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KPMG maintains a system of quality controls for its audit practice that respect to our accounting and auditing practice. As is ccstomary in E.;3
Is designed to meet the requirements of the AICPA and the roles and most peer reviews, a =after of comment issued by the peer;eview
standards adopted or issued by the Public Company Accounting firm accompanied the peer review report. There are no matters
Oversight Board (PCAOBI.The accompanying document, Our System reported that we consider to have a material effect on the conduct of ].
of Quality Controls:Serving the Public Interest Through Independence, KPMG's accounting and auditing prectice.The most recent peer review
to
Integrity, Ethics, Objectivity, and Quality Performance, describes that recent, letter of comment, our letter of response, and the AICPA rX
system and encompasses: acceptance letter on our peer review are pubic documents and are
• Independence,integrity, and objectivity accessible through the A(CPAs SEC Practice Section public file Web
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Personnel management site at This//www aicpa.orgJmembers/drobecto,
• Acceptance and continuance of clients and engagements iv
• Engagement performance 0 T Iii E R Ez X T E P ?q AL try R E °A t * tend,',£` y. P:
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• Monitoring S N V r S T T G ac T t 0 N S
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In December 2002 the Transition Oversight Staff iTOS), formerly the
KPMG continuously reviews its policies and practices in light of chang- Public Oversight Board staff, issued its Report on the Independence
ing regulatory and professional requirements. Quality Control Systems of the Four Reviewed Firms(Bin 4 Report)to `
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the SEC. KPMG received an unqualified repot The full report contained
N T E R ES A L Q U A t E-1-Y R S A i S log 5 16 specific deficiencies in the Big Four firms' systems and controls.
KPMG conducts an annual internal review of its accounting and audit- Only one such item, however, was attributable to KPMG, worst sug- '
ing practice through its Quality Per;ormanee Review Program;QPRP, gents more numerous audits of personal information submitted by
which is described in the aforementioned document. QPRP is KPMG partners and managers for purposes of testing compliance
designed to meet the quality control element of monitoring, as with independence requirements. In fact, in the six-month period
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required by the AICPA Quality Control Standards. For the five year immediately prior to-,hat reviewed by the TOE, KP(GG had performed
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paned ending December 31, 2003, our QPRP did not identify any hundreds of Such audits, and it continues a rigorous review process •,';
Issues considered to have a material effect on the conduct of KPMG's today, in compliance with the SEC Practice Section membership
life,
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accounting and audrcing practice.As do most quality review programs, requirements.The full report issued by the TOS is accessible through
we identify areas for continuous improvement and disseminate our the TOS Web site at http//wwwcoversightstafforg112_19_02A.pdf,
findings to KPMG professionals through written communications,
internal training tools, and periodic partner, manager,and staff meet- In 2003,In anticipation,of KPMG'£registraon with the PCAOB,the firm
ings. These areas are also emphasized in subsequent years of the voluntarily agreed to he subject to the limited irspecion processes of
QPRP to gauge the extent of continuous improvement- The PCAOB.As a function of KPMG's registration this past October,the ;
PCAOB will conduct full annuaf inspections on the firm commencing in
c X T E R fy A L P E R R E V & . sill[`."s May 2004.
KPMG's system of quality controls to, the accounting and auditing
practice was subjected to external peer reviews in 1999 and 2002. Our .rn E V S E V'4 R C T i 0 of P L Al ad IS
external peer reviews were conducted by PricewaternouseCoopers As part of KPMG'£contnuous min ovement and quality control pro-
LLP(PwCt another Big Pour firm. Each review resulted in PwC issuing gram, the firm's leadership develops an action plan and accompany- "
an unmod,led report on KPMG's system of auaity controls with log steps designed to add --he findings from both internal and
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C0NCLUS- 10N
byre remain confident that our firm''s structure, policies, and proce-
dures allow our professionals to provide an outstanding level of audit
quality in an independent,objective,and ethical manner,instilling pub-
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I[c and stakeholder confidence.,'-
We pledge to keep pace with the evolution of business and markets
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by continuing our substantial investment In the research and develop- °2
ment needed to maintain audit quality and,by keeping abreast of the
changes In the audit landscape resulting from changing public expec-
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tations and regulatory oversight. -.
To help ensure quality control, KPMG:rriR continue to provide training,
technology-based tools, and audit methodologies that contribute to `^
quality audits.
We encourage you to contact us with any comments or questions you
may have.
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The BMP methodologyincludes: + - '
Approval of a summary issues document by carious parties,includ
• Understanding the client's business, including the financial report- ing the engagement partner and concurring review partner
ing and business control environments • In-depth technical reviews by the concurring review partner in cer # `
• Understanding the attributes of key processes that are relevant to tain situations
the financial statements tt
• Understanding and identifying business and financial statement Consultation with others within,the firm is encouraged and,In certain 5 3.
risks circumstances, required.
• Identifying relevant business and financial statement controls
• Testing control design and operating effectiveness Su far the E ment Team Support ngage
• Substantively testing significant transactions, balances, and man- Technical support for each engagement team comes from a network
agement estimates of professional practice and SEC reviewing partners.
• Evaluating and documenting the results of the test work
Additional support comes from:
BMP addresses both manual and information technology controls and • A dedicated group of area risk management partners responsible t,y
includes integration of the firm's information technology professionals. for providing risk management leadership and for directing either- g.
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erica to firm policy and professional standards within each of the
In addition, KPMG was an early adopter of SAS No.99, Consideration firm's six geographic areas.These highly experienced profession-
of Fraud In a Financial Statement Audit,when the standard was issued als, residing within operating offices, are available to consult on
in October 2002.As a result, the firm Integrated in its workflow the industry and tschrical issues.
process and procedures set forth in SAS No.99 regarding the conic- Audit support teams in each of KPMG's six geographical areas that ;a,
eratlon of fraud risk factors relating to fraudulent financial reporting, are responsible for providing ongoing support to engagement �}
The firm has embedded forensic audit techniques in the audit process teams to the firm's audit_ methodology and documentation stan-
for certain engagements,and has reinforced and enhanced commune- dards. This group also performs periodic reviews of in-process Cir
cations Pertaining to the engagement team', professional skepticism engagements to assess adherence to KPMG's audit methodology. ':
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with respect to potential fraud factors- • The Department of Professional Practice, which is responsible
for conducting technical research, interacting with professional
KPMG's supervision, review, and consultation guidelines for audit standards-setting groups,and providing consultation. „
work include: =
• Review and approval by the engagement partner or manager of AA 0 N f T 0 R t N G
engagement Planning and analysis prior to the start of significant Monitoring procedures involve ongoing consideration and evaluation
fieldwork by the firm of the foliowing issues:
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+ Review of all work papers by another KPp1G nrofessionai,including • Relevance and adequacy of the firm's policies and procedures
review by the engagement partner of key work papers in high-risk • Appropriateness of the firm's guidance materials and practice aids
audit areas • Effectiveness of professional development activities
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• Assignment of a eorournrg review partner to ail audit engage- Compliance with professlanal and firm standards, policies, and �
merits procedures �-.:;
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Performance Evaluation and Compensation other regulatory(e.g.,GAO)CPE requirements also comply with those
All professionals, including partners, undergo annual goal setting and rules-The GAO currently requires 30 hours of CPE in a two-year period,
performance evaluations conducted by performance managers who including 24 hours in the government environment. 5
are familiar with the professional's performance- Competencies oval- �'•
uated include professional performance, technical knowledge, quality To assist individuals In meeting these requirements as well as the kk
and risk management, personal effectiveness, leadership, and man- requirements of their hate licensing authorities, the firm annually 5'
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',. agement skills. offers courses at all professional levels and has an annual process for fr°
setting individual professional development goals.The firm requires
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The results of the annual performance evaluation have a direct effect and provides all professionals with annual training in independence '
on compensation of KPMG personnel,including f - -p g partners,and in some standards.The firm also maintains an electronic compliance reporting
cases on their continued association with the firm.The compensation system so that professionals can monitor their compliance with CPE
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of our partners is determined annually by our Management Committee requirements,
and approved by our Board of Directors. Compensaton is based on K`
professional performance, technical competence, quality and risk Licensing _
management, personal effectiveness, leadership, service, and mar- KPMG requires that all partners and managers who provide profes-
ketplace compensation benchmarks for similarly situated profession- sional services to clients and meet the requirements to be licensed as n.
as and management skills. Our policies for setting compensation certified public accountants iCPAs) must be licensed In the states in
amounts will not allow an audit partner, as defined by the SEC, to be which they practice-in addition, audit managers must be CPAs, or In
compensated for the safe of non-audit services to his or her audit the case of non-U.S,citizens or expatriates,the equivalent(e.g.,char-
client. Our process for setting compensation amounts has been tered accountan).The firm monitors license expiration and renewalw.
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reviewed add revised accordingly to meet the requirements of the Act for these individuals using an electronic database that generates an
and the SEC rules, automated notification whenever a license is about to expire.The firm
prohibits partners who fail to maintain a valid license from practicing
Development and Training public accounting-In such situations,the individual is subject to disci-
As one of KPMGa core competencies,the firm's professionals meet plinary procedures up to and including dismissal_
their continuing professional education GPE) requirements through c<(
various professional development courses,including local office,area, Supervision
and national training courses.We have established f rmvaide policies Supervision Involves directing the efforts of professionals who are -
that often exceed the CPE requirements of most states.T hose poll- involved In accomplishing the objectives of the audit and determining L
coos ensure that all professional members of the firm maintain their whether those objectives are accomplished.Elements of supervision _
professional competence and meet all regulatory and professional include instructing professionals,keeping informed of significant prob-
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standards. In accordance with these requirements,each audit profas- Iems, reviewing the wort performed,and reconciling issues or agree-
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sionai must earn at least 20 hours of CPE credits each year and 120 ing on appropriate conclusions,The worse performed by each KP?+hG
hours in any three-year period. "engagement team members partici- audit professional is reviewed to determine whether it was ade-
pate in Internal and external industry-specific training programs, quately performed and to evaluate whether the results are consistent t
including technical updates, industry conferences, and enabling skills with the conclusions to be presented in the auditor's report.
training. In addition, the firm mandates that individuals subject to
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Conflicts of Interest AICPA and firm rules governing treatment of confidential client infor 5.:
independence, integrity, and objectivity are the central pillars of our motion at commencement of employment, in an annual affidavit,and
firm.Thus, we work diligently to avoid even the appearance of a con- upon promotion to the management group, if applicable. s
flirt of interest
Compliance and Ethics Hotline
KPMG personnel are alert to actual and potential conflicts of interest, To further our commitment to integrity and ethical behavior, KPMG }
identifying them at the earliest opportunity and resolving, managing, maintains a confidential Compliance and Ethics Hotline.The hotline is 8;
or avoiding the conflict.Conflicts of interest may preclude KPMG from or, important component of the mechanisms available to help KPMG
accepting a client or an engagement, personnel report concerns about possible illegal,unethical,or Improper
conduct. Use of the hotline is encouraged as an alternative means for
When we become aware of a potential conflict of interest,the engage- reporting concerns or in circumstances under which KPMG personnel
ment partner discusses the situation with DPP and/or the Office of feel uncomfortable reporting a concern through normal channels.
General Counsel. Generally, before agreeing to pursue the engage- Callers' reports are handled confidentially and no retaliation or retribu, f`r`
ment,the parties involved in the professional service are notified of the ;ion of any kind for"good faith"reports is permitted.
potential conflict of interest and, if it is resolved, the engagement is
further evaluated using the firm's normal engagement acceptance Resolution of Differences of Opinion
process. The firm has established protocols for consultation and documentation
of significant accounting and auditing matters,including procedures to
If the engagement is accepted, it may be necessary to establish resolve differences of opinion on engagement issues. Consultation
"ethical dividers" with respect to the professionals assigned. If a with a team member at a higher level of responsibility than either of "
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potential conflict cannot be resolved,the engagement or prospective the differing parties usually resolves such differences-In other circum-
client is declined. stances, such matter-,may be elevated through the chain of responsi-
bility for resolution by DPP In all such matters, KPMGP chairman
Conflicts Check System retains ultimate authorty for resolving differences of opinion. _=
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KPMG's Conflicts Check System is used to identify potential conflicts
of interest.The conflicts database contains information from an exten- Document Retention
sive list of internal data sources and is updated on a timely basis.At Like most businesses. KPMG has a formal document retention policy
the request of an engagement team,the ethics and compliance group that governs the period for which we retain audit work papers and c
produces a conflict report_The engagement team is responsible for other client-specific information. In light of recent legislative and mg- `
reviewing the detail provided in the report and for conducting appro- ulatory developments, which are still evolving, we are conducting a _
priate follow-up,including documenting the resolution of the matter, review of this policy to help ensure our continued fur compliance with s,_
the legal and ethical obligations of the firm.The firm complies vtith the
Client Confidentiality recently issued SEC rules with respect to the retention requirements g; `C.r
In accordance with professional standards, KPMG requires its per- for documents supporting an audit report,
sonnet to maintain the confidentiality of a client or former client.The
firm also requires its professionals to affirm their understanding of the
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is used to confirm the individual's compliance with,and understand- Non-Audit Services
ing of, KPMG's independence policies. The fire's independence Professional services provided by KPMG to public company audit,
group, which consists of approximately 20 professionals dedicated clients conform to applicable ethical, professional, and regulatory
solely to independence matters, reviews and resolves questions and requirements and are within the limitations imposed by SEC tripe-
.' apparent violations that may be reported on the affidavits. pendence:ales,The Act defined and the SEC subsequently expanded
the types of professional services that could impair auditor odepen k
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To further monitor compliance,the firm continuously audits selected pence. Firm policies were modified to help prevent the provision o,
Independence affidavits and the information reported in the auto- such services to audit clients. Working vom databases in the firm's
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mated independence tracking system. Individuals selected for audit proprietary system, Sentinel, the lead audit engagement partner
must submit certain personal financial information {brokerage approves each potential non-audit service for a public company audit t"
accounts,tax returns,etc)for review. client and ensures that all services,Including non-audit services, have y
been pre-approved by the company's audit committee, f-?
The firm's policies also address disciplinary actions in the event of •
individual noncompliance with its independence policies.Such actions Communications with the Audit Committee
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vary based on the event and may include dismissal,depending on the The SEC has issued final rules Implementing provisions within the Acts"
severity of the violation, that affect communications between the auditor and the issuer's audit
committee.The rules require timely reports to the audit committee by
Audit Committee Pre-Approval of Astor Services the auditor on (1) critical accounting policies and practices, 12) after-
The SEC rules implementing the Act require that the audit committee native accounting treatments, and l3}other material communications
pre-approve all services rendered by the issuer's principal aud-,tor between the auditor and management of the issues v<t
Engagements perfam3ed by the firm are subject to a written contract
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or engagement letter that defines the terms and conditions of the These changes are in addition to or clarify annual communications -
engagement. For engagements involving the audit of an issuer's required by the generally accepted auditing standard (GAAS) K
financial statements, the chairman of the audit committee and the Communications with Audit Committees,which has been adopted by �a'
chief executive officer or chief financial officer execute the agreement. the PCAOB as an interim standard-Some of the items required to be
For other engagements,after pre-approval in accordance with the Phil-
reported pursuant".o the standard are:
Iles of the audit committee, a member of the client's management • Accounting policies and alternative treatments,including those that
ratth the authority to engage KPMG generally executes the contract or are significant;and for SEC registrants only,a discussion of certain -
engagement letter, ether accounting policies `=
• Quality of the accounting principles, rot just the acceptability of _
It is the responsibility of the lead audit engagement partner to ensure such principles
that the company's audit committee has pre-approved at services. • Significant management judgments and accounting estimates ;
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For engagerztents subject to GAO standards the t`ran requires • Audit adjustments and uncorrected misstatements
approval by the lead audit engagement partner before commence- • Other information in documents containing audited financial state-
ment of such services, ments
• Disagreements with management },.
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attestation standards, finarroal reporting, advisory services, and Department of Professional practice—Tax s
'.. Independence.DPP—Assurance is organized into three groups, pro- DPP—Tax supports the firm's Tax Services practice to facilitate under-
fessional practice, risk management, and ethics and compliance. standing of and compliance with the firm's policies and procedures.
DPP—Tax provides professional practice and risk management sup- s
Professional Practice Group port to the firm's tax professionals in areas such as consultation on
The professional practice group provides support to the Assurance existing and emerging tax rules and regulations, development of
practice in a variety of ways, including: f(rmwide tax positions, and management of the firm's internal tax � -
• Providing guidance regarding engagement-related technical issues quality review program.
referred by client service professionals '
• Developing and disseminating topic-specific guidance regarding Concurring Review Partners -<<
emerging technical and professional issues The concurring review partner is independent of the audit engage-
• Providing consultation on and assistance with firm and individual ment team, having no engagement responsibilities other than those rye;
issues pertaining to compliance with regulatory and professional relating to the independent and impartial review of the financial state-
standards, independence rules,and regulations ments and selected work papers. These individuals review the key
elements at each audit, the appropriateness of the financial state-
Risk Management Group ments and related disclosures, and the conclusions of the audit part- a..,
The risk management group consists of partners and other profes- ner with respect to the audit, before the firm issues its audit report.
sionals who are charged with promoting quality and controlling risk by
focusing on the firm's risk management processes.This group also Partners who perform concurring reviews of all public company audits,
monitors compliance with the firm's policies and procedures through have received internal training and credentials to serve as SEC review- f,f
coordination of the firm's internal and external quality review pro- ing partners.These individuals are the firm's top technical partners and py e
grams for the Assurarce and Advisory SE•vices practi^e. are highly knowledgeable in SEC accounting and reporting masers.
Ethics and Compliance Group y} ':
The ethics and compliance group consists of partners and other
professionals who have responsibility for conducting compliance
tests of firm policies in areas Such as the independence of the firm's
professionals.
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OUR QUALITY STr T � �� � T
Independent, quality work is the most important factor In serving the Independence Policies supported by integrated, Web-based Sys-
public interest,and it is critical to retaining the confidence of our con- tems that help our professionals maintain and monitor their com-
stituents(i.e., the various parties in the financial reporting spectrum). prance with independence requirements. t j:
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• KPMG's Audit Committee Institute iACli, a unique resource that G:u.
The American Institute of Certified Public Accountants(AICPA)quality communicates with audit committee members and senior man-
control standards, which were adopted by the PCAOB as part of its agement to enhance their awareness of, commitment to,and ael
interim professional standards, define a quality control system as a ity to implement effective audit committee processes. ACI also
I process that provides a firm with reasonable assurance that its per- supports KPMG partners and employees by providing background
sonnel comply with applicable professional standards and the firm and information on current issues affecting audit committees.
f't standards of quality:' In addition, the PCAOB has publicized its intent • Our Assurance &Advisory Services Center, a dedicated group of to check registered accounting firms' compliance with its own rules, professionals who develop the methodologies used in our audit
professional standards, the rules of the Act, and the 5FC`s rules and and non-audit service processes,
regulations. The Audit Quality Council, which provides key input into the flrm's
ongoing strategy related to development of our professionals and f=.,
For more than a century, KPMG has provided its clients with rode- the audit tools they use,and guidance to support our audit practice
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pendent, quality work, earning a reputation for independence, A vice tJialNevei position for Risk and Regulatory Matters that a
integrity, ethical behavior, and objectivity.This is due in large part to reports directly to KPMGS chairman.
our highly developed system of quality controls, which has been cria- • The Audit Training and Methodology Partner program in which part- g
cal to our success, ners in leadership positions play a critical role in Improving overall ',
audit quality by actively participating in setting our training strategy �:c
The key components of KPM6's quality c r%y
-control system are: and developing content as well as delivering audit training pro- tS
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• The oversight of professional performance, including concurring grants,methodology, guidance, and mots,
partner reviews, triennial peer reviews by an independent outside x-
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audit firm to meet licensing requirements of state boards of accou-r,- �..a
tansy, and our internal Quality Performance Review; Program
IQPRP),which provides for the review of a sampling of partners and >:
audit engagements each year for quality and compliance.
• The Department of Professional Practice OPP),a dedicated group
of partners, senior managers,and other professionals who provide
ongoing technical guidance and support for field professionals on a
real-time basis-
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CC) N i ,_ N f S 3 'she Sarbanes-Oxley Act of 2002 r,
3 The Public Company Accounting Oversight Board
d Our Quaht5 Statement ff£
a mta,rnal Quatty CantraE Sgsszrns anal Pvatuadcree C
5 Background and Organization
5 Recent Oovelopments
5 Risk Management and Quality Control Structure
5 Risk Management Steering Group "`
5 Risk Management Partners and Professional Practice Partners
5 Department of Professional Practice—Assurance r.,v
u Professional Practice Group
6 Risk Management Group .'�.
6 Ethics and Compliance Group
6 Department of Professional Practice—Tax ;ye
6 Concurring Review Partners
Z Qua hrty Control Elements
] Independence, Integrity, Ethics,and Objectivity
? Independence.Monftorina
8 Audit Committee Pre-Approval o:Auditor Services `
8 Non AuditServices
fi Communications avTh the Audit Committee
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9 Post Employment Prairies
10 Conflicts of interest gg
10 Conflicts Cheek System
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io Client Confidentiality -x
to Compliance and Ethics Hotline
10 Resolution of Differences of Opinion
10 Document Retention
11 Personnel Management
11 Recruiting and Hiring
11 Assignment Evaluation,and Advancement
11 Rotation of Partner,
12 Performance Evaluation and Compensation
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12 Development and Training f:Gs,
12 Licensing >.3.
12 Supervision
13 Acceptance and Continuance of Clients and Engagements
13 Prospective Client Evaluation Process
13 Continuance Process
13 Engagement Performance
13 Business Measurement Process
id Support fair the Engagement Team
14 Monitoring
1., internal Inspection Processes
c te e
55 Peer Review
15 R kPic Company Accounting Oversight Board inspections
15 Extemai Review of Independence Quality Controls
16 Canelire,ion '
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