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Audit Transparency Report10 - Deloitte UKannualreport.deloitte.co.uk/interface2010/pdfs/deloitte-audit... · 6 April 2008; as such, Deloitte LLP (Deloitte) is required to prepare

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Page 1: Audit Transparency Report10 - Deloitte UKannualreport.deloitte.co.uk/interface2010/pdfs/deloitte-audit... · 6 April 2008; as such, Deloitte LLP (Deloitte) is required to prepare

Audit Transparency Report

2010

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Contents

Introduction 1

Leadership and governance 2

Quality 6

Ethics and objectivity 14

Legal structure and network 16

Partner remuneration 19

Financial information 20

Appendix – Public interest entities 21

Regulatory contextThis Transparency Report has been prepared in accordance with the provisions of theStatutory Auditors (Transparency) Instrument 2008 (the Instrument), made by theProfessional Oversight Board (POB) of the Financial Reporting Council (FRC) on 3 April2008. The Instrument came into force on 6 April 2008 and requires the publication ofcertain information by transparency reporting auditors, defined as statutory auditors thathave made an audit report on the annual accounts of one or more public interestentities during the financial year of that statutory auditor. The Instrument applies inrespect of any financial year of a transparency reporting auditor commencing on or after6 April 2008; as such, Deloitte LLP (Deloitte) is required to prepare a transparency report.This Transparency Report is in respect of the year ended 31 May 2010.

In addition to the requirements of the Instrument, the POB issued the ‘Audit QualityFramework’ (the Framework) in February 2008 and has indicated that TransparencyReports may represent a useful opportunity for audit firms to set out the steps that theyare taking to achieve audit quality by reference to the Framework. This TransparencyReport addresses all of the elements set out in the Framework. A reconciliation of thisTransparency Report to the Framework has been supplied to the POB. This TransparencyReport has also been prepared with due regard to publications issued by and commentsreceived from the POB regarding transparency reporting by audit firms.

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Deloitte Audit Transparency Report 2010 1

This is the third Deloitte Audit Transparency Report,published for the year ended 31 May 2010. This yearhas seen considerable debate regarding the role of theauditor. We believe that market participants shouldconsider areas in which the auditor can bring scrutinyto objective measures that are outside the scope offinancial statement audits, but are neverthelessimportant and merit debate amongst preparers, usersand regulators.

The non-audit services debateThe Deloitte view is that, in the context of currentethical standards and the diligence of audit committees,this debate is being overplayed. The importance ofauditor independence is fully recognised by auditcommittees and the profession; this is most clearlyevidenced by the very low proportion of revenue thatthese services represent to the large firms. The financialinformation within our transparency report shows thatrevenue from such services to all audit clients is 10% ofour revenue. For FTSE 100 clients specifically, theAuditing Practices Board’s published data indicates thisfigure is closer to 4% across the profession.

What is important is that the existing requirements areproperly observed, and we have taken on board thecomments made in the Audit Inspection Unit’s annualreport in respect of auditor independence.1 Deloitte’spolicies have absolute clarity regarding independencerequirements for audit teams, who are not rewarded forproviding non-audit services, nor does selling suchservices form part of their objectives. We remainresponsive to our clients’ needs, but always within thespirit and letter of the ethical framework.

The results of regulatory inspectionThe AIU’s annual report published in July 2010 confirmsthat the major firms have policies and procedures inplace to support audit quality that are generallyappropriate to the size of the firms and the nature oftheir client base. The AIU did, however, indicate thatthey felt there was room for improvement at all of thefirms and will publish individual inspection reports onfirms, including Deloitte, in September 2010.

Based on the final draft of the Deloitte report, we arepleased that over 70% of our audit files under reviewwere prepared to a good standard. This compares to anaverage of less than 50% for the other firms.2 We were,however, disappointed that two files required significantimprovements in relation to the evaluation of goodwillimpairment, although in neither case has this caused usto doubt the validity of our audit opinion.

In one file, there was a substantial amount ofheadroom in the goodwill impairment calculations, butthe documentation in the file should have betterevidenced the assessment of the underlyingassumptions. In the other audit file, the basis forextending an eighteen month forecast for a furtherperiod should have been better evidenced togetherwith further consideration of management’s sensitivityanalysis. In both cases, these findings were shared withthe clients’ audit committee and remedial action wastaken to address the concerns raised by the AIU in thefollowing years’ audit.

We have also responded to these findings withrefinements to our policies and procedures, and clearreminders to our people of the importance of diligencein the area of goodwill impairment, particularly arounddocumentation requirements.

Introduction

1 The Audit Inspection Unit(AIU) is part of theFinancial ReportingCouncil, the UK’sindependent regulatorresponsible for promotingconfidence in corporatereporting and governance.The AIU itself is responsiblefor monitoring the auditsof all listed and otherpublic interest entities.The AIU's annual report for2010 is here:http://www.frc.org.uk/pob/audit/reports.cfm

2 This calculation is based oninformation extracted fromthe table in section 3.2 ofthe AIU annual reportpublished in July 2010after removing the auditreviews attributable toDeloitte

Vince Niblett, Managing Partner, UK Audit

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The relentless pursuit of the highest quality andintegrity in our professional work remains one ofthe cornerstones of our firm's continuing success,allowing us to deliver excellence to our clients.Deloitte’s leadership is taken from our partnergroup and our focus on quality encompasses thevalues of all our people. We do not take forgranted the trust placed in Deloitte by clients andthe wider business community, and sustaining thistrust rests with every individual – at every level –within our firm.

Audit Firm Governance CodeIn January 2010, the Institute of Chartered Accountantsin England & Wales (ICAEW) published the Audit FirmGovernance Code. This Code applies to the eight largestaudit firms in respect of financial years commencing onor after 1 June 2010 and sets a benchmark for goodgovernance. We welcomed the consultations on whichthe Code was based, and welcome the publication ofthe Code itself. We recognise the value in demonstratingour own commitment to best practice and are pleasedto record that we are already largely compliant with theCode’s requirements. We consider two particularaspects of the Code to be noteworthy:

• Independent non executives: the Code requiresaudit firms to appoint independent non executives tothe governance structures of the firm. We areconfident that well-chosen individuals with appropriateexperience will bring value and strength to ourbusiness and enhance the transparency and opennessto which we are committed. We are well advanced inidentifying candidates for these roles, and alreadyhave a shortlist of candidates under consideration.

• Investor dialogue: the Code requires audit firms tohave dialogue with listed company shareholders, andnot just the companies and their audit committees.We consider this a positive development andwelcome the opportunity it will present for us to keepin touch with shareholder opinion and interests.We have strong links with the investor communityand will continue to expand upon this in the monthsahead. The independent non executives will be ofparticular importance in facilitating open andconstructive dialogue with key stakeholders.

Organisational structureThe principal activities of Deloitte LLP are the provisionof audit, tax, consulting and corporate finance servicesin the United Kingdom and the Channel Islands.In addition, professional services are provided inSwitzerland by a subsidiary entity and in the Middle Eastby a joint venture with the local Deloitte ToucheTohmatsu Limited (“DTTL”) member firm.

Deloitte operates an integrated business model: each ofthe four service lines operates a common set ofprocedures and policies where possible and appropriate,and each has developed additional policies andguidance to reflect the specific requirements of itsbusiness offerings. For the purposes of transparencyreporting under the Statutory Auditors (Transparency)Instrument 2008, this report contains information aboutDeloitte which is relevant to all of the service lines, aswell as specific matters relevant to our audit business.

Executive GroupDeloitte’s activities are managed by the Senior Partnerand Chief Executive, and the Executive Group, which isappointed by the Senior Partner and Chief Executive.In keeping with our client service focus, members ofthe Executive Group are also actively engaged withour clients.

The members of the Executive Group as at the date ofthis report are:

John Connolly, Senior Partner and Chief Executive,Steve Almond, Global, Richard Buck, Technology,Sabri Challah, Corporate Development, Stuart Counsell,Finance & Legal, Cahal Dowds, Regions, Martin Eadon,Clients & Industries, Margaret Ewing, Vice Chairman,Heather Hancock, Innovation and Brand, PanosKakoullis, Superscale relationships, John Kerr, Talent,Tim Mahapatra, Corporate Finance, Ian McNeil, PartnerEdge, Vince Niblett, Audit, David Owen, Consulting,Gerry Paisley, Practice Protection, Richard Punt,Growth, Nick Shepherd, Drivers Jonas Deloitte andDavid Sproul, Tax.

Aidan Birkett, Corporate Finance, and Bob Warburton,Finance & Legal, also served on the Executive Groupduring the year.

Leadership andgovernance

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Deloitte Audit Transparency Report 2010 3

Senior Partner and Chief ExecutiveJohn Connolly, the Senior Partner and Chief Executive,has full executive authority for the management ofDeloitte. The Senior Partner and Chief Executive isnominated by the Board of Partners and elected by thepartners for four year terms of office. John Connollybegan his third and final term as Senior Partner andChief Executive on 1 June 2007. The Board is workingclosely with the Senior Partner and Chief Executive toensure that succession planning is properly addressed inadvance of the conclusion of his term on 31 May 2011.

The responsibilities of the Senior Partner and ChiefExecutive fall under five principal headings:

• the business of Deloitte, including the developmentand management of professional services at thehighest level of quality and compliance with allregulations;

• the development of policies and strategic direction;

• financial performance;

• partners, including our talent goals; and

• international, representing the UK firm in itsassociation with DTTL.

The Senior Partner and Chief Executive communicatesregularly with the partner group and with all of ourpeople, in person and by a series of webcasts,voicemails and regular email alerts. The partner groupalso meets at least annually, with the most recentmeeting having taken place in July 2010 in London.

UK presence on the Board of Deloitte ToucheTohmatsu LimitedJohn Connolly is also the Chairman of the Board ofDirectors of DTTL, the international organisation of whichwe are a member. He was elected on 1 June 2007 for afour year term of office. In that capacity, John workswithin DTTL to help member firms to share theircollective expertise and experience of client service, talentdevelopment and quality and risk management processeswhich, inter alia, will allow them to enhance qualitythroughout the network. The international network has aseparate Chief Executive Officer, Jim Quigley, who waselected on 1 June 2007 for a four year term of office.In addition, the following UK partners have served on theDTTL Global Board since 1 June 2007: Sabri Challah,David Cruickshank and Sharon Fraser.

Audit ExecutiveThe Managing Partner, Audit and the Audit Executivegroup are responsible for the delivery of Deloitte’sbusiness objectives within the UK audit service line.The Audit Executive meets monthly.

The members of the Audit Executive group as at thedate of this report are:

Vince Niblett, Managing Partner, Audit, David Barnes,Head of London Audit – Financial groups, Sharon Fraser,Head of Regional Audit, Stephen Griggs, Audit TalentPartner, Panos Kakoullis, Head of London Audit –Corporate groups, Simon Letts, Audit Quality & RiskManagement Partner, Simon Owen, Information andTechnology Risk and David Noon, Business Process andRisk Consulting.

Richard Norton, National Leader – Enterprise RiskServices also served on the Audit Executive during theyear.

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Board of PartnersThe Board of Partners is responsible for the promotionand protection of partner interests and for the oversightof management. It approves Deloitte’s long-termstrategies and has specific oversight of risk and quality.The Board is composed of the Chairman, the SeniorPartner and Chief Executive, both of whom are electedby the partners, a further 10 elected partners, fiveExecutive Group partners proposed by the SeniorPartner and Chief Executive and affirmed by thepartners, and up to two co-opted members.

Like the Senior Partner and Chief Executive, theChairman is nominated by the Board and elected bythe partners and serves for a four year term of office.David Cruickshank commenced his first term of officeas Chairman on 1 June 2007. The separation of theroles of Chairman and Chief Executive provides a strongmeasure of accountability for the executive team.

Deloitte’s partnership agreement stipulates that the10 elected Board members and the Chairman must notbe members of the Executive Group. As a result, themajority of the Board membership is independent ofthe Executive Group. The Board meets monthly exceptfor August.

The Board as at the date of this report comprised:

David Cruickshank, ChairmanJohn Connolly, Senior Partner and Chief Executive

10 elected members:David Barnes, John Cullinane, Richard Edwards,John Fotheringham, Humphry Hatton, Ellie Patsalos,Chris Powell, Ian Steele, Geoffrey Taylor andDenis Woulfe.

Five Executive Group members:Steve Almond, Martin Eadon, Vince Niblett,David Owen and David Sproul.

Board secretary:Stuart Counsell

Richard Norton and Sharon Fraser served on the Boarduntil 16 July 2010.

Corporate GovernanceThe Board’s oversight of management and theestablishment and operation of audit, remunerationcompensation and nomination committees ensure thatDeloitte adheres to applicable corporate governance,quality and risk management requirements, anddiscloses these matters in full.

The membership of each of these committees is madeup of elected members of the Board who areindependent from the Executive Group, or from withinthe partner group.

Audit CommitteeEach year the Board appoints an Audit Committee,which operates in accordance with such written termsof reference as the Board may from time to timedetermine. The Audit Committee is made up of at leastthree Partners (excluding any Partners who aremembers of the Executive Group and holders of suchsenior management appointments as the Board mayfrom time to time determine). The Board appoints oneof the members of the Audit Committee as theChairman of the Committee. The Audit Committeeserves for the duration of a calendar year.

Appointments to the Audit Committee are made everyyear and a Partner appointed to the Audit Committeeserves for the entire year and, subject to not fallingwithin the exclusion referred to above, may bereappointed for any subsequent year.

The Audit Committee plays a key role in our riskmanagement and quality process, taking responsibilityfor monitoring the reporting, accounting, financial andcontrol aspects of the executive management’s activities.The Audit Committee liaises closely with the externalauditors regarding the results of the audit and is activelyinvolved in the selection of the external auditors.The Audit Committee receives regular assurance reportsfrom our Assurance Group, management and others onthe operational effectiveness of matters related to riskand control, as well as monitoring the timeliness andeffectiveness of corrective action taken by management.The Audit Committee’s activities and findings arereported upon to the Board. The Audit Committeemeets at least three times a year. It met five times duringthe year ended 31 May 2010.

Leadership and governance

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Deloitte Audit Transparency Report 2010 5

Compensation CommitteeEach year the Board sets up a CompensationCommittee to make observations to it with regard tothe proposed assignment of role levels and theallocation of profit sharing units to Partners who aremembers of the Board. The Committee operates inaccordance with the general policy objectives andguidelines laid down by the Board from time to timeand is made up of the Chairman of the Board whochairs the Committee, two Partners who are membersof the Board, elected by the Board, and two Partners(not being members of the Board at the time of theirelection) elected by the Partners.

The Compensation Committee serves for the duration ofa calendar year. Elections and appointments to theCompensation Committee are held or made every yearand a Partner elected or appointed to the CompensationCommittee serves for the entire year. The CompensationCommittee meets approximately once a year.

The Secretary to the Board acts as Secretary to theCompensation Committee.

Remuneration CommitteeEach year after the Board has appointed two Partnersto the Compensation Committee, the Board appoints aRemuneration Committee to make recommendations toit with regard to the proposed assignment of role levelsand the allocation of profit sharing units to theChairman, the Senior Partner and such other holdersof senior management appointments as the Boardmay have determined. The Board appoints one of themembers of the Committee as its Chairman.The Committee is made up of three Partners who aremembers of the Board and the two members of theBoard who are members of the CompensationCommittee.

The Remuneration Committee serves for the duration ofa calendar year. Appointments to the RemunerationCommittee are made every year and a Partnerappointed to the Remuneration Committee serves forthe entire year. The Remuneration Committee meetsapproximately twice a year.

The Secretary to the Board acts as Secretary to theRemuneration Committee.

Nomination CommitteeEach year the Board sets up a Nomination Committeeto oversee the selection of candidates to stand in Boardelections. The Nomination Committee operates inaccordance with the general policy objectives laid downby the Board from time to time and shall be made upof the Chairman of the Board who shall be theChairman of the Committee, two Partners who aremembers of the Board and four Partners (not beingmembers of the Board or the Executive Group at thetime of their election) elected by the Partners.

The Nomination Committee serves for the duration ofa calendar year. Elections and appointments to theNomination Committee are held or made every yearand a Partner elected or appointed to the NominationCommittee serves for the entire year. The NominationCommittee meets approximately six times a year.

The Secretary to the Board acts as Secretary to theNomination Committee.

Assurance GroupDeloitte’s Assurance Group (which comprises ourinternal audit, monitoring and information securityassurance teams) is a key element of our continuousreview of the effectiveness of our systems of internalcontrol. Reporting to the Managing Partner, PracticeProtection, the Group reviews compliance with thefirm’s policies and procedures and both financial andnon-financial processes. They work closely with ourexternal auditors and other assurance providers,reporting on a formal basis to the Audit Committee.

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Our relentless pursuit of quality is one of thecornerstones of our success. By deliveringconsistent, objective and insightful assurance andadvice of the highest quality and reliability,underpinned by our strong ethical principles, weearn our clients’ trust and inspire each other.Quality is not an isolated, abstract concept:delivering quality is our individual and collectiveresponsibility, which drives client satisfaction,regulatory compliance and ultimately growth withinour business and the opportunities available to ourpeople.

Our Board pays close attention to quality and riskmanagement across our business. The managingpartner and risk partner for each of our four servicelines have reported to the Board throughout this period,covering quality, regulation and risk.

Our delivery of quality is achieved through effectiveinternal quality control systems and a focus onleadership, communication, infrastructure andperformance management. We have rigorousprocesses, systems and tools supported by aconsultative culture which promotes the merits ofconsultation on difficult issues and supports partners inthe exercise of their personal judgement. Theseprocesses are in place not only where required byregulation, but are a cornerstone of our business.

Within the audit business, the internal quality controlsand systems include our dedicated professionalstandards review team (PSR) which provides a ‘hot’review before any audit or other opinion is signed, adedicated technical advisory team, the NationalAccounting and Audit group (NAA) together withengagement quality assurance reviews (EQAR),independent review partner (IRP) and national riskpartner input (where appropriate) and annual practicereviews of a selection of completed engagements.These controls and systems allow us to deliver technicalexcellence, underpinned by objectivity and integrity, atall stages of the client engagement.

Quality is not just delivering against the standards weset ourselves. It is equally about ensuring that we haveunderstood the needs of our clients, that our responseis agile regardless of the complexity of services or theclient’s location, and that our commitment to personalethics and corporate responsibility and transparencypermeate everything we do. We continue toindependently test and assess our performance andpromote accountability at the highest level through ourClient Service Assessment and Client Care relationshipreview programme. The latest results continue to showa high level of satisfaction among our clients, and alsoreinforce that the trust our clients place in us cannot betaken for granted.

Statement on the effectiveness of thefunctioning of the internal quality control systemWe are satisfied our internal quality controls andsystems are robust, operating effectively and allow us toreadily identify any areas of potential improvement orrefinement. We guard against complacency andcontinually seek to improve all aspects of our business,as we aim to be the standard of excellence.

Quality and risk management frameworkOur quality and risk management framework isembedded in all parts of our business. The frameworkbrings a rigorous approach across all of our serviceofferings in areas such as client and engagementacceptance, partner portfolios, engagement risk andassessment of existing and new service offerings.Its primary purpose is to underpin our commitment toquality, integrity and ethical behaviour consistentlythroughout our business, whilst establishing that theresponsibility for quality sits with those who deliverservice to our clients. Each service line has a dedicatedquality and risk management team, the head of whichsits on that service line’s executive, and these teamswork closely with the central Practice Protection Group(PPG), the head of which sits on the firm’s executive.

Quality

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Deloitte Audit Transparency Report 2010 7

Audit processOur audit process and methodology encourage andfoster professional scepticism and a robust challenge,recognising this as a valuable component of the auditprocess for our clients. Our audit technology and tools,AuditSystem/2 (AS/2), provide a comprehensiveframework for the planning, performance,documentation and review of our work in accordancewith auditing standards and applicable professional,regulatory and legal obligations.

AS/2 has a particular focus on gaining a deepunderstanding of our clients’ businesses and keytransaction flows. AS/2 includes DTTL’s Audit ApproachManual (AAM), common documentation and enablingsoftware technology. The AAM is the methodologyDeloitte member firms apply in providing professionalservices relating to the audit of financial statements.The common documentation and the enabling softwaretechnology that AS/2 provides are tools that enhancethe consistent implementation of the AAM on aworldwide basis and promote effectiveness andefficiency. The AAM provides the flexibility to serve theunique circumstances and complexities of our clients.This audit approach goes beyond testing transactionsand balances, to providing insights to directors andaudit committees.

The AAM and AS/2 are well structured and require theactive involvement of partners and managers in auditplanning, as well as providing a framework andprocedures to obtain sufficient appropriate auditevidence effectively and efficiently and to capturethat evidence in appropriate audit documentation.This allows compliance with auditing, ethical and otherapplicable standards combined with technology and astructure that facilitates an effective and properlyevidenced comprehensive review of the audit work.This approach and our overarching quality frameworkprovide confidence in our integrity, objectivity andindependence.

We operate on the basis of a strong culture ofadaptability; this and the way in which AS/2 has beendeveloped, allow us to introduce rapid but consideredchanges and enhancements to methodology anddocumentation within 24 hours.

As a result, we have been able to continue to roll outnew requirements in rapid response to the currenteconomic climate and related challenges to the marketsand to our clients. Given the huge volume of audit,accounting, legal and regulatory material generatedeach year, we consider our flexibility and supportingtechnology to be a great benefit to our clients and toour people.

Partner-led approachEngagement partners remain fully responsible for theservices they provide and for understanding theirclients’ businesses. Their involvement is required fromthe very outset of any client relationship andengagement, with partner-led audit planning key to ouraudit approach.

Where the professional services we provide are subjectto external regulation, they are led by persons who areindividually authorised by the appropriate regulatorybody. For example, all partners and senior employeeswho act as audit engagement partner for statutoryaudits have been granted Responsible Individual statusby the ICAEW under the ICAEW’s Audit Regulations.

Our audit business is structured into specialist industrygroups, led by senior partners with great depth ofexperience and expertise. These groups collaborate inorder to share their understanding of marketdevelopments, risk assessments and emerging trends.This is particularly important at times of marketturbulence and change. Our partners and people arecontinuously building their understanding of theirclients’ businesses, helping us better to conduct ouraudits in a way most beneficial to all stakeholders.

These steps ensure that our partners and staffunderstand their clients’ business and adhere to theprinciples underlying auditing and ethical standards.We are confident that our partners and staff exhibitprofessional scepticism in their work and are robust indealing with issues identified during the audit.

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People developmentOur approach to continuing professional development isbased around targeted learning programmes, includingregular audit and industry specific training that keepsour people at the forefront of new developments andregulations. These processes and systems are designedso that all our work is of the highest quality, that wecomply with regulations and that we do not accept anyassignments that would compromise our integrity orindependence.

All of our partners and people are supported in theirethical, quality, compliance and personal independence,risk management and anti-money launderingobligations by appropriate technical and other learningprogrammes as well as supervision by more senior teammembers and our partner-led audit process. Over andabove a comprehensive mandatory audit learning anddevelopment syllabus for our staff, we run monthlytechnical briefings and updates which are presented liveand are also available online for subsequent download.In addition, the firm provides mandatory annualaccounting and auditing technical training during thesummer months, as well as specific learning moduleswhere new developments require additionalunderstanding.

We continue to provide our people with extensive andtimely information regarding the current economicclimate and its implications. From early on, werecognised this as a global issue and our InternationalFinancial Reporting Standards (“IFRS”) Centre ofExcellence played a leading role in developing ourresponse. Our aim is to heighten the level of awareness,rather than change established procedures.

Our approach allows us to develop our people not onlythrough structured learning but also by appropriatementoring, on-the-job training, appraisal and othersupport activities. Partner leadership of theseprogrammes is an important aspect of their value andsuccess. Individual appraisals set considerable store byfeedback provided on specific engagements.Our increasing use of web-enabled technology tocapture 360 degree feedback from peers as well asteam members and partners allows us to obtain arounded view of individuals’ performance anddevelopment needs.

The evaluation of our people for promotion involves adetailed scrutiny of their personal performance, byreference to our wide-ranging competency model,which includes competencies relating to technicalability, service excellence, marketing andcommunication skills, management effectiveness andleadership effectiveness.

All of our people are required to complete annualreturns regarding their fitness, propriety and personalindependence.

We are confident that these actions, led by ourpartners, create an environment where achieving highquality is valued, invested in and rewarded and that ourappraisal and reward systems for partners and ourpeople promote the characteristics essential to qualityauditing. Quality and ethics form the cornerstone of ourappraisal criteria; audit partners and staff are notevaluated or remunerated by reference to the selling ofnon-audit services to their audit clients. In addition,these steps ensure that staff performing detailed ‘on-site’ audit work have appropriate capabilities,experience and competence, are appropriatelysupervised by partners and managers and that sufficienttraining is given to audit personnel in audit, accountingand industry specialist issues.

Quality controlWe have in place rigorous processes, systems and toolsto promote high quality standards throughout anengagement. These include PSR, regulatory assurancereviews, EQAR, independent partner reviews and annualpractice reviews of completed engagements. Our auditmethodology and tools ensure that our audit qualitycontrol procedures are effective, understood and applied.

The EQAR role is separate from that of the IRP requiredunder auditing standards3, with the former providingsecond partner review, consultation and client servicesupport and the IRP acting as a third partner review,including an objective evaluation of the significantjudgements made and conclusions reached. The IRP isnot part of the client-facing team and is, therefore, ableto bring an independent viewpoint and challenge to theaudit process.

Quality

3 Within Deloitte, theEngagement QualityControl Review requiredunder auditing standards isreferred to as anIndependent ReviewPartner to emphasise theneed for that reviewpartner to be independentof the audit team

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Deloitte Audit Transparency Report 2010 9

The practice review, which covers each of our auditpartners in a three year cycle, is subject to oversight byan independent partner from another member firmwithin the DTTL network. Engagements are selectedacross our audit business portfolio, with the files thensubject to independent inspection by other members ofour professional staff from separate offices or groups.The practice review determines whether we havecomplied, in all material respects, with the professionalstandards and the policies contained in the DeloittePolicies Manual and the AAM, the applicableprofessional standards and applicable regulatory andlegal requirements. Our overall risk managementprocedures are also evaluated.

The results of the practice review are communicated tothe Managing Partner, Audit and to the Senior Partnerand Chief Executive, as well as to DTTL. The practicereview is an objective and robust exercise with aninvestment of approximately 1,000 days of time fromexperienced professional staff and significant seniorpartner resource and leadership.

The UK practice review and the inspection programmesof our regulators, including the AIU, facilitate our focuson continuous improvement, allowing audit quality tobe monitored within our firm and for appropriaterefinements and improvements to be made.

RegulationThe AIU undertakes independent inspections of theoverall quality of the auditing function in the UK inrelation to listed and other major public interest entities.The AIU published a report on the finding of its2008/2009 inspection of Deloitte LLP on 7 December2009. The full report is available on the FRC’s websiteat the following link:http://www.frc.org.uk/images/uploaded/documents/Deloitte%20Public%20Report%202008-9%20final.pdf

The AIU’s report on Deloitte identified our commitmentto high quality audit work. The main areas forimprovement recommended in the AIU’s 2009 report,which have already been communicated to auditpartners and staff and addressed in our materials,where appropriate, were:

• in a minority of files certain threats to objectivity andindependence and the related safeguards were notidentified in respect of non-audit services;

• a minority of audit directors and senior managers,contrary to our policies, referred to the selling of non-audit services to their audit clients in their appraisals;and

• in a minority of files there was insufficient evidence ofthe involvement of Independent Review Partners on atimely basis.

We have also reviewed a final draft of the 2009/2010report, which we understand will be published inSeptember, and discuss its key findings in Vince Niblett’sintroduction to this report.

The AIU's recognition of the emphasis we place on ouroverall systems of quality control is welcome. We arecommitted to retaining our focus on audit quality andrecognise that we are on a journey of continuousimprovement. The external inspection process providesfurther impetus to our quality agenda and we confirmthat we have implemented a number of actions torespond to the AIU findings.

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Audit Quality & Risk ManagementAudit partners are supported by the Audit Quality & RiskManagement team (AQRM), led by a senior auditpartner reporting jointly to the Managing Partner, Auditas well as to the Managing Partner, Practice Protection,who in turn report to the Senior Partner and ChiefExecutive. The partner in charge of AQRM leads agroup of professionals, who have also retained client-facing responsibilities, in the following core activities:

• Quality control: We consider PSR to be a particularlystrong feature of our firm’s quality control procedures.The PSR team, reporting to AQRM, is operationallyindependent of the business units and auditengagements they are reviewing. PSR supports ourhigh standard of client service by providing a furtherindependent challenge to the quality of our auditwork. Our PSR professionals work with engagementteams throughout the audit process, focussing onsignificant accounting, auditing and financial reportingjudgements, appropriate audit documentation anddisclosure areas. In conjunction with independentoversight from DTTL, AQRM conducts the practicereview and other monitoring at the engagement,partner and business unit level. The AQRM partner orhis delegate meets with every audit partner annually toconduct a full review of that partner’s portfolio througha series of client risk assessment meetings (CRAMs).The CRAMs process covers the agreement of thequality and risk management considerations, audit risksidentified and overall risk assessment of the audit, andthe continuance decision as auditor for each of theclients.

• Regulators: AQRM is responsible for the firm’s liaisonwith the regulators’ monitoring teams throughouttheir extensive visits. During the year, the firm wassubject to monitoring visits from the AIU, the QualityAssurance Department of the ICAEW and, in prioryears, the US Public Company Accounting OversightBoard. AQRM, in conjunction with Practice Protection,also handles those very few instances where our workor conduct is investigated by regulators, or whereclaims have been made or threatened. We are proudof our reputation and the fact that such investigationsand claims are rare. The firm currently has only a verysmall number of audit claims before the courts, noneof which is material in the context of the firm’sreputation or financial position.

• Engagement support: AQRM works with a team ofover 30 client-serving professionals who are fullyintegrated and embedded within our audit business’sgroups, offices and industry teams. These QualityLeaders provide first-line support to our engagementpartners and teams, whilst also gathering feedbackand questions for AQRM and promulgating keymessages within their parts of the business. Thisallows our communication strategy to reflect theneeds of the differing parts of our audit service line.

• Learning and guidance: AQRM supplements ourcore materials with additional guidance and learningmaterials in order to help embed quality and riskmanagement skills, values and knowledge in all of ourpractitioners. An outsourced approach to quality isneither responsive nor effective; our engagementpartners are responsible for all aspects of servicedelivery.

• Internal strategic contribution: the AQRM partner isa member of the Audit Executive and contributesactively to the firm’s strategic and commercialdirection. This influence allows quality and riskmanagement considerations to be addressed as anintegrated part of our business strategy. During theyear, AQRM contributed to initiatives covering not justquality and risk management considerations, but alsooperational effectiveness, efficiency and talentmanagement.

• External contribution: members of AQRM, NAA andour client-facing people contribute actively to theregulatory, legislative, governance and professionalagenda. This allows us to make a valuablecontribution to the environment within which ourbusiness operates, reflecting the needs of our clientsand other market participants.

Quality

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Accounting and auditing expertiseEngagement partners benefit from expert and strongtechnical support on accounting, auditing andregulatory matters as they affect our audit clients andthe audit work itself. Our technical expertise is leadingedge and our approach responsive and consultative,both externally and internally. In NAA we havededicated teams to support on UK auditing andaccounting matters, IFRS and our audit methodology.Expertise is also available from DTTL and other memberfirms; our audit policies and methodology aredeveloped and implemented globally to help deliverconsistency and quality within the internationalnetwork. On US accounting and auditing issues, theexpertise of the Global IFRS & Offerings Services (GIOS)network is available to support our client-facingprofessionals. Both NAA and GIOS are key componentsof our client service proposition, comprising highlyrespected partners and staff with outstandingreputations within the profession as well as internally.

NAA develops and maintains numerous publicationsand databases to support quality and adherence torelevant requirements. The partners within NAAcontribute to regulatory and professional developments.During the year this included, for example, membershipof the CBI Companies Committee, UK AccountingStandards Board, European Financial Reporting AdvisoryGroup, Urgent Issues Task Force and the InternationalCommittee of the Auditing Practices Board,chairmanship of the Financial Reporting Faculty andEthics Standards Committee of the ICAEW, ConsultativeCommittee of Accountancy Bodies Ethics Group and ofthe stakeholder panel considering assurance aspects ofthe Stewardship Code for institutional investors.4

Our clients and people need swift, consistent andborderless responses to IFRS technical queries. DTTLmember firms have established a network of nine IFRSCentres of Excellence around the globe (including onein the UK) manned by experts with day-to-day, first-hand experience of the issues of practical application ofIFRS in different regulatory, legal and local accountingenvironments around the world.

The leaders of these centres consult with each otherwith a view to reaching consensus on complextechnical accounting matters. Designated experts drawnfrom this network are available to advise engagementpartners dealing with complex accounting issues. Theglobal IFRS technical activities of this network are ledout of London, by a UK partner. The global IFRScommunications activities are also led out of London.

The global IFRS network established and runs theworld’s leading IFRS related resource centre and newsservice through its website, IASPlus.com. This freeservice provides around-the-clock IFRS related news, anarchive of cumulative information on the developmentof IFRS, and learning material, including IFRS e-learning,and has several hundred thousand users every month.

Members of NAA also support the Deloitte Academyand engage with bodies representing the corporatesector and investors to respond to their needs. TheAcademy is a response to the increasing demands ondirectors of UK public companies and provides access toa comprehensive programme of technical training,support and guidance across a wide range ofmanagement and governance issues relevant tobusiness leaders. The Academy curriculum is customisedto the specific needs of directors based on their roleand company profile and is delivered in a dedicatedpurpose-built facility.

These resources and our partner-led audit approachensure that our partners and staff have sufficient timeand resources to deal with difficult issues as they ariseand that high quality technical expertise is availablewhen the audit team requires it or encounters anunfamiliar situation.

4 The FRC published a UKStewardship Code forinstitutional investors inJuly 2010 with the aim ofenhancing dialoguebetween institutionalinvestors and companies:http://www.frc.org.uk/images/uploaded/documents/UK%20Stewardship%20Code%20July%2020103.pdf

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ReportingWe recognise that there is considerable value to ourclients and to our wider stakeholders in providing clearand unambiguous reports of the highest quality in thecontext of applicable laws and regulations. Our auditreports comply with auditing standards and legislationand, within that prescribed format, convey our opinionclearly with a proper conclusion as to the truth andfairness of the financial statements. Our communicationswith audit committees and our clients’ boards ofdirectors cover the scope of our audit, our considerationof any threats to our independence or objectivity, ourrisk assessment and the judgements made as well asproviding value-added commentary around morequalitative aspects of financial reporting andmanagement of clients’ businesses.

A fair feeIn setting our fee structures, we acknowledge theimportance of our role and the need to demonstrate ahigh-quality and value-added service that is efficient,fair and competitively priced. Our audit approach and,in particular, our focus on early engagement with ourclients on key audit issues, ensures that the collection ofsufficient audit evidence is not constrained by financialpressures. In agreeing timetables, fees andresponsibilities, we ensure that the reporting deadlinesallow us the opportunity to carry out an audit withoutundue reliance on work performed before the end ofthe reporting period.

Practice Protection GroupSupporting our client-serving professionals is the firm’sPractice Protection Group (PPG), which is responsible forthe oversight of the firm’s ethics, compliance, securityand risk management processes. PPG comprisesregulatory compliance, independence and conflicts, riskmanagement, anti-money laundering, informationsecurity and internal audit specialists providing an all-round function to support the management of qualityand risk. PPG provides practical support and advice toclient-serving professionals in all services lines andoffices. In addition, it establishes and promulgates firm-wide quality, risk management and compliancestrategy and policy; manages claims and insurance; anddrives compliance with regulatory requirements inrelation to all of the firm’s business activities.

Information securityThe importance of maintaining confidentiality aroundclient and other confidential information is continuallyemphasised and our approach to encryption, ethicalwalls, clear desk policy and secure storage devicesunderpins this commitment. Our policies require allconfidential information held on the firm’s laptops tobe encrypted, and our people are expected to take theutmost care with such information, whether in hardcopy or electronic form. We have supported this bysignificant investment in a document managementsystem to refine our working practices and the adoptionof encryption software to protect the security ofinformation in our possession. In conjunction withexternal regulatory inspections, we undertake our ownregular security checks to confirm that our informationsecurity policies are being complied with.

During this year we achieved ISO 27001 certification,the international standard for information securitymanagement. This is part of our ongoing commitmentto our clients to improve the quality of our service tothem. It gives our clients real assurance that when wehandle their confidential information, we do so in anappropriate and secure way. Information security isincreasingly a core business requirement and one wesupport through the delivery of extensive informationand technology risk services to our clients. Our owncompliance to the standard demonstrates ourcommitment to this area.

Business risk appraisalThe business environment remains complex and regularevaluation of emerging, existing and changing risks isessential. We have a process in place to identify andmanage challenges through our business riskframework. This focuses on the key risks which couldhave a material impact on the realisation of ourstrategy. These risks are evaluated for their potentialimpact on our people, our infrastructure and ourstrategy. In doing so, we consider the underlying causesof the risks, including the actions of our people, andissues relating to our infrastructure and resources aswell as the environment in which we operate.Each identified risk is owned by a senior partnerresponsible for co-ordinating mitigating activities andmonitoring warning indicators.

Quality

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External factorsWe are active participants in the audit regulatoryenvironment, and support the FRC in its efforts to findways of reducing the complexity in financial reporting.In addition to our responsibilities as auditors, we alsorecognise the importance of proactive engagementwith clients, shareholders and other market participantsthrough the Deloitte Academy, industry initiatives andour contribution to relevant debates. We have raisedthe subject of ethics, non-audit services and possiblefurther restrictions with key investors, stakeholders andclients and continue to contribute to this importantdebate. We engage in discussion and debate with keycommentators and stakeholders, including respondingto the various consultation documents issued byregulatory and other bodies.

We encourage our clients to take an approach tocorporate governance that attaches importance tocorporate and financial reporting and to the auditprocess, and audit committees to be active, professionaland robust in dealing with issues identified during theaudit. We agree with the FRC that the involvement ofshareholders, where appropriate, increases thelikelihood that directors and management will complywith their obligations in relation to the preparation ofreliable financial statements.

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We have well-established systems and proceduresto help safeguard the objectivity of our people andthe firm, to avoid conflicts of interest and tocomply with ethical and other applicable standards.We continue to balance carefully thestraightforward approach outlined in the DeloitteCode and the increasing levels of regulation andprofessional requirements in this area.

We take these requirements seriously and adopt anapproach that wholeheartedly embraces the spirit aswell as the letter of regulation. We are confident thatthey are demonstrated through the tone set by theleaders of our practice and the behaviour and actions ofour people.

We continue to balance carefully the straightforwardapproach outlined in the Deloitte Code and theincreasing levels of regulation and professionalrequirements.

Deloitte CodeThis sets out our ethical framework and codifies ourethical principles:

• honesty and integrity – we act with honesty andintegrity;

• professional behaviour – we operate within the letterand the spirit of applicable laws;

• competence – we bring appropriate skills andcapabilities to every client assignment;

• objectivity – we are objective in forming ourprofessional opinions and the advice we give;

• confidentiality – we respect the confidentiality ofinformation;

• fair business practice – we are committed to fairbusiness practices;

• responsibility to society – we recognise and respectthe impact we have on the world around us;

• respect and fair treatment – we treat all ourcolleagues with respect, courtesy and fairness; and

• accountability and decision making – we lead byexample using our shared values as our foundation.

We see ‘doing the right thing’ as being a principle thatis fundamental, not just to the public interest and theinterest of our clients, but also to the reputation of ourfirm, partners and people.

Independence and conflicts of interestWe have invested in best-in-class systems to enable usto maintain our independence and avoid conflicts ofinterest in client assignments. We monitor investmentsto ensure that we safeguard the independence andobjectivity of Deloitte, our people and our engagementteams. Our firm has a dedicated Compliance,Independence and Ethics Partner, as well as a team ofprofessionals to support our people with theircompliance obligations. The Compliance, Independenceand Ethics Partner works directly with the Senior Partnerand Chief Executive and the Board to set the strategyand priorities for ethics and compliance, and hasoperational responsibility for our compliance,independence and ethics programme.

Tools and technologyOur engagement take-on, continuance, compliance,audit appointment and client database systems are allinternally developed and comprise robust, sophisticatedsolutions to the complexity of regulatory requirements;the tools are designed to be intuitive to use whilstfacilitating timely compliance, reporting and monitoring.We assess whether potential new engagements areconsistent with maintaining independence andidentifying and managing any potential conflicts ofinterest, and we monitor partner and staff investmentsto ensure that we safeguard the independence andobjectivity of Deloitte, our people and our engagementteams.

Ethics and objectivity

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LearningOur online anti-money laundering and independenceand ethics learning programmes are undertaken byeveryone in the firm, using examples to translateindependence and ethical questions into practicalactions. A more focussed Personal Independence onlinelearning programme is completed by all of our client-facing people of manager grade and above. In addition,our helplines allow our people to request information,ask questions or report issues confidentially to seniormembers of PPG.

Partner rotationWe apply audit partner rotation policies such that auditengagement partners and other key partners involved inaudits of our listed public interest clients serve in theseroles only for a period of five years and seven yearsrespectively. IRPs for each listed public interest auditclient are rotated after seven years.

Whistle-blowingPPG provides a whistle-blowing facility for all of ourpeople. This policy is fundamental to our professionalintegrity and reinforces the value that we place on ourpeople being honest and respected members of theirindividual professions. The policy has the followingfundamental elements:

1. Protection – all of our people are protected fromvictimisation, harassment or disciplinary action as aresult of any disclosure made in good faith and notmaliciously or for personal gain.

2. Anonymity – normally our people make disclosuresinternally and their identity is protected at all stagesin any internal matter.

3. Encouragement – the firm encourages those whosuspect wrongdoing to report it.

Confirmation of review of independencepractices and monitoringWe confirm that an internal review of ourindependence practices has been properly conductedin the year. Our internal practice review and othermonitoring processes provide us with assurance thatthese policies are appropriately observed. In addition,the practice review includes an assessment ofcompliance with DTTL and UK independence policies.The results of these internal reviews are reported to UKLeadership and DTTL’s Chief Executive Officer and Boardof Directors. Significant issues are discussed in regionalDTTL meetings of the independence network andconsidered as further guidance and learning materialsare developed.

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Deloitte LLP is a limited liability partnership,incorporated under the Limited Liability Partnerships Act2000 and is wholly owned by its members (normallyreferred to as partners). Deloitte LLP provides auditservices from 20 principal locations in the UK andCrown Dependencies. Deloitte LLP employs over12,000 staff, with some 700 partners.

Deloitte LLP is the UK member firm of the DeloitteNetwork. The “Deloitte Network” is an association offirms that are members of Deloitte Touche TohmatsuLimited, an English company limited by guarantee(“DTTL”).

DTTL does not provide professional services to clients,or direct, manage, control or own any interest in anymember firm or any member firm’s affiliated entities.Member firms in the Deloitte Network provide servicesto clients, either directly or through their affiliates(member firms and their affiliates are collectivelyreferred to herein as “Member Firms”). Member Firmsoperate under the Deloitte brand and related names,including “Deloitte”, “Deloitte & Touche”, “DeloitteTouche Tohmatsu”, and “Tohmatsu”.

Member Firms provide professional services in particulargeographic areas and are subject to the laws,regulations and professional requirements of thejurisdictions in which they operate. Each Member Firmis structured differently in accordance with, amongothers, national laws, regulations and customarypractices.

Member Firms are not subsidiaries or branch offices ofDTTL and do not act as agents for DTTL or otherMember Firms. Rather, they are locally-formed entitieswith their own ownership structure independent ofDTTL that have voluntarily become members of theDeloitte Network with a primary purpose to coordinatetheir approach to client service, professional standards,shared values, methodologies, and systems of qualitycontrol and risk management. DTTL has adopted certainpolicies and protocols in each of these areas in an effortto establish a consistently high level of quality,professional conduct and service in all Member Firms.

This structure confers significant strengths, combininghigh quality standards and methodologies with a deepunderstanding of local markets and a sense ofresponsibility and initiative among professionals whohave a direct stake in the integrity and growth of theirrespective practices.

With Member Firms in more than 140 countries, theinternational network of DTTL brings world-classcapabilities and deep local expertise to help clientssucceed wherever they operate. The 165,000professionals in DTTL Member Firms are committed tobecoming the standard of excellence. Aggregate revenueof DTTL Member Firms for the year ended 31 May 2009was US$26.1 billion.

There are governance and management structures atboth the DTTL and Member Firm levels. At the DTTLlevel, the DTTL Board of Directors (DTTL Board) hasadopted certain resolutions, policies and protocolsregarding the governance of DTTL, professionalstandards and methodologies and systems for qualitycontrol and risk management in an effort to establish aconsistently high level of quality, professional conductand service in all Member Firms. Member Firms provideservices to clients and are responsible for applying thesepolicies as well as for setting their own policies andexercising professional judgement to ensure compliancewith applicable professional standards and local lawsand regulations.

At both the DTTL and the Member Firm level, there is acontinuous goal to identify areas for improvement, soas to maintain the highest level of confidence amongtheir stakeholders.

The DTTL Board is the highest governing body of DTTL.DTTL’s highest management body is the DTTL Executive,which is led by the DTTL chief executive officer (CEO).

Legal structureand network

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The ExecutiveDTTL’s CEO is approved by the DTTL Board subject toratification by a two-thirds majority of eligible MemberFirm personnel, serves a term of four years and may beapproved and ratified for one additional four-year term.The DTTL Executive, currently consisting of 19 members,includes senior DTTL and Member Firm leaders fromvarious regions around the world. It is responsible for,among other things, fostering a common vision andhelping to develop and direct DTTL’s strategies. TheDTTL Executive works in a collegial style and attemptsto reach decisions through consensus.

The DTTL CEO, Jim Quigley, who was appointed on1 June 2007, leads the Executive and selects itsmembers, subject to approval by the GovernanceCommittee of the Board and the provisions of DTTL’sgoverning documents. Jeffrey Rohr is the DTTL ChiefFinancial Officer, and Philip Rotner serves as DTTLGeneral Counsel.

Global Audit Leadership TeamThe Global Audit Leadership Team (GALT) comprisesGlobal Audit’s senior leadership body and is responsiblefor approving Global Audit Strategy and overseeing ourimplementation plans. GALT also approves policy andmethodology revisions recommended by the AuditTechnical Advisory Board.

GALT membership consists of the Audit business leaderstogether with the partners with specific responsibilityfor implementing our plans.

The Board of Directors and the GovernanceCommitteeThe DTTL Board has responsibility for addressinggovernance issues within the competencies of DTTL.The DTTL Board must approve major initiatives of DTTL,such as strategies, plans, major transactions andsignificant policies.

The DTTL Board is led by the DTTL Chairman who iselected by the Board members. The current Chairman isJohn Connolly, the Senior Partner and Chief Executive ofDeloitte UK. Amadou Raimi of Deloitte France is theVice Chairman. Each was elected in 2007 and is servinga four-year term. The DTTL Board has 35 members: theDTTL CEO and 34 members appointed by MemberFirms and regions representing jurisdictions and regionsaround the world. The number of representatives fromeach Member Firm and region is determined by theDTTL Board based on a number of factors.

Member Firms that hold seats on the DTTL Board selectthe persons who will hold the seat(s) allocated to them.The Member Firms that hold seats on the DTTL Boardare determined on the basis of such factors as size,revenues, and clients. The DTTL Board also includes fiveregional seats, ensuring that smaller Member Firms arerepresented. Members serve a four-year term, and maybe reappointed.

The DTTL Board is supported by its GovernanceCommittee, which has oversight responsibility for DTTL’smanagement and focuses particularly on the majorstrategic issues facing DTTL and the Member Firms. TheGovernance Committee comprises representatives fromthe largest Member Firms, plus the DTTL CEO (ex-officioand non-voting). Each committee member has one voteon matters considered by the Governance Committee.To maintain independence and objectivity, a member ofthe Governance Committee may not also serve on theExecutive, except for the DTTL CEO.

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The DTTL Board also has a number of other committeesthat coordinate and recommend action on a widescope of financial and administrative issues relating toDTTL’s role. The Board committees include RiskManagement, Audit and Finance, Membership Affairsand CEO Evaluation and Compensation.

• The DTTL Risk Management Committee performsoversight with respect to, among other things, DTTL’srole in providing assistance to the Member Firms asthey carry out their risk management responsibilities.

• The DTTL Audit and Finance Committee’s purpose isto assist the Board in its oversight responsibilityrelated to the quality and integrity of DTTL’s financialreports and the adequacy and effectiveness of itsinternal accounting and financial controls.

• The DTTL Membership Affairs Committee overseesDTTL management’s responsibilities regarding therights and obligations of Member Firms and reportsto the Board accordingly.

• The DTTL CEO Evaluation and CompensationCommittee assists by proposing both the appropriateevaluation and the level of compensation of the DTTLCEO for the Board’s consideration.

DTTL Governance and Member Firm voting rightsMember Firms have voting rights in DTTL that are seteach year to be proportional to their respectiveprofessional headcount and annual revenue (eachweighted 50%). Member Firms approve the annualallocation of votes among themselves.

Legal structure and network

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Deloitte Audit Transparency Report 2010 19

Partners’ profit sharingPartners share profits based upon a comprehensiveevaluation of their individual contribution to theachievement of the firm’s strategic objectives.

Partners are assigned to an equity group, which isreviewed annually and which describes the skills,attributes and broad performance expected of them.Each equity group carries a wide band of profit sharingunits so that relative contributions can be recognised.

In assessing the performance of partners, a strongcontribution in the following areas is an absoluteexpectation from all partners, notwithstanding the levelof their contribution in other areas:

• Quality: A role model for quality in professional work.

• Talent: Contribution to mentoring, leading,recruitment, engagement, development and trainingof our people.

In addition, the following criteria are also used forassessing the performance and contribution of eachpartner:

• Clients: Client portfolio managed and rolesperformed.

• Brand and eminence: Market related activityincluding stakeholder relations, thought leadership,innovation and brand protection roles.

• Revenue generation, growth and businessbuilding: Contribution to business development andrelationship building.

• Financial success: Overall contribution to thefinancial success of Deloitte.

• Leadership and management: Contribution to thefirm’s broad success through leadership andmanagement roles.

We ensure that there is a strong linkage between auditquality and partner remuneration and a thoroughpartner selection process.

Partners who provide audit services are expected to beresponsive to their clients’ needs, but they are notevaluated or remunerated on the selling of otherservices to their audit clients.

We are confident that this approach precludes financialconsiderations from driving actions and decisions havinga negative effect on audit quality.

We use a partner Audit Quality Dashboard to assist inthe appraisal process. The Audit Quality Dashboardidentifies objective metrics of quality and measurespartner performance against those metrics. The resultsare considered alongside other sources of evidence inassessing partner contribution to quality and whensetting objectives for the forthcoming year. We havefound that the Audit Quality Dashboard hasstrengthened the linkage between audit quality andpartner remuneration.

Partner performance is evaluated in all of thecompetencies, beginning with the Board’s approval ofthe profit sharing strategy proposed by the SeniorPartner and Chief Executive and concluding with theBoard’s review of the recommended profit allocationand equity group for each individual partner, theconclusions of which are disclosed in full to all partners.A committee of partners oversees the managementprocess to ensure consistent and equitable treatment.

Partners’ drawings and the subscription andrepayment of partners’ capitalAll partners are equity partners and share in the profitsand subscribe the entire capital of Deloitte LLP. Eachpartner’s capital subscription is linked to his or her shareof profit and is repaid in full on ceasing to be a partner.The rate of capital subscription is determined from timeto time depending on the financing requirements of thebusiness.

Partners draw a proportion of their profit share in twelvemonthly on account instalments during the year in whichthe profit is made, with the balance of their profit, net ofa tax deduction, paid in instalments in the subsequentyear. All payments are made subject to the cashrequirements of the business. Tax retentions are paid toHM Revenue & Customs on behalf of partners with anyexcess being released to partners as appropriate.

Partner remuneration

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The Statutory Auditors (Transparency) Instrument 2008requires transparency reporting auditors to providefinancial information for the firm’s financial year,including “showing the importance of the auditor’sstatutory audit work”.

We have extracted the following financial informationfrom Deloitte’s annual accounts and financial recordsfor the year ended 31 May.

Year ended 31 May 2010

1. From financial information extracted from Deloitte’sfinancial records showing the relative importance ofaudit work and the levels of non-audit servicesprovided to audit and non-audit clients:

Operating profit for statutory audit and directly relatedservices is calculated based on direct costs, includingstaff costs, recorded on audit engagements, togetherwith an allocation of overheads such as property and IT.Overhead costs have been allocated, on a pro-ratabasis, based on headcount or revenues.

Year ended 31 May 2009

1. From financial information extracted from Deloitte’sfinancial records showing the relative importance ofaudit work and the levels of non-audit servicesprovided to audit and non-audit clients:

Financial information

Revenue Amount£m

Percentage%

Audit and directly relatedservices

476 24

Non-audit work – auditclients

195 10

Non-audit work – non-auditclients

1,282 66

Total 1,953 100

Revenue Amount£m

Percentage%

Audit and directly relatedservices

462 24

Non-audit work – auditclients

181 9

Non-audit work – non-auditclients

1,326 67

Total 1,969 100

2. From financial information extracted from Deloitte’sfinancial records showing the operating profit for thereportable segment under the Voluntary Code ofPractice on Disclosure of Audit Profitability:

Operating Profit Amount£m

Audit and directly related services 136

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Deloitte Audit Transparency Report 2010 21

A list of our public interest entity audit clients in respectof which an audit report was signed by Deloitte LLP inthe year ended 31 May 2010 is provided on ourwebsite at the following link:

http://annualreport.deloitte.co.uk/audit-transparency-2010/AT-PIE-list-2010.pdf

Under the provisions of the Statutory Auditors(Transparency) Instrument 2008, made by theProfessional Oversight Board of the Financial ReportingCouncil, “public interest entity” means an issuer whosetransferable securities are admitted to trading on aregulated market and the audit of which is a statutoryaudit within the meaning of section 1210 of theCompanies Act 2006.

Appendix –Public interest entities

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Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.

Deloitte LLP is the United Kingdom member firm of DTTL.

© 2010 Deloitte LLP. All rights reserved.

Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registeredoffice at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) 20 7936 3000 Fax: +44 (0) 20 7583 1198.

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