an open book deloitte llp audit transparency report for the year

An open bookDeloitte LLPAudit Transparency Report for the year ended 31 May 2009

Regulatory contextThis Transparency Report has been prepared in accordancewith the provisions of the Statutory Auditors (Transparency)Instrument 2008 (the Instrument), made by the ProfessionalOversight Board (POB) of the Financial Reporting Council (FRC)on 3 April 2008. The Instrument came into force on 6 April2008 and requires the publication of certain information bytransparency reporting auditors, defined as statutory auditorsthat have made an audit report on the annual accounts of oneor more public interest entities during the financial year of thatstatutory auditor. The Instrument applies in respect of anyfinancial year of a transparency reporting auditor commencingon or after 6 April 2008; as such, Deloitte LLP (Deloitte) is nowrequired to prepare a transparency report, having previouslyelected to do so on a voluntary basis. This Transparency Reportis in respect of the year ended 31 May 2009.

Deloitte & Touche LLP changed its name to Deloitte LLP on 1 December 2008.

In addition to the requirements of the Instrument, the POBissued the ‘Audit Quality Framework’ (the Framework) inFebruary 2008 and has indicated that Transparency Reportsmay represent a useful opportunity for audit firms to set outthe steps that they are taking to achieve audit quality byreference to the Framework. This Transparency Report addressesall of the elements set out in the Framework. A reconciliationof this Transparency Report to the Framework has beensupplied to the POB.

VI_A Page Head (30-50pt)

1. Introduction 2

2. Leadership and governance 4

3. Quality 7

4. Independence, conflicts of interest and ethics 13

5. Legal structure and network 15

6. Partner remuneration 16

7. Financial information 17

Appendix – Public interest entities 20

Contents

Deloitte Audit Transparency Report 2009 1

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1. Introduction

A conversation with Vince Niblett, Managing Partner, UK Audit

I am pleased to be publishing our second transparencyreport for Deloitte. In so doing, we continue todemonstrate the open and straightforward nature thatunderpins our values at Deloitte, and our commitmentnot only to delivering quality, but also to cooperationand openness.

What do you think of the role of auditors in thecurrent economic climate?The quality of auditing in the UK has been confirmed bythe principal regulator as being fundamentally sound,and Parliamentary and other enquiries support thisposition.

Going forward, it is clear to me that the role of auditorsis a critical one in underpinning confidence and securityin the capital markets, and this has been recognised bythe comments made by the authorities, regulators andother commentators.

We welcome the ongoing dialogue with regulators andstakeholders as we work together to refine and evolvethe roles played by all market participants. Throughoutthis process, a focus on transparency and consistencywill allow us all to interact productively and to thebenefit of all parties.

Auditing is a regulated business, what do yourregulators think?In December 2008, the AIU1 issued their first publicreports on their individual inspections of the larger auditfirms. The AIU’s overall conclusion was that theyconsider the quality of auditing in the UK to be“fundamentally sound”.

The AIU report on Deloitte identified our commitmentto quality and continuous improvement in the conductof statutory work. The AIU observed that this wasfurther evidenced by the open and candid manner inwhich Deloitte has consistently dealt with them. We have implemented fully the improvementsrecommended by the AIU in their report.

We consider that the AIU’s report provides a balancedview of the results of their inspection, and we havetherefore recorded our agreement with their overallconclusions and findings. In our assessment, the AIUpublic report demonstrates that Deloitte has highquality policies and procedures.

1 The Audit Inspection Unitis part of the FinancialReporting Council, theUK’s independentregulator responsible forpromoting confidence incorporate reporting andgovernance. The AIU itselfis responsible formonitoring the audits ofall listed and other publicinterest entities. Thepublic reports are here:http://www.frc.org.uk/pob/audit/firmreports.cfm


Besides the production of this report, what isDeloitte doing to promote transparency in themarketplace? We take seriously the contribution we make to theprofession and to business more widely by, for example,participating in public policy formulation. We continueto build our audit services upon our reputation and ourability to deliver high quality services to complex clientsand markets. Our robust policies, procedures andmethodology are then complemented by strong qualitycontrol, a challenging programme of review and riskmonitoring, as well as our primary asset: the quality ofour people. As a firm, we are only as strong as ourpeople and processes allow, and the more we can doto demonstrate the ethics of openness and accountabilitythat underpin our firm, the stronger we will be.

This report is a good example; not only does it complywith the requirements of the applicable statutoryinstrument, but it also follows the recommendations ofthe Audit Quality Framework, issued by the FRC as anaid to audit committees and other stakeholders inassessing audit quality.

Where do you see the future of our profession?Is increased regulation inevitable, or desirable? Auditing today is as complex and important as ever. The changes introduced by the Companies Act 2006,ranging from auditor liability reform to the introductionof a new offence for reckless reporting, coupled withthe challenging capital market conditions, have wide-ranging implications. The current economic climate has inevitably prompted consideration of increasedregulation in all areas of accounting, auditing andethical standards. In my view, the challenge is toidentify those areas where better regulation wouldenhance the business environment most effectively. We continue to support the Financial Reporting Councilin its efforts to find ways of reducing the complexity infinancial reporting.

Vince NiblettManaging Director, AuditDeloitte LLP

Deloitte is not just an audit practice; what aboutyour wider role?Across our wider business, Deloitte is committed tohelping clients not only to survive the current challengingmarkets but to emerge as winners in the medium term.We believe that this environment creates conditions inwhich companies can distinguish themselves fromcompetitors if they are confident, determined andprepared to take bold action.

How do you value the importance oftransparency, both for Deloitte, and in thebroader business context? By providing our stakeholders with a clear view of howDeloitte works, we are delivering on a vital element ofour business: making proactive efforts to sustain ourstakeholders’ high levels of trust. But the issues of trustand openness in business extend beyond the concernsof our firm. The complexity of the capital markets andthe challenges posed by the current economic climatehave provided an even greater need for transparency asa basis for demonstrating audit quality.

Robust corporate governance is key for maintainingconfidence in the markets by investors and consumers.Heightened scrutiny and accountability place boardmembers under ever greater pressure to delivereffective governance, reporting and shareholder value.Navigating a course in these challenging markets is vitalif ‘UK plc’ is to sustain effective capital markets andensure continued economic success.

What changes do you anticipate to the governanceand transparency in place at Deloitte? We welcome the second consultation paper recentlypublished by the independent Audit Firm GovernanceWorking Group.2 By formalising the components ofgood governance, the proposals will allow bettercomparability of audit firms, as well as establishingbenchmarks for those firms wishing to audit companiesof public interest.

Deloitte’s governance structures are robust and webelieve that they address the vast majority of theproposals and considerations in the paper. The proposedintroduction of independent non-executives to ourgovernance model raises general considerations regardingindependence, conflicts of interest and liability. We are confident that, if these potential obstacles canbe overcome, well-chosen individuals with appropriateexperience could bring value and strength to ourbusiness and enhance the transparency and opennessto which we are committed.

2 Audit Firm GovernanceSecond ConsultationPaper, published by theInstitute of CharteredAccountants in Englandand Wales and the FRC:http://www.icaew.com/index.cfm/route/166515/icaew_ga/en/Home/Press_and_policy/Press_releases/Draft_code_of_governance_for_audit_firms_to_be_published

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Deloitte’s leadership is taken from our partner groupand our focus on quality encompasses the values of allour people. We do not take for granted the trust placedin Deloitte by clients and the wider business community,and sustaining this trust rests with every individual – at every level – within our firm.

Organisational structureThe principal activities of Deloitte LLP are the provisionof audit, tax, consulting and corporate finance servicesin the United Kingdom. In addition, professionalservices are provided in Switzerland by a subsidiaryentity.

Deloitte operates an integrated business model: each ofthe four service lines operates a common set of proceduresand policies where possible and appropriate. Each ofthe service lines then develops additional policies andguidance to reflect the specific requirements of theirbusiness 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 of theExecutive Group are also actively engaged with our clients.

The members of the Executive Group for the year underreview were:

John Connolly, Senior Partner and Chief Executive,Steve Almond, Global, Aidan Birkett, CorporateFinance, Sabri Challah, Corporate Development, Stuart Counsell, Deputy to the Chief Executive, Cahal Dowds, Regions, Martin Eadon, Clients &Industries, Margaret Ewing, Vice Chairman, Heather Hancock, Brand & Innovation, John Kerr,Talent, Vassi Naidoo, Quality, Vince Niblett, Audit,David Owen, Consulting, Gerry Paisley, PracticeProtection, Graham Richardson, London SeniorPartner, David Sproul, Tax and Bob Warburton,Finance & Legal.

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 term as Senior Partner and ChiefExecutive on 1 June 2007. The responsibilities of theSenior Partner and Chief Executive fall under fiveprincipal 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 Deloitte Touche Tohmatsu.

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 meet at least annually, with the next meetingarranged for September 2009 in London.

2. Leadership and governance

The relentless pursuit of thehighest quality and integrity inour professional work remainsone of the cornerstones of ourfirm’s continuing success,allowing us to deliverexcellence to our clients.


UK Presence on the Board of Deloitte ToucheTohmatsuJohn Connolly is also the Chairman of the Board ofDirectors of Deloitte Touche Tohmatsu (DTT), theinternational organisation of which we are a member.In that capacity, John works within DTT to help memberfirms to share their collective expertise and experienceof client service, talent development and quality andrisk management processes which, inter alia, will allowthem to enhance quality throughout the network. Theinternational network has a separate Chief ExecutiveOfficer, Jim Quigley. In addition, the following UKpartners serve on the DTT Global Board: 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 members of the Audit Executive group for the yearunder review were:

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, and Richard Norton, NationalLeader – Enterprise Risk Services.

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. The Board iscomposed of the Chairman, the Senior Partner andChief Executive, both of whom are elected by thepartners, a further 10 elected partners, five ExecutiveGroup partners proposed by the Senior Partner andChief Executive and affirmed by the partners, and up totwo co-opted members.

Like the Senior Partner and Chief Executive, the Chairmanis nominated by the Board and elected by the partners andserves for a four year term of office. David Cruickshankcommenced his first term of office as Chairman on 1 June2007. The separation of the roles of Chairman and ChiefExecutive provides a strong measure of accountabilityfor the executive team.

Deloitte’s partnership agreement stipulates that the 10 elected board members and the Chairman must not be members of the Executive Group. As a result,the majority of the Board membership is independentof the Executive Group. The Board meets monthlyexcept for August.

The Board during the year under review comprised:

David Cruickshank, ChairmanJohn Connolly, Senior Partner and Chief Executive

10 elected members:John Cullinane, Sharon Fraser, Stephen Griggs, Ian McNeil, Richard Norton, Ellie Patsalos, Ian Steele,Geoff Taylor, Denis Woulfe and Lionel Young.

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

Board secretary:Bob Warburton

Corporate GovernanceThe Board’s oversight of management and theestablishment and operation of audit, remuneration and nomination committees ensure that Deloitteadheres fully to corporate governance and riskmanagement requirements.

The membership of each of these committees is madeup of elected members of the Board who areindependent from the Executive Group.

Deloitte’s partnership agreement stipulates that the 10 elected board members and the Chairman must not be members of the Executive Group. As a result,the majority of the Board membership is independentof the Executive Group.

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Audit CommitteeThe Audit Committee plays a key role in our riskmanagement process, taking responsibility for monitoringthe reporting, accounting, financial and control aspectsof the executive management’s activities. The AuditCommittee liaises closely with the external auditorsregarding the results of the audit and is actively involvedin the selection of the external auditors. The AuditCommittee receives regular assurance reports from our internal audit team, management and others on the 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 at each meeting of the Board.

Remuneration CommitteeThe Remuneration Committee monitors the objectivesand reviews the performance of the Chairman and ofthe Senior Partner and Chief Executive and makesrecommendations to the Board on profit sharing.

Nomination CommitteeThe Nomination Committee produces a candidate listfor elections to the Board to achieve the representationand diversity required.

Internal auditDeloitte’s internal audit team is a key element of ourcontinuous review of the effectiveness of our systems of internal control. Reporting to the Managing Partner,Practice Protection, the internal audit team is acombination of permanent staff and client-servingsecondees from our internal audit service line. The teamreviews both financial and non-financial processes andworks closely with our external auditors, reporting on aformal basis to the Audit Committee.


3. Quality

Our delivery of quality isachieved through effectiveinternal quality control systemsand a focus on leadership,communication, infrastructureand performance management.We have rigorous processes,systems and tools supported bya consultative culture whichpromotes the merits ofconsultation on difficult issuesand supports partners in theexercise of their personaljudgement.

These processes are in place not only where required by regulation, but are a cornerstone of our business.One of our principal regulators, the AIU, has publiclycommented upon our commitment to quality andcontinuous improvement.

Within the audit business, the internal quality controlsystems include our dedicated professional standardsreview team (PSR) which provides a ‘hot’ review beforeany audit or other opinion is signed, together withengagement quality assurance reviews and annualpractice reviews of a selection of completed engagements.

These systems allow us to deliver technical excellence,underpinned by objectivity and integrity, at all stages of the client engagement. To measure our performanceagainst the high standards we set ourselves, our clientservice assessment process undertakes independent andformal evaluations of the level of satisfaction of ourclients. The latest results continue to show a very highlevel of satisfaction among our clients.

Statement on the effectiveness of the functioningof the internal quality control systemWe are satisfied our internal quality control systems are robust, operating effectively and allow us to readilyidentify any areas of potential improvement or refinement.We guard against complacency and continually seek toimprove all aspects of our business, aiming to be thestandard 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 throughout ourbusiness, whilst establishing that the responsibility forquality sits with those who deliver service to our clients.

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 comprehensive frameworkfor the planning, performance, documentation and reviewof our work in accordance with auditing standards andapplicable professional, regulatory and legal obligations.

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AS/2 has a particular focus on gaining a deepunderstanding of our clients’ businesses and keytransaction flows. AS/2 includes DTT’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 are tools that enhance the consistentimplementation of the AAM on a worldwide basis andpromote effectiveness and efficiency. The AAM providesthe flexibility to serve the unique circumstances andcomplexities of our clients. This audit approach goesbeyond testing transactions and balances, to providinginsights to directors and audit committees. The AIUpublic report noted the flexibility and responsiveness ofour audit methodology and technology as a particularstrength.

The AAM and AS/2 are well structured and require theactive involvement of partners and managers in auditplanning, as well as providing a framework and proceduresto obtain sufficient appropriate audit evidence effectivelyand efficiently and to capture that evidence in appropriateaudit documentation. This allows compliance withauditing, ethical and other applicable standards combinedwith technology and a structure that facilitates aneffective and properly evidenced comprehensive reviewof the audit work. This approach and our overarchingquality framework provide confidence in our integrity,objectivity and independence.

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 havebeen able to continue to roll out new requirements inrapid response to the current economic climate andrelated challenges to the markets and to our clients.Given the huge volume of audit, accounting, legal andregulatory material generated each year, we considerour flexibility and supporting technology to be a greatbenefit to our clients and to our people.

Partner-led approachEngagement partners remain fully responsible for the services they provide and for understanding theirclients’ businesses. Their involvement is required fromthe very outset of any client relationship and engagement,with partner-led audit planning key to our audit 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 Institute of Chartered Accountants in England &Wales (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 in order 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 staff understandtheir clients’ business and adhere to the principlesunderlying auditing and ethical standards. We areconfident that our partners and staff exhibit professionalscepticism in their work and are robust in dealing withissues identified during the audit.

People developmentOur approach to continuing education is based aroundtargeted learning programmes, including regular auditand industry specific training that keeps our people atthe forefront of new developments and regulations.These processes and systems are designed so that allour work is of the highest quality, that we comply withregulations and that we do not accept any assignmentsthat would compromise our integrity or independence.

All of our partners and people are supported in theirquality, compliance, risk management and anti-moneylaundering obligations by appropriate technical andother learning programmes as well as supervision bymore senior team members and our partner-led auditprocess. Over and above a comprehensive mandatoryaudit learning and development syllabus for all gradesof staff, we run monthly technical briefings and updateswhich are presented live and are also available onlinefor subsequent download. In addition, the firm providesmandatory annual accounting and auditing technicaltraining during the summer months, as well as specificlearning modules where new developments requireadditional understanding.


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 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. Ourincreasing use of web-enabled technology to capture360 degree feedback from peers as well as teammembers and partners allows us to obtain a roundedview of individuals’ performance and developmentneeds.

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. In addition, these steps ensure that staffperforming detailed ‘on-site’ audit work haveappropriate capabilities, experience and competence,are appropriately supervised by partners and managersand that sufficient training is given to audit personnel inaudit, accounting and industry specialist issues.

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

The EQAR role is separate from that of the IndependentReview Partner (IRP) required under auditing standards,3

with the former providing second partner review,consultation and client service support and the IRPacting as a third partner review, including an objectiveevaluation of the significant judgements made andconclusions reached.

The practice review, which covers each of our auditpartners in a three year cycle, is subject to oversight byan independent partner from elsewhere within the DTTnetwork. Engagements are selected across our auditbusiness portfolio, with the files then subject toindependent inspection by other members of ourprofessional 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 Audit Approach Manual, the applicable professional standards and applicableregulatory and legal requirements. Our overall riskmanagement procedures 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 DTT. The AIU publicreport considered our practice review to be well plannedand executed, with appropriate steps taken on itsresults. The practice review is an objective and robustexercise with an investment of well over 500 days oftime and significant senior partner resource andleadership.

The UK practice review and the inspection programmesof the AIU and other regulators facilitate our focus oncontinuous improvement, allowing audit quality to bemonitored within our firm and for appropriaterefinements and improvements to be made.

RegulationThe AIU conducts a review each year of our whole-firmprocedures insofar as they relate to our audit businessand of a number of completed audit engagements ofpublic interest clients. The AIU’s July 2008 report on itsinspection of the firm for the year to 31 March 2008was addressed to the Audit Registration Committee ofthe ICAEW with whom the firm is registered for auditservices. The AIU’s report recommended that the firm’sregistration to conduct audit work should be continued.

In December 2008, the AIU issued their public report ontheir inspection of Deloitte and the six other largestaudit firms for the year ended 31 March 2008conducted during 2007/8. The AIU’s overall conclusionis that they consider “the quality of auditing in the UKto be fundamentally sound.” Their report on Deloitteidentified our commitment to quality and continuousimprovement in the conduct of statutory work.

3 Within Deloitte, the Engagement QualityControl Review requiredunder auditing standardsis referred to as anIndependent ReviewPartner to emphasise the need for that reviewpartner to be independentof the audit team

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The AIU observed that this was further evidenced bythe open and candid manner in which Deloitte hasconsistently dealt with them. We have fullyimplemented the improvements recommended by theAIU in their report. We consider that the AIU’s reportprovides a balanced view of the results of theirinspection, and we have therefore recorded ouragreement with their overall conclusions and findings.In our assessment, the AIU public report demonstratesthat Deloitte has high quality policies and procedures.

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: the firm’s PSR professionals report toAQRM and are operationally independent of thebusiness units they are reviewing. In conjunction withindependent oversight from DTT, AQRM also conductsthe practice review and other monitoring at theengagement, partner and business unit level. The AQRM partner or his delegate meets with everyaudit partner annually to conduct a full review of that partner’s portfolio through a series of client riskassessment meetings (CRAMs). The CRAMs processcovers the agreement of the quality and riskmanagement considerations, audit risks identified and overall risk assessment of the audit, and thecontinuance 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 Directorate of the ICAEW and, in the prioryear, the US Public Company Accounting OversightBoard. AQRM, in conjunction with Practice Protection,also handles those very few instances where mattersare being investigated by regulators in relation tocomplaints, or where claims have been made orthreatened. We are proud of our reputation and thefact that such claims, complaints and disputes arerare.

• 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 supplement our corematerials 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 influence: members of AQRM, our NationalAccounting and Audit group (NAA) and our client-facing people contribute actively to the regulatory,legislative and professional agenda. This allows us tomake a valuable contribution to the environmentwithin which our business operates, reflecting theneeds of our clients and other market participants.

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, International Financial ReportingStandards (IFRS) and our audit methodology.


Expertise is also available from DTT 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, the International Financial ReportingInterpretations Committee and the InternationalCommittee of the Auditing Practices Board,chairmanship of the Financial Reporting Faculty andEthics Standards Committee of the ICAEW and of theConsultative Committee of Accountancy Bodies EthicsGroup. During the year, one of the partners withinNAA, Isobel Sharp, was awarded the CBE and made avisiting professor at Edinburgh University.

Our clients and people need swift, consistent andborderless responses to IFRS technical queries. Deloittemember firms have established a network of eight 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. Designated expertsdrawn from this network are available to adviseengagement partners dealing with complex orcontentious accounting issues. The leaders of thesecentres consult with each other with a view to reachingconsensus on complex technical accounting matters.

Members of NAA also support the Deloitte Academy and 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 to a 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.

Reporting We 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, our risk assessment and the judgements made as well as providing value-added commentary aroundmore qualitative 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 a high-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 of sufficient audit evidence is not constrained byfinancial pressures. 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 and riskmanagement processes. PPG comprises regulatorycompliance, risk management, anti-money laundering,information security and internal audit specialistsproviding an all-round function to support themanagement of quality and risk.

PPG provides practical support and advice to client-serving professionals, particularly in connection withclients or engagements which span more than oneservice line.

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In addition, it establishes and promulgates firm widequality, risk management and compliance strategy andpolicy; manages claims and insurance; and drivescompliance with regulatory requirements in relation toall of the firm’s business activities.

Information securityInformation security is a topical issue and one that wehave been alert to for many years. The importance ofmaintaining confidentiality around client and otherconfidential information is continually emphasised andour approach to encryption, ethical walls, clear deskpolicy and secure storage devices underpins thiscommitment. Our policies require all confidentialinformation held on the firm’s laptops to be encrypted,and our people are expected to take the utmost carewith such information, whether in hard copy or electronicform. We have supported this by significant investmentin a document management system to refine ourworking practices and the adoption of encryptionsoftware to protect the security of information in ourpossession. We undertake regular security inspections,including laptops, to confirm that individual users arecomplying with our information security policies.

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 risk framework.This focuses on the key risks which could have a materialimpact on the realisation of our strategy and these areevaluated in the light of their potential impact on ourpeople, our infrastructure and our markets. Each identifiedrisk is owned by a senior partner responsible for co-ordinating mitigating activities and monitoringwarning indicators.

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 auditor liability limitation agreementswith our key clients and continue to monitor thisimportant aspect of market reform. We engage indiscussion and debate with key commentators andstakeholders, including responding to the variousconsultation documents issued by regulatory and otherbodies.

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 support ofshareholders, where appropriate, increases thelikelihood that directors and management will complywith their obligations in relation to the preparation ofreliable financial statements.


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 of our people.

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

• honesty and integrity – we act with honesty andintegrity;

• professional behaviour – we operate within theletter and 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, but alsoto the reputation of our firm, partners and people.

Independence and conflicts of interestWe have invested in best-in-class systems to enable us to maintain our independence and avoid conflicts of interest in client assignments. Our firm has adedicated Compliance, Independence and EthicsPartner, as well as a team of professionals to supportour people with their compliance obligations. The Compliance, Independence and Ethics Partner worksdirectly with the Senior Partner and Chief Executive andthe Board to set the strategy and priorities for ethicsand compliance, and has operational responsibility forour independence, ethics and compliance programme.

4. Independence, conflicts of interest and ethics

We have well-establishedsystems and procedures to helpsafeguard the objectivity of ourpeople and the firm, to avoidconflicts of interest and tocomply with ethical and otherapplicable standards. Wecontinue to balance carefullythe straightforward approachoutlined in the Deloitte Codeand the increasing levels ofregulation and professionalrequirements in this area.

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Tools and technologyOur engagement take-on, continuance, compliance and client database systems are all internally developedand comprise robust, cutting-edge solutions to thecomplexity of regulatory requirements; the tools aredesigned to be intuitive to use whilst facilitatingcompliance, reporting and monitoring. We assesswhether potential new engagements are consistentwith maintaining independence and managing anypotential conflicts of interest, and we monitor partnerand staff investments to ensure that we safeguard theindependence and objectivity of Deloitte, our peopleand our engagement teams.

LearningOur online independence and ethics learningprogramme is undertaken by everyone in the firm, using examples to translate independence and ethicalquestions into practical actions. This year we have rolledout a Personal Independence online learning programmeto all of our client-facing people of manager grade andabove. In addition, our helplines allow our people torequest information, ask questions or report issuesconfidentially to senior members 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 five 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 independence practicesand monitoringBased on the following actions, we are able to confirmthat an internal review of our independence practiceshas been properly conducted in the year. Our internalpractice review and other monitoring processes provideus with assurance that these policies are appropriatelyobserved. In addition, the practice review includes anassessment of compliance with DTT and UK independencepolicies. The results of these internal reviews arereported to UK Leadership and DTT’s Chief ExecutiveOfficer and Board of Directors. Significant issues arediscussed in regional DTT meetings of the independencenetwork and considered as further guidance andlearning materials are developed.

Our online independence and ethicslearning programme is undertaken byeveryone in the firm, using examples to translate independence and ethicalquestions into practical actions.


5. Legal structure and network

Deloitte LLP is a limited liability partnership, incorporatedunder the Limited Liability Partnerships Act 2000 and iswholly owned by its members (normally referred to aspartners). Deloitte LLP changed its name from Deloitte& Touche LLP on 1 December 2008.

Deloitte LLP operates from 20 locations in the UK andalso operates in Guernsey, Jersey and the Isle of Man.Deloitte LLP’s subsidiaries also operate from fivelocations in Switzerland. Deloitte LLP employs over12,000 staff, with nearly 700 partners.

Deloitte LLP is the UK member firm of Deloitte ToucheTohmatsu (DTT), a Swiss Verein whose member firmsare a network of legally separate and independententities. Each member firm provides services in aparticular geographic area and is subject to the lawsand professional regulations of the particular country or countries in which it operates. DTT does not provideservices to clients, or direct, manage or control itsmember firms. Neither DTT nor any of its member firmsare liable for each other’s acts or omissions.

With member firms in 140 countries, the internationalnetwork of DTT brings world-class capabilities and deeplocal expertise to help clients succeed wherever theyoperate. The 165,000 professionals in DTT memberfirms are committed to becoming the standard ofexcellence. Aggregate revenue of DTT member firms for the year ended 31 May 2008 was US$27.4 billion.

DTT member firms are owned locally and managed bytheir respective national management. This structureallows the DTT organisation to establish policies;member firms apply these policies in quality assuranceprocesses that comply with local regulatory, legislativeand professional requirements.

16

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 roles carried.

• 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.

The AIU public report endorsed our strong linkagebetween audit quality and partner remuneration andthorough partner selection process.

Partners who provide audit services are expected to be responsive 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.

In 2008, we introduced a partner Audit QualityDashboard to assist in the appraisal process. The AuditQuality Dashboard identifies objective metrics of qualityand measures partner performance against those metrics.The results are considered alongside other sources ofevidence in assessing partner contribution to qualityand when setting objectives for the forthcoming year.

Partner performance is evaluated in all of thecompetencies, beginning with the Board’s approval of the profit sharing strategy proposed by the SeniorPartner and Chief Executive and concluding with the Board’s review of the recommended profit allocation and equity group for each individual partner,the conclusions of which are disclosed in full to allpartners. A committee of partners oversees themanagement process to ensure consistent andequitable 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. Each partner’s capital subscription is linked to his or her share of profit and is repaid in full on ceasing to be a partner. The rate of capital subscription isdetermined from time to time depending on thefinancing requirements of the business.

Partners draw a proportion of their profit share intwelve monthly on account instalments during the yearin which the profit is made, with the balance of theirprofit, net of a tax deduction, paid in instalments in thesubsequent year. All payments are made subject to thecash requirements of the business. Tax retentions arepaid to HM Revenue & Customs on behalf of partnerswith any excess being released to partners asappropriate.

6. Partner remuneration


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

We have extracted the following financial information from Deloitte’s annual accounts and financial records for theyear ended 31 May 2009.

Year ended 31 May 20091. From Deloitte’s annual accounts for the year ended 31 May 2009, showing the relative importance of theAudit service line to our business as a whole:

The group has four reportable operating segments: Audit, Tax, Consulting and Corporate Finance. The audit segmentprovides audit, internal audit, regulatory, risk & control and accounting & financial reporting services. The tax segmentprovides business tax, employer and personal tax services. The consulting segment provides strategy, operations,human capital, enterprise application and technology integration services as well as actuarial & insurance solutions.The corporate finance segment provides transaction support, reorganisation services, forensics & dispute servicesand advisory services.

The reportable segments reflect the group’s principal management and internal reporting structures and are strategicbusiness units that offer different services. They are managed separately because each business requires differentskills and methodologies.

The accounting policies of the operating segments are the same as those described in the summary of accountingpolicies shown in the annual report. The group evaluates the performance of the segments on the basis of netrevenue and profit or loss from operations before finance income, finance cost and tax expense.

7. Financial information

Audit£m

Tax£m

Consulting£m

CorporateFinance

£mUnallocated

£mTotal

£m

Revenue 647 523 478 321 – 1,969

Expenses anddisbursements

(80) (64) (72) (38) – (254)

Net revenue 567 459 406 283 – 1,715

Profit from operations 188 160 127 106 – 581

Finance income 41 41

Finance cost (58) (58)

Profit before tax 564

Tax (2) (2)

Profit for the year 562

Total assets 144 190 97 95 368 894

Total liabilities and equity 8 3 2 8 873 894

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Performance assessment of the segments includes a review of certain assets such as client receivables, amounts to be billed to clients and prepayments, segment liabilities reviewed include accruals and specific staff liabilities. All other assets and liabilities, including non-current assets, balances with partners, cash, provisions and retirementbenefit balances are controlled centrally and are not allocated across service lines.

Inter-segment revenue is not material as revenue is shared proportionately by those service lines delivering servicesto clients.

2. From financial information extracted from Deloitte’s financial records showing the relative importance of audit work within the Audit business:

Revenue

Auditclients

£m

Non-auditclients

£mTotal

£mPercentage

%

Statutory audit work420 – 420 65%

Non-audit work 59 168 227 35%

Total 479 168 647 100%

Percentage 74% 26% 100%


Year ended 31 May 20081. From Deloitte’s annual accounts for the year ended 31 May 2008, showing the relative importance of theAudit service line to our business as a whole:

2. From financial information provided to the Professional Oversight Board as part of data submitted underthe ‘Key facts and trends in the accountancy profession’ protocol showing the relative importance of auditwork within the Audit business:

Audit£m

Tax£m

Consulting£m

CorporateFinance

£mUnallocated

£mTotal

£m

Revenue 619 567 469 355 – 2,010

Expenses anddisbursements

(89) (76) (75) (45) – (285)

Net revenue 530 491 394 310 – 1,725

Profit from operations 177 185 123 136 – 621

Finance income 68 68

Finance cost (35) (35)

Profit before tax 654

Tax (2) (2)

Profit for the year 652

Total assets 139 200 86 102 469 996

Total liabilities and equity 6 3 3 3 981 996

Revenue

Auditclients

£m

Non-auditclients

£mTotal

£mPercentage

%

Statutory audit work 363 – 363 59%

Non-audit work 108 148 256 41%

Total 471 148 619 100%

Percentage 76% 24% 100%

20

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 2009 is provided on ourwebsite at the following link:http://annualreport.deloitte.co.uk/audit-transparency-2009/AT-PIE-list-2009.pdf

Under the provisions of the Statutory Auditors(Transparency) Instrument 2008, made by the ProfessionalOversight Board of the Financial Reporting Council,“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

Deloitte refers to one or more of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein, and its network of member firms, each ofwhich is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legalstructure of DTT and its member firms.

Deloitte LLP is the United Kingdom member firm of DTT.

© 2009 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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