140709_item 7 - kpmg audit highlights draft- management response

8/3/2019 140709_Item 7 - KPMG Audit Highlights Draft- Management Response

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Tower HamletsHomes Limited

AUDIT HIGHLIGHTSMEMORANDUM ANDMANAGEMENT LETTER

Year ended 31March 2009

12 June 2009

HOUSING

AUDIT


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1 2009 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMGInternational, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted.KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

32. Executive Summary

13Appendix 5: Letter of Independence

11Appendix 4: Management Representation Letter

8Appendix 3: Recommendations

7Appendix 2: ISA 260 Communication of Audit Differences

42. Highlights Memorandum

21. Introduction

6Appendix 1: Management Letter

Page

Contents

The contacts at KPMGin connection with thisreport are:

Mike McDonagh

Partner

Tel: 0121 335 2367

Fax: 0121 232 3578

[email protected]

Sarah Porter

Manager

Tel: 0121 232 3694

Fax: 0121 232 3578

[email protected]

Tom Hartlebury

Engagement Incharge

Tel: 0121 232 3694

Fax: 0121 232 3578

[email protected]

This report is intended for internal purposes by the Management, Board and Committees ofTower Hamlets Homes Limited and should not be used or distributed to others without our prior

written consent. To the fullest extent permitted by law, KPMG LLP does not assume anyresponsibility and will not accept any liability in respect of this report to any party other than thebeneficiaries.


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Section one

Introduction

Background

The purpose of this report is to set out certain matters which came to our attention during the course of our audit ofthe accounts of Tower Hamlets Homes Limited (the Company, THH) for the year ended 31 March 2009.

THH began trading in July 2008 and was set up as a Company Limited by Guarantee. It is a wholly owned

subsidiary of the London Borough of Tower Hamlets (LBTH).Objective of our audit

Our audit work is designed to consider whether the financial statements of THH give a true and fair view of the stateof affairs of THH as at 31 March 2009 and of its results for the year under review taking into account therequirements of:

The Companies Act 2006; and

UK Generally Accepted Accounting Practice.

Our objective is to use our knowledge of THH gained during our routine audit work to make useful comments andsuggestions for you to consider. However, you will appreciate that our routine audit work is designed to enable usto form the above audit opinions on the annual financial statements of THH and should not be relied upon todisclose errors or irregularities which are not material in relation to those financial statements.

Appendix 2 summarises those matters that are required to be brought to your attention in accordance withInternational Auditing Standard (ISA) 260.

Independence

KPMG conforms to the highest governance standards at all times and ensures that any additional services areapproved in line with THHs protocols as part of agreeing any engagement to ensure transparency in ourrelationship.

ISA 260 Communication of audit matters with those charged with governance requires us to communicate at leastonce a year regarding all relationships between KPMG and THH that may be reasonably thought to have bearing onour independence.

During the year there were no relationships that, in our professional judgement, may reasonably be thought to bearon KPMG LLPs independence. Appendix 5 provides further details on our independence considerations.

Acknowledgements

We would like to take this opportunity to thank the staff of Tower Hamlets Homes for their co operation andassistance throughout our audit.

.


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Section two

Executive Summary

Audit progress and status

We have illustrated below our audit approach:

Dec Jan Feb Mar Apr May Jun Jul Aug Sep

December

Internal planning to decide on the scope of work and focuswork on key audit areas

Assessment of key risks and audit issues

Contact with Finance to agree timetables

March

Interim commenced on 9 March 2009Analysis of business issues and initial identification of auditfocus areas

Assessment of business processes and controls

May/ June

Final audit work commenced on 18 May 2009

Performance of remaining audit procedures

Form audit conclusions

Audit clearance meeting with management

Clearance of financial statement disclosures

June

Issue audit opinions

Presentation of highlights memorandum

Debrief on audit process

Our audit work on the accounts is now complete and we anticipate issuing an unqualified audit opinion

for the period ended 31 March 2009, following approval of the accounts by the Board.In Section 3 we have summarised the main features the financial statements.

Performance Improvement Observations

THH did not begin trading until July 2008 and therefore work remains ongoing to establish a stableworkforce, robust systems of internal control and sound governance arrangements. Although significantprogress has already been made by management, we did identify a number of areas where controlscould be further developed. At the time of the audit management acknowledged further improvementswere needed and had already begun to address the majority of issues. The key points to note are:

SLA and payroll costs are currently netted off the management fee by LBTH which does not allowTHH to review and appropriately authorise expenditure;

The accounts closedown, preparation, and review procedures will need to be improved to ensure a

smooth and efficient financial reporting process in 2009/10;

Payroll reconciliations should be undertaken throughout the year;

The journal authorisation process should be tightened to ensure that journals cannot be reversedwithout approval;

There is scope for Agency costs to be reduced; and

Bank reconciliations should be undertaken on a more regular basis.

Further details are provided at Appendix 2.

Audit Differences

Under the requirements of ISA 260 Communication of audit matters with those charged withgovernance, we are required to report any material adjusted audit differences arising from our work.

All audit differences were adjusted by management. Further details are provided at Appendix 3 of thisreport.


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Section three

Highlights Memorandum

This section of our report summarises the main features of the financial statements.

Profit and Loss

Source: Financial statements

9 Months to 31stMarch 2009

000's

(1,969)PROFIT/ (LOSS) ON ORDINARY ACTIVITIES AFTER TAXATION

(5)Tax credit/(charge) on profit on ordinary activities

(1,965)PROFIT/ (LOSS) ON ORDINARY ACTIVITIES BEFORE TAXATION

(36)Interest payable and similar charges

22Other interest receivable and similar income

(1,951)OPERATING PROFIT/ (LOSS)

(2,107)Other (income) expenditure from pension reimbursement right

1,361GROSS PROFIT/ (LOSS)

(29,068)Cost of sales

29,225Turnover

Turnover

All of the turnover received by THH is from the management fee paid by LBTH.

Cost of sales

The majority of cost of sales comprise employee costs of 17,761k, of which 5,343k relates to

agency staff.

Costs of sales also include payments of 6,136k to LBTH against Service Level Agreements for theprovision of services such as HR, payroll, internal audit, ICT, and the head office accommodation.

The net impact of FRS 17 pension costs is 1,205k. Financial Reporting Standards require accountingadjustments to be made to the Profit and Loss account to replace actual pension contributions madein the year with actuarial costs.

Expenditure from the pension reimbursement right

THH has entered into an agreement with LBTH whereby LBTH indemnify THH against all liabilities arisingfrom the Pension Scheme. Consequently, there is an equal and opposite reimbursement to all of thepension losses accounted for in the Statement of Total Recognised Gains and Losses (STRGL) and Profitand Loss (P&L) Account. Since the actuarial gain is recognised in the STRGL but the reimbursement inthe P&L Account, this results in an overall debit to the P&L account of 3,345k.

Interest receivable

Interest receivable relates to interest earned on cash balances invested by THH during the year.

Interest payable

The majority of interest payable relates to FRS 17 adjustments to reflect the net impact of the expectedreturn on pension assets and interest on pension scheme liabilities (33k). The remaining 3k relates tointerest on the bank overdraft held by THH.

Taxation

Specific guidance has been issued by HMRC with respect to ALMOs which states the transactionsbetween an ALMO and its Council member lack the necessary element of commerciality to amount totrading. As such THH have only provided for 5k of corporation tax, which is based on interest earned oncash investments. THH does not trade with any third party other than LBTH.

Loss after TaxationThe deficit for 2008/09 has arisen as a result of accounting for FRS17. Profit before FRS 17 adjustmentsis 1,376k.


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Section three

Highlights Memorandum (contd)

Balance sheet

Source: Financial statements

1,375,771RESERVES

1,375,771NET ASSETS

125,000Pension Related Asset

(125,000)Pension liability

1,375,771NET ASSETS EXCLUDING PENSIONLIABILITY

1,238,297NET CURRENT ASSETS

(2,724,224)Creditors

3,962,520Current Assets

137,474Fixed assets

31st March 2009

Fixed assets

All of the fixed assets have been purchased in year at a cost of 172k. The assets arepredominately furniture for THHs head office.

Depreciation on fixtures, fitting and equipment is charged at 20% per annum, giving rise to a 34kcharge for the 9 months ended 31st March 2009.

Current assets

Current assets consist of

Cash balances of 3,850k; Stocks of anti-graffiti paint amounting to 42k, and

Car loans to employees of 71k (transferred from LBTH).

Creditors

972k of creditors relates to amounts owed by THH to LBTH in relation to SLAs. Other creditors relatelargely to VAT due to HMRC (334k), PAYE and NI (373k), trade creditors and accruals (1,019k),and an overdraft (68k).

Pension liability/ related asset

THH has adopted the full requirements of FRS 17. The pension scheme was transferred by LBTH toTHH fully funded, although changes to assumptions and the valuation of the pension fund during theyear has resulted in a deficit at 31 March 2009. The liability/ asset will be recalculated annually by the

scheme actuary to reflect changes in assumptions, market conditions and life expectancies.

The pension asset reflects the indemnity provided by LBTH. After accounting for the indemnity there isa nil effect on the reserves of THH.


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Private & confidential

The Board of Directors

Tower Hamlets Homes Limited

Jack Dash House

2 Lawn House Close

Marsh Wall

London

E14 9YQ

Dear Sirs

Management Letter for the 9 months ended 31 March 2009

In accordance with International Auditing Standard 260 we are required to set out any matters that came to our attentionduring the course of the audit of Tower Hamlets Homes Limited (the Company)

This letter is provided on the basis that it is for the information of the Board and Management of the Company and that it willnot be quoted or referred to, in whole or in part, without our prior written consent.

Appendix 2 summarises those matters that are required to be brought to your attention in accordance with International

Auditing Standard (ISA) 260.Our objective is to use our knowledge of the Company gained during our audit work to make useful comments andsuggestions for you to consider. However, you will appreciate that our routine audit work is designed to enable us to form anopinion on the financial statements of the Company and it should not be relied upon to disclose all irregularities that may existnor to disclose errors that are not material in relation to those financial statements.

We would like to take this opportunity to record our appreciation of the assistance and co-operation given to us by all of theCompanys employees.

Yours faithfully

KPMG LLP

Appendix 1

Management Letter


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Appendix 2

Recommendations

We have given each of our recommendations a risk rating as explained below and agreed with management what action youwill need to take. The table also includes recommendations on systems and controls We will follow up our recommendations aspart of next years audit.

Low risk: issues that would, ifcorrected, improve the internal controlin general but are not vital to the overallsystem. These are generally issues ofbest practice that we feel would benefityou if you introduced them.

Medium risk: issues that have animportant effect on internal controls butdo not need immediate action. Youmay still meet a system objective in fullor in part or reduce (mitigate) a riskadequately but the weakness remainsin the system.

High risk: issues that are fundamentaland material to your system of internalcontrol. We believe that these issuesmight mean that you do not meet asystem objective or reduce (mitigate) arisk.

Priority rating for recommendations raised

Agreed, reconciliationwill be undertaken on a

monthly basis in thefuture and will bereviewed and signed offby the financialcontroller.

Reconciliation of the payroll systemto the ledger should be undertaken

at least quarterly. Thereconciliation should beindependently reviewed andevidenced by the reviewer.

Payroll reconciliation

THH does not currently undertake areconciliation between the general ledger and

the payroll system regularly throughout theyear. However, a reconciliation was producedfor the purposes of the audit upon request.This reconciliation is particularly important asthe payroll system is controlled by LBTHrather than THH.

(Medium)

2

THH has agreed withLBTH that as of1/09/2009 all income/expenditure betweenthe two parties will beseparately invoicedbefore any payment ismade, no charges willbe accepted without anapproved invoice.

THH and LBTH should look tointroduce a system whereby allincome and expenditure isseparately invoiced between thetwo parties before any payment ismade.

The invoices relating to the SLAsand payroll should then beapproved by THH in line with itsdelegated authorities. SLAs shouldbe reviewed with reference towhether they match the fixed prices

included within the delivery plan.

In addition, it would be appropriatefor THH to market test all of theservices provided by the council toensure that value for money isachieved. This is likely to beconsidered as part of the pendingAudit Commission inspection.

Transactions with London Borough of

Tower HamletsTHH currently receives the management feenet of LBTH Service Level Agreement (SLA)costs, and payroll costs which are paid byLBTH. This means that THH are unable toproperly review and approve the amount ofincome received and costs incurred.

It was identified through our audit that LBTHhas not charged the fixed amounts for theSLAs specified in the ManagementAgreement, and although the overall variancewas only 21k, individual SLA variances wereas much as 464k.

(Medium)1

RecommendationManagement response

and due dateObservationRiskNo.


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Appendix 2

Recommendations (contd)

THH ledger closedownto be aligned with LBTHfor year end 09/10

Financial controller toreview keyreconciliations on amonthly basis

Financial Controller tooversee and liaise withKPMG Audit team on allaspects of the audit for2009/10

THH should investigate with LBTHthe possibility of aligning the ledgerclose down dates, and should agreeany intercompany adjustments assoon as possible after the accountshave closed.

Once the new Financial Controller isin post, roles and responsibilitiesshould include the following in orderto ensure an efficient audit:

Notifying the auditors of anysignificant developments orchanges in the Companies

operations throughout the year; Reviewing key control account

reconciliations on a monthlybasis;

Producing a closedowntimetable and allocating roles tokey staff;

Producing a clear workingpaper file to support thedraft accounts; and

Formally agreeing inter-companybalances with LBTH.

The draft accounts should also bereviewed by the Director of Financeprior to the commencement of theaudit.

Accounts closedown, preparation, andreview procedures

It was identified through our audit that theledger for THH was closed down on 8th April,yet LBTH do not close their ledger until 20 th

April. Because of the large number oftransactions between LBTH and THH thismeant that a large number of adjustments tothe ledger were necessary in order toprepare the accounts, which resulted indelays to the audit process.

In addition, a large number of presentationalerrors were identified within the initial draft ofaccounts and the balance sheet did notbalance.

As this was the first year of preparingaccounts, such issues are to be expectedand we have not charged any increased feefor the additional audit work undertaken. Weunderstand that a number of the key financestaff currently in place are temporary and thatTHH is looking to appoint a full time FinancialController who will manage the audit processfor 2009/10.

(Medium)

3

The journalauthorisation process isto be reviewed by thefinancial controller

THH should alter the authorisationsettings for journals such that alljournal reversals must be authorisedby the member of staff who originallyauthorised the journal, and thatjournals can only be reversed once.

Journal procedures

We identified through a review of the journalsposted in year that although all journals haveto be initiated and reviewed by appropriatelyauthorised staff before they can be posted, itis possible for the person who posted thejournal to reverse it without authorisation.

In addition, it is possible to reverse journals

multiple times without authorisation, whichmay lead to duplication.

(Medium)4

RecommendationManagement responseand due date

ObservationRiskNo.


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Appendix 2

Recommendations (contd)

A review is taking place

of all agency staff anda number are beingreplaced withpermanent positions orreduced in number

THH should undertake a review of

its Agency costs and the potentialoptions available to reduce costsin this area. This may involve therecruitment of more permanentstaff and/or a cost reductionexercise to market test providers.

Agency costs

Employee costs of 17,761k consist of 5,343k

of agency costs. This represents 30% of totalemployee costs and is a significant expense tothe THH. Excessive use of Agency staff, ratherthan permanent, can also lead to disruptionand inconsistencies.

(Medium5

Agreed all bankaccounts will bereconciled on a monthlybasis and reviewed bythe financial controller

The Bank Statement for the callaccount should be agreed to theledger on a monthly basis, alongwith all other accounts. This reviewshould be documented.

If possible THH should add the callaccount to the list of bankaccounts that are accessible usingthe online tool.

Bank Statements

THH has a number of accounts with the Co-operative bank. The Companies main bankaccount was satisfactorily reconciled from theledger to the bank statement by the financeteam. However, since the call account does notchange significantly during the year, thereshould be no reconciling items between theledger and bank statement and no formalreconciliation or review is undertaken. Theinitial bank letter received did not include the906k held in the call account and since THHhad not received a bank statement sinceNovember it was unable to evidence thebalance in the account.

We were subsequently provided with a revisedbank letter to verify the balance.

The other accounts held with Cooperative can

be monitored using an online tool which allowsthem to print bank statements. This is notcurrently available for the call account.

(Medium)6

RecommendationManagement responseand due date

ObservationRiskNo.


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Appendix 3ISA 260 Communication of Audit Differences

We are required by ISA (UK and Ireland) 260 Communication of Audit Matters to Those Charged with Governanceto communicate all uncorrected misstatements, other than those that we believe are clearly trivial, to those chargedwith governance. We are also required to report all material misstatements that management has corrected but thatwe believe should be communicated to the Audit Committee to assist it in fulfilling its governance responsibilities.

This appendix sets out the audit differences that we identified following the completion of our audit of TowerHamlets Homes Ltd for the 9 months ended 31 March 2009.

Unadjusted audit differences

There are no material audit differences identified during the course of our work which have not been accounted forwithin the final version of the Companys financial statements.

Adjusted audit differences

We identified a number of audit adjustments and have detailed below those which were material to the accounts:

Payroll accrual

A payroll journal had been posted twice in error and was therefore reversed in the final set of accounts.

314Payroll Costs

CreditDebitCreditDebit

172

(000)(000)

P&L Account

Cost of Sales

172Fixed asset additions

Fixed assets

It was identified that a number of items recorded in expenditure related to furniture purchased by the Company. It wasnecessary to capitalise these items as fixed assets in the accounts.

314Intercompany creditors

373Intercompany creditors

Payroll accruals

Payroll costs are paid initially by LBTH, who then net the cost from the management fee when it is paid to THH. It wasidentified that the debit to move the payroll accrual (PAYE, NI, etc) to HMRC creditors had not been recorded, although theopposite entry had been posted to the P&L Account. The adjustment to HMRC creditors has been recorded, and as suchthis is a one sided adjustment.

(000)(000)

Balance Sheet

Rationale/ Balance

Presentational differences

We identified a number of presentational adjustments which were made to the accounts.


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KPMG LLP

2 Cornwall Street

Birmingham

B3 2DLDear Sirs

This representation letter is provided in connection with your audit of the 2009 financial statements of TowerHamlets Homes (the Company), for the purpose of expressing an opinion: (i) as to whether these financialstatements give a true and fair view of the financial position of Tower Hamlets Homes and of its financialperformance; and (ii) whether these financial statements have been properly prepared in accordance with UKGenerally Accepted Accounting Practice. These financial statements comprise the balance sheet as at 31stMarch 2009, and the profit and loss account, statement of total recognised gains and losses and cash flowstatement for the 9 months to 31st March 2009, and a summary of significant accounting policies and otherexplanatory notes.

We acknowledge as directors our responsibilities under the Companies Act 2006 for preparing financialstatements which give a true and fair view.

We also acknowledge as directors our responsibilities under the Companies Act 2006 for making accuraterepresentations to you and for ensuring that there is no relevant audit information that you are unaware of.

The Board approves the financial statements.

The Board understands that auditing standards require you to obtain representations from directors on mattersthat are material to your opinion. The Board understands that omissions or misstatements of items are material ifthey could, individually or collectively, influence the economic decisions of users taken on the basis of thefinancial statements. Materiality depends on the size and nature of the omission or misstatement judged in thesurrounding circumstances. The size or nature of the item, or a combination of both, could be the determiningfactor.

The Board has made appropriate inquiries of directors and officers of the Company with the relevant knowledgeand experience. Accordingly, the Board confirms, to the best of its knowledge and belief, the following

representations:The financial statements referred to above, which have been prepared on a going concern basis, give a true andfair view and have been properly prepared in accordance with UK Generally Accepted Accounting Practice.

All the accounting records have been made available to you for the purpose of your audit, and the full effect of allthe transactions undertaken by the Company have been adequately reflected and recorded in the accountingrecords in accordance with agreements, including side agreements, amendments and oral agreements. All otherrecords and related information, including minutes of all management, Board and shareholders meetings and,when applicable, summaries of actions of meetings held after period end for which minutes have not yet beenprepared, have been made available to you.

The Board is not aware of any known actual or possible non-compliance with laws and regulations that couldhave a material effect on the ability of the Company to conduct its business and therefore on the results andfinancial position to be disclosed in the financial statements for the 9 months ended 31st March 2009.

The Board:

understands that the term fraud includes misstatements resulting from fraudulent financial reporting andmisstatements resulting from misappropriation of assets. Misstatements resulting from fraudulent financialreporting involve intentional misstatements including omissions of amounts or disclosures in the financialstatements to deceive financial statement users. Misstatements resulting from misappropriation of assets involvethe theft of an entitys assets, often accompanied by false or misleading records or documents in order to concealthe fact that the assets are missing or have been pledged without proper authorisation.

acknowledges responsibility for the design and implementation of internal control to prevent and detect fraud anderror.

There have been no instances of fraud or suspected fraud affecting the Company involving:

management and those charged with governance;

employees who have significant roles in internal control; or

others where the fraud could have a material effect on the financial statements

Appendix 4

Pro-forma Management Representation Letter


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Appendix 4

Pro-forma Management Representation Letter (contd)

There have been no allegations of fraud, or suspected fraud, affecting the financial statements communicatedby employees, former employees, analysts, regulators or others.

has disclosed to you the results of its assessment of the risk that the financial statements may be materiallymisstated as a result of fraud.

The Board confirms the completeness of the information provided to you regarding the identification of relatedparties and regarding transactions with such parties that are material to the financial statements. The identityof, and balances and transactions with, related parties have been properly recorded and when appropriate,adequately disclosed in the notes to the financial statements. The Board is not aware of any other suchmatters required to be disclosed in the financial statements, whether under FRS 8 Related party disclosuresorother requirements. Included in Appendix A to this letter are the definitions of both a related party and arelated party transaction as the Board understands them and as defined in FRS 8.

Presentation and disclosure of the fair value measurements of material assets, liabilities and components ofequity are in accordance with UK Generally Accepted Accounting Practice. The amounts disclosed representthe Boards best estimate of fair value of assets and liabilities required to be disclosed by these standards.The measurement methods and significant assumptions used in determining fair value have been applied on aconsistent basis, are reasonable and such assumptions appropriately reflect the Boards intent and ability to

carry out specific courses of action on behalf of the Company where relevant to the fair value measurementsor disclosures.

The Board has recorded or disclosed, as appropriate, all liabilities, both actual and contingent, and hasdisclosed in Note 11 to the financial statements all guarantees given to third parties.

The estimated financial effect of pending or threatened litigation and claims against the Company has beenproperly recorded and/or disclosed in the financial statements. Except as disclosed in the notes to thefinancial statements, the Board is not aware of any additional claims that have been or are expected to bereceived.

Except as disclosed in the financial statements or notes thereto there are no:

(a) other gain or loss contingencies or other liabilities that are required to be recognised or disclosed in thefinancial statements, including liabilities or contingencies arising from environmental matters resulting from

illegal or possibly illegal acts, or possible violations of human rights legislation; or(b) other environmental matters that may have a material impact on the financial statements.

The Board confirms that:

The financial statements disclose all of the key risk factors, assumptions made and uncertainties surroundingthe Companys ability to continue as a going concern as required to provide a true and fair view.

Any uncertainties disclosed are not considered to be material and therefore do not cast significant doubt onthe ability of the Company to continue as a going concern.

On the basis of the process established by the Board and having made appropriate enquiries, the Board issatisfied that the actuarial assumptions underlying the valuation of pension scheme liabilities are consistentwith its knowledge of the business. The Board further confirms that:

(a) all significant retirement benefits, including any arrangements that are statutory, contractual or implicit in

the employer's actions; arise in the UK and the Republic of Ireland or overseas; are funded or unfunded; andare approved or unapproved, have been identified and properly accounted for; and

(b) all settlements and curtailments have been identified and properly accounted for.

The schemes set out in the attached schedule have been accounted for in the financial statements. There areno other schemes of any significance.

This letter was tabled and agreed at the meeting of the Board of Directors on 23rd June 2009.

Yours truly,

Chairman

Secretary


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Appendix 5

Letter of Independence

Private & confidential

The Board of Directors

Tower Hamlets Homes Limited

Jack Dash House

2 Lawn House Close

Marsh Wall

London

E14 9YQ

Dear Sirs,

Professional ethical standards require us to communicate to you in writing at least annually all significant factsand matters, including those related to the provision of non-audit services and the safeguards put in place that, inour professional judgment, may reasonably be thought to bear on KPMG LLPs independence and the objectivity

of Mike McDonagh and the audit team. This letter is intended to comply with this requirement.

We have considered the fees paid to us by the Company for professional services provided by us in the periodfrom 1 April 2008 to 31 March 2009. We are satisfied that our general procedures support our independenceand objectivity in relation to non-audit services.

General procedures to safeguard independence and objectivity

KPMG LLP is committed to being and being seen to be independent. As part of our ethics and independencepolicies, all KPMG LLP Partners and staff annually confirm their compliance with our Ethics and IndependenceManual including in particular that they have no prohibited shareholdings. Our Ethics and Independence Manualis fully consistent with the professional practice rules of the Institute of Chartered Accountants in England and

Wales, by whom we are regulated for audit purposes.

As a result we have underlying safeguards in place to maintain independence through:

- Instilling professional values

- Communications

- Internal accountability

- Risk management

- Independent reviews.

Please inform me if you would like to discuss any of these aspects of our procedures in more detail.

There are no other matters that, in our professional judgement, bear on our independence which need to bedisclosed to the Board of Directors.

Confirmation of audit independence

We confirm that as of 7 July 2009, in our professional judgment, KPMG LLP is independent within the meaningof regulatory and professional requirements and the objectivity of the Partner and audit staff is not impaired.

This report is intended solely for the information of the Management, Board and Committees of Tower HamletsHomes Limited and should not be used for any other purposes.

Yours faithfully

KPMG LLP

140709_item 7 - kpmg audit highlights draft- management response

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