1202-1331615_ey us transparency report_ca0121

Transparency Report 2011

Ernst & Young LLPUnited States of America

Contents

More information about Ernst & Young can be found in the “Global review 2011” on our website at www.ey.com

Managing Partner’s letter 1

Legal structure, ownership and governance 2

Network arrangements 3

Internal quality control system 5

Effectiveness of quality control system 5

Instilling professional values 7

Performing audits 7

Review and consultation 8

Internal and external accountability 10

Audit quality reviews 11

External quality assurance review 12

Independence practices 13

Recruitment and professional development 16

Partner remuneration 17

Audits of public companies and other services 18

1Transparency Report 2011 Ernst & Young LLP

At Ernst & Young, we firmly believe the audit profession plays a vital role in promoting investor confidence in financial reporting and the world’s capital markets. We recognize the importance of this role and take seriously our commitment to executing high-quality audits. We understand that greater investor understanding of the measures audit firms take to provide audit quality could further bolster investor confidence. Given our important public company auditor franchise, we have welcomed the expansion of audit firm oversight over the past decade because we believe it has helped to further the quality of our work and the transparency of our organization. For these reasons, we embrace the requirements of the European Union’s 8th Company Law Directive for certain independent auditors of public interest entities to publish annual transparency reports disclosing certain information about their businesses and audit practices. This Transparency Report 2011 for Ernst & Young LLP in the United States, which covers our fiscal year ended 1 July 2011, complies with the Directive. We also encourage you to refer to the Ernst & Young Global review 2011 (such a report has been issued annually starting in 2009) for information on how the global integration of Ernst & Young enhances the provision of high-quality services by member firms and thus benefits all stakeholders. In this Transparency Report, we provide an overview of our governance structure, our internal quality control system, how we instill professional values, how we perform audits, our review and consultation process, our process for audit quality reviews, and other matters relevant to audit quality. We welcome this opportunity to engage with all of our stakeholders around these important topics. We will continue to invest in our quality framework and our people and share progress with our stakeholders along the way. We believe that collectively these steps will support investor understanding and bolster confidence in the quality of our services. To this end, we also are in the process of preparing a separate, comprehensive report on our audit quality initiatives that will go beyond the requirements of this Transparency Report. We anticipate publishing our audit quality report later in 2012.

Sincerely,

Stephen R. Howe, Jr. Managing Partner Ernst & Young LLP

Managing Partner’s letter


Ernst & Young LLP (“EY” or “the Firm”) is a Delaware (US) limited liability partnership.1 It is a US member firm of Ernst & Young Global Limited (“EYG”), a United Kingdom private company limited by guarantee.

The member firms of EYG are grouped into four geographic Areas: Americas, Asia-Pacific, EMEIA (Europe, Middle East, India and Africa) and Japan. The Areas comprise a number of Sub-Areas, which are composed of member firms or sections of those firms.

EY is part of the Americas Area, which comprises member firms in 30 countries, organized into 11 Sub-Areas, and is a member of Ernst & Young Americas LLC (“EY Americas”), the coordinating entity of the Americas Area. EY is divided into seven Sub-Areas and there are four Americas Sub-Areas outside of the United States.2

Partners and principals of the EYG firms in the Americas are members of EY Americas, in addition to being members in their home country firms. EY Americas is the entity charged with overseeing the further development and coordination of the firms comprising the Americas Area; however, EY Americas has no financial operations and does not provide services to clients.

The principal governing bodies of EY Americas are:

Americas Executive The Americas Executive is the Board of EY Americas. It has authority for executing the global Ernst & Young strategy in the Americas Area under four global Ernst & Young dimensions: people, quality, growth and operational excellence. It comprises the Non-executive Chair; the Americas Area Managing Partner; the Americas Senior Vice Chair – Chief Operating Officer; the Americas Senior Vice Chair – Markets; the Americas Vice Chairs for People, Quality & Risk Management, and Accounts, Industry, and Business Development; the Americas service line Vice Chairs for Assurance, Advisory, Transaction Advisory Services and Tax; and the eleven Vice Chairs/Managing Partners of the Sub-Areas in the Americas.

Americas Advisory Council The Americas Area has an elected Americas Advisory Council, which is composed of a number of partners or principals of the EYG member firms in the Americas Area. It serves in an advisory role to the Americas Executive on policies, strategies and other matters and its approval is required

for a number of significant matters, e.g., appointment of the Americas Managing Partner.

Partner Forums To provide a broader voice to more of our partners and principals on matters of importance to them, we are establishing Partner Forums in the Americas. There will be one Forum for each of the Americas’ eleven Sub-Areas and one Forum across the Americas for each of our four service lines. The Forums will act in an advisory role, providing input to the Sub-Area Managing Partner or service line Vice Chair on important matters affecting the practices in the Sub-Areas and service lines.

Americas Ethics Oversight Board With a membership drawn from Americas leadership, our service lines, and the member firms comprising the Americas Area, the Americas Ethics Oversight Board (“AEOB”) strives to create an environment that encourages all personnel to act responsibly, including the reporting of misconduct without fear of retaliation. The AEOB is further responsible for evaluating certain breaches of the Global Code of Conduct and recommending appropriate consequences and sanctions for misconduct, ranging from training and counseling to separation from the member firm.

Governance in the Firm Reflective of the EYG network’s approach to Global and Area integration, where permitted, member firm boards have limited duties and reduced membership. The EY Board, which is responsible for the management of EY, comprises the Firm’s Managing Partner, its Senior Vice Chair – COO, Senior Vice Chair- Markets, the Vice Chair – People, and the Vice Chair – CFO. Among other basic matters the EY Board is responsible for certain EY partner/principal matters and has delegated its oversight of such matters (for example, partner/principal admissions, separations, disciplinary matters, and earnings allocations) to a newly constituted US Partner/Principal Matters Committee, which comprises the EY Board members, the Firm’s Vice Chairs for our four service lines, and the Vice Chairs/Managing Partners for the Firm’s seven US Sub-Areas.

1 A separate entity, Ernst & Young US LLP, includes partners that are the same CPA partners of EY and also includes non-licensed principals. The employees of Ernst & Young U.S. LLP work for and are under the supervision of EY. All professional services, including the services of all CPAs, are provided through EY. 2 Effective 1 January 2012, changes were made to the Operating Agreement of EY Americas. At the same time, changes also were made to the governing documents of EY. The discussion that follows in this Report regarding the legal structure, organization, and governance of EY and EY Americas reflects these changes that have been made subsequent to our fiscal year ended 1 July 2011. 3 For additional information on the INEs, refer to the Global review 2011, Ernst & Young, 2011.

Legal structure, ownership and governance


The global Ernst & Young organization is a global leader in assurance, tax, transaction, and advisory services. Worldwide, our 152,000 people in more than 140 countries are united by shared values and an unwavering commitment to quality, integrity and professional skepticism. We make a difference by helping our people, clients and wider communities achieve their potential. In today’s global market, our integrated approach is particularly important in the delivery of high-quality multinational audits, which can span multiple jurisdictions. In the report that follows, we set out core elements of the Firm’s quality framework that support our seamless, consistent, high-quality service delivery.

EYG is the central entity of the global network and coordinates the member firms and cooperation among them. EYG does not provide services to clients. Its objectives include the promotion of the provision by its member firms of seamless, consistent, high-quality service, worldwide. Each member firm is a legally distinct entity. The member firms’ obligations and responsibilities are governed by the regulations of EYG and various other agreements.

The structure of the global organization reflects the principle that we have one shared strategy. EYG’s principal governing bodies include:

Global Advisory Council The Global Advisory Council is the main advisory body of the global organization. It comprises a number of member-firm partner-level professionals (referred to as “partners”) drawn from across the four Areas and includes independent non-executive representatives (“INEs”). Partners who otherwise do not hold senior management roles are elected by their peers for a three–year term, with provisions for one successive reappointment. The INEs, who are involved at a global level uniquely in our profession, are nominated by a special committee. The five INEs are seasoned, senior-level professionals with wide-ranging experience who bring diverse, outside perspectives to matters of importance to the global organization and the profession.3 The Global Advisory Council advises the Global Executive and the global network on policies, strategies, and the public interest aspects of their decision-making. The approval of the Global Advisory Council is required for a number of significant matters that could affect the global organization.

Global Executive The Global Executive brings together the leadership of global functions, services and geographies. It is chaired by the Chairman and Chief Executive Officer of EYG and includes its Chief Operating Officer; the Area Managing Partners; the Global Managing Partners of People, Markets, Quality & Risk Management and Operations and Finance; and the global service line Vice Chairs — Assurance, Advisory, Tax and Transaction Advisory Services, as well as the Global Vice Chair for Public Policy. The Global Executive also includes a representative from the emerging markets practices.

The Global Executive and the Global Advisory Council approve nominations for the Chairman, Chief Executive Officer and the Chief Operating Officer of EYG and ratify appointments of Global Managing Partners. The Global Executive also approves appointments of Global Vice Chairs. The Global Advisory Council ratifies the appointments of any Global Vice Chair who serves as a member of the Global Executive. Furthermore, the Global Executive approves appointments of Area Managing Partners. Such appointments are subject to ratification by the Global Advisory Council.

Global Executive Committees Chaired by members of the Global Executive and bringing together representatives from the four Areas, the Global Executive Committees are responsible for making recommendations to the Global Executive. There are committees for People, Quality & Risk Management, Markets, Operations and Finance, Assurance, Advisory, Tax, and Transaction Advisory Services.

Global Practice Group This group brings together the members of the Global Executive, Global Executive Committees and Sub-Area leaders. The Global Practice Group seeks to promote common understanding of Ernst & Young strategic objectives and consistency of execution across the network.

Under the regulations of EYG, the member firms commit themselves to pursue the global Ernst & Young objectives, such as the provision of seamless, consistent high-quality service, worldwide. To that end, the member firms undertake to implement the global strategies and plans and to maintain the necessary scope of service capability. They are required to comply with common standards, methodologies and policies, including those

Network arrangements


regarding audit methodology, quality and risk management, independence, knowledge-sharing, human resources and technology enablers.

Above all, EYG member firms commit themselves to conducting their professional practices in accordance with the applicable professional and ethical standards as well as with all applicable requirements of law. This commitment to integrity and “doing the right thing” is underpinned by the Global Code of Conduct and our Values.

Besides adopting the regulations of EYG, member firms enter into several other agreements covering aspects of their membership in the global

organization, such as the right and obligation to use the Ernst & Young name and the sharing of knowledge.

Member firms are subject to reviews that evaluate their adherence to EYG requirements and policies governing issues, such as independence, quality and risk management, audit methodology and execution, and human resources. As necessary, special focus reviews are performed to address situations or concerns as they arise. Member firms unable to meet the quality commitments and other EYG membership requirements are subject to separation from the global organization.


EY’s reputation for providing high-quality professional audit services in an independent, objective and professionally skeptical manner is fundamental to our success as independent auditors. We continue to invest in initiatives to promote enhanced objectivity, independence and professional skepticism. These qualities are fundamental attributes of a high-quality audit.

At EY, our role as auditors is to provide assurance on the financial reports of the entities that we audit. We bring together qualified teams to provide these services, drawing on our expertise – across industry sectors and services. We strive to improve our quality and risk management processes continuously so that the quality of our service is at a consistently high level.

We recognize that in today’s environment — characterized by continuing globalization and the rapid movement of capital — the quality of our audit services has never been more important. Reflecting the strength of our commitment to delivering quality in everything we do, the global network has continued to invest heavily in developing the audit methodology, tools and other resources needed to support quality service delivery. While the market and stakeholders continue to demand high-quality audits, they also demand increasingly efficient and effective delivery of audit services. The global Ernst & Young organization continues to seek ways to improve the effectiveness and the efficiency of our audit methodology and processes, while continuing to improve audit quality. We work to identify areas where we can further improve our audit quality. We seek to learn from external and internal inspection activities and to identify root causes of quality occurrences and create an environment where continuous improvement in audit quality can occur.

Effectiveness of quality control system A comprehensive set of global audit quality control policies and practices, as described herein, has been designed for implementation by the member firms of the Ernst & Young global network. These policies and practices meet the requirements of the International Standards on Quality Control issued by the International Auditing and Assurance Standards Board (“IAASB”). EY has adopted these global policies and procedures and has supplemented them in several respects to comply with local laws and professional guidelines. The Firm also has implemented audit quality control policies and practices that have been designed to meet the requirements of

the US Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board (“PCAOB”), the American Institute of Certified Public Accountants (“AICPA”), the various state boards of accountancy, and other federal and state regulators.

We also execute the global Audit Quality Review (“AQR”) program to annually evaluate whether our system of audit quality control has operated effectively in a manner so as to provide reasonable assurance that the Firm and its personnel comply with applicable professional, regulatory, and internal requirements.

The results of the AQR program and external inspections are evaluated and communicated within the Firm to provide the basis for continuous improvement in audit quality, consistent with the highest standards in the profession.

We are proud of the high quality of our audits. At the same time, we are continuously working hard to make further improvements. The recent results of our internal practice monitoring, together with our evaluation of the recent feedback received from independent regulatory inspections, provide EY with a basis to conclude that, notwithstanding opportunities for further improvement in audit quality, our audit quality control systems are designed appropriately and are operating effectively.

In this section, we describe the various components of our audit quality control system:

• ► Instilling professional values

• ► Performing audits

• ► Review and consultation

• ► Internal and external accountability

• Audit quality reviews

Internal quality control system


Our Values Who we arePeople who demonstrate integrity, respect and teaming.

People with energy, enthusiasm and the courage to lead.

People who build relationships based on doing the right thing.


Instilling professional values Tone at the top Setting the right “tone at the top” is a key responsibility of our senior leadership team. We communicate to our people that quality and professional responsibility start with them and are the most important things they do every day. Our approach to ethics and integrity is embedded in our training programs and internal communications. Senior management regularly reinforces these expectations and the importance of performing quality work and complying with professional standards and our policies through varied forms of communication. Also, we assess quality of professional service as a key metric in evaluating and rewarding all professionals.

Our culture strongly supports collaboration and teamwork and places special emphasis on the importance of consultation in dealing with complex or subjective accounting, auditing, reporting, regulatory, and independence matters. We also emphasize the importance of determining that an engagement team and client have correctly followed consultation advice. Our internal message consistently has been that no single client is more important than professional reputation — the reputation of the Firm and the reputation of each of our professionals. “Quality In Everything We Do” is a message that we continually reinforce to our people.

Code of conduct We promote a culture of integrity, as well as the performance of high-quality audits, among all professionals at EYG member firms. The Global Code of Conduct provides a clear set of the standards and behaviors that guide our actions and our business conduct. It is organized into five categories containing principles that are to be followed by everyone within the Firm to guide behavior across all areas of activity:

• ► Working with one another

• ► Working with clients and others

• ► Acting with professional integrity

• Maintaining our objectivity and independence

• Respecting intellectual capital

All EY personnel annually must affirm compliance with the Global Code of

Conduct. Through monitoring procedures and frequent communications, we strive to create an environment that encourages all personnel to act responsibly, including the reporting of misconduct without fear of retaliation. In addition to the Global Code of Conduct, we have specific anti-bribery and insider trading policies.

We also have EY/Ethics, a global ethics hotline, to provide Ernst & Young people around the world, clients and others outside of the organization with a means to confidentially report activity that may involve unethical or improper behavior that may be in violation of professional standards or otherwise inconsistent with the Global Code of Conduct. EY/Ethics is operated on behalf of EY by an external organization that provides confidential and, if so desired, anonymous hotline reporting services for companies worldwide.

Performing audits Audit methodology The Ernst & Young Global Audit Methodology (“EY GAM”) provides a global framework for delivery of high-quality audit services through consistent application of thought processes, judgments and audit procedures in all audit engagements. One of the cornerstones of EY GAM is making (and reconsidering and modifying, when appropriate, throughout the audit) risk assessments and then determining the nature, timing and extent of audit procedures based on those risk assessments. EY GAM also places emphasis on the application of appropriate professional skepticism in the execution of audit procedures. EY GAM is based on International Standards on Auditing (“ISAs”) and is supplemented in the United States to comply with the auditing and other applicable professional standards of the PCAOB, AICPA, and other regulatory or statutory requirements.

EY GAM is organized into interdependent phases designed to focus on business and financial statement risks and how those risks affect our audit of such financial statements. EY GAM reflects the typical flow of an audit’s execution. The methodology and related guidance are presented in a three-layer format. The three parts of EY GAM consist of the GAM Framework, GAM Performance Guidance and GAM Enablers. The GAM Framework is a concise description of how Ernst & Young US professionals perform an audit and provides links to the GAM Performance Guidance. The GAM Performance


Guidance also describes parameters for making certain audit decisions. The GAM Enablers consist of templates, examples, checklists and leading practice illustrations for performing and documenting audit procedures.

Enhancements to our audit methodology are made on a regular basis as a result of new standards, emerging auditing issues and matters, implementation experiences and external and internal inspection results. For example, EY GAM was rewritten in the recent past to incorporate new auditing requirements as a result of the issuance of new and clarified ISAs. In addition, through audit planning and other reminders this year, we emphasized key topics of interest to the PCAOB and the International Forum of Audit Regulators (“IFIAR”), including professional skepticism, group audits, revenue recognition and engagement quality reviews.

As part of EY GAM, there are procedures required to be completed to assess independence from the entities that we audit.

Technology enablers Numerous technology enablers are used by audit engagement teams to assist in executing and documenting the audit work performed in accordance with EY GAM and the Firm’s supplemental guidance. For example, GAMx is an audit support tool that drives uniform execution of EY GAM and appropriate audit documentation, strengthening our ability to deliver consistent, high-quality audits. The tool provides linked access to knowledge databases (audit guidance and interpretations), professional standards, documentation templates and other tools necessary to execute and document a risk-based audit effectively. GAMx provides a team-collaboration environment that facilitates sharing information and the documentation of procedures and conclusions. GAMx also enables secure peer-to-peer communications so our people can work together even when they are not in the same physical location. Audit engagement teams use other software applications, forms and templates during various phases of an audit to assist in making and documenting audit considerations and data acquisition and analysis functions.

Formation of audit engagement teams EYG and Firm policies require an annual review of partner assignments by our Assurance leadership and, for listed company audits, concurrence by Professional Practice Directors (“PPDs”) to make sure that the professionals

leading the audits possess the appropriate competencies, i.e., the knowledge, skills and abilities to fulfill their engagement responsibilities, and that they are in compliance with applicable auditor partner rotation regulations.

The assignment of people to audit engagement teams also is made under the direction of our Assurance leadership. Factors considered when assigning people to audit teams include competence, engagement size and complexity, specialized industry knowledge and experience, timing of work, continuity and opportunities for on-the-job training. For more complex engagements, consideration is given to whether specialized or additional expertise is needed to supplement or enhance the audit engagement team.

In many situations, internal specialists are assigned as part of the audit engagement team to assist in performing audit procedures and obtaining appropriate audit evidence. These professionals are used in situations requiring special skills or knowledge, such as taxation, information systems, asset valuation and actuarial analysis.

Review and consultation Reviews of audit work EYG and Firm policies describe the requirements for timely, direct executive participation on audits and various levels of reviews of the work performed. Members of the audit engagement team perform a detailed review of the audit documentation while engagement executives perform a second-level review. A tax representative reviews the significant tax and other relevant working papers. For listed companies, an engagement quality review partner (described below) reviews important areas of accounting, financial reporting and audit execution, as well as the listed audit client’s financial statements and our report thereon. The nature, timing and extent of the reviews of the working papers that are appropriate in a given instance depend on many factors, including materiality; the subjectivity and complexity of the subject matter; the ability and experience of the audit team member preparing the audit documentation; the level of the reviewer’s direct participation in the audit work; and the extent of consultation employed.

These policies also describe the roles and responsibilities of each audit engagement team member and the requirements for documenting the audit procedures performed and the conclusions reached.


Consultation requirements Consultation requirements and related policies and procedures are designed to involve the right resources so that audit teams can reach appropriate conclusions on relevant accounting, auditing, reporting, regulatory, and independence matters. Consultation is a part of the decision-making process, not just a process to provide advice. For complex and sensitive matters, we encourage, and in several situations require, consultation outside of the audit engagement team with other personnel who have more experience or specialized knowledge, primarily Professional Practice and Independence personnel. We provide guidance on matters that require consultation.

Ernst & Young policies also describe our requirements for documenting consultations, including the requirement to obtain written concurrence from the person consulted to demonstrate the consultant’s understanding of the matter and its resolution.

Engagement quality reviews Engagement quality reviews, performed by audit partners in compliance with professional standards, are required by EYG policies for audits of all listed companies. EY requires that engagement quality reviews be performed not only for audits of listed companies but for all audits that we conduct. Engagement quality reviewers are experienced professionals with significant subject-matter knowledge and provide a further objective evaluation of significant accounting, auditing and reporting matters. In no circumstances may the responsibility of the engagement quality reviewer be delegated to another individual. The engagement quality review for a listed company is an activity that generally spans the entire engagement cycle and is not limited to a review of the financial statements at the time of issuance of our report. Policies and procedures for the performance and documentation of engagement quality reviews, which have been strengthened in recent years to place more emphasis on this important quality feature, provide specific guidelines on the nature, timing and extent of the procedures to be performed. At EY, In addition to review and approval by the Assurance Managing Partners, the PPDs concur with all engagement quality review assignments for listed companies.

Audit engagement team disagreement resolution process We have a collaborative culture and encourage our people to speak up if a

professional disagreement arises or they are uncomfortable about a matter pertaining to an audit engagement. Policies and procedures are designed to empower our people by requiring members of an audit engagement team to raise any disagreements that are considered to be material or that may affect our opinion on the financial statements being audited. Such policies are introduced at the entry level and reinforced thereafter to instill in our people both the responsibility and authority to require a thorough hearing and vetting of differing viewpoints.

Differences of professional opinion that arise during an audit generally are resolved at the audit engagement team level. However, if any individual involved in the discussion of an issue is not satisfied with the decision, he or she has both the right and the obligation to see that the issue is referred to the next level of authority. If the engagement quality reviewer makes recommendations that the engagement partner does not accept and the matter is not resolved to the reviewer’s satisfaction, the report is not issued until the matter is resolved by following the appropriate consultative processes for resolution of professional differences. When a matter that goes beyond the audit engagement team is ultimately resolved, our policies require resolution of the matter to be documented in the same manner as described previously for consultations.

Document retention and data privacy The Firm has record retention policies that apply to all engagements and personnel. Our policies address legal requirements in the United States applicable to the creation and maintenance of working papers relevant to the audit work performed. Our policies also emphasize that all documents must be preserved whenever EY becomes aware of any actual or reasonably anticipated claim, litigation, investigation, subpoena or other government proceeding involving the Firm or one of the entities we audit that may relate to our work.

The EYG network has a global policy on data privacy that sets forth the principles to be applied to the use and protection of personal data, including that relating to current, past and prospective personnel, clients, suppliers and business associates. The policy provides a foundation for maintaining the privacy of all personal data used by EY. Furthermore, the Firm has policies to address our specific US data privacy requirements and business needs.


Internal and external accountability Audit partner rotation Mandatory audit partner rotation is one of the measures that the global network supports to help strengthen auditor independence. The Firm complies with the audit partner rotation requirements of the SEC, the PCAOB, other regulators and the International Ethics Standards Board for Accountants. EY supports audit partner rotation because it provides a fresh perspective and promotes independence from company management while at the same time retaining some important aspects of engagement team continuity, expertise and knowledge of the business. Audit partner rotation, combined with independence requirements, enhanced systems of internal quality controls, audit committee oversight and independent audit regulatory oversight help strengthen independence and objectivity and are important safeguards of audit quality.

For audits of public companies, the Firm rotates the partner in charge of the audit, the engagement quality reviewer and certain other partners (as defined) no less frequently than the maximum consecutive years of service permitted under the SEC independence rules. The partner in charge of the audit and the engagement quality reviewer are permitted to serve a maximum of five consecutive years with a five-year time out before resuming another role on the same audit. All other partners subject to mandatory rotation are permitted to serve a maximum of seven years with a two-year time out.

To monitor these requirements effectively, we have tools with which we track partner rotation. We also have implemented a process to facilitate effective partner rotation planning and assignment.

Client acceptance and continuance The global network’s client acceptance and continuance policy sets forth principles to determine whether to accept a new client or a new engagement or to continue a relationship with an existing client. These principles are fundamental to maintaining quality, managing risk, protecting our personnel and meeting regulatory requirements. The objectives of the policy are to:

• Establish a rigorous process for evaluating risk and making decisions to accept/continue clients or engagements

• ► Meet applicable independence requirements

• ► Identify and deal appropriately with any conflicts of interest

• ► Identify and decline clients that pose excessive risk

• ► Require consultation with designated professionals to identify additional risk-management procedures for specific high-risk factors

• ► Comply with legal, regulatory and professional requirements.

In addition, the EYG and Firm conflicts policies form the framework for the client and engagement acceptance and continuance processes as far as they relate to potential conflicts of interest. These policies define categories of conflicts of interest, a process for identifying potential conflicts and provisions for managing conflicts that have been identified as quickly and efficiently as possible through the use of appropriate safeguards. Such safeguards range from obtaining the relevant clients’ consents to act for two or more clients to member firms ceasing to act in order to remove an identified conflict.

The Global Tool for Acceptance and Continuance (“GTAC”) is an intranet-based system for effectively and efficiently coordinating client and engagement acceptance and continuance activities in line with global, service line and member firm policies. GTAC takes users step-by-step through the acceptance and continuance requirements and connects to the resources and information needed to assess both business opportunities and associated risks.

The acceptance process involves a careful consideration of the risk characteristics of a prospective client and several due-diligence procedures. Before we take on a new engagement or client, we determine if we can commit sufficient resources to deliver quality service, especially in highly technical areas, and that the services the client wants are appropriate for us to provide. The approval process is rigorous, and the Firm requires that the acceptance of all new audit engagements (whether for listed or non-listed entities) be approved by the applicable Sub-Area Assurance Managing Partner and PPD.

In the Firm’s annual continuance process, we review our service delivery and ability to continue to provide quality service and confirm that the entities we audit share our commitment to quality and transparency in


financial reporting. The partner in charge of each audit, together with our Sub-Area Assurance leadership, annually reviews our relationship with the entity to determine whether continuance is appropriate. As a result of this review, certain audit engagements are identified as requiring, and are then subjected to, additional oversight procedures during the audit, and some audit engagements are discontinued. As with the acceptance process, our PPDs are involved in the continuance process and must concur with the continuance decisions.

Both acceptance and continuance decisions depend on, among other things, conclusions on the integrity of management and the absence of any perception that a company’s management pressures the audit engagement team to accept inappropriate accounting and reporting or uses financial pressures to undermine audit quality.

Audit quality reviews The global AQR program is a cornerstone of EYG’s efforts to maintain and improve audit quality among member firms. EY executes the global AQR program, reports results and, where appropriate, develops and executes responsive actions plans. The primary goal of the global AQR program is to determine whether systems of quality controls, including those of the Firm, are appropriately designed and followed in the execution of audit engagements to provide reasonable assurance of compliance with policies and procedures, professional standards and regulatory requirements. The global AQR program complies with guidelines in the International Standard on Quality Control No. 1, as amended (“ISQC No. 1”), and is supplemented by the Firm to comply with applicable professional standards and regulatory requirements in the United States and to meet our specific needs. The AQR program also aids EY’s continual efforts to identify areas where we can improve our performance or enhance elements of our quality control processes.

The AQR program is implemented annually and is coordinated and monitored by the Firm’s Professional Practice network, with oversight by the Quality & Risk Management function.

The engagements reviewed each year are selected on a risk-based approach emphasizing audit engagements that are large, complex or of significant public interest. The AQR program includes detailed, risk-focused file reviews covering a large sample of listed and non-listed audit engagements to measure compliance with our internal policies and procedures, EY GAM

requirements and relevant US professional standards and regulatory requirements. In addition, practice level reviews are performed to assess compliance with quality control policies and procedures in the functional areas set forth in ISQC No. 1 and applicable US standards. The AQR program complements external practice monitoring and inspection activities, such as regulatory inspection programs and external peer reviews.

In calendar year 2011, the EY AQR program encompassed the inspection of 268 audit engagements. Based on the results of our internal inspection program, we concluded that our system of quality control for our accounting and auditing practice has been designed and has operated in a manner to provide the Firm with reasonable assurance of complying with professional standards. In cases where material or less significant deficiencies are identified, the Firm determines root causes, develops and executes remedial action plans and seeks ways to further improve audit quality.

In 2011, we reassigned experienced partners in each Sub-Area to the Firm’s Professional Practice Quality & Regulatory Matters group as dedicated team leaders for our AQR program. These team leaders are assisted during the AQR process by reviewers who are selected based on their skills and professional competence in accounting and auditing, as well as their industry specialization. Additionally, the reviewers frequently work in the AQR program over a period of several years and possess a high level of skill in the execution of the program. AQR reviewers are assigned to inspections outside of their home location and are independent of the audit teams reviewed.

Results of the AQR program and external practice-monitoring and inspection activities are evaluated and communicated so that quality improvement actions can be taken at the appropriate level. Measures to resolve audit quality issues noted from the AQR program, regulatory inspections and peer reviews are addressed by the Firm’s Assurance leadership and Professional Practice group. The actions identified are then monitored to provide important practice monitoring feedback for our continuing quality improvement efforts. The Firm has a Quality Control Committee that facilitates continuous improvement in audit quality through a variety of means, including the identification and communication of “lessons learned” from past experiences, emerging regulatory, reputational, and legal issues and leading professional practices for the performance of high-quality audits.

The PCAOB performs an annual inspection of the EY audit practice with respect to audits of US SEC issuers. As part of its inspections, the


PCAOB evaluates the Firm’s quality control systems and reviews selected engagements. The most recent inspection report on EY is the 2010 inspection report issued by the PCAOB on 30 November 2011.

Information on the PCAOB and publicly available inspection reports can be found on its website. The public portions of the PCAOB’s reports describe the procedures performed during the inspections and certain observations regarding audit performance.

Because the PCAOB inspection process is intended to be a constructive and collaborative process, the Sarbanes-Oxley Act of 2002 provides that the section of the PCAOB inspections reports providing observations on a registered public accounting firm’s quality controls will only have limited distribution to certain regulators. An inspected firm has one year in which to address any quality control deficiencies identified in this section of the inspection report. Only those deficiencies that are not remediated to the PCAOB’s satisfaction within this one-year time frame are released publicly. To date, no such reports have been released on EY.

We take steps to address all of the matters described in the inspection reports, both in the public and non-public portions of the reports.

EY also participates in the AICPA peer review program that requires a triennial review of our system of quality control for our accounting and auditing practice for entities other than SEC issuers. The purpose of the AICPA peer review program is to serve as a bridge between the PCAOB’s inspections program and state licensing and other federal regulatory practice monitoring requirements.

The most recent peer review of EY was completed by KPMG for the year ended 30 June 2010. KPMG issued a report with a “pass” rating (report options are either pass, pass with deficiency(ies) or fail) dated 6 December 2010.

External quality assurance review

http://pcaobus.org/Pages/default.aspx


Independence Practices

The EYG network’s independence policies and processes are designed to enable the Firm and its professionals to comply with the independence standards applicable to specific engagements, including, for example, the independence standards of the SEC, PCAOB, AICPA, and other US federal and state regulators. All professionals and certain other employees are required to participate in annual independence learning to help maintain our independence when performing audit services. The goal is to help our people understand both their personal and the Firm’s obligations to be free from interests or relationships that might be regarded as being incompatible with objectivity, integrity and impartiality during our audits.

We consider and evaluate independence from several relevant perspectives, including the financial relationships of both our Firm and our professionals, employment relationships, business relationships, the permissibility of non-audit services we provide to entities we audit, partner rotation, fee arrangements, partner remuneration, and, where applicable, Audit Committee preapproval and communications requirements.

A professional’s failure to comply with applicable professional independence requirements generally will factor into annual performance evaluations and may lead to other disciplinary measures.

We have implemented both global and US-based applications, tools and processes to support us, our professionals and other employees in complying with our independence policies.

Independence Policy The EYG network’s Global Independence Policy contains the independence requirements for member firms, professionals and other employees. It is a robust policy predicated on the independence code of the International Ethics Standards Board for Accountants (“IESBA”) of the International Federation of Accountants (“IFAC”), with more stringent requirements where prescribed by a given regulator, specifically including the additional independence requirements of the SEC. In addition, EY has a separate US Independence Policy to address the independence requirements of the SEC, PCAOB, AICPA and other federal and state regulators. These independence policies also contain helpful supplementary guidance on a wide range of topics to aid professionals and other employees

in applying the complex independence rules. These independence policies are readily accessible to our people through our intranet.

Independence System The EYG network’s Global Independence System (“GIS”) is an intranet-based tool that helps member firms, their professionals and other employees identify the entities for which independence is required and the independence restrictions that apply to each one. Most often these proscribed entities are listed entities we audit and their affiliates, but they can include other entities for which we provide attest or assurance services. The tool includes family-tree data relating to affiliates of the entities we audit and is updated periodically by our engagement teams. The entity data includes notations that indicate the independence rules applicable to each entity so that our professionals can readily view both the entity and the independence notations. GIS is frequently used by our professionals as part of the engagement acceptance process to determine the type of services that can be provided to, or relationships we may have with, the entity based on the independence restrictions.

Independence Monitoring System The Firm’s Independence Monitoring System (“IMS”) is another important tool that assists member firms and their professionals in identifying proscribed securities and other impermissible financial interests. Professionals at manager or higher ranks are required to report in the IMS the securities that they or their immediate family members hold. When an individual reports a proscribed security into IMS, the individual will receive a disposal notice and be required to dispose of the security in a timely manner. Identified exceptions are reported through the Global Independence Incident Reporting System (“GIIRS”) for regulatory matters.

IMS also facilitates automated annual and quarterly confirmation of compliance with global independence policies, as described in greater detail below.

Independence compliance EYG has established a number of processes and programs aimed at monitoring compliance with independence requirements by professionals and member firms. These include the following activities, programs and processes:


Independence confirmations Annually, each member firm and its associated entities are included in an Area-wide process to confirm compliance with our independence policies and requirements and to report identified exceptions, if any.

All professional personnel at EYG member firms and certain others based on their role or function are required to confirm compliance with EYG independence policies and procedures no less than annually. In addition, all partners are required to confirm compliance with certain independence matters quarterly.

Timely and accurate completion of annual and quarterly independence confirmations is a high priority for the responsible leadership teams.

Independence Compliance Team The Independence Compliance Team (“ICT”) conducts an array of testing and Americas’ member firm visits to assess compliance with several independence matters, including reviews of non-audit services, business relationships with entities we audit and financial relationships of member firms.

A separate compliance group, the Independence Compliance Audit Group (“ICAG”), establishes the annual program for testing compliance with personal independence confirmation requirements and with reporting of information into IMS. For the 2010 annual testing cycle completed in March 2011, the ICAG tested in excess of 800 EY partners/principals and other personnel.

Each EYG member firm independence leader confirms annually compliance with applicable independence and related policies and reports instances of non-compliance identified through internal independence reviews, quality reviews, the monitoring system and consultations.

Non-audit services Compliance with professional standards governing the provision of non-audit services to entities we audit is designed to be achieved through review and preapproval by the audit partner and, for SEC issuers that we audit, preapproval by the issuer’s audit committee. The audit partner’s approval and, where applicable, the audit committee’s preapproval of services is documented in GTAC. In addition, the Firm has developed a variety of mechanisms to further safeguard our independence as it relates to non-audit services, including the global Service Offering Reference Tool

(“SORT”), the independence policy and related guidance, training, tools and required procedures completed during the performance of audits and our internal inspection processes.

Independence learning EYG develops and deploys a variety of independence learning programs within the global network.

The annual independence learning program covers the Global Independence Policy and focuses on changes as well as recurring themes and topics of importance, including areas where the independence rules for audits of SEC issuers are more restrictive than the independence rules of IFAC’s IESBA. The annual independence learning must be completed by professionals and certain other personnel. Timely completion of annual independence learning is required and is monitored closely. EY modifies the global program to cover the US Independence Policy.

In addition to the annual independence learning program, there are numerous other independence learning programs or content, such as in the new hire and experienced hire programs, certain milestone programs and core service line curricula.

Service Offering Reference Tool The Firm assesses and monitors our portfolio of services on an ongoing basis, confirming that they are permitted by law and professional standards, so that we have the right methodologies, procedures and processes in place as we develop new service offerings. When appropriate, we exit or restrict services that could present independence or other risks. SORT provides our people with information about our service offerings. SORT includes guidance around which services can be delivered to entities we audit and to entities we do not audit, and independence and other risk management considerations.

Business Relationships Evaluation Tool The Firm oversees compliance with the independence requirements regarding its business relationships through its Business Relationships Evaluation Tool. The Firm, its professionals and other employees are required to evaluate and obtain approval of proposed direct or indirect business relationships with third parties, including entities we audit, in advance so that our business relationships are consistent with applicable independence professional standards.


Audit committees and corporate governance In addition to our internal applications, processes and tools that enable compliance with independence rules and policies, the EYG network recognizes the important role audit committees and similar corporate governance bodies play in the oversight of auditor independence. Empowered and independent audit committees play a vital role on behalf of shareholders in protecting independence and preventing conflicts of interest. The EYG member firms are committed to robust and regular communication with audit committees or those charged with governance.


A strategic objective is to attract and build lifelong relationships with talented audit professionals. We are proud of our people culture, and we are committed to doing even more to advance the development of our professionals.

Recruiting for the Firm’s Assurance practice is performed primarily on university campuses and supplemented, when necessary, by hiring people with prior work experience.

Ernst & Young member firms aspire to have a leading people culture everywhere in the world. Creating a culture that attracts, retains and develops outstanding people leads to higher quality service.

Candidates are evaluated based on the following competencies:

• Technical skills and knowledge

• Intellectual competence

• Leadership skills

• Team/personal skills

• Motivation

• Communication skills

• Administrative skills

Professional development Ernst & Young and You (“EYU”) is the network’s globally consistent career development framework. Through EYU, we provide our people with opportunities for the right experiences, learning and coaching to help them grow and achieve their potential.

EYU expands the commitment to coaching via various forms of counseling and mentoring, from the moment people are recruited through the various phases of their careers.

The learning component of EYU is based on an extensive and globally consistent learning curriculum that helps all of our people develop the right technical and personal leadership skills wherever they are located around the world. The core audit training courses are supplemented by learning programs that are developed in response to changes in auditing, accounting and reporting, independence and professional standards and to emerging practice issues. The Firm requires its audit professionals to obtain at least 20 hours of

continuing professional education each year and at least 120 hours over a three-year period. Of these hours, 40% (eight hours each year and 48 hours over a three-year period) must cover technical subjects related to auditing and accounting.

In recent years, we have been investing in additional classroom training for the Firm’s audit professionals, particularly its managers, senior managers, and partners. Our annual “Executive Events,” which consist of summer, fall, and calendar year-end sessions aggregating approximately 40 hours of classroom training, address emerging issues in accounting and auditing as well as “lessons learned” from our internal AQR and PCAOB inspections.

In addition to formal learning, professional development occurs through coaching and experiences our professionals receive on the job. Coaching helps to transform knowledge and experience into practice. Experienced professionals are expected to coach and develop less-experienced personnel to create a continual learning environment.

Performance management A comprehensive performance management process requires our people to set goals, have clear work expectations, receive feedback and talk about their performance. The Performance Management and Development Process (“PMDP”) is designed to help our people grow and succeed in their careers. Under the PMDP, periodic job performance reviews are combined with annual self-appraisal and annual reviews. As part of the annual review process, each professional, in conjunction with his or her counselor (an assigned, more experienced professional), identifies opportunities for further development. Professionals and their counselors are guided by a set of service line competencies that articulate the knowledge and skills that should be maintained and developed for the respective rank.

Recruitment and professional development


Quality is a central element of our professional services and a key component of our performance-management systems. Partners and other professionals are evaluated and compensated based on criteria that include specific quality and risk management indicators, covering both actions and results.

The Global Partner Performance Management (“GPPM”) process is a globally consistent evaluation process for all partners in EYG member firms around the world. It reinforces the global business agenda by linking their performance to wider goals and values. GPPM is an ongoing cyclical process that includes goal setting, personal development planning, performance review and recognition and reward. It is used as the cornerstone of the evaluation process to document partners’ goals and performance. A partner’s goals are required to reflect various global priorities, one of which is quality.

Specific quality and risk management performance measures have been developed to take account of:

• ► Technical excellence

• ► Living our values as demonstrated by behaviors and attitude

• ► Demonstrating knowledge of and leadership in quality and risk management

• ► Compliance with policies and procedures

• ► Compliance with laws, regulations and professional duties

• ► Contributing to protecting and enhancing the Ernst & Young brand

The Firm’s partner/principal compensation philosophy calls for meaningfully differentiated rewards based on the professional’s level of performance, as measured by the GPPM process. Professionals are assessed annually on their performance in quality service delivery, leading people, operational excellence and market leadership and growth. To recognize different market values for different skills and roles, and to attract and retain high-performing individuals, the following factors are also considered when calculating total reward: seniority, role and responsibility, long-term potential and mobility.

In accordance with the independence rules of the SEC and PCAOB, the Firm’s audit partners do not earn or receive compensation based on the audit partner procuring engagements with entities we audit to provide any services other than audit, reviews, and compilations.

Instances of non-compliance with quality standards result in remedial actions that may include compensation adjustment, additional training, additional supervision or reassignment. A pattern of non-compliance or particularly serious non-compliance may result in actions that include separation from the Firm.

The “quality ratings” assigned to audit partners by the Firm’s PPDs and to audit practice business units by the Firm’s Quality Control Committee receive significant consideration in the annual performance evaluation and compensation processes for audit partners and practice management partners, respectively.

Partner remuneration


Audits of public companies and other services

In the most recent EY annual report filed with the PCAOB at the end of June 2011, we listed all audit reports issued during the annual period ended 31 March 2011 with respect to financial statements of US SEC issuers. The information on such audit reports was provided in Item 4.1 of PCAOB Form 2 – Annual Report Form. The following link is to the PCAOB website where such information is available electronically.

For annual reporting to the PCAOB, fees billed to US SEC issuer audit clients during the reporting period are categorized into four categories of services that are consistent with the SEC’s rules for proxy disclosures by SEC issuers of fees paid to the independent auditors. Such fees are reported in Item 3.2 of PCAOB Form 2 as percentages of total fees billed to all clients for all services during the reporting period. The following table reflects the percentages reported in the Firm’s report on Form 2 to the PCAOB for the reporting period ended 31 March 2011. 4

Total revenue5 for the Firm from all audit and non-audit clients for the fiscal year ended 1 July 2011 was $7.5 billion, of which approximately 40% was from Assurance, 31% from Tax, and 29% from Advisory and Transaction Advisory Services.

4 Additional information on the methodology used by the Firm to compute these percentages is available at Item 3.2 (and related exhibit) of the Firm’s annual report on Form 2 at www.pcaobus.org. 5 Revenue includes expenses billed to clients and revenue related to billings to other EYG member firms.

Service Percent

Audit 30%

Other accounting 3%

Tax 5%

Other non-audit 1%

Total 39%

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Auditors play a vital role in promoting transparency and supporting investor confidence and economic growth. We embrace the opportunity to be more transparent ourselves.

Ernst & Young

Assurance | Tax | Transactions | Advisory

About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.

Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

© 2012 Ernst & Young LLP. All Rights Reserved.

Score No. CA0121

1202-1331615 BOS

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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