication channels are maintained to allow for ad-hoc consultations.

4. Audit Methodology and Audit Team Formation

At KPMG AZSA, we continuously invest in our audit methodology and tools in order to perform high-quality and efficient audits. We have also established and operate a system that allows partners and team members to secure sufficient hours for executing their work.

4-1. A Global Audit Methodology 4-3. Formation of Audit Teams According to KPMG AZSA conducts audits in accordance with the Skills and Experience KPMG Audit Manual, which is the manual used in Leaders of the firm’s management units, including common by KPMG member firms. The KPMG Audit offices and audit divisions, form audit teams by Manual contains KPMG’s audit methodology and appointing engagement partners and professional staff. audit policies that must be complied with, meeting Such appointments are made taking into account the international audit requirements while including skills needed for the audit work, experience in the sector additional requirements for the maintenance and to which the client belongs and other factors. To ensure enhancement of audit quality. that an appropriate team can be formed within KPMG KPMG AZSA has added to the KPMG Audit Manual AZSA, the appointment of partners to public interest criteria required of professionals that are unique to entities is subject to certain conditions and approval Japan, as well as applicable laws, regulations, guidelines by the Senior Executive Board. The appointed partner and other norms. KPMG AZSA also maintains the verifies that the assigned audit team has sufficient Combined Audit Manual (CAM) based on the KPMG competence and aptitude to appropriately execute audit Audit Manual for audits of internal control, allowing work in accordance with the applicable laws, regulations efficient integrated audits of financial statements and and standards. internal controls. 4-4. Appropriate Involvement of 4-2. Manual-based Utilization of Electronic Engagement Partners Audit Tools Audit partners are in a position to bear responsibility At KPMG AZSA, working papers are created using regarding all processes and results of an audit. Based eAudIT, an electronic audit tool. eAudIT supports on a sufficient understanding of a client, partners will be auditing based on the KPMG Audit Manual and appropriately involved and exert their leadership in each can be accessed at all times simultaneously by the stage of assessing risk, addressing risk procedures and members of audit teams. eAudIT allows the timely and coordinating audits. appropriate preparation of working papers and review Full participation by the engagement partner is by supervisors. indispensable in identifying critical audit matters, such KPMG is currently making large-scale investments for as areas requiring judgment and significant risks. Full the purpose of amending and strengthening its audit involvement of engagement partners allows for effective methodology and audit tools. KPMG Clara workflow and efficient audits. is an audit tool that has adopted these amended audit methodologies, and after pilot operations in FY2018 and partial deployments in FY2019, KPMG International and KPMG AZSA are scheduled to gradually expand deployment of this audit tool from FY2020 onward.

4-5. Involvement of Specialists such as 4-7. Promoting Efficient and Consistent Audits IT Experts through Work Centralization Where an audit involves complex IT processes, At KPMG AZSA, we have established the AZSA Delivery transactions requiring expertise related to tax, finance or Center (ADC) within the Quality Assurance Headquarters. pensions, or fraud, experts will be involved. Tasks including sending and receiving confirmation letters, Specialists belonging to KPMG AZSA or another KPMG assisting with the preparation of audit contracts and member firm, or a specialist from KPMG Global, may be audit instructions sent to overseas subsidiaries and other involved depending on the risk assessment. such work are centralized in the ADC in order to promote efficient and consistent audit. KPMG AZSA’s policy is to include IT specialists with expertise in information technology and system audits We have also been working on the centralization and in audit teams in order to address the increasingly streamlining of sending and collecting confirmation sophisticated and complex information systems of letters through the establishment of the Audit clients. For the year ended June 2020, specialists were Confirmation Center GK (ACC) on 30 November 2018 as involved in 1,515 audit teams. a joint investment with the other three major audit firms. As a result, the centralization of confirmation letters for the 4-6. Securing Working Hours for Audit entire firm for the year ended June 2020 reached 48%. Team Members We will improve environment for professionals to focus their field of expertise by promoting further centralization The assignment of audit team members is decided in and streamlining of audit tasks. such a way as to ensure that sufficient time is allowed for completing essential tasks such as assessing risks We have also assigned audit assistants in each audit and procedures for addressing risks. The streamlining division to provide direct support to audit teams at of audit tasks will also be driven through the automation audit sites. and centralization of various tasks. As of June 2020, 187 people belong to ADC (including Meanwhile, we have also established a mechanism for those with other concurrent roles). preventing excessive overwork through measures such as restricting access to internal networks (see page 76). For the year ended June 2020, average working hours increased from the previous term due to frequent meetings to deliberate on new issues associated with the impacts of COVID-19, as well as working in an unaccustomed remote-working environment. We will level workloads in the future based on the implementation of planned audits in anticipation of the New Normal and improvements in task efficiency. Average Annual Audit Hours According to Title

Year ended Year ended Standard annual Title June 30, 2019 June 30, 2020 audit hours Partner 1,835 1,910 Senior Manager, 1,839 2,001 Manager 1,680 Other 1,869 1,991 professionals Average 1,858 1,982 *Standard annual audit hours are calculated by converting the annual number of working days specified by the firm based on a 7-hour working day. *Audit hours are based on the aggregation of hours worked by professionals engaged in audits throughout the period (those with less than 35 hours of involvement in an engagement are not included). *Time spent on engagement work, management work and training is included in audit hours, while non-assigned hours or used for leave is not included.

5. Pursuing a High Level of Expertise and Providing High-quality Services

At KPMG AZSA, the quality control department and support departments liaise to support the implementation of high-quality audits by audit teams. A system has also been developed that is fully capable of addressing IFRS and US standards.

5-1. Quality Control Department Comprising Two HQ Functions The quality control department within KPMG AZSA Both headquarters comprise partners and professionals consists of the Quality Assurance Headquarters and Risk with experience in the relevant field, and provide Management Headquarters. appropriate support to audit divisions and audit teams. The Quality Assurance Headquarters oversees matters In addition to the quality control department, we have regarding the quality control of audits and accounting also established the Senior Review Board, Divisional treatments and disclosures. The Risk Management Review Boards and International Review Board for Headquarters oversees matters regarding professional implementing quality control reviews from a standpoint ethics and independence, as well as the supervision of independent of management, as well as the Review quality control. Support Office for supporting operations.

Quality Control Departments

Firm Management CE and Senior Eecutive oard Members

irect eport

Review Board Quality Control Departments Support Departments to Quality Assurance Senior eview oard Quality Assurance Risk Management Headquarters Headquarters

ivisional eview ● igital Innovation

oards ● Audit Practice ● Accounting Practice ● is Management ● GJP etwor epartment epartment International eview Audit Monitoring ffice Country es oard AZSA elivery Center IS Advisory ffice Compliance Promotion ffice

S Capital Marets ffice ● Sector Management ffice of Senior eview ● Information Security ffice oard ffice for Promotion of epartment Advanced isclosures

Instruction Inuiry Monitor eport Support

Audit Divisions

is Assessment Monitoring

Audit Teams

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KPMG AZSA’s quality control department works closely 5-2. Monitoring of Audit Tasks by the Audit with the following departments in working towards the Divisions and Headquarters enhancement of audit quality. Our audit divisions and Risk Management Headquarters • Digital Innovation Division (DI) – Carries out research (Audit Monitoring Office) monitor audit tasks with and development for the sophistication and the aim of maintaining and enhancing the quality of all streamlining of audit procedures utilizing AI and digital audit tasks. technologies (see P.19). Through such monitoring we can gain an understanding • GJP Network and Country Desks – Support the of particularly significant risks, and support resolving maintenance and enhancement of audit quality accounting and audit issues as necessary while at a global level through collecting information on confirming the response status of audit teams on an risks including those relating to accounting, tax, and ongoing basis. Audit divisions select companies subject government regulations, and supporting audits for to monitoring taking into account overall risks of audits overseas subsidiaries (see P.55). that the division oversees, and inherent accounting and • Sector Management Office – Accumulates industry audit topics of the respective financial year. knowledge from inside and outside of Japan, and Audit tasks are monitored by partners with appropriate contributes to refining risk assessment in audits and experience and knowledge from the perspective of a designing audit procedures (see P.53). third party, from the viewpoints of whether the planning and audit procedures performed are necessary and sufficient together with the progress of the audit, and Headcount of Quality Control Departments (including those with concurrent roles) whether descriptions in audit work papers are sufficient and clear. as of June 30, as of June 30, 2019 2020 At our headquarters, partners with a wealth of Audit Assurance Headquarters 125 149 experience and knowledge are selected to monitor audit Risk Management Headquarters 109 111 tasks with particularly high audit risks. We have a lateral Total 234 260 understanding of the monitoring status of each audit division through communication with audit divisions The Next Generation Audit Technology Team established within the every three months. Quality Assurance Headquarters split off to become the independent Digital Innovation Division in July 2019. This also serves the purpose of making audit divisions The headcount of the Quality Assurance Headquarters as of June 2019 aware of matters that need to be addressed or issues was recalculated, omitting Next Generation Audit Technology Team members for ease of comparison. common to many audit tasks in response to changes in the outside environment.

Headcount of Review Boards

as of June 30, as of June 30, 2019 2020 Companies subject to audit monitoring 224 companies 207 212 (for the year ending June 2020)

5-3. Establishment of Portal for Inquiries 5-4. Contribution to the Development of We have established a portal for receiving consultations Accounting and Audit Standards related to individual engagements in order to assist KPMG AZSA sends our professionals to accounting audit engagement professionals in addressing difficult standard and audit standard development bodies, or contentious matters. If review by the Senior Review thereby contributing to the development of Board (see P.62) is deemed necessary as a result of a such standards. consultation, audit teams will promptly receive such a review. KPMG AZSA accepts advance consultations from audit teams even for cases for which consultations or review by the Senior Review Board are not mandatory, and encourages consultation submissions, and quality control reviews where appropriate. Engagement teams are required to submit consultations to the portal when indicators suggesting material misstatements due to fraud are identified. (see. P.56) Moreover, we are also progressing with the utilization of our accounting and audit Q&A system (KOMEI) that accumulates and shares insights within the firm through the utilization of AI technologies (see P.17), in addition to releasing an FAQ page on our website based on a classification of inquiries received from audit teams. Through this process we are able to narrow down our focus on matters of higher priority and secure time for consideration with a focus on these matters.

Flow of Inquiries

Senior Review

Escalation as necessary

Portal for consultations Compile into a database Accounting Audit procedures raud isclosure Q&A Accounting and Audit System Inuiry Answer Inuiry Answer Inuiry Answer “KOMEI”

Search Engagement Team

Examples of transactions that require consultation hen consideration is reuired for the accounting treatment of transactions with a comple scheme ・ hen consideration is reuired for the accounting treatment of transactions for which business practices are not yet established ・ hen significant changes occur in the audit plan e.g. when implementing alternative procedures due to not being able to ・ implement important audit procedures as scheduled due to impacts of CI1 hen fraud is identified including suspicion of fraud ・

5-5. Ensuring a Sufficient Audit Structure for 5-6. Expertise Regarding US Standards Companies Adopting IFRS The Department of Professional Practice collects At KPMG AZSA, we have many professionals with a and shares information on the latest trends and wealth of experience in audits of companies adopting developments in IFRS, US and Japanese standards. IFRS both in and outside of Japan. Audit teams need to make judgments related to various KPMG AZSA has seconded many of our employees issues of interpretation and application of US GAAP/ to the IFRS-setting body IASB and KPMG’s central GAAS at Japanese clients that arise during the closing of organization for IFRS (International Standards Group accounts and during the audit. KPMG AZSA’s US Capital based in London), and has accumulated insights Markets Group, established within the Department regarding audits for Japanese companies centering on of Professional Practice, supports audit teams by our partners with a wealth of IFRS knowledge. interpreting US GAAP/GAAS in the context of business At KPMG AZSA, we have developed a system for practices of Japanese corporations. making judgements for ourselves on issues regarding The US Capital Markets Group is organized around those the interpretation and application of IFRS in account who have experience in the US member firm’s quality closing and audits for Japanese companies based control department, US Department of Professional on such insights, and have the capability to provide Practice (US-DPP, New York), thereby providing a high interpretations and judgments appropriate to the degree of expertise in US standards. practice of Japanese companies in a timely and The head of the US Capital Markets Group also appropriate manner. concurrently serves as the Leader of DPP for the ASPAC We have also established the IFRS Advisory Office for (Asia Pacific) region, and has a high degree of knowledge analyzing topics specific to Japan, and collect and share and expertise enabling appropriate judgments to information relating to recent IFRS trends, while also writing be made that suit the actual practices of Japanese articles or books for publication, and holding seminars. companies conducting business globally. We have prepared a structure for responding to IFRS through practice and training for the continuous growth 5-7. Accumulation of Industry Knowledge in of talent in anticipation of a further increase in companies Japan and Overseas adopting IFRS. KPMG AZSA has established the Sector Management Office and liaises with KPMG member firms overseas to accumulate industry knowledge both in and outside of Japan (see P.84). Industry knowledge that is accumulated is shared with the firm through internal training programs, and effectively utilized for assessing audit risks and designing audit procedures. We have an up-to-date understanding of business situations despite the drastic changes occurring in our current environment, and make use of this knowledge for the maintenance and enhancement of audit quality.

6. Audit Structure for Addressing the Globalization of Clients

With the global impacts of COVID-19, significant changes are occurring in how to conduct global business. KPMG AZSA has an audit structure and support system in place that goes beyond borders to address the globalization of our clients.

6-1. Implementation of Group Audits 6-2. Parent Company Audit Team Initiatives According to Materiality Close cooperation between parent and subsidiary audit For group audits, the parent company audit team teams is important for ensuring the smooth completion conducts an assessment of financial materiality and of group audits. degree of risk for consolidated subsidiaries and plans Given that material accounting and audit issues arise in required audit procedures for each company according subsidiaries located in regions with significantly different to materiality. accounting practices and business styles, the parent The subsidiary audit teams perform audits based on company audit team in Japan should take ownership to instructions from the parent company audit team. The solve problems collaboratively, rather than leaving issues parent company audit team expresses an opinion on to be resolved by subsidiary audit teams. consolidated financial statements after receiving reports KPMG AZSA gains an understanding of issues through on audit results from subsidiary audit teams. appropriate communication utilizing online meeting systems and remote reviews of audit working papers. Engagement partners of the parent company audit team ensure that there is close communication between the parent company, overseas subsidiaries and local audit teams to ensure a smooth resolution of issues.

Scoping of Group Audits Communication in the Group Audit

eportin on matters Consolidated Designation Audit Procedures under consideration Subsidiaries etc Presenting a uniﬁed view arent Compan udit Client udit eam Companies with high -wa communication financial materiality Reachinguniﬁed a view sharin Information Audit procedures Significant Instructions

addressing financial eportin component statement audits or harin overall unit risks of each company information Companies with issues and significant risks in problem solvin

consolidated financial Information sharin statements

Depending on the risk, Overseas financial statement Client Overseas udit Component Other audit, risk-specific audit uditor Companies other than ubsidiaries Information sharin component procedures, or analytical the above unit procedures at a group level perform by the parent company auditor

GJP Network

uroe ile ast merias an fria Asia Pacific

about people about people about people

Numbers above are apanese-speakin professionals as of une

6-3. Ensuring Consistent Standards of 6-6. The GJP Network Auditing at a Global Level The GJP Network (Global Japanese Practice Network) is All KPMG member firms strictly comply with prescribed an organization supporting the provision of procedures based on a common quality management optimal services to Japanese Companies by KPMG framework and audit methodologies. member firms. We are therefore able to ensure consistent standards of GJP has established a network of Japanese-speaking auditing at a global level by having our KPMG professionals including professionals on secondment in member firms carry out the audits of our clients’ 91 cities across each of our regions: Americas; Europe, overseas subsidiaries. Middle East and Africa (EMA); and Asia Pacific (ASPAC). We implement high-quality group audits and advisory 6-4. Contributing to the Enhancement of Audit services through this network. The network also Quality at a Global Level provides the latest local information in Japanese and supports the entry of Japanese companies into KPMG AZSA fulfils an important role in KPMG’s audit overseas markets. quality enhancement at a global level. KPMG AZSA’s Deputy Managing Partner (Head of Quality Control) is in a position of representing and leading Asia Pacific 6-7. Supporting Local Professionals on (ASPAC) as the Regional Head of Audit & Assurance, Secondment from Japan while also serving as a member of the Global Audit KPMG AZSA has established divisions for four regions Steering Group (GASG) which includes representatives of high strategic importance for Japanese companies of the top ten countries, and is deeply involved in (China, India, Middle East and Africa, and ASEAN), as deciding policies and measures at a global level. well as Country Desks comprising professionals who have experience working abroad in over 30 countries. 6-5. Collaboration with KPMG Member Firms Those in charge of Country Desks support local KPMG AZSA participates in KPMG’s Global Board professionals on secondment from Japan, and meetings as a leading country and is strengthening our liaise with KPMG member firms to coordinate connection with KPMG member firms in all countries information regarding each region and realize smooth through a close exchange of information. communication in group audits. This allows us to take necessary measures appropriately in liaison with KPMG member firms if issues should occur in group audits.

7. Actions to Address Fraud and Fraud Risk

KPMG AZSA identifies and assesses fraud risk, and formulates audit plans according to risk. We also make the completion of training courses on fraud mandatory for all of our professionals involved in audit services.

7-1. A More Robust Structure for Addressing Where fraud takes place at an overseas subsidiary, Fraud Risk it is easy for communication to be inadequate due to differences in business, accounting and auditing Even after the Financial Services Agency issued practices in the various countries. Such situations the Standard to Address Risks of Fraud in an Audit, require careful attention so that adequate investigations accounting scandals continue to occur. Based on and timely reporting may be conducted locally. this standard, KPMG AZSA develops overall audit The audit team of a parent company must collect plans that ensure sufficient time, assignment of information and identify and assess the fraud risk appropriate specialists and implementation of specific in cooperation with auditors of the component. audit procedures to address identified fraud risks. In Necessary information is provided and instructions are situations where a material misstatement is suspected given to auditors of the component so that the local or identified, it is always reported to the Quality audit is performed efficiently. Assurance Headquarters through the consultation portal. Instructions are then received from the Quality Assurance Headquarters on the audit procedures to Examples of Actions Taken to Address Fraud be implemented and whether or not review by the Client Audit Team Senior Review Board is required. Review by the Senior • Suspicion of fraud uncovered Review Board is mandatory in cases where a material through whistleblowing (Indication misstatement is suspected. of material misstatement) • Fact finding through At KPMG AZSA, all partners and managers engaged in internal investigation audits are required to attend multiple training sessions • Clarification of all facts, • Reporting to the audit firm, investigation into the cause of on fraud to raise their awareness of fraud. These training discussion of actions to be taken the fraud, and investigation into sessions explain specific fraud cases and provide reminders similar situations for auditors using cases from the Audit Recommendations • Consultation with Engagement Quality Control (EQC) reviewer Guide, which is issued by the Japanese Institute of • Consulting with the Quality Certified Public Accountants (JICPA) for practical use in the Control Headquarters routine execution of audits. • Involvement of a fraud specialist • Launch an official internal investigation* • Consideration of the need for 7-2. Quick Action in the Event of Fraud retroactive revisions of prior year financial statements; if necessary, Quick action is required when fraud has occurred. The revisions to be made client needs to make clear all facts and analyze the • Review results of internal investigation, selective conduct cause of the fraud, determine any impact on accounting of own investigation and investigate whether or not other similar situations • Consideration of the need for exist. It is further necessary to devise and implement • Report results of investigation retroactive revisions of prior year financial statements measures to prevent a recurrence of similar cases, • Consultation with EQC reviewer take corrective actions for internal control and consider • Review by the Senior whether prior year financial statements must be revised. Review Board • Consideration by the Compliance For such clients, the audit team provides timely and Committee and decision on appropriate advice and considers the sufficiency of disciplinary actions • Improvement actions for the client’s investigation, corrective actions taken internal controls with respect to internal controls and whether or not • Verification of internal retroactive corrections are required. Depending on the control improvements • Consultation with EQC reviewer case, a specialist with insight into fraud and scandal investigations may be involved to complete the * Depending on the nature of the case and the financial impact, a third-party committee may need to be organized in addition to internal investigation. necessary procedures.

8. Independence, Integrity, Ethics and Objectivity

Strict independence is required for the provision of audit services. At KPMG AZSA, we establish rules and policies regarding independence and implement training and monitoring initiatives.

8-1. Enactment of Code of Ethics on 8-2. Rotation of Partners and Audit Maintaining Independence Team Members KPMG AZSA stipulates policies and procedures There is a limitation as to the number of years KPMG regarding matters including firm independence, AZSA partners can be involved with the same client independence at an individual level, relationships (this includes years before being appointed as the after retirement, rotation of partners and audit team engagement partner for Public Interest Entities. members and approvals of audit and non-audit services. This limitation complies with the Certified Public Our internal ethics policies regarding the maintenance Accountants Act and other Relevant Ordinances, the of independence reflect the requirements of KPMG’s JICPA’s Code of Ethics and related regulations, and independence policies, the Certified Public Accountants our firm’s policy, “Limitations on the Maximum Period Act and other Relevant Ordinances, and the JICPA’s of Involvement of Partners in Audit and Attestation Code of Ethics and Independence Guidelines. Engagements,” which reflects KPMG International’s In addition, the following matters are implemented for all policies in this area. of our partners and employees. The following conduct is restricted for partners during • The completion of training programs regarding the cooling off period after their involvement in the audit independence and affidavits is mandatory, and engagement of a particular client is finished. thoroughly disseminated. • Continued involvement in audits of the client • Investigations on the economic independence of • Appointment as a quality control reviewer individuals are conducted, and the compliance status of independence monitored. • Involvement in professional consultations The independence of firms from clients also needs to • Having any influence on audit results be assured for all services provided by KPMG globally. • Supervising or coordinating other professional At KPMG, the engagement partners responsible for services for the client audits therefore confirm whether or not services can be • Supervision of the relationship between provided by cross-checking against the regulations of the firm and the client professional ethics regarding independence for all audit and non-audit service contracts. • Important or frequent interaction with the management and those charged with governance of the client There is a risk of impaired independence due to familiarity arising from long-term and consecutive involvement with clients that are Public Interest Entities. Submission rate of Additional rules regarding the independence of partners, written affidavits of 100 100 independence audit team members and the audit team as a whole have FY ended FY ended June 2019 June 2020 been established in order to prevent this.

Number of violations identified 4 FY ended FY ended June 2019 June 2020 • Total number of cases resulting in a violation of independence regulations • We conﬁrmed that there was no impact on our objectivity and fairness as auditor by carrying out additional procedures immediately after the violation came to light. We are implementing necessary measures to ensure the prevention of similar violations.

8-3. Clarification of Policy for Providing Non-audit Services KPMG Japan is an accounting firm with KPMG AZSA Group Governance and System for Checking at its core. Independence and Identifying Conflicts of Interest With a view toward our social infrastructure role of ensuring the reliability and fairness of the capital markets, KPMG AZSA we follow a policy of providing services that are worthy of the trust placed in us by society by contributing to the sound development and transformation of companies, rather than only pursuing profit. Group governance through 100% ownership of subsidiaries and appointment of board of directors When providing non-audit services to our clients, we limit our services to those that allow us to retain our independence as auditors without assuming management responsibilities or performing work that we would go on to audit (i.e. self-audit). KPMG KPMG KPMG KPMG FAS Healthcare Consulting AZSA Japan Sustainability Governance of Group Companies KPMG AZSA manages group companies that provide advisory services as 100%-owned subsidiaries. Senior Executive Board members of the audit corporation act KPMG Member Firms as directors of group companies and participate in their management in order to reinforce governance of the group by KPMG AZSA. The firm has established the Country A Country Country C KPMG Japan Management Committee (see P.82) with participation by representatives of the group companies Inquiries on independence and freedom from conﬂicts of of KPMG Japan in order to unify the management interest before providing non-audit service policies of its advisory subsidiaries.

Checking Independence and Conflicts of Interest KPMG member firms are required to register proposed Independence Sentinel System Conﬂict of audit and non-audit services prior to commencing work Check Interest Check within Sentinel, a system that checks independence and The audit engagement Services already identifies conflicts of interest. partner and other registered are personnel verify the compared against the The verification process within Sentinel enables audit nature of a non-audit new service being engagement partners, who are responsible for managing service to be provided proposed to determine client relationships, to determine which services are and consider whether whether a conﬂict of or not an engagement interest exists and provided. The firm’s Risk Management department should be accepted. whether an further confirms that the proposed service does not engagement should present a conflict of interest. This process prevents the be accepted. acceptance of engagements for services that may impair the firm’s independence or cause a conflict of interest.

9. Initiatives for Compliance and Information Security

The strict handling demanded by society with regard to compliance matters and information security is increasing year by year. KPMG AZSA works conscientiously towards the maintenance and operation of a compliance organization and information security structure.

9-1. Maintenance and Operation of Compliance Organization Inappropriate Completion of e-Learning Courses We maintain and operate a compliance organization In accordance with the Certified Public Accountants to ensure that compliance requirements are Act, CPAs are obligated to continually complete thoroughly observed. training courses and acquire required credits. Recently, it became evident that some of our As of 1 July 2020, our internal committee comprising 17 firm’s partners and professionals were involved in members and one outside member (a lawyer) have been inappropriate conduct relating to the completion proactively working on the following activities. of e-Learning courses within the firm, and • Implementation of compliance training consequently did not satisfy credit requirements. • Promotion of awareness by issuing mail magazines We unreservedly acknowledge that such • Establishment of a “compliance hotline” conduct lacked the ethics required of professional accountants, and furthermore that insufficiencies A whistle-blower hotline has also been set in the function of our internal control system led up to collect a wide range of internal and external to this incident. We will take initiatives to prevent information related to violations of, or acts that may a recurrence of such conduct by strengthening violate, laws and regulations, for example fraud or our internal control system while thoroughly manipulation of accounts, impairment of independence implementing compliance education. and insider trading.

> Initiatives for preventing a recurrence Ensure everyone is informed and aware of “Tone at the Top” • Communication of messages from the firm’s senior management regarding ethics and compliance • Implementation of individual training for those involved in inappropriate completion of courses • Reinforcement of ethical values through compliance training Strengthening our internal management structure • Securing time to complete training based on regular reviews of assignment status • Strengthening monitoring by the newly established Compliance Promotion Office • Identifying inappropriate conduct through regular monitoring of training completion records • Thoroughly implementing comprehensive checks when changing systems

9-2. Prevention of Insider Trading 9-3. Thorough Information Security Measures Audit team members frequently come into contact with The maintenance of information security is an important material, undisclosed information while performing challenge for audit firms that handle confidential client audits and are required to conduct work with a high information. KPMG AZSA has established an Information sense of ethics. At KPMG AZSA, insider trading Security Department within the Risk Management prevention efforts include the establishment of the Headquarters, while also setting a clear policy for the Insider Trading Oversight Committee, mandatory training wide-ranging domains of information security. for partners and staff and the submission of written The importance of handling confidential client information affidavits pledging to observe laws and regulations. is communicated to all partners and employees by Other measures include prohibitions and restrictions on providing training on the Code of Conduct and annual investments in audit clients and mandatory registration processes including a compliance affidavit. of securities and other assets in an online tool. The policy for retention periods and methods of handling working papers is decided in accordance with ethics rules, standards of regulatory authorities, laws and regulations for handling of audit working papers and other policies related to auditing. The firm’s policy on data privacy for managing the handling of personal information complies with the Act on the Protection of Personal Information, and all partners and employees are required to receive training on data privacy. In addition, communication inside and outside of KPMG AZSA is analyzed in real time by security specialists at KPMG’s Global Security Operation Center (GSOC).

VDI (Virtual Desktop Infrastructure) Due to the nature of audit work, personal computers are often carried outside company premises. The firm therefore introduced VDI (Virtual Desktop Infrastructure) as a security measure. In a VDI environment, data including eAudIT and KPMG Clara workflow (see P.15) is not saved on firm-issued PCs but is saved instead on the server. This means client data is stored on a server in a data center managed by KPMG AZSA, rather than on the hard drive of a firm-issued PC, thereby further enhancing information security.

10. Review Structure

KPMG AZSA aims to maintain and improve audit quality by implementing quality control reviews at two levels, according to the degree of significance. We also mitigate the risk of surprises through our open corporate culture which encourages early consultation and review.

10-1. Two-layer Review Structure According to 10-2. Divisional Reviews Implemented for Degree of Significance All Audits At KPMG AZSA, we implement two layers of quality When audit reports are issued for all audit services, it is control reviews. All of our audit services undergo mandatory that a partner in a position independent of the divisional reviews, and those engagements with audit team conducts a quality control review within the significant audit judgments are further subject to review Divisional Review Board. by the Senior Review Board. For the audits of listed companies in particular, a strict Senior Review Board review is implemented with regard to judgments made by the audit team from accepting an engagement, Comprises a Chairman and Vice-Chairmen who are preparing an audit plan to forming an audit opinion. selected by the Partners Meeting. If the divisional review for listed companies is for a Roles company with a March year-end, the following schedule • Establishing the basic policies for quality control reviews will be implemented. Additional reviews will be • Appointing the Chairman and Vice-Chairmen for Divisional conducted as necessary if audit risk is high or there are Review Boards significant issues for consideration. • Monitoring the status of divisional reviews • Making final judgments on significant audit issues Quality Control Review Schedule (March year-end company) Divisional Review Boards iming eview Subect etails Review boards are set up by audit division units, and to address the expertise and special nature of certain Early Aug 1 eview eview plan and conclusions for the 1st uarter industries across all of the firm’s areas nationwide. Roles End of Sept Audit Plan asic approach for the annual goal audit • Addressing engagement partner consultations eview 1 • Appointing and guiding divisional review board members eview plan and conclusions Early ov 2 eview • Understanding audit risks and monitoring divisional reviews for the 2nd uarter

• Reporting review results to the Senior Review Board End of ec Audit Plan etailed plan for the annual goal eview 2 audit

Review Structure Early eb eview eview plan and conclusions for the rd uarter Senior Review Review by Senior Board Review Board Companies pinion on the Companies In case of a significant audit udgment Early May Establishing the basic ・reuiring review under the firms policies Act Audit Act Audit ・policies of a review Appointing the Chairman in Inst pinion on the inancial ・ and iceChairman for eporting audit riss Mid June Instruments Echange ivisional eview oards ・ Echange Act eporting status of reviews Act Audit Monitoring the status ・ Audit ・of reviews Divisional Review esponding consultations Board ・from engagement partners Audit Division eviewer selection ・and supervision

Reviewer Review Audit Team All audit engagements are subect to review. ・or listed companies, each phase of the audit is ・subect to review.

10-3. The Senior Review Board Renders Final 10-5. Smooth and Timely Communication Judgment on Significant Audit Issues KPMG AZSA considers our open corporate culture In situations where the audit team and reviewer have which encourages smooth and timely communication as a difference of opinion, or significant audit judgments a particular strength. are involved, the review is escalated from the relevant We accept consultations as needed when audit Divisional Review Board to the Senior Review Board, teams are unsure of judgments, and encourage early which renders the firm’s final judgment. consultation and review. The number of cases considered by the Senior Review We mitigate the risk of new issues, unexpected Board for the year ended June 2020 totaled 371. outcomes, or surprises occurring near the account closing date by providing such support in advance. 10-4. Comprehensive Understanding of Risk Information Based on Risk Survey Forms Status of Consultations and Reviews Audit teams of clients subject to certain requirements, such From July 2019 to June 2020 as listed companies, prepare a risk survey form twice a year Number of in advance Number of final and submit these to the Divisional Review Boards. consultations and consultations and reviews reviews The Divisional Review Boards review the risk survey forms Review 298 371 and conduct hearings with audit teams and Divisional Accounting 515 93 Review Board members to comprehensively understand audit risk information. Audit 250 98 Total 1,063 562 Risks are reported to the Senior Review Board, which then conducts a review if they deem it necessary. * Of the requests for review by the Senior Review Board, those for which the Board convened are categorized as "final" and those which were handled primarily on a documentation basis are categorized as "in advance."

10-6. Allocation of Reviewers with Expertise on IFRS and US Standards Audits of companies that have adopted IFRS or US accounting standards are subject to a divisional review by reviewers who have experience auditing clients that use these standards and are fully competent in conducting reviews. The same applies for the Senior Review Board, where partners who are experts in IFRS and US GAAP audits are selected as reviewers and address complex and difficult issues. For SEC filings, Japanese SEC reviewing partners review and approve related documents, and audits are completed within the firm. For audits involving highly sensitive matters, reviewing partners consult with KPMG US-DPP as necessary and take prompt action.

Message Message from the Chairman of the Senior Review Board

A demand for foresight and initiative We are currently facing unprecedented circumstances that are still ongoing due to the outbreak of COVID-19. Amid these circumstances, we need to continue fine-tuning our audit procedures to ensure the maintenance and enhancement of audit quality. We can expect new challenges to arise for our clients as well, many of which may result in audit issues. In other words, it is critical for management of companies to have a flexible approach in responding quickly to the crisis, while auditors are expected more than ever before to have the foresight and initiative to analyze risks and address them from the standpoint of management. It is extremely important that reviewers who are independent from audit teams confirm that audit teams have sufficiently communicated with client management, designed audit procedures based on an appropriate understanding of audit risks, and obtained adequate and appropriate audit evidence from the viewpoint discussed above, from planning the audit to forming an audit opinion. KPMG AZSA and the Senior Review Board are committed to constantly maintaining and enhancing audit quality by ensuring that our review functions are sound and effective, and preventing material deficiencies in significant audit areas, based on an awareness of the changes occurring in the world around us. Specifically, we establish basic policies and review key matters on a yearly basis and disseminate them throughout the firm and aim to address risks at an early stage by maintaining close mutual communication between audit teams, Divisional Review Boards and the Senior Review Board. We achieve this by conducting regular interviews regarding audit risks of audit clients overseen by Divisional Review Boards, sharing notifications with the purpose of disseminating matters of concern in audits in a timely manner, and information sharing through holding reporting meetings among parties responsible for reviews.

Chairman of the Senior Review Board Eiji Mizutani

11. Continual Improvement

KPMG AZSA is committed to the maintenance and enhancement of audit quality by utilizing the results of both our firm’s voluntary quality monitoring program and inspections conducted by external institutions to continually improve quality.

11-1. Utilization of Results of Voluntary Quality Monitoring Programs for Quality Improvement KPMG requires all member firms to undergo an integrated monitoring program to verify that quality control policies and procedures are fit for purpose, appropriate and operating effectively. Based on this monitoring program, KPMG AZSA conducts Quality Performance Reviews at the engagement level and the Risk Compliance Program at the firm level. Any areas for improvement that are identified by this monitoring program are reported to the Senior Executive Review Board and the required action plans are implemented.

Quality Performance Reviews Risk Compliance Program An engagement quality performance review is KPMG member firms annually self-assess the status of conducted for all partners at least once every three their compliance with quality control requirements. years. The results are subject to a second round of KPMG International’s Global Compliance Review team reviews by partners from KPMG member firms before reviews the self-assessments of firms once every three ratings are finalized. years. The team reviews the procedures conducted as Evaluation policies were revised in the year ended part of the self-assessment and the appropriateness of June 2019 with the aim of utilizing review results more judgments in order to achieve consistency of procedures proactively for improvements in quality. and judgment criteria at a global level. The most recent Results of this review for the past two years are given review resulted in no objections to KPMG AZSA’s self- below. None of the review results included cases that assessment results. required a revision of audit opinion.

Quality Performance Review Results

FY ended FY ended Year of review June 2019 June 2020 No deficiencies, or clearly 70 55 S immaterial deficiencies only (61%) (59%) Mainly deficiencies in 32 29 P documentation (28%) (31%) Mainly deficiencies in audit 12 9 U procedures (11%) (10%) Number of reviews 114 93 (partner coverage) 47.0% 43.8%

11-2. Inspection by External Bodies as Verification of the Status of Our Firm’s Quality Control The Japanese Institute of Certified Public Accountants (JICPA), the Certified Public Accountants and Auditing Oversight Board (CPAAOB) and the Public Company Accounting Oversight Board (PCAOB) conduct external inspections of KPMG AZSA. We have a structure in place for conducting root cause analysis and taking corrective measures for any deficiencies that are identified in our audits.

Review by the Japan Institute of Certified Certified Public Accountants and Auditing Public Accountants (JICPA) Oversight Board (CPAAOB) Quality control reviews by the JICPA are performed for The CPAAOB receives reports from the JICPA on quality audit firms that audit listed companies and other designated control reviews and examines, from a public interest entities. Quality control reviews of the largest audit firms standpoint independent of the JICPA, whether the are normally undertaken once every two years. Additionally, quality control review system is operating appropriately where circumstances are identified that could damage the and whether audits by audit firms are being conducted public’s trust in audits, special reviews are conducted, for appropriately. The CPAAOB also conducts on-site example reviews of a limited population of audit firms. inspections of audit firms as necessary. The results of the regular quality control reviews are reported If it becomes clear that a quality control review by the JICPA to audit firms. Depending on the progress of improvement was not conducted appropriately, an audit firm’s quality relating to any improvement orders, the JICPA may take control was found to be materially insufficient, or audit work actions including issuing a warning, a strict warning, or did not comply with a law or regulation, the CPAAOB will a recommendation to resign from an audit engagement. recommend to the Commissioner of the Financial Services Depending on the nature of such actions, the JICPA may Agency administrative sanctions necessary to ensure the additionally add a disclosure to the Register of Listed proper operation of the JICPA and audit firms. Company Audit Firms* explaining any qualification or may In response to such a recommendation made by the have the firm in question removed from the register. CPAAOB, the Financial Services Agency may impose KPMG AZSA has not been subject to any such actions administrative sanctions (disciplinary actions), including resulting from quality control reviews made in the past – issuing an order to improve business operations, whole or neither disclosure of qualifications to the Register of Listed partial suspension of business, or a fine. Company Audit Firms nor removal from the register. In the past five years, KPMG AZSA received no * The JICPA operates a registration system for audit firms that conduct administrative sanctions from the Financial Services Agency. audits of listed companies and publishes on its website the Register of Listed Company Audit Firms including an overview of firm systems of Inspection by the Public Company Accounting quality control. Oversight Board (PCAOB) It is mandatory for accounting firms performing audits of publicly listed companies in the US to register ction reuired based on IC review results In the past ﬁve years with the PCAOB. 0 case The PCAOB conducts a regular inspection of both the systems of quality control and quality of individual audit dministrative sanctions from the inancial ervices enc In the past ﬁve years engagements of registered accounting firms in accordance 0 case with PCAOB standards. Inspection reports that have been conducted by the PCAOB to date are available on its website.

Quality Control Review by JICPA and Inspection by CPAAOB

Client Quality control review: JICPA examines the state of operations of an audit firm. udit ecommendation Report on quality control review: JICPA reports the Committee ⑤ results of a review to the CPAAOB. Inspection④ Oversight review: CPAAOB conducts an oversight review primarily on the appropriate operation of the udit Communication quality control review system and of the audit work eport② on ualit Oversiht③ Inspection④ of the audit firm. control review review Inspection: CPAAOB inspects the JICPA, the audit firm or the audit client. Recommendation: CPAAOB recommends administrative sanctions or other measures to the Financial Services Agency

Annual Audit Schedule for Listed Companies (in case of March year-end)

-June July Aug Sept Oct Nov Dec Jan Feb Mar

Confirmation of Independence

Risk Assessment in Engagement Audit Contracts Acceptance and Continuance

Formation of Audit Teams

Management Discussion

Communication Those Charged with with Clients Discuss the Audit Plan Governance Discussion

Q3 Review Q1 Review Report Q2 Review Report Report

Understand and Discuss Management’s Assessment of Internal Controls Internal Control

Evaluate the Design of Evaluate the Implementation of Internal Controls Internal Controls

Quarterly Reviews Q1 Review Q2 Review Q3 Review

Substantive Procedures Substantive Procedures

Engagement Quality Control Reviewer Appointment

Quality Control (QC) Q3 QC Q1 QC Review Q2 QC Review Review Review

Audit Plan QC Review 1 Audit Plan QC Review 2 Senior Review

Monitoring of the System of Quality Controls

Apr May June July - Reference

2. Audit Contracts > P.46

Feedback from Clients

3. Communication with Stakeholders > P.47 Company Act Audit Results Q3 Review Fin Inst & Exchange Report Act Audit Results

Understand and Discuss Management’s Assessment of Internal Controls 4. Audit Methodology and Audit Team Formation > P.48

5. Pursuing a High Level of Expertise and Evaluate the Implementation of Internal Controls Providing High-quality Services > P.50

6. Audit Structure for Addressing the Globalization of Clients > P.54

7. Actions to Address Fraud and Fraud Risk > P.56

8. Independence, Integrity, Ethics and Objectivity > P.57

9. Initiatives for Compliance and Information Security > P.59

Consideration of Disclosure Documents

Q3 QC Company Act Audit QC Review 10. Review Structure > P.61 Review Fin Inst & Exchange Act Audit QC Review

Monitoring Program of 11. Continual Improvement > P.64 KPMG

: We execute the aforementioned processes as required through the year.

1. KPMG AZSA’s Professionals...... 70

2. Human Resource Development at KPMG AZSA...... 72

3. Responsiveness to Change...... 74

4. Creating a Friendly Working Environment...... 76

1. KPMG AZSA’s Professionals

Regardless of how much technology evolves, the source of providing high-quality audits and value-added services is our people. KPMG AZSA is enhancing the diversity of our people and organization in order to address the various expectations placed on audit firms in a timely manner.

1-1. Diverse Professionals Responsible for 1-2. Active Recruitment of Talent with High-quality Audits Diverse Backgrounds Nowadays, the involvement of specialists outside of At KPMG AZSA we employ professional staff based on accounting is essential for the provision of audit services. the firm’s management policy and in accordance with a Our professionals comprise not only certified public personnel plan. accountants but also experts in various fields including IT We actively recruit talent with diverse expertise and experts and data scientists, and consultants who deliver backgrounds in addition to regular recruitment of advisory services. individuals who have passed the CPA exam. Our partners interview applicants directly in the final Composition of Professional Workforce , stage of recruitment, following a document screening Average years of experience and selection of candidates based on competence (as of June 2020) and professional aptitude tests. We are committed to identifying talent who are capable of executing Partners and Directors tasks appropriately in accordance with KPMG AZSA’s management policy. . years 1-3. Evaluation System Emphasizing Audit Quality Enhancement Managers We believe that the appropriate assessment of professional staff and feedback on performance and . years results assists them in accelerating their further growth, which results in an enhancement in audit quality.

Other professionals Assessments emphasize the ability to make appropriate judgments utilizing professional skills based on a high . years level of comprehension, logical thinking and problem solving skills, founded on ethics and integrity. Assessments of partners are heavily focused on quality control, and a comprehensive rating is given based on the guidance for Quality and Compliance. Non-audit services provided to clients are not subject to evaluation. .

Message Message from Senior Executive Board Member – Head of People

With the rapid development of globalization and digitalization, the range of skills demanded of accountants is expanding, while opportunities for professionals specializing in fields outside of accounting, such as data scientists, are also increasing. At KPMG AZSA we have been implementing a broad range of talent development measures including training in global, digital and human skills, with the aim of providing high value-added services as professionals who can respond flexibly to changes in the environment. Even in the midst of change, our high standards of ethics and integrity as professionals constitute our backbone, and it is essential that we gain the trust of the public and clients on this basis. With this in mind, the fact that some of our partners and professionals inappropriately acquired continuing professional education (CPE) credits obligatory under the CPA Act, as disclosed by our firm in September 2020, has shaken the public’s trust in KPMG AZSA, and we take this matter extremely seriously. While putting all of our efforts into preventive measures, we will also work on thoroughly fostering a high level of ethics as professionals and implementing compliance education. Our professionals at KPMG AZSA are committed to self-discipline, taking on bold challenges for new value creation, while respecting colleagues with various backgrounds and accepting diversity, and I believe this is what supports the quality of our services. With the outbreak of COVID-19, the work style at KPMG AZSA has been transforming significantly. We will emphasize the importance of acting with professional awareness and ethics, and provide opportunities and systems for professionals to think for themselves, learn and grow in order to continuously provide high-quality services in the future.

Senior Executive Board Member in Charge of HR Hiroyuki Yamada

2. Human Resource Development at KPMG AZSA

At KPMG AZSA we place an emphasis on human resource development based on an understanding that the basis of audit quality is the quality of our people. We will foster true professionals who contribute to society through the “Three O’s” – OJT, Off-JT and Opportunity.

2-1. Fostering True Professionals Who 2-2. Human Resource Development by Contribute to Society Means of the “Three O’s” KPMG AZSA understands that the basis of audit quality OJT | Improving Skills and Abilities through is the quality of our people, and we have set our Human Practical Experience Resource Development Principle as follows. OJT is the basis of developing talent. Professional “In order for KPMG AZSA to realize the firm’s skills and abilities are acquired through the guidance of basic principles and to fulfill its responsibilities supervisors and through practical experiences, such as as a public institution, we must develop true consultations with clients. professionals who make a contribution to society KPMG AZSA has been providing planned and by systematically building and maintaining an consistent OJT at both the firm and division levels environment that allows our people to acquire through the introduction of a PDCA cycle for talent the expertise and skills necessary to provide development. We seek to foster a growth mindset high-quality services.” through discussions regarding OJT and an introduction We define true professionals as persons who not only of successful cases, and provide guidance to junior possess both expertise and skills, but also have high staff based on a tutoring system. ethical standards, integrity, and a sense of responsibility, We are committed to promoting team management that and are capable of solving problems based on their own addresses environmental changes to ensure that we powers of understanding and logical thinking. foster talent through OJT in any environment. While the individual’s own diligent self-study and high aspirations are the foundation of developing such true Off-JT | Providing Practical and Pragmatic Training professionals, we also believe that true professionals Of the Off-JT we offer, our headquarters hosts training can be developed by enhancing OJT, by supplementing regarding mandatory knowledge for those involved in practical expertise and human skills through Off-JT, and audit engagements, as well as training for addressing by providing wide-ranging opportunities in accordance firm issues. In responding to the needs at audit sites, our with the firm’s Human Resource Development Principle divisions also implement training in line with professional described above. knowledge and practice as training to supplement OJT. We also provide training for acquiring digital skills and Conceptual Diagram of Human skills necessary for working in an online environment. Resource Development rowth indse During the year ended June 2020, training hours per nd t a ou d esource D n tu an eve da trainee averaged 71.9 hours. With a focus on technical -s m lo ti lf u pm o e s n 企業にとってグローバル化は不可避です。 en training, questionnaires completed after the training are t r AbcdeGIabcd i used for continuous improvement of training courses. n T c J O i O rue p f f l professionals - e J verae annual trainin hours s T per trainee ours eceeded the average of .1 mentioned in AZSA . hours 1. hours uality 201 as the average was recalculated to include ended June 201 ended June 2020 eternal online training. esults of uestionnaire O reardin trainin pportunity 4.4 4.4 points points ended June 201 ended June 2020

Training System (overview)

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1 raining Programs such as Internal Control Audit, Corporate a and a Effect Accounting 2 Conducted on Milestone raining Conducted by online due to CI1 on the year ended June 2021 Postponed due to CI1 on the year ended June 2021.

Opportunity | Providing Wide-ranging Work Opportunities Number of Persons Transferred within KPMG AZSA

Engaging in audit work for diverse sectors and business Year ended June Year ended June Transfer to 30, 2019 30, 2020 models expands one’s knowledge and is therefore HQ (Quality Control Departments) 70 124 important in developing professional talent. Professional staff in our audit divisions are periodically transferred Other Audit Divisions and Offices 190 189 to the audit teams of clients that are different in scale Advisory Divisions 126 68 and sector. We seek to develop true professionals with Total 386 381 diverse experience by transferring staff members not only between audit divisions but also to departments Number of Persons Loaned to External Public responsible for quality control, to our advisory divisions Institutions and Corporations and among different offices. Staff members are also as of June 30, as of June 30, actively seconded to external public institutions and Loan to 2019 2020 corporations, in an effort to develop true professionals by JICPA, FASF etc. 27 28 providing diverse experience. Other (corporations) 41 40 Total 68 68

3. Responsiveness to Change

At KPMG AZSA we believe that having the resilience, or strength to respond to the constant changes in companies and society in a timely manner, demonstrates true growth, and we are focused on fostering talent who can address the recent acceleration in digitalization and globalization.

3-1. Global Talent Who Understand Different Cultures and Diversity As the globalization of Japanese corporations accelerates, Global Skills Training KPMG AZSA is continuously nurturing global talent to As a basis for overseas secondments and for working build an infrastructure system that enables us to support in Japan on international audit work, KPMG AZSA the globalization of our clients. We define global talent is implementing various programs, such as English as “professionals who understand different cultures and training in Japan, short-term study-abroad opportunities diversity, who have a certain level of linguistic ability and and new manager training programs held by KPMG in who perform work on the global playing field.” Global other countries to develop wide-ranging global skills, in talent is fostered through the global skills training which addition to English as a linguistic skill. includes language training and short-term study-abroad opportunities, as well as the overseas secondment KPMG AZSA has maintained good relations with the programs. The cumulative number of globally capable Central University of Finance and Economics in Beijing. professionals we have developed through the global skills Based on this relationship, the firm sends professionals training and overseas secondment programs is 2,295. to study at the university on both a two-week program in Chinese and a four-month intensive program for Due to difficulties in realizing study-abroad and overseas the purpose of developing candidates for future secondment programs due to COVID-19 in 2020, we assignment to China. have enhanced our online training.

Global Talent Headcount (cumulative) Global Skills Training (June 2020) people people Number of participants people people people English Training in Japan 888 Short Term study abroad program 131 Training at KPMG Global 60 One Week MBA training 6 Others 5 Number of participants 1,090

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(“Global Talent” is defined as those with a TOEIC score over 730, those with experience working abroad, foreign nationals and those proficient in other foreign languages)

Overseas Secondment Programs 3-2. Improvement in Digital Literacy KPMG AZSA is developing global professionals who KPMG AZSA is focused on improving the digital literacy not only have skills, but also a global mindset through of our professionals. business experience gained abroad. The firm is therefore We newly established the AZSA Digital Academy (ADA), actively promoting the assignment of its personnel to a program for fostering digital talent, in 2020 with the other KPMG member firms. aim of realizing 3C x Impacts & Insights at audit sites by KPMG AZSA has two primary overseas secondment utilizing rapidly evolving technologies and data (see P.19). programs, the Global Japanese Practice (GJP) program and the Senior Development Program. • The GJP program mainly sends personnel who are managers or above on assignment to the local Japan desk for a period of approximately three years. Voice The Voice of Our People • The Senior Development Program sends staff at the senior accountant level to offices in English-speaking グローバルスキル研修 KPMG member firms for a period of between 18 and I have been serving in concurrent roles in the Digital 22 months to experience audit work as local audit Innovation Division (“DI Division”) and audit division team members. 国内研修 since July 2018. 名 We have additionally been sending many personnel who I have two primary roles in the DI division. are managers or above to KPMG Global Solutions Group The 海外修学first is providing data analysis and solutions131 to (KGSG), a research institution of KPMG International, 名 as well as to International Standards Group (ISG) in the audit teams. As manager I lead projects while acting U.K. and Department of Professional Practice (DPP) in as a go-between for digital technologists and audit teams, andKPMG have the role of a “catalyst” for promoting the US, both of which formulate interpretations and 海外主催 0 the best outputs. 名 application guidelines for accounting standards. My second role is the planning and marketing for The cumulative number of participants in these the firm’sMA overall digital strategy and initiatives. I am programs is 625. The ratio of partners and managers 短期 required to identify the changing expectations of名 our who have overseas secondment experience is shown clients without delay and address them in a dynamic below. One in every four partners and managers have and timely manner. For this role it is essential that I secondment experience. sendその他 messages that resonate with the other5 party and 名 assemble content that is convincing. Global Opportunities Program (June 2020) Going forward, audit firms will experience significant changes from their current organization centered 研修参加人員数2020 6 100 Number of participants on accountants,（年月期） and working合計 as a team of diverse名 Global Japanese Practice 147 professionals will become the norm. The DI division I think shows the future of KPMG AZSA one step ahead Senior Development Program 53 in the sense of professionals with different expertise Secondments to KPMG Global 13 merging into a collaborative group. Others 13 It is stimulating to pave the way to a new stage of Number of participants 226 audit digitalization while making full use of my audit experience, and it will be a major asset for my career. Partners and Mangers with Overseas Secondment Experience (as of June 30, 2020)

Number Percent Partner, Director 247 35.3%

Senior Manager, Manager 306 24.3% Digital Innovation Division Total 553 28.2% Senior Manager

Miki Miyake

4. Creating a Friendly Working Environment

At KPMG AZSA we believe that in order to effectively develop talent it is also important to create a working environment in which all of our people find it easy to work and achieve results. Our firm is active in further improving its working environment through the execution of work style reform, including the promotion of remote working amidst the COVID-19 pandemic, the promotion of inclusion & diversity, the firm’s Global People Survey (GPS, an attitude survey) and other means.

4-1. An AZSA Work Style for a Fulfilling Work 4-2. Promotion of Inclusion and Diversity Life and Personal Life KPMG AZSA is composed of a wide variety of talent, At KPMG AZSA, we view growth as professionals including people with expertise in different areas, such and physical and mental health as the purpose of our as digital, cyber, finance and real estate, as well as work style reform, and have been promoting reform employees including foreign colleagues with differing based on the three frameworks of audit services, values. In addition, some of our people have restrictions policy and culture. on their working time due to the provision of nursing We have also introduced the “AZSA Work Style” to care to family members or child rearing. We believe that exemplify a work style of professional awareness, an inclusive working environment where individuals productivity and communication. We have implemented respect each other’s differences, inspire each other, and various initiatives including morning and evening division demonstrate their individual abilities as much as possible meetings, “kaeru meetings” (with the dual meaning of can foster various perspectives. This contributes to “going home” and “changing” work style), preparing the improvement of audit and advisory services and various manuals to improve efficiency, and providing solutions that we provide to address complicated opportunities for learning to promote self-improvement. issues confronting society and our clients. KPMG AZSA Recent initiatives to rebuild work style in a way that suits promotes Inclusion & Diversity as a way of achieving environmental changes due to COVID-19 have led to the our common goal of contributing to clients and society promotion of remote working and a further enhancement through the provision of high-quality services. of work style. Main Inclusion and Diversity Initiatives We are committed to carrying out reforms with the aim • Established Key Performance Indicators (KPI) for of becoming an organization in which a fulfilling work life promoting the success of women. The ratio of women and personal life are the norm by firmly rooting the AZSA in management roles is 13% (the goal is for this ratio to Work Style in our culture. reach 15% by 2023). Main Work Style Reform Policies and Initiatives • Activities of the Working Women’s Network (WWN) • Implementation of Variable Working System as a network of female staff working at KPMG AZSA. • Limited Access to Internal Network at night and • A “Flexible Work Program” offering choices in on weekends work style • Continuation of working arrangements combining • Supporting career development through regular office and remote work, and promotion of audit interviews with employees relating to childbirth, child procedures utilizing the latest digital technologies rearing and nursing care • Expansion of a staggered working hours system • Supporting the return of employees to work through a partnership with a consortium facility offering childcare • Expanding the number of childbirth leave days and applicable period for spouses

• Clarifying in the firm’s Code of Ethics that any kind 4-4. GPS – Attitude Survey for Continuous of human rights violations will not be tolerated, Improvements in Our Firm including discrimination based on sexual orientation The Global People Survey (GPS) is an attitude survey and gender identity conducted by KPMG member firms worldwide covering • Certified as an “Eruboshi” company all partners and personnel as a continuous improvement with highest rating by the Ministry of exercise. The survey includes items on leadership and Health, Labor, and Welfare as a firm communication, as well as staff career development, that implements effective initiatives to compensation and benefits and working environment. promote the advancement of women. Eruboshi We then compare the scores our people give to each of • Acquired the “Platinum Kurumin,” a these items with scores from other regions of KPMG certification for companies with high and from other professional services firms. The survey standards of providing support to families results are shared with all personnel and are used in raising children, the first of its kind for a considering and implementing measures aimed at continuously improving the organization and at creating large audit firm. Platinum Kurumin a friendly workplace in which people collaborate across offices, divisions, and infrastructure departments. 4-3. VOICE – Realizing the Ideas of Our People For KPMG AZSA’s most important GPS indicator VOICE (Valuable Opinions and Ideas to Change “Engagement Index (voluntary willingness to serve Effectively) is an intranet tool for collecting feedback on the firm and satisfaction with the firm),” the ratio of issues at work, requests and improvement suggestions, positive responses rose by 10% from the year ended in order to incorporate the voice of our people into the June 2017, to 70%. firm’s operations.

VOICE contributes to the review and standardization Engagement – Positive Responses by Year of existing work methods and the establishment of an efficient business infrastructure. It also provides an ％ opportunity for communication between the staff and 0 ％ management of KPMG AZSA. ％ Topics raised by staff are studied by the responsible departments with a view to implementing changes, and the results are made public. We recently asked staff to submit opinions for “VOICE x Audit Reform,” and carried out a full-scale implementation of online communication tools to improve task efficiency.

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1. KPMG International...... 80

2. KPMG Japan...... 82

3. Industry Knowledge...... 84

1. KPMG International

KPMG is a global network of professional firms providing audit, tax and advisory services. We operate in nearly 150 countries and have more than 219,000 people working in member firms around the world.

1-1. Member Firms Comprising of The Global Management Team Supervising Independent Entities the Execution Status of Plans All KPMG member firms are legally independent and The Global Management Team is led by the Global separate entities. Chairman and includes the Global Chief Operating Officer, global function heads (audit, tax and advisory KPMG International* has developed a system for functions), and the global heads of functions including providing consistent services on a global scale, and quality & risk, people, clients & markets, technology & supports the provision of high-quality audit, tax and knowledge, corporate affairs, and the General Counsel; advisory services by its member firms. it supports member firms in their execution of the global * KPMG International Limited is a private English company limited by guarantee. KPMG International Limited and its related entities do not strategy and is responsible for holding them accountable provide services to clients. for commitments made. The Global Management Team also supervises 1-2. Involvement of Japan in 10 steering committees, which have the role of Key Governance Bodies promoting practical discussions and matters for The key governance and management bodies of KPMG resolution in each region. Japan actively participates International are the Global Council, the Global Board, in all steering committees. and the Global Management Team. The Global Council – 1-3. Regional Structure Composed of Equivalent to a Shareholders’ Meeting Three Regions The Global Council is composed of 59 representatives of KPMG maintains a regional structure composed of member firms and is a body equivalent to a shareholders’ three regions: the Americas, EMA (Europe, Middle meeting in ordinary corporations; it is the supreme East, and Africa), and ASPAC (Asia Pacific). Japan decision-making body responsible for the annual belongs to the ASPAC region. Under the regional accounts, revision of the firm’s statutes and election of chairman of each region there is a board, which acts as the Global Chairman and Global Board members. Japan a decision-making body. is a member of the Global Council.

The Global Board – As of September 2020, the following members of KPMG AZSA Equivalent to a Board of Directors participate in the operation of KPMG ASPAC. Through these roles, KPMG AZSA contributes to the KPMG Global Network. These The Global Board is the principal governance and oversight arrangements allow for the situation in Japan to be conveyed and body composed of 20 representatives of member discussed in advance so that KPMG’s various methodologies can be firms, the Global Chairman and Regional Chairmen applied to the audit practice in Japan. (representatives of the three regions), and is equivalent to a Board Member Head of Audit & Assurance “board of directors” in ordinary corporations. Toshiya Mori Takuji Kanai The key responsibilities of the Global Board include (KPMG Japan Chairman) (Head of Audit)

approving strategy, protecting and enhancing the Head of DPP Audit Quality Leader KPMG brand, overseeing the management of KPMG Eiichi Fujita Simon Dobbins (Head of US Capital Markets Group International and approving policies and regulations. (Partner) in Japan) As of end of September 2020, Toshiya Mori (Deputy Managing Partner of KPMG AZSA and Chairman of AAS Leader Head of Energy & Natural Resources KPMG Japan) represents Japan as a member of the Junichi Adachi Mina Sekiguchi (Head of AAS Division) Global Board, thus playing an important role in KPMG (Head of Energy and Infrastructure) International’s management.

about 150 21000 countries people

Number of Number of countries personnel

Audit Tax Advisory Revenues 11.1 in billions 6.6 in billions 11.9 in billions 2. in billions (as of September 30, 2019)

Message Message from Global Chairman

As a New Reality emerges, the quality we deliver and the values that define our firm are more important than ever. COVID-19 has reconfigured how we work and how we interact. It has altered our economies and has the potential to reshape our communities long into the future. Across all of KPMG, we are working together closer than ever to meet these challenges with a renewed sense of purpose — to inspire confidence and to empower change – in all that we do. This is certainly true in Japan. As Global Chairman, my team and I are working with our colleagues at KPMG Japan to drive strategic investments globally and in ASPAC, including through our Global Japanese Practice, one of KPMG Japan’s largest investments . We want to make sure KPMG remains at the forefront of innovation for our Japanese clients and stakeholders, wherever they do business. I have complete confidence in the management of KPMG AZSA, our firm’s third largest audit practice, as they lead with courage while delivering quality and safeguarding the public’s trust. They have a well-earned reputation as a leader in audit innovation, and they’ve only enhanced it Global Chairman KPMG International with an impressive array of investments in technology, which are presented in these pages. As we navigate the unforeseen challenges of a New Reality, I remain fully committed to Bill Thomas supporting KPMG Japan and KPMG AZSA to ensure that our Japanese clients around the world receive the very best from KPMG. I look forward to following through on this commitment together with my Japanese colleagues

2. KPMG Japan

KPMG Japan represents a group of eight professional firms providing audit, tax, and advisory services and comprising approximately 8,900 personnel. We are committed to providing services to our clients through seamless collaboration, utilizing the expertise and skills of a wide range of professionals, and maximizing the value of KPMG’s global network.

2-1. Discussing the Management of KPMG Japan Among the Main Member Firms The KPMG Japan Management Committee comprises representatives from the major KPMG Japan firms including KPMG AZSA, KPMG Tax Corporation, KPMG Number of Consulting and KPMG FAS. The committee discusses the most important personnel 3 people topics related to management of KPMG Japan, including the firms’ collaborative Revenues structure, talent development and continual improvement of the quality of our 14.5 Billion Yen services. This allows the firm to bring together the best resources KPMG has to offer and deliver the best possible service to address the management issues of Audit Tax Advisory our clients. KPMG AZSA’s Senior Executive Board members act as directors on 82.7 17.5 64.2 the boards of our advisory subsidiaries, thereby ensuring a consistent approach Billion Yen Billion Yen Billion Yen to operational management. Additionally, these advisory subsidiaries are also subject to monitoring and audit by the Management Oversight Committee and (as of June 30, 2020) Internal Control office. * Tax revenue as of September 30, 2020.

KPMG Japan Chairman: Toshiya Mori CEO: Hiroyuki Takanami Audit Ta Advisory KPMG AZSA LLC KPMG Tax Corporation KPMG Consulting Co., Ltd. CEO: Hiroyuki Takanami Representative Partner: Yuichi Komakine President and CEO: Masahiro Miyahara Professional services including audit, Services including ta advice related to the Support for overall improvement of management assurance and attestation services, clients corporate activities, preparation of including planning of business strategies, financial advisory and Initial Public ffering ta returns, booeeping and payroll. improvement of business efficiency, enhancement support services. of profit management capability, and strengthening governance and ris management. KPMG Social Insurance KPMG FAS Co, Ltd and Labor Advisors Corporation Representative Partners: Masahiko Chino, Representative: Mayumi Ogawa Osamu Matsushita, Hikaru Okada Advisory services including social labor Services including MA and business insurance administration. restructuring advisory, management strategy consulting and fraud investigations. KPMG Healthcare Japan Co., Ltd. Managing Partner: Keiichi Ohwari, Jun Matsuda usiness and financial services strategy, ris assessment, MA, etc. for the healthcare industry including medical and nursing care facilities. KPMG AZSA Sustainability Co., Ltd. Managing Partners: Junichi Adachi, Kazuhiko Saito hird party assurance services to enhance the reliability of nonfinancial information. KPMG Ignition Tokyo, Inc. President and CEO, Masayuki Chatani evelopment of digital technology solutions for KPMG Japans audit, ta and advisory functions. © 2021 KPMG AZSA LLC, a limited liability audit corporation incorporated under the Japanese Certified Public Accountants Law and a member firm of the KPMG global organization of independent 82 member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. AZSA Quality 2020/21 Initiatives for Enhancing Audit Quality

2-2. Fostering Unity Among Constituents 2-3. Contributing to Society Through Through Various Activities CSR Activities Utilizing Our Knowledge KPMG Japan engages in a number of activities to ensure and Experience all personnel understand the firm’s basic principles and By taking advantage of our experience and insights develop a sense of oneness. gained through our core business as a professional firm we are committed to share our values with society and KPMG Japan Kickoff contribute to the development of a sustainable society. KPMG Japan holds the KPMG Japan Kickoff every year, bringing all personnel together under one roof. The meeting Contribution to Lifelong Learning is a valuable opportunity to foster a sense of oneness By placing emphasis on the fourth UN Sustainable across all functions including audit, tax and advisory. Development Goal (SDG), “Quality education,” KPMG AZSA provides activities aimed at fostering the next KPMG Japan Partners Meeting generation of leaders to university, high school and The KPMG Japan Partners Meeting, attended by junior-high students. the partners and directors of KPMG Japan, is held We provide accounting and audit classes which allow bi-annually to share information and discuss the direction students to understand the ways in which accounting of KPMG Japan as a whole, as well as the audit, tax, knowledge is useful in society, as well as entrepreneur and advisory functions, and serves to deepen mutual classes to support members of the younger generation understanding among the partners and directors of who wish to solve social issues through business. KPMG Japan. Online meetings were held in 2020 to discuss how to Support with Expertise address market changes due to COVID-19, and what is Junior staff of KPMG AZSA volunteer at the Nippon now expected of partners. Foundation Paralympic Support Center to support the organization’s internal audit of subsidies that are granted Chairman Award to sports associations. The Chairman Award is an accolade system for all We seek to solve social issues by taking advantage of of KPMG Japan to recognize accomplishments and skills and experience gained through our businesses, contributions at work, and to demonstrate timely such as providing free audits to the US-Japan Council. appreciation for the efforts of our people. Announcing the awards within the firm contributes to a feeling of Environmental-Friendly Firm accomplishment and enhances motivation. In order to take responsibility for climate change, KPMG member firms worldwide have made efforts to reduce CO2 emissions. KPMG Japan also calculates total CO2 emissions in order to have an understanding of the CO2 emissions created by our business and works to reduce the emissions.

Support for Blind Soccer We entered into a partnership contract with the NPO Japan Blind Football Association and have held the Club Championship event each year since 2016. We have also been sponsoring the Japan men’s national blind soccer team since January 2020.

3. Industry Knowledge

In cooperation with KPMG member firms worldwide, KPMG Japan accumulates insights specific to each industry sector. We provide professional services that are informed by a deep knowledge of industries.

Key Industries in Which KPMG Japan Provides Services Based on Our Insights

Finance Technology, Media and Telecommunications With innovations in digital technologies and the emergence of For technology and media companies in which digital transformation financial platforms, financial institutions are facing drastic changes (DX) has been progressing, there has been disruption in industry in their business environment, including stricter financial regulations structure at an unprecedented pace. The communications industry domestically and abroad, negative interest rates, globalization and is facing a twofold challenge of providing OTT *4 services and a changes in demographics. We provide comprehensive services based 5G network that is safe and reliable. KPMG offers such industries on our expert insights and taking into account the volatile business solutions utilizing TOM (Target Operating Model) and AI from a global environment to address the more complex management issues faced perspective, and advice based on our wealth of insights. We also by financial institutions. We provide a wide range of services including support the resolution of various issues that accompany the application compliance with global financial regulations and financial infrastructure of new accounting standards. regulations, addressing financial crime and fintech, organizational restructuring, supporting entry into offshore markets, business process transformation and building risk management systems.

Public Sector Consumer Goods Government bodies and non-profit organizations have been required in Demographic and economic changes, as well as changes in consumer recent years to adapt to various changes, including the demand for more needs and behaviors as a result of advances in technology, are accountability, privatization, and the introduction of PFI (Private Financial dramatically changing the market and competitive landscape. By Initiatives)*1. We respond to a wide range of needs in addressing maximizing the value of its global network, KPMG supports clients in these challenges, including internal audit, the introduction and use of their response to these and other management issues, including access corporate accounting techniques, enhanced disclosures, organizational to overseas markets and transformation to a client-centric business restructuring, and measures to improve work efficiency. We will also model that incorporates cutting-edge technologies. provide new support services based on the experience and know-how of our KPMG global network.

Manufacturing Automotive Digitalization with the premise of competing at a global level is The automotive industry is being forced to make large investments for accelerating rapidly in the manufacturing industry. Technologies for technology innovation, such as addressing environment restrictions supervising and controlling operations, Industry 4.0 based on a fusion and CASE*5. At the same time, there are demands to respond to the with IT, and transformations for realizing CPS *2 continue to be the key drastic changes in mobility needs in the With/After Corona (New themes in the industry. KPMG provides insights in anticipation of DX to Normal) era, in addition to collaborations and competition with different CX*3 looking ahead ten years, and provides strong support to clients in industry companies entering the market. KPMG will utilize our global addressing challenges they may face. network to have a team of experts with a wealth of insights regarding key management issues including ESG, supply chain, digitalization and security support the transformation of our clients.

Energy Life Sciences In the energy industry, there is demand for the conversion of business The life science industry faces challenges including the increasing strategies in line with the transition to a decarbonized society cost of healthcare and the reduction of drug prices, while being (energy transition), and the redesign of task processes utilizing digital required to strictly observe environment compliance and pursue infrastructure. Further, large-scale internal transformation in companies efficiency gains. At KPMG, we leverage our extensive experience and is essential to address climate change risks and digitalization. professional knowledge to provide audit, tax support including transfer KPMG will utilize our global network and support management in pricing, M&A support including for overseas business expansion, and addressing such issues and achieving their goals. advice on digital transformation, cost reduction, risk and compliance, and IT implementation.

*1 PFI (Private Finance Initiative): Financing public sector projects such as construction, maintenance management and operations through the private sector *2 CPS (Cyber-Physical System): A system in which observed data obtained in the actual world (physical environment) is quantified and analyzed in a cyber environment for the realization of a more sophisticated society *3 DX to CX: Measure to enhance CX (customer experience) using DX (digital transformation) *4 OTT (Over-The-Top) Service: The operation of large-capacity data services such as video streaming on the internet by a company with no relation to telecommunications carriers or internet service providers *5 CASE: Presents the vision the automotive industry aims for based on the acronym for Connected, Autonomous, Shared & Services, and Electric

1. Corporate Overview

(as of June 2020)

Headquarters 1-2 Tsukudo-cho, Shinjuku-ku, Tokyo

Offices Supervising Offices: Tokyo, Osaka, Nagoya Regional Offices: Sapporo, Sendai, Hokuriku, Kita-Kanto, Yokohama, Kyoto, Kobe, Hiroshima, Fukuoka 12 offices

Number of CPAs 3,146 (Includes 28 Representative Partners and 530 Partners) Passed the CPA exam 1,238 Employees Professionals 1,120 (Includes 34 Specified Partners and 1 Representative Partner) 6,268 people (Full-time) Administration Staff 764

Audit Engagements: 3,635 Number of Financial Instruments and Exchange Act and Companies Act: 785 / Financial Instruments and Exchange Act: 34 Companies Act: 1,386 / Incorporated Educational Institutions: 46 / Labor Unions :16 / Other statutory audits: 568 / Clients Other voluntary audits: 800 Other engagements: 2,133 (the number of clients with other engagement contracts for the year ended June 2020)

July 1969 Asahi & Co. was established July 1985 Asahi & Co. and Shinwa Audit Corporation merged to form Asahi Shinwa & Co. October 1993 Asahi Shinwa & Co. merged with Inoue Saito Eiwa Audit Corporation to form Asahi & Co. History February 2003 KPMG audit division spun off from Shin Nihon & Co. to form AZSA & Co. April 2003 Asahi & Co. became a member firm of KPMG January 2004 Asahi & Co. merged with AZSA & Co. to form KPMG AZSA & Co. July 2010 KPMG AZSA & Co. became limited liability company and changed its name to KPMG AZSA LLC

2. Financial Information

The financial status of KPMG AZSA LLC for the years ended June 2019 and June 2020 is summarized below. Summary Balance Sheet (Million yen) The financial statements of KPMG AZSA are subject to June 30, 2019 June 30, 2020 audit by another audit corporation. Current assets 49,911 54,650 Non-current assets 19,315 22,464 Summary Income Statement (Million yen) Total assets 69,226 7 7, 115 Year ended Year ended June 30, 2019 June 30, 2020 Current liabilities 24,546 29,997 Revenue 100,493 105,970 Non-current liabilities 16,628 18,973 Operating expense 98,688 103,517 Total liabilities 41,175 48,971 Operating income 1,805 2,452 Partners’ capital 28,052 28,144 Non-operating income 1,057 1,086 Valuation and translation adjustments (0) (0) Non-operating expense 911 1,163 Total net assets 28,051 28,144 Ordinary income 1,950 2,374 Total liabilities and net assets 69,226 7 7, 115

The clients of KPMG AZSA include the following companies listed on the First Section of the Tokyo Stock Exchange, national universities, and local governments (569 corporations).

Fishery, Agriculture & Forestry/Mining Textiles and Apparels/Pulp and Paper Pharmaceutical

• Maruha Nichiro Corporation • TOYOBO CO., LTD. • Kyowa Kirin Co., Ltd. • SAKATA SEED CORPORATION • TEIJIN LIMITED • Takeda Pharmaceutical Company Limited • K&O Energy Group Inc. • SUMINOE TEXTILE CO., LTD. • Sumitomo Dainippon Pharma Co., Ltd. • NIPPON FELT CO., LTD. • CHUGAI PHARMACEUTICAL CO., LTD. Construction • DYNIC CORPORATION • HISAMITSU PHARMACEUTICAL CO., INC. • SOTOH CO., LTD. • SANTEN PHARMACEUTICAL CO., LTD. • MIRAIT Holdings Corporation • KOMATSU MATERE CO., LTD. • Nichi-Iko Pharmaceutical Co., Ltd. • Besterra Co., LTD. • TSI HOLDINGS CO., LTD. • Fuji Pharma Co., Ltd. • Daiseki Eco. Solution Co., Ltd. • Sanyo Shokai Ltd. • SAWAI PHARMACEUTICAL CO., LTD. • Hazama Ando Corporation • DESCENTE, LTD. • Zeria Pharmaceutical Co., Ltd. • Takamatsu Construction Group Co., Ltd. • Tokushu Tokai Paper Co., Ltd. • DAIICHI SANKYO COMPANY, LTD • Taisei Corporation • Hokuetsu Corporation • Taiko Pharmaceutical Co., Ltd. • Fudo Tetra Corporation • TOMOEGAWA CO., LTD. • Daito Pharmaceutical Co., Ltd. • TEKKEN CORPORATION • RENGO CO., LTD. • PeptiDream Inc. • DAIHO CORPORATION • TOTETSU KOGYO CO., LTD. Chemicals Oil and Coal/Rubber/Glass and • P.S. Mitsubishi Construction Co., Ltd. Ceramics Products • MAEDA ROAD CONSTRUCTION CO., LTD. • Showa Denko K.K. • WAKACHIKU CONSTRUCTION CO., LTD. • SUMITOMO CHEMICAL COMPANY, • Fuji Oil Company, Ltd. • NIPPON RIETEC CO., LTD. LIMITED • Cosmo Energy Holdings Co., Ltd. • TOENEC CORPORATION • Sumitomo Seika Chemicals Company, Limited • Toyo Tire Corporation • SUMITOMO DENSETSU CO., LTD. • TOSOH CORPORATION • Sumitomo Rubber Industries, Ltd. • JGC HOLDINGS CORPORATION • AIR WATER INC. • Sumitomo Riko Company Limited • YAMATO CORPORATION • Toho Acetylene Co., Ltd. • AGC Inc. • Takasago Thermal Engineering Co., Ltd. • TODA KOGYO CORP. • Nihon Yamamura Glass Co.,Ltd. • SANKO METAL INDUSTRIAL CO., LTD. • KANEKA CORPORATION • Nippon Electric Glass Co., Ltd. • DAI-DAN CO., LTD. • JSR Corporation • TAIHEIYO CEMENT CORPORATION • HIBIYA ENGINEERING, LTD. • Sumitomo Bakelite Company, Limited • NORITAKE CO.,LIMITED • OSJB Holdings Corporation • DaikyoNishikawa Corporation • NGK SPARK PLUG CO., LTD. • Takenaka Corporation • MORIROKU HOLDINGS COMPANY, LTD. • MARUWA CO., LTD. • DKS Co. Ltd. • SHINAGAWA REFRACTORIES CO., LTD. Foods • NICCA CHEMICAL CO., LTD. • KROSAKI HARIMA CORPORATION • Dai Nippon Toryo Company, Limited • Isolite Insulating Products Co., Ltd. • TOYO SUGAR REFINING CO., LTD. • Nippon Paint Holdings Co., Ltd. • NICHIHA CORPORATION • Nippon Beet Sugar Manufacturing Co., Ltd. • Kansai Paint Co., Ltd. • Meito Sangyo Co., Ltd. • SHINTO PAINT COMPANY, LIMITED Iron and Steel • CALBEE, Inc. • SAKATA INX CORPORATION • Marudai Food Co., Ltd. • FUJIFILM Holdings Corporation • NIPPON STEEL CORPORATION • S Foods Inc. • Shiseido Company,Limited • Kobe Steel, Ltd. • Itoham Yonekyu Holdings Inc. • TAKASAGO INTERNATIONAL • NAKAYAMA STEEL WORKS, LTD. • Asahi Group Holdings, Ltd. CORPORATION • Godo Steel, Ltd. • Kirin Holdings Company, Limited • KONISHI CO., LTD. • TOKYO STEEL MANUFACTURING CO., LTD. • DyDo GROUP HOLDINGS, INC. • OAT Agrio Co.,Ltd. • KYOEI STEEL LTD. • ITO EN, LTD. • Taisei Lamick Co., Ltd. • TOKYO TEKKO CO., LTD. • Japan Foods Co., Ltd. • NITTO DENKO CORPORATION • OSAKA STEEL CO., LTD. • FUJI OIL HOLDINGS INC. • SANKO GOSEI LTD. • MARUICHI STEEL TUBE Ltd. • AJINOMOTO CO., INC • TOLI Corporation • Nippon Koshuha Steel Co., Ltd. • TOYO SUISAN KAISHA, LTD. • Nifco Inc. • Sanyo Special Steel Co., Ltd. • DAIREI CO., LTD. • PACIFIC METALS CO., LTD. • KENKO MAYONNAISE CO., LTD. • NICHIA STEEL WORKS, LTD. • Riken Vitamin Co., Ltd.

as of June 2020

Nonferrous Metals/Metal Products Electric Appliances Precision Instruments

• MITSUI MINING & SMELTING CO., LTD. • IBIDEN CO., LTD. • TERUMO CORPORATION • MITSUBISHI MATERIALS CORPORATION • KONICA MINOLTA, INC. • CREATE MEDIC CO., LTD. • Sumitomo Metal Mining Co., Ltd. • MINEBEA MITSUMI Inc. • JMS Co., Ltd. • Sumitomo Electric Industries, Ltd. • MITSUBISHI ELECTRIC CORPORATION • Mani, Inc. • ALPHA Corporation • SINFONIA TECHNOLOGY CO., LTD. • A&D Company, Limited • RS Technologies Co., Ltd. • Meidensha Corporation • DAIKEN MEDICAL Co., LTD. • Shinwa Co., Ltd. • TOREX SEMICONDUCTOR LTD. • Sincere Co., LTD. • CORONA CORPORATION • W-SCOPE Corporation • SEIKO HOLDINGS CORPORATION • TAKADAKIKO Co., Ltd. • DAIHEN Corporation • Sankyo Tateyama, Inc. • YA-MAN LTD. Other Products • ALINCO INCORPORATED • Nissin Electric Co., Ltd. • NORITZ CORPORATION • NITTO KOGYO CORPORATION • TRANSACTION CO., LTD. • SANYO INDUSTRIES, LTD. • GS Yuasa Corporation • Eidai Co., Ltd. • NEC CORPORATION • BANDAI NAMCO Holdings Inc. Machinery • Iwatsu Electric Co., Ltd. • TOMY COMPANY, LTD. • Japan Display Inc. • TOPPAN PRINTING CO., LTD • Takuma Co., Ltd. • Nippon Signal Company, Ltd. • TSUTSUMI JEWELRY CO., LTD. • TAKISAWA MACHINE TOOL CO., LTD. • NOHMI BOSAI LTD. • OLIVER CORPORATION • FUJI CORPORATION • Panasonic Corporation • KING JIM CO., LTD. • DISCO CORPORATION • ANRITSU CORPORATION • ITOKI CORPORATION • NC Holdings Co., Ltd. • TDK Corporation • Mitsubishi Pencil Co., Ltd. • IWAKI CO., LTD. • NIHON DEMPA KOGYO CO., LTD. • KOKUYO CO., LTD. • HIRATA Corporation • NIHON TRIM CO., LTD. • OKAMURA CORPORATION • Nabtesco Corporation • YOKOWO CO., LTD. • MODEC, Inc. • TEAC CORPORATION Electric Power and Gas • HOSOKAWA MICRON CORPORATION • HIROSE ELECTRIC CO., LTD. • GIKEN LTD. • SUMIDA CORPORATION • Chubu Electric Power Company, • OKADA AIYON CORPORATION • JAPAN ELECTRONIC MATERIALS Incorporated • KOMATSU LTD. CORPORATION • The Chugoku Electric Power Company, • SUMITOMO HEAVY INDUSTRIES, LTD. • HORIBA, Ltd. Incorporated • NIKKO CO., LTD. • MegaChips Corporation • RENOVA, Inc. • KITAGAWA IRON WORKS CO., LTD. • COSEL CO., LTD. • Tokyo Gas Co., Ltd. • TAKAKITA CO., LTD. • Stanley Electric Co., Ltd. • OSAKA GAS CO., LTD. • Organo Corporation • OKAYA ELECTRIC INDUSTRIES CO., LTD. • TOHO GAS CO., LTD. • DAIDO KOGYO CO., LTD. • Zuken Inc. • HIROSHIMA GAS CO., LTD. • SAMCO Inc. • CASIO COMPUTER CO., LTD. • RISO KAGAKU CORPORATION • TAIYO YUDEN CO., LTD. Land/Marine/Air Transportation • DAIKOKU DENKI CO., LTD. • SCREEN Holdings Co., Ltd. • SANDEN HOLDINGS CORPORATION • ZOJIRUSHI CORPORATION • TOBU RAILWAY CO., LTD. • MAX CO., LTD. • TOKYO ELECTRON LIMITED • Sotetsu Holdings, Inc. • SEGA SAMMY HOLDINGS INC. • Keio Corporation • East Japan Railway Company • TSUBAKI NAKASHIMA CO., LTD. Transportation Equipment • MAEZAWA KYUSO INDUSTRIES CO., LTD. • Kintetsu Group Holdings Co., Ltd. • NIPPON PILLAR PACKING CO., LTD. • Ashimori Industry Co., Ltd. • HANKYU HANSHIN HOLDINGS, INC. • Makita Corporation • Mitsui E&S Holdings Co., Ltd. • Nankai Electric Railway Co., Ltd. • Hitachi Zosen Corporation • Kawasaki Heavy Industries, Ltd. • Kobe Electric Railway Co., Ltd. • Mitsubishi Heavy Industries, Ltd. • Sanoyas Holdings Corporation • Nagoya Railroad Co., Ltd. • THE KINKI SHARYO CO., LTD. • NIKKON Holdings CO., LTD. • F-TECH INC. • JAPAN OIL TRANSPORTATION CO., LTD. • Lecip Holdings Corporation • FUKUYAMA TRANSPORTING CO., LTD. • Nissin Kogyo Co., Ltd. • SEINO HOLDINGS CO., LTD. • KYB Corporation • S LINE CO., LTD. • PRESS KOGYO CO., LTD. • Mitsui O.S.K. Lines, Ltd. • Mazda Motor Corporation • IINO KAIUN KAISHA, LTD. • Imasen Electric Industrial Co., Ltd. • Japan Airlines Co., Ltd. • Honda Motor Co., Ltd. • Pasco Corporation • SUBARU CORPORATION • TBK Co., Ltd. • MEIWA INDUSTRY CO., LTD. • NIHON PLAST CO., LTD.

© 2021 KPMG AZSA LLC, a limited liability audit corporation incorporated under the Japanese Certified Public Accountants Law and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 87 Warehousing and Harbor • NIPPON TELEGRAPH AND TELEPHONE Retail Trade Transportation CORPORATION • HIKARI TSUSHIN, INC. • ASKUL Corporation • NISSIN CORPORATION • NTT DOCOMO, INC. • PAL GROUP HOLDINGS CO., LTD • MITSUBISHI LOGISTICS CORPORATION • Fibergate Inc. • Halows CO., LTD. • Mitsui-Soko Holdings Co., Ltd. • NTT DATA CORPORATION • Alpen Co., Ltd. • The Sumitomo Warehouse Co., Ltd. • PCA CORPORATION • Qol Holdings Co., Ltd. • Toyo Logistics Co., Ltd. • CAPCOM CO., LTD. • DOUTOR NICHIRES Holdings Co., Ltd. • JAPAN TRANSCITY CORPORATION • SCSK Corporation • BRONCO BILLY CO., LTD. • Utoc Corporation • NSD CO., LTD. • Treasure Factory Co., LTD. • SANRITSU CORPORATION • The Asahi Shimbun Company • AP COMPANY CO., LTD. • Kintetsu World Express, Inc. • Torikizoku co., ltd • Azuma Shipping Co., Ltd. • Yossix Co., Ltd. • AIT CORPORATION Wholesale Trade • ASAHI CO., LTD. • KAWANISHI HOLDINGS, INC. • Seven & i Holdings Co., Ltd. Information & Communication • JALUX Inc. • TSURUHA HOLDINGS INC. • TOKYO ELECTRON DEVICE LIMITED • TORIDOLL Holdings Corporation • NEC Networks & System Integration • Sojitz Corporation • KUSURI NO AOKI HOLDINGS CO., LTD. Corporation • ALFRESA HOLDINGS CORPORATION • Sushiro Global Holdings Ltd. • Systena Corporation • SHINYEI KAISHA • Right-on Co., Ltd. • NS Solutions Corporation • Yashima Denki Co., Ltd. • Ryohin Keikaku Co., Ltd. • AZIA CO., LTD. • JUTEC Holdings Corporation • G-7 HOLDINGS Inc. • KOEI TECMO HOLDINGS CO., LTD. • Cominix CO., LTD • MARCHE CORPORATION • Densan Co., Ltd • WIN-Partners Co., Ltd. • SRS HOLDINGS CO., LTD. • Broadleaf Co., Ltd. • SHIP HEALTHCARE HOLDINGS Co., Ltd • Totenko Co., Ltd. • SYSTEM INFORMATION CO., LTD • MEIJI ELECTRIC INDUSTRIES CO., LTD. • SHIMACHU CO., LTD. • MEDIA DO HOLDINGS Co., Ltd. • FUJI KOSAN COMPANY, LTD. • LIFE CORPORATION • V-cube, Inc. • SATORI ELECTRIC CO., LTD. • TEN ALLIED CO., LTD. • Encourage Technologies Co., Ltd. • HAKUTO CO., LTD. • AOYAMA TRADING CO., LTD. • Fixstars Corporation • MEDIPAL HOLDINGS CORPORATION • SHIMAMURA CO., Ltd. • CARTA HOLDINGS, INC. • HAGIWARA ELECTRIC HOLDINGS CO., LTD. • Takashimaya Company, Limited • TechMatrix Corporation • SUZUDEN CORPORATION • H2O RETAILING CORPORATION • ZAPPALLAS, INC. • DOSHISHA CO., LTD. • Kintetsu Department Store Co., Ltd. • Internet Initiative Japan Inc. • HASHIMOTO SOGYO HOLDINGS CO., LTD. • IZUMI CO. LTD. • I’LL INC • SIIX CORPORATION • K’S HOLDINGS CORPORATION • MarkLines Co., Ltd. • TAKASHIMA & CO., LTD. • YAMADA DENKI CO., LTD. • Mobile Factory, Inc • TSUBAKIMOTO KOGYO CO., LTD. • AIGAN CO., LTD. • TERRASKY CO., LTD. • SUMITOMO CORPORATION • Sagami Holdings Corporation • PiPEDO HD, Inc. • Uchida Yoko Co., Ltd. • SAC’S BAR HOLDINGS INC. • Internetworking & Broadband Consulting • SATO SHOJI CORPORATION Co., Ltd. • Ryoyo Electro Corporation • NEOJAPAN Inc. • Tokyo Sangyo Co., Ltd. • Akatsuki Inc. • Shinsho Corporation • Kanamic Network Co., LTD • HANWA CO., LTD. • ORO Co., Ltd. • IWATANI CORPORATION • Needs Well Inc. • SHOKO CO., LTD. • Signpost Corporation • Kyokuto Boeki Kaisha, Ltd. • PROTO CORPORATION • SAN-AI OIL CO., LTD. • INFOCOM CORPORATION • Inabata Co., Ltd. • Trend Micro Incorporated • Mitsuuroko Group Holdings Co., Ltd. • Toukei Computer Co., Ltd • MOS FOOD SERVICES, INC. • XNET Corporation • SODA NIKKA CO., LTD. • Cybozu, Inc. • PALTAC Corporation • Information Services Intl - Dentsu • MITANI SANGYO CO., LTD. • ACCESS CO., LTD. • KOA Shoji Holdings corporation • Computer Institute of Japan, Ltd. • KATO SANGYO CO., LTD. • Marvelous Inc. • ZAOH COMPANY, LTD. • Tokyo Broadcasting System Holdings, Inc. • TV Asahi Holdings • Vision Inc. • CROPS CORPORATION

(as of June 2020)

Banks • EJ Holdings Inc. • Utsunomiya University • Artner Co., Ltd • SAITAMA UNIVERSITY • The Shimane Bank, Ltd. • GCA Corporation • Tokyo University of Foreign Studies • JAPAN POST BANK Co., Ltd. • COOKPAD Inc. • Niigata University • San ju San Financial Group, Inc. • SAINT-CARE HOLDING CORPORATION • UNIVERSITY OF FUKUI • Daishi Hokuetsu Financial Group, Inc. • DIP Corporation • Hamamatsu University School of Medicine • Sumitomo Mitsui Trust Holdings, Inc. • DIGITAL HOLDINGS, Inc. • Aichi University of Education • Sumitomo Mitsui Financial Group, Inc. • Shin Nippon Biomedical Laboratories, Ltd. • TOYOHASHI UNIVERSITY of • Tsukuba Bank, Ltd • TSUKUI CORPORATION TECHNOLOGY • The Bank of Iwate, Ltd. • Brass Corporation • Tokai National Higher Education and • The Ogaki Kyoritsu Bank, Ltd. • Hakuhodo DY Holdings Inc. Research System • The Fukui Bank, Ltd. • Gurunavi, Inc. • Shizuoka University • THE SHIMIZU BANK, LTD • F@N Communications Inc. • Mie University • THE NANTO BANK, LTD. • LIKE Co., Ltd. • SHIGA UNIVERSITY OF MEDICAL • The Hyakugo Bank, Ltd. • Dentsu Group Inc. SCIENCE • The Kiyo Bank, Ltd. • TAKE AND GIVE. NEEDS Co., Ltd. • Kyoto University of Education • The Hiroshima Bank, Ltd. • Nippon Air Conditioning Services Co., Ltd • KYOTO INSTITUTE OF TECHNOLOGY • The Chugoku Bank, Limited • ORIENTAL LAND CO., LTD. • Osaka University • The Iyo Bank, Ltd. • RESORTTRUST, INC. • Osaka Kyoiku University • THE AWA BANK, LTD. • USS CO., LTD. • Hyogo University of Teacher Education • Seven Bank, Ltd. • Interworks, Inc. • Kobe University • THE BANK OF KOCHI, LTD. • KeePer Technical Laboratory Co., Ltd • Nara University of Education • Yamaguchi Financial Group, Inc. • SANKI SERVICE CORPORATION • Nara Women’s University • The Bank of Nagoya, Ltd. • JAPAN MATERIAL Co., Ltd. • Nara Institute of Science and Technology • North Pacific Bank, Ltd. • LIKE Kids, Inc. • Wakayama University • The Aichi Bank, Ltd. • CAREERLINK Co., Ltd. • Okayama University • ERI HOLDINGS CO., LTD. • HIROSHIMA UNIVERSITY Securities and Commodities Futures/ • ABIST Co., Ltd. • Yamaguchi University Insurance/Other Financing Business • WILL GROUP, INC. • UNIVERSITY OF TOKUSHIMA • Escrow Agent Japan, Inc. • Naruto University of Education • Mercuria Investment Co., Ltd. • Japan Post Holdings Co., Ltd. • Kochi University • Daiwa Securities Group Inc. • Strike Co., Ltd. • Kyushu Institute of Technology • TOYO SECURITIES CO., LTD. • Solasto Corporation • Oita University • THE KOSEI SECURITIES CO., LTD. • GameWith, Inc. • University of Miyazaki • Monex Group, Inc. • SoldOut, Inc. • Kagoshima University • AIZAWA SECURITIES CO.,LTD. • RPA Holdings, Inc. • Inter-University Research Institute • Japan Post Insurance Co., Ltd. • SPRIX co., ltd. Corporation, National Institutes for the • MS&AD Insurance Group Holdings, Inc. • Forum Engineering Inc. Humanities • Dai-ichi Life Holdings, Inc. • TOSHO CO., LTD. • Inter-University Research Institute • JACCS CO., LTD. • TOKYO DOME CORPORATION Corporation, Research Organization of • ORIX CORPORATION • NOMURA Co., Ltd. Information and Systems • NEC Capital Solution Limited • KNT-CT Holdings Co., Ltd. • Inter-University Research Institute • Aflac Life Insurance Japan Ltd. • SECOM CO., LTD. Corporation, National Institutes of Natural • SUMITOMO LIFE INSURANCE COMPANY • Daiseki Co., Ltd. Sciences • Meiji Yasuda Life Insurance Company

Cities Incorporated administrative agencies etc. Real Estate • TOKYO METROPOLITAN GOVERNMENT • Organization for Postal Savings, Postal Life • Star Mica Holdings Co., Ltd. • Sendai City Insurance and Post Office Network. • The Global Ltd. • Kawasaki City • Japan External Trade Organization • Sansei Landic Co., Ltd • Shizuoka City • Japan Water Agency • Tenpo Innovation CO., LTD. • Hamamatsu City • National Printing Bureau • Mitsui Fudosan Co., Ltd. • Okazawaki City • Japan Mint • HEIWA REAL ESTATE CO.,LTD. • Otsu City • Organization for Small & Medium Enterprises • DAIBIRU CORPORATION and Regional Innovation, JAPAN • Sumitomo Realty & Development Co., Ltd. • RIKEN Institute of Physical and Chemical • Sunnexta Group Inc. National Universities Research • HOKKAIDO UNIVERSITY • New Energy and Industrial Technology Services • Hirosaki University Development Organization • Miyagi University of Education • Japanese Red Cross Society • CHUCO CO., LTD. • Ibaraki University • TAKEEI CORPORATION • University of Tsukuba

* The companies listed on the First Section of the Tokyo Stock Exchange are presented in the order of securities code.

KPMG AZSA has adopted the Audit Firm Governance Code. We are implementing further improvements to our governance in order to fulfill our social responsibility of supporting the capital markets and continuously enhance audit quality.

[The Role of the Audit Firm]

Principle and Guidance Status of Action Taken AZSA Quality 2020/21

An audit firm has the public interest role to ensure the credibility of corporate financial information through the audits, seek to protect Principle stakeholders such as participants in the capital market and thereby contribute to the sound development of the national economy. In order to 1 accomplish this role, the audit firm should encourage its personnel to have frank and openminded dialogue, enhance mutual development, promote their full competence, and continuously enhance the audit quality on a firm-wide basis.

An audit firm should recognize its public interest role and CEO repeatedly issues messages on continuous activities clearly express the tone at the top so that the top management to maintain and enhance audit quality. An organizational P.4 0 Quality control based on Guidance and the firm personnel will proactively accomplish their system of quality control is in place wherein each our four defense lines 1-1 respective roles, as well as so that all partners of the firm duly hierarchical layer of the Four Defense Lines carries out its P.4 4 Responsibility for undertake their responsibilities to develop the operational respective responsibility for audit quality. Quality Control structure of the firm.

An audit firm should define the values to be commonly A sense of oneness as an organization is established by maintained by its personnel and also develop the code of sharing our firm’s basic principles of Purpose, Values, conduct to put these values into practice. Vision and Strategy. P.30 Basic Principles and Corporate Culture Guidance Point for further reinforcement In light of the occurrence of inappropriate conduct P.59 Initiatives for 1-2 relating to e-Learning, we will steadily implement Compliance and various measures and thoroughly raise awareness Information Security among our people in order to maintain high ethical standards as certified accountants and an audit firm.

An audit firm should appropriately motivate its personnel in The firm fosters true professionals in accordance order to raise their morale and help them to fully maintain and with our Human Resource Development Principles demonstrate their professional competence and skepticism. and conducts appropriate evaluations with a focus on Guidance Human Resource performance and efforts related to audit quality. For P.6 8 Development 1-3 partner evaluations the most important evaluation areas are quality and quality control. Provision of non-audit services to audit clients is excluded from evaluation.

An audit firm should develop an organizational culture of Through repeated reorganizations an open openness which encourages its personnel to share issues, organizational culture is created, sharing the firm's Management from knowledge and experiences related to audits and proactively principles regardless of former affiliation. Diverse Backgrounds Guidance participate in a dialogue and discussion. Fostering an organizational culture of openness among P.31 1-4 all of the organization’s people and making it stick is an A Corporate Culture ongoing challenge. We are working as an organization Encouraging Free and Open Communication to address this through internal communications and more sophisticated knowledge sharing techniques.

An audit firm should clarify its stance toward non-audit With respect to the provision of non-audit services, P.5 8 Clarification of Policy services (provided by the firm and its group organizations). the firm maintains a system to strengthen governance for Providing Non-audit Services Guidance of not only KPMG AZSA but also the entire group including subsidiaries that provide advisory services, P.82 Discussing the 1-5 as well as a mechanism to appropriately monitor Management of KPMG independence and conflicts of interest. Japan Among the Main Member Firms

[Organizational Structure] Principle and Guidance Status of Action Taken AZSA Quality 2020/21

Principle An audit firm should have effective management in order to develop its organizational operations as a whole for the continuous enhancement 2 of the audit quality.

An audit firm should establish an effective management The firm clarified responsibility for management structure to ensure its effective management and operations. by designating its Senior Executive Board and P.3 3 Management/ Executive Board as the decision-making and Execution, Supervision Guidance executive bodies respectively. and Evaluation 2-1 We are working to strengthen the firm’s organizational P.3 4 Decision-making management foundation in order to respond to the management and challenges represented by the firm’s increasing size Execution and changes in the external environment.

[Organizational Structure] Continued

Principle and Guidance Status of Action Taken AZSA Quality 2020/21

An audit firm should clarify the role of the management in An organizational system of quality control is in place important operations, including the following matters, in order to wherein each hierarchical layer of the Four Defense meet the public expectations of audits and ensure its effective Lines carries out its respective responsibility for audit P.4 0 Quality control based on management and operations: quality. The final responsibility for quality control our four defense lines Development of organizational structure to ensure appropriate rests with the CEO; however, the Senior Executive judgments of the audit firm on important issues that potentially Board member appointed by the CEO to oversee P.4 4 Responsibility for Quality have a significant influence on the reliability of audit quality from quality control is responsible for developing overall Control the capital market, and proactive involvement in those significant quality control policies and for monitoring how such issues by utilizing the structure mentioned above; quality control policies are followed.

The development of an environment that allows audit teams to Frank and in-depth exchanges of opinions are P.45 Improvement through conduct a macroscopic analysis based on an understanding of the enabled through two-way communication with audit Feedback from Clients economic environment and frank and in-depth dialogue with audited committees and by receiving feedback from clients (ACCESS) companies in order to identify the risks of material misstatements on the quality of services provided. P.47 Communication with and to respond to the assessed risks appropriately; Stakeholders Guidance Setting an appropriate environment for people development, The firm fosters true professionals in accordance 2-2 human resources management and performance evaluation in with our Human Resource Development Principles order to raise the morale of the firm personnel and help them to and conducts appropriate evaluations with a focus on Human Resource maintain and demonstrate their professional competence; and performance and efforts related to audit quality. For P.6 8 Development partner evaluations the most important evaluation areas are quality and quality control. Provision of non-audit services to audit clients is excluded from evaluation.

Consideration and development of the effective utilization of The firm uses an electronic audit tool and is information technology (IT) in order to enhance the efficiency undertaking the development and introduction of and effectiveness of audits, with a view to accommodating the audit techniques that employ cutting-edge digital P.14 Digital audits envisioned anticipated advanced utilization of IT by audited companies. technologies such as advanced statistical analysis, by KPMG AZSA AI/RPA, and infrastructure technology. Point for further reinforcement P.4 8 Manual-based Utilization We will continuously maintain IT infrastructure of Electronic Audit Tools necessary for addressing remote-working matters in line with the COVID-19 situation.

An audit firm should appoint members of its management All officers including the CEO, Senior Executive Guidance team not only by taking into account their thorough knowledge Board members and Executive Board members and experience of audit practice but also by ensuring the are selected through direct election by all partners P.3 3 Election System 2-3 effectiveness of the management function for its organizational thereby ensuring the firm’s organizational operation. operations as the team.

Principle An audit firm should have a function to supervise and evaluate the effectiveness of its management from the independent viewpoint and 3 thereby support to enhance the effectiveness of the management.

An audit firm should establish a function to supervise and evaluate The firm established the Management Oversight P.3 3 Management/Execution, the effectiveness of its management and thereby support to Committee comprising partners who are not involved Supervision and Guidance enhance its effectiveness, and clarify the role of the function. in firm management. Evaluation 3-1 P.36 Supervision and Evaluation of Effectiveness of Management Functions

An audit firm should appoint independent third persons as The firm established the Public Interest Oversight P.3 3 Management/Execution, the members of the function responsible for the supervision Committee as an independent supervisory body. Supervision and Guidance and evaluation, and effectively utilize their knowledge and Evaluation experience to deal with the issues recognized by the firm 3-2 from the perspective to ensure the effective management and P.36 Supervision and Evaluation of Effectiveness of organizational operations and accomplish its public interest role. Management Functions

An audit firm should clarify the role of independent third persons The Public Interest Oversight Committee receives to participate in the supervision and evaluation structure within reports from the Management Oversight Committee the firm considering that those persons are expected to be on important firm activities and projects and engages involved in the following matters, for example: CEO or Senior Executive Board members in discussion. Oversight of the evaluation of the effectiveness of the management; The Committee also supervises from a public interest Oversight of the process of the election or appointment, standpoint whether or not the supervisory and P.3 3 Management/Execution, retirement, evaluation and remuneration of the management evaluation processes of the Nomination Committee Supervision and Guidance team members; and Compensation Committee are appropriately Evaluation Oversight of developing the policies for people development, human carried out. 3-3 resources management, performance evaluation and remuneration; P.36 Supervision and Evaluation Oversight of the evaluation of the status of development of of Effectiveness of Management Functions policies and procedures regarding whistle-blowing from within the audit firm and external sources, and the status of verification and utilization of provided information; and In fulfilling their oversight role, independent third persons should also be involved in dialogue with audited companies, shareholders and other participants in the capital market.

An audit firm should develop an environment in which necessary The firm established a secretariat to assist information is provided to the members of the function the effective execution of the activities of the P.36 Supervision and Evaluation Guidance responsible for supervision and evaluation in a timely and Management Oversight Committee and Public of Effectiveness of 3-4 appropriate manner, and in which assistance is provided in the Interest Oversight Committee and maintains an Management Functions execution of its operations so that the members can effectively environment to support its smooth operation fulfill their responsibilities. including the provision of any necessary information.

Principle and Guidance Status of Action Taken AZSA Quality 2020/21

Principle An audit firm should develop an operational structure to effectively manage its organizational operations. The audit firm should also strengthen its people retention and development and proactively engage, in dialogue and discussion within the firm and with audited 4 companies about the possible enhancement of audit quality.

An audit firm should develop a structure that allows its Management policies are disseminated and management to share necessary information from each information shared at audit work sites through two- audit team in a timely manner and also disseminate their way internal communication facilitated by the Four P.4 0 Quality control based on Guidance philosophy and defined values throughout the organization. Defense Lines. our four defense lines The management should effectively utilize such a structure Point for further reinforcement 4-1 in the operations of the firm. In addition, a proactive dialogue We will incorporate issues identified in the Audit P.4 4 Responsibility for and discussion for improvement of the audit quality should be Quality Enhancement Project and the resulting Quality Control encouraged within the firm. planned improvements into firm-wide measures and execute them.

An audit firm should develop and operate policies for managing The firm fosters true professionals in accordance people development, human resources management and with our Human Resource Development Principles performance evaluation in order to raise the motivation of the and conducts appropriate evaluations with a focus on Guidance Human Resource firm personnel and help them to maintain and demonstrate performance and efforts related to audit quality. For P.6 8 Development 4-2 their professional competence. In doing so, whether the firm partner evaluations the most important evaluation areas personnel sufficiently exercised their professional skepticism are quality and quality control. Provision of non-audit should be fully taken into consideration. services to audit clients is excluded from evaluation.

An audit firm should pay particular attention to the An organizational system of quality control is in place following points: wherein each hierarchical layer of the Four Defense Well-balanced assignment of the firm personnel to respective Lines carries out its respective responsibility for teams in terms of the extensive knowledge and experience to audit quality. allow the teams to exercise their professional skepticism; The audit divisions are responsible for appropriately P.4 0 Quality control based on assigning personnel. our four defense lines Point for further reinforcement We will aim to further promote diversity from various P.4 6 Audit Contracts viewpoints such as gender, job type, nationality and age, in order to increase our competitive-edge through the acceptance of a diversity of values and Guidance broad-based utilization of our people. 4-3 Providing the firm personnel with opportunities to gain extensive True professionals are fostered based on the firm’s knowledge and experience relevant to audit, such as experience Human Resource Development Principles. Human in non-audit service and/or temporary transfer to companies resources are actively developed by providing diverse P.6 8 Human Resource outside the audit industry; and work experiences including secondments to outside Development Appropriate evaluation and well-planned utilization of the firm public institutions and companies in addition to job personnel with extensive knowledge and experience. rotation inside KPMG AZSA. P.19 Digital talent Point for further reinforcement development program We will aim to further expand the digital knowledge “Azsa Digital Academy” for realizing 3C x I of our partners and employees to address the advanced digitalization occurring in society and in our audit environment.

An audit firm should make efforts for audit teams to have Sufficient opportunities for discussion with client candid and in-depth dialogue about audit risks with the top management and audit committees are provided. management of audited companies, such as the CEO and CFO, Guidance Communication with and those charged with governance including the members of P.47 Stakeholders 4-4 the audit and supervisory board as well. It should also ensure to have sufficient dialogue and discussion with audited companies at each audit team level.

An audit firm should develop and disclose policies and The firm has established an internal compliance hotline procedures regarding whistleblowing from within the firm and and contact for whistleblowing by outside informants. Initiatives for Guidance external sources, and appropriately make use of the provided P.59 Compliance and 4-5 information. In doing so, the audit firm should pay particular Information Security attention to ensure that a whistleblower does not have to be concerned about the risk of disadvantage.

[Ensuring Transparency]

Principle and Guidance Status of Action Taken AZSA Quality 2020/21

Principle An audit firm should ensure such transparency as to allow stakeholders in the capital market to appropriately assess its audit quality, by explaining the status of the Code’s implementation. The audit firm should also effectively utilize the internal and external assessment of its 5 initiatives for improvement in its management and operations.

An audit firm should explain the status of the Code’s The firm issues AZSA Quality annually to introduce implementation and its initiatives for the enhancement of our initiatives for enhancing audit quality. Guidance audit quality in plain language, in the form of publicly available AZSA Quality 2020/21 5-1 documents such as “Transparency Report,” to allow audited companies, shareholders and other stakeholders in the capital market to appropriately assess its audit quality.

An audit firm should explain the following matters as well: The CEO repeatedly issues messages on continuous The tone at the top toward the continuous enhancement of the activities to maintain and enhance audit quality. P.4 0 Quality control based on audit quality in order for the management and the firm personnel An organizational system of quality control is in our four defense lines of the firm proactively fulfill their respective roles; place wherein each hierarchical layer of the Four P.4 4 Responsibility for Defense Lines carries out its respective responsibility Quality Control for audit quality.

The defined values to be commonly maintained by the firm A sense of oneness as an organization is established Shared basic principles personnel, and way of thinking and code of conduct to put these by sharing our firm's basic principles of Purpose, P.30 that are the foundation values into practice; Values, Vision and Strategy. of our audit quality

The stance toward non-audit services (provided by the firm and With respect to the provision of non-audit services, its group organizations) ; the firm maintains a system to strengthen governance P.5 8 Clarification of Policy of not only KPMG AZSA but also the entire group for Providing Non-audit including subsidiaries that provide advisory services, Services as well as a mechanism to appropriately monitor independence and conflicts of interest. P.82 Discussions on KPMG The firm is working to promote a sense of unity Japan Management Among Key Member among the KPMG Japan group entities that goes Firms beyond a focus on compliance and the maintenance Guidance of independence.

5-2 The composition and role of the management; The firm clarified responsibility for management P.3 3 Management/ by designating its Senior Executive Board and Execution, Supervision Executive Board as the decision-making and and Evaluation executive bodies respectively. P.3 4 Decision-making management and Execution

The composition and role of the function to supervise The firm established the Management Oversight P.3 3 Management/ and evaluate the effectiveness of the management and Committee comprising partners who are not involved Execution, Supervision organizational operations, as well as the reasons for the in firm management.The firm established the Public and Evaluation appointment, role and contribution of independent third persons Interest Oversight Committee as an independent P.36 Supervision and Evaluation appointed as the members of the function ; and supervisory body. of Effectiveness of Management Functions

The assessment with respect to the effectiveness of the The Management Oversight Committee are P.36 Supervision and Evaluation initiatives for the enhancement of the audit quality, which is responsible for supervising and evaluating the of Effectiveness of carried out by the firm including the members of the function management and execution by CEO and the Management Functions responsible for the supervision and evaluation. Senior Executive Board Members. Results of the P.38 Assessment of the supervision and evaluation are reported to the Effectiveness of Partners Meeting and to investors and other parties Activities Intended to through AZSA Quality. Enhance Audit Quality

An audit firm should strive for proactive dialogue about its The firm seeks to enhance communication with initiatives for enhancement of the audit quality with audited audited companies by sharing information through companies, shareholders and other stakeholders in the capital marketing activities and seminars, and by periodically Guidance Communication with market. In doing so, the audit firm should effectively utilize the holding stakeholder dialogues. The Public Interest P.47 Stakeholders 5-3 knowledge and experience of independent third persons. Oversight Committee (independent members) attend such events, providing management with feedback from the perspective of an independent third party.

An audit firm should periodically assess the Code’s The Management Oversight Committee are P.36 Supervision and Evaluation implementation and the effectiveness of its initiatives for responsible for supervising and evaluating the of Effectiveness of enhancement of the audit quality. management and execution by CEO and the Management Functions Guidance Senior Executive Board Members. Results of the 5-4 supervision and evaluation are reported to the P.38 Assessment of the Partners Meeting, and beginning next year our Effectiveness of Activities Intended to management and executive bodies will consider Enhance Audit Quality improvement measures.

An audit firm should effectively utilize the useful information We periodically hold stakeholder dialogues.Through obtained through the dialogue with stakeholders such as these events we received feedback on the capital participants in the capital market and the results of the markets’ expectations for audit firms, and we are Guidance Proactive Dialogue with assessment of the Code’s implementation for improving its making use of this information to improve our P.47 Market Participants 5-5 effective management and organizational operations. organizational operations. Going forward we will strive to continue this active exchange of opinions with participants in the capital markets.

In addition to AZSA Quality: Initiatives for Enhancing Audit Quality, KPMG AZSA also issues a Transparency Report publication to explain KPMG’s audit quality framework. KPMG Japan, which includes KPMG AZSA, also issues annual publications that showcase our activities and initiatives.

AZSA Quality 2020/21

Intended to deepen readers’ understanding of the current state of our firm’s audit quality by describing the initiatives underway to enhance audit quality.

home.kpmg/jp/azsa-quality Issued | October 2020

Transparency Report 2020/21

Describes the audit quality framework of KPMG, which serves as a basis for our firm’s audit quality.

home.kpmg/jp/transparency-report Issued | October 2020

Issued October 2020

Contact KPMG AZSA LLC Otemachi Financial City South Tower 1-9-7 Otemachi, Chiyoda Ward, Tokyo 100-8172 Japan

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