2018 DELIVERING ON OUR AUDIT QUALITY INTENT

Delivering on Our Audit Quality Intent

This is a time of accelerating evolution and tremendous opportunity.

Our clients are evaluating and adjusting their business models and approaches to keep up with—and take advantage of— disruptive changes in the world of business, and so must we. As an audit firm, BDO USA, LLP1 continually refines our approach to serving clients with an eye on both external and internal factors. It is our intent and commitment to deliver high quality audits and provide our clients with deep insights and value.

We recognize that we cannot deliver quality audits unless we have the trust of both those who oversee our work and those who rely on it. To build upon that trust, we are deliberate in both our commitment and actions, and strive to achieve the highest audit quality.

Our Audit Quality Statement of Intent and the commitment we expect of our auditors are the foundation of all of our actions, supported by our exceptional people and the expressed tone of our leaders. This is what enables our focus on driving the evolution of the audit, our responsiveness to market needs, and our efforts to constantly move toward greater audit quality. It is this foundation that allows us to execute our audit engagements through the lens of a quality-centric and evaluative mindset.

This report is our opportunity to “open our books” for review. It lays out in detail how BDO is choosing to proactively work within our firm and with the profession, regulators, and other key stakeholders to carry out and deliver on our audit quality intent.

1 BDO is the U.S. member firm of BDO International Limited, a UK Company limited by guarantee, and forms part of the international BDO network of independent member firms.

WAYNE BERSON Chief Executive Officer of BDO USA, LLP and Chairman of the Global Board of Directors of BDO International Ltd.

CHRISTOPHER D. TOWER National Assurance Managing Partner, Audit Quality & Professional Practice

E X T E R N A L FA C T O R S

CORPORATE GOVERNANCE

ACCOUNTING & REPORTINGCOMPLEXITY

INVESTORS &SHAREHOLDERS

REGULATORYENVIRONMENT

BUSINESSENVIRONMENT

INNOVATINGFUTURE AUDITS

ACTING ONAUDIT QUALITY

INTENTAUDITQUALITY

I N T E R N A L FA C TO R S

COMPETITIONSUSTAINABILITY & INNOVATION

RESPONDING TO THE MARKET

LEADING BY ACCOUNTABILITY

DEVELOPING EXCEPTIONAL

PEOPLE

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 2

Audit Quality Statement of Intent

With a focus on delivering the highest possible audit quality, we design and execute efficient, compliant audits that are (1) delivered by technically competent and thoughtful professionals, (2) are valued by our clients, and (3) can be relied on with confidence by capital markets.

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 3

Our Audit Quality Statement of Intent succinctly explains how we approach our audit engagements. But to truly appreciate the passion with which we pursue this goal, it is important to understand why we are so committed to audit quality.

Put simply, we believe that audit quality is the cornerstone of trust in financial reporting and financial markets. Without trust, capital markets cannot function efficiently and innovation cannot thrive. In an era of rapid change and disruption across industries, trust is more important than ever.

We also believe that people will always be the core of audit quality. While technology and integrated processes can make an auditor more effective and efficient, the success of an audit depends on people who have high caliber skills, expertise, and judgment. People analyze data and identify risks. People gather all necessary insight to discuss, manage, and ultimately, make important judgments during the most challenging moments of an audit. Even as we continually look for ways to fully leverage cutting-edge tools to strengthen our ability to deliver audit quality, we do not discount the value added by well-developed and skilled people.

This Statement of Intent is part of who we are and represents our commitment to our clients and to our profession. It is the responsibility of every BDO auditor to demonstrate professional skepticism and to take an unbiased approach that focuses on evaluating the facts, seeking the truth, standing firm in the face of adversity, and bringing clients the right answers through the right services.

To fulfill our responsibilities as auditors and deliver on our intent every day, we embrace professional skepticism in everything we do and are ready to address every expectation of regulators, boards of directors, the auditing profession, and ultimately, ourselves. We are continually refining and improving our tools and guidance to enhance audit quality. We are also investing time, ideas, and resources to supporting the research and development of the “audit of the future.”

Beyond these ongoing actions, we make these seven commitments to our clients and other key stakeholders:

1. We commit to assuming both individual and collective responsibility for every audit.

2. We commit to leading in the field by making appropriate judgments in real time and supporting our people in their pursuit of audit quality.

3. We commit to continuous learning—our own and that of our clients— making time to pursue continuing education, explaining and guiding those with whom we work, and exploring with curiosity what we need to achieve.

4. We commit to knowing and applying the professional standards and all firm guidance effectively in delivering our work. We do not “go it alone.” Instead, we use the guidelines and parameters BDO has painstakingly established.

5. We commit to approaching every moment of our day with the mindset of an evaluator. As an evaluator, we seek out the facts, consider the applicable literature, evaluate the alternatives, and then present persuasive judgments.

6. We commit to seeking and implementing change and not becoming attached to the status quo or old orthodoxies. Instead, we will transform what we do every day, in every way.

7. We commit to involving others, both when it is required and when it is not. Collaboration strengthens our own judgments, helps us to find and seek the right answers, and makes us better professionals.

Audit quality is a never-ending pursuit. As our clients’ businesses and industries evolve and the nature of the audit adjusts in response, BDO’s focus on audit quality and the commitments we make will never waver.

The following sections of our report underscore how we live each of these commitments every day.

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 4

INNOVATING FUTURE AUDITS 6

RESPONDING TO THE MARKET 11

DEVELOPING EXCEPTIONAL PEOPLE 18

LEADING BY ACCOUNTABILITY 23

ACTING ON OUR AUDIT QUALITY INTENT 27

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 5

Innovating Future Audits

First-class auditing firms must have strong project management processes, the ability to leverage technology, a willingness to ask the right questions, and a focus on helping clients deal with risks and challenges that are uncovered by the audit results. But these core competencies are ‘table stakes.’ In today’s landscape, clients require and, indeed, demand something more from their auditors: innovation.”

Financial statement audits represent independent assurance that a company is fairly presenting its financial position, results of operations, and cashflows. It is an understatement to say that various stakeholders must be able to trust and rely on these audits. To help ensure that each audit fulfills this role, an auditor must understand and provide timely insight into the nuances of a client’s business and industry, financial reporting, and corporate governance. That is the nature of the audit.

In today’s rapid age of change, many boards of directors, audit committees, CEOs, and CFOs are rightfully concerned about the future of the audit. Their concerns focus on how well and how quickly their auditors can adapt auditing methodologies, resources, and practices to the changes affecting their own companies.

In nearly every industry, well-established companies and business models face a constant threat of disruption as the Internet of Things (IoT), robotics, and artificial intelligence create new possibilities and transform customer expectations. Data analytics is rapidly revealing new insights about how companies and their auditors can operate more efficiently and create more value in the examination and presentation of information. The rise of distributed ledger technology (blockchain) and digital currencies is revolutionizing how financial transactions are made and processed. Looming over all of these innovations are the serious and ongoing concerns companies face when it comes to the security of and controls over their data.

All of these changes are putting immense pressure on service providers, regulators, and others throughout the accounting and audit community. However, we view these forces of change as a tremendous opportunity to apply our quality-centric mindset in innovative, valuable ways on behalf of our clients.

BILL EISIG Atlantic Region Managing Partner and Chairman of the Board of Directors

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 6

Innovation and Transformation: People, Process and TechnologyWe continue to innovate and transform our audit practice amid rapidly evolving business and regulatory landscapes by:

Maintaining professional skepticism at all times

Developing data analytics platforms for hosting data and deploying data analytics techniques

Constructing continual learning opportunities for auditors and clients

Leveraging augmented intelligence

Refreshing global and U.S. audit methodology

Increasing automation

Translating work papers using neuroscience-enabled software

Enhancing an audit client portal for real-time information sharing and management

Undertaking digital transformation

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 7

INNOVATION AND TRANSFORMATION: PEOPLE

Emphasizing the Mindset of Our Auditors

Beyond simply keeping up with the latest technological developments and trends that are shaping our clients’ businesses, BDO is analyzing the trajectory of where these forces are headed and positioning our approach to audit quality accordingly. This means proactively sharpening tools and techniques in response to the realities of the marketplace, regulation, and other factors. It also means designing and testing our tools and techniques to help ensure that they maintain audit consistency even in the face of rapid change.

Our greatest asset in delivering both audit innovation and consistency is our people. Effective auditors must develop and maintain the mindset of an evaluator and the ability to break down any conscious or unconscious bias in audit execution and decision making. To foster this mindset among all of our people, we have worked alongside respected professors Douglas Prawitt, William Tayler, and Steven Glover of Brigham Young University (BYU), to create a Professional Skepticism and Judgment Framework as the central part of our auditor toolkit and continuous education (Figure 1).

Figure 1. Professional Skepticism and Judgment Framework

When we can commit to the mindset of an evaluator and

execute professional skepticism in everything we do, we will

exceed every expectation that the regulators, client boards, and our profession have of us and that we

have of ourselves.”

PHILLIP AUSTIN Managing Partner – Audit

PROFESSIONALJUDGMENT

ITERATIVE ACTIONS

1

2

6

3

5

4COACH COMMUNICATE

CONSULT

AVOID TRAPS AND BIASES

DOCUMENT

TECHNICAL KNOWLEDGE APPROPRIATE MINDSET

B

USINESS ACUM

EN

Definethe Matter

SpecifyObjectives

IdentifyPossibilities

Gather and Analyze Info

ReachConclusion

Reflect

BASELINE ATTRIBUTES

By guiding audit-related decision making and honing professional skepticism, this framework is designed to drive the audit behaviors necessary to provide consistent outcomes that are supported with well-reasoned evaluative judgment. The framework provides the structure through which auditors can apply their technical knowledge and business acumen with the appropriate mindset of an evaluator. It supports an iterative process of coaching, consulting, communicating, and documenting the core elements of the audit process. Just as importantly, it helps our people avoid the traps and biases that can affect audits.

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 8

INNOVATION AND TRANSFORMATION: PROCESS AND TECHNOLOGY

Our Professional Skepticism and Judgment Framework is just one element of BDO audit innovation. We are delivering tangible, meaningful improvements for our clients, their stakeholders, and the larger auditing community in several other prominent areas.

Driving Global Audit Consistency

Our National Assurance Office (National Assurance) has become a leader of our audit transformation and innovation endeavors and our efforts to strengthen collaboration with our network of colleagues throughout the world. To achieve this, we are equipping our people with powerful tools that focus on enhancing communication, connection, and the management of the many, often daily, interactions involved during audit engagements. The next generation of our Global Audit Process tool (APT)2 helps improve our ability to enhance scalable audit integration, including scaling how we evaluate and reach conclusions about a client’s internal controls. We also collaborated with Microsoft on a successful pilot of our BDOLexi Translation App, a working paper translation tool designed to help manage information in multiple languages during global audits.

Leveraging the Digital Revolution

Cloud-based software and other digital tools can significantly improve the efficiency with which clients manage all aspects of accounting and auditing functions. We are at the forefront of investing in and developing cloud-based tools and augmented intelligence designed to help companies manage changing accounting requirements. For example, BDO is a founding member of the ConsenSys Accounting Blockchain Coalition, a group dedicated to educating businesses and organizations on accounting matters relevant to digital assets and distributed ledger technology, including blockchain.

In response to the implementation of significant new accounting standards, we are leveraging CoStar’s Lease Manager solution through our Accounting Reporting & Advisory Services (ARAS) practice to allow clients to capture, analyze and classify leases, and satisfy compliance and reporting requirements under FASB ASC Topic 842, Leases. Last year, we launched BDODrive, an integrated solution with a unique combination of professional and technological resources for core accounting and financial management, and an exceptional range of business advisory services. Powered by Microsoft and Intuit, BDODrive leverages leading-edge, cloud technology and security to bring a new level of efficiency and standardized best practices to outsourced finance and accounting services.

2 BDO employs our Global Audit Process Tool (APT) as an audit software tool that supports our proprietary audit methodology enabling our engagement teams to conduct consistent, risk-based audits, both domestically and internationally, across the BDO International Member Firm Network.

We are very pleased to have worked closely with BDO in developing

this new framework. We are incorporating this professional

skepticism and judgment framework as the basis for our continuing

academic research and coursework at BYU. We are excited to see that

the leadership demonstrated by BDO for new ideas and perspectives is making an impression on the next

generation of auditors.”

DOUGLAS PRAWITT Brigham Young University Professor

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 9

Employing the Power of Data

The ability to capture, analyze, and generate actionable insights from data has become a “must have” critical skill for auditing firms. We continue to develop and incorporate analytics-driven audit techniques designed to close the gap between data management and decision making. Tools including BDOAdvantage can help audit engagements streamline the extraction and analysis of large data sets throughout the year. The resulting changes to data management and analysis not only yield potential cost efficiencies but also identify and effectively channel auditing procedures to key areas of risk.

Adding Value From the Client Perspective

While we are continually improving our internal processes and developing new tools to support our commitment to audit quality, we never lose sight of the fact that our relationship with each client is critical to an audit’s success.

Innovation isn’t limited to leveraging new technology or implementing new methodologies. True innovation also involves looking at clients’ challenges from new perspectives and identifying new ways to add value to a company and its stakeholders. We know that our clients are looking for a business advisor who can use the audit as an opportunity to uncover previously unknown or unrecognized risks and business issues, particularly as our clients move into new markets and pursue emerging opportunities.

Thus, communications with our clients have taken on new meaning. We have extended capabilities for our Client Portal App through which clients can now more easily share information and interact with BDO audit teams in real time.

Through our subscription service on BDO.com, we are ensuring clients receive a steady stream of thought leadership and learning opportunities specific to their business.

At BDO, we are committing ourselves to continual innovation in the pursuit of audit quality, which has positioned us well to address our clients’ evolving needs.

BDOAdvantage Dashboard Analysis Sample BDO Subscription Service

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 10

Responding to the MarketAt BDO, we consider our reputation in the markets we serve to be both a responsibility and an opportunity. Our audit professionals do not view the audit simply as a compliance exercise. We know that our clients rely on and trust audits to provide not only the necessary financial reporting assurance for stakeholders but also important and actionable insight about the risks and opportunities facing their businesses.

Our auditors work to gain a full understanding of each client’s business so that we can help those organizations recognize the financial accounting ramifications of their decisions. That’s why we commit ourselves every day to building these types of client relationships and embracing our role as a true business partner.

Of course, this role includes advising on key business issues as soon as they arise. Our rapid response to U.S. tax reform and our ongoing efforts to help clients fortify their cybersecurity efforts are just two examples of how we look at the issues clients are facing holistically. In both cases, we have built teams of highly skilled professionals across our audit, tax, and advisory practices to help clients address their most pressing business challenges. The result is a cross-functional effort that draws on the knowledge of professionals who are on the front lines dealing with these issues for clients in the U.S. and around the world.

We believe that our ability to replicate this model of responsiveness to address whatever new challenges and questions arise in our clients’ industries has a meaningful impact on audit quality—for our individual clients and for the profession as a whole.

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 11

U.S. TAX REFORM: A LESSON IN RAPID RESPONSE

When Congress passed the U.S. Tax Cuts and Jobs Act in late 2017, businesses were looking for immediate insight into how the law would affect their operations, tax planning, and overall decision making and reporting. Our multidisciplinary leadership team of tax, accounting, financial reporting, and audit professionals immediately went to work analyzing the law and identifying issues clients would need to address both immediately and over the near term to comply with the law’s requirements and to take advantage of the opportunities resulting from its passage.

We then overlaid an industry lens, identifying specific issues and opportunities most relevant to each client’s industry and situation. Once we completed our initial analysis, our response team began identifying how the law would affect individual audit and tax engagements so those insights and adjustments could be incorporated immediately into any client engagements already underway.

Within days of the new law’s passage, our professionals were providing clients with focused advice on issues and questions specific to each organization. Going forward, in tandem with the anticipated release of over 1,500 pages of U.S. regulation related to the law, our response team will continue its work helping our clients navigate the myriad implications of these regulations.

BDO provided outstanding service to our business both before and after the enactment of the Tax Cuts and Jobs

Act of 2017. Beforehand they provided useful analyses of both the House and Senate bills enabling us to advise

executive leadership of the impact of each. After the enactment, BDO provided a final analysis that facilitated

accurate year-end 2017 tax accounting. And in 2018, BDO continues to advise us on emerging developments

with regard to tax accounting and disclosures.”

TOM SISK Director of Tax, Spartan Motors

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 12

CYBERSECURITY: EMERGING THREATS DEMAND ONGOING DILIGENCE

Few issues today cause C-level executives and board members as much angst as cybersecurity threats. No industry is immune from these risks. That is why we are marshalling the full force of BDO’s intellectual capital to help our clients protect their data—and their stakeholders.

To help clients deal with current and emerging cybersecurity threats and manage their responsibilities for data protection, we maintain a multidisciplinary team that includes an audit partner leader who serves on the American Institute of Certified Public Accountants (AICPA) and the Center for Audit Quality (CAQ) Cybersecurity Working Groups. It is the goal of these groups to help both BDO and our clients understand cybersecurity issues and, more importantly, identify the resources necessary to mitigate risks, including updating and adapting internal controls to deal with these threats. Our auditors also work directly with leading cybersecurity professionals within the firm’s Advisory practice, including former FBI experts, to offer clients the latest tools, insights, and mitigation strategies around cyber risk.

Our professionals have spent the last several years working with the AICPA on its cybersecurity initiatives, including the development of its new cybersecurity examination engagement. Additionally, BDO was a key contributor in the development of the AICPA’s Cybersecurity Risk Management Framework. Our team regularly uses that framework to examine companies’ controls, protocols, and policies related to cybersecurity and to perform attestation engagements detailing the effectiveness of client cybersecurity risk management programs. Additionally, we further support the CAQ’s efforts in this area and contributed to the recently released CAQ Cybersecurity Risk Management Oversight: A Tool for Board Members.

Our work in Systems and Organization Controls for Cybersecurity (SOC for Cybersecurity) is an important outgrowth of our team’s efforts. This comprehensive examination service helps clients describe their risk management programs, assert that the controls implemented are suitably designed and operating effectively, and highlight the auditor’s attestation as to the fairness of the description and the suitability of the design and operating effectiveness of the controls.

Thanks to our team’s relentless vigilance in a field of rapidly emerging new threats, we continue to improve our effectiveness in developing and implementing cybersecurity controls gudiance, benchmarking the state of clients’ efforts against best practices, and auditing cybersecurity risk management programs.

SUPPORTING COMPLEXITY

Audit relationships with our clients require a careful balancing act. For these relationships to work, both parties must bring the same level of commitment to ethics, learning, and knowledge, while also having similar approaches to reporting financial information. In this type of relationship, auditors learn from clients and vice versa as both parties share insight into new regulatory and reporting requirements, industry developments, and changes to the client’s business.

Our investments in client education and support are essential to the success of our client relationships. To help clients better understand the complexities of implementing emerging accounting requirements and implications of new business transactions, we have developed our Accounting & Reporting Advisory Services (ARAS) practice.

One area where ARAS has been particularly valuable is in helping clients manage the intricate new accounting standards for revenue recognition and lease accounting that are priorities for many corporate finance and accounting departments. ARAS also provides services to help under-resourced finance and accounting departments deal with the questions and analysis involved in major business transactions, which can include everything from business combinations and discontinued operations to debt modifications and stock compensation. Another critical element of ARAS is in providing support for ongoing reporting requirements, including those related to a company’s readiness for an initial public offering.

FINANCIAL

STRATEGY

CU

LTUR

E

IND

UST

RY

CYBER RISKMANAGEMENT

HOLISTICAPPROACH

InformationGovernance

Information Security

Incident Response

Cyber Threat

Intelligence

Cyber Insurance

Data Privacy

Strategy & Program Design

RiskAssessment

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 13

SHAPING THE FUTURE OF AUDIT

One of our most crucial responsibilities is to work with both the audit profession and our clients to shape the future of the audit. To that end, we are making investments in the form of personnel, time, technology, and resources to ensure BDO ideas and innovations play a leading role in that conversation. BDO partners and other experienced professionals are dedicating thousands of hours annually to this endeavor.

Enhancing the Audit Profession: Partners in ActionSee how several BDO partners are at the forefront of the effort to continually enhance the audit profession’s ability to shape the audit of the future to best serve our stakeholders:

WAYNE BERSON Chief Executive Officer / Greater Washington, D.C.

Serves on the Center for Audit Quality (CAQ) Governing Board and chairs the CAQ Financial Oversight Committee.

CHRISTOPHER TOWER National Managing Partner, Audit Quality and Professional Practice / Orange County, CA

Named to serve on the Standing Advisory Group (SAG) of the Public Company Accounting Oversight Board (PCAOB), which advises the PCAOB on the development of auditing and related professional practice standards. Serves on both the CAQ Professional Practice Executive Committee and the CAQ Advisory Council.

BRIAN MILLER National Partner, Audit Transformation & Innovation / San Francisco, CA

Member of the American Institute of Certified Public Accountants (AICPA) Audit Data Analytics working group and author of portions of the AICPA Guide to Audit Data Analytics, Chair of the Rutgers AICPA Data Analytics Research (‘RADAR’) initiative focused on advanced integration of data analytics within the accounting profession and leader of BDO’s global Data Analytics Strategy, Standards & Programs initiative.

JIN KOO National Accounting Partner / Dallas, TX

Recently completed a two-year fellowship with the Financial Accounting Standards Board (FASB), which involved contributions to accounting standard setting related to cash flows, income tax disclosures, and stock compensation.

JEFF WARD National Managing Partner of Third-Party Attestation Services / St. Louis, MO

Played a key role in developing the AICPA’s 2017 Cybersecurity Risk Management Framework used to examine companies’ controls, protocols, and policies related to cybersecurity and to perform attestation on the effectiveness of client cybersecurity risk management programs.

JAN HERRINGER National Assurance Partner / Woodbridge, NJ

Member of the CAQ Task Force on Auditor Reporting focused on the new PCAOB auditing standard that expands the auditor’s report and requires auditors to identify critical audit matters (CAM) and describe how these matters were handled in the audit. Member of the Auditing Standards Board of the AICPA and is further serving as President of the New York State Society of CPAs.

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 14

Small- and mid-cap companies

Directors and C-Suite Executives

Top of mind issues including:XX Director Diversity

XX Tax Reform

XX Capital Formation - Boardroom Pitfalls

XX Boards as Catalysts for Entrepreneurship

XX Onboarding Your Board

XX Curing Your Organization’s Culture Woes

XX and more.

Dynamic resources for board of directors and financial executives.

25+ webinars

offered annually

50+ CPE-worthy self-studies

10,000+ CPE hours

issued in 2017

External collaborations focused on:

200+ searchable publications, practice aids & tools, including:

Three-pronged curriculum:

Topical Board & Governance Primers

Emerging Governance Issues

Accounting & Reporting Hot Topics

“The myriad of issues faced by smaller businesses today are daunting. BDO’s ongoing efforts to actively educate, inform and engage, at multiple levels and through various vehicles, greatly assists our board in meeting challenges, and in turn, helps drive long term value for our shareholders.”

BERNARD C, BAILEY, PHD Chairman and CEO, Authentix

24/7 ACCESS TO VIRTUAL PROGRAMMING

TIMELY THOUGHT LEADERSHIP

CONTACT

AMY ROJIK 617-239-7005arojik@bdo.com

MATTHEW BECKER 616-802-3413 mkbecker@bdo.com

DAVID YASUKOCHI 714-913-2597 dyasukochi@bdo.com

ADAM BROWN 214-665-0673 abrown@bdo.com

JEFF WARD 314-889-1220 jward@bdo.com

CHRISTOPHER TOWER 714-668-7320 ctower@bdo.com

MARCH 2018www.bdo.com

TAX REFORM, CYBERSECURITY, BOARD REFRESHMENT AND EXECUTIVE MISCONDUCT AMONG TOP ISSUES AT 2018 SHAREHOLDER MEETINGS ACCORDING TO BDO USA, LLP

A return of volatility to the stock market, executive misconduct, seemingly endless reports of cyber breaches, global economic concerns, demands for transparency, and historic changes brought about by the new tax law are just a few of the topics being discussed in corporate board rooms around the country. These issues and many more will make for an intriguing annual meeting season this Spring.

AN OFFERING FROM THE BDO CENTER FOR CORPORATE GOVERNANCE AND FINANCIAL REPORTING

BDO SHAREHOLDER MEETING ALERT

EVENTS - LEARN, MENTOR & NETWORK

© 2018 BDO USA, LLP. All rights reserved.

The BDO Center for Corporate Governance and Financial Reporting

SUBSCRIBE TODAY

VISIT THE CENTER

Get a closer look at BDO’s dynamic resources for board of directors and financial executives.

RAISING THE KNOWLEDGE BAR

We believe having a client base that values continuing education is an important factor to ensuring overall audit quality. Thus, we continue to amass significant client-centric educational offerings focused on issues that matter and add incremental value to our service. Thanks to the BDO Center for Corporate Governance and Financial Reporting, the marketplace has a convenient way to keep up with the latest thinking on issues relevant not only to audit, finance, and accounting executives but also corporate board and audit committee members.

The Center offers complimentary access to real-time education with continuing professional education (CPE) credits through access to live webinars and in-person local forums, along with self-directed learning through self-study coursework, publications, practice aids, and tools. This information covers important emerging issues in corporate governance and trending topics in accounting and financial reporting that impact those charged with governance and their advisors.

The Center also provides in-depth analysis and best practices on issues that range from director diversity and on-boarding new directors to the pitfalls of boardroom involvement in capital formation and significant evolving standards on revenue recognition, lease, and financial instrument accounting. The Center also captures emerging areas like information governance under the European Union’s General Data Protection Regulation (GDPR) that recently went into effect, providing companies with real-time insight into risks it may or may not yet be contemplating.

Board members and, in particular, audit committees need to remain sharp and educated on issues of importance to our stakeholders. BDO recognizes this and provides our board with direct access to its National technical experts, who make learning impactful for our directors and financial executives.”

MORTON ERLICH Audit Committee Chair, Skechers USA Inc.

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 15

SOCIAL SUSTAINABILITY CONNECTION TO AUDIT QUALITY

We believe that audit quality begins with a workplace that is conducive to the needs of our professionals and our clients and that instills a clear and consistent value system. We aim to always put people first, a core value deeply rooted in our firm. We have been recognized for our achievements and continue to work hard in caring for our people and our clients.

As important as creating an internal environment that is supportive of producing quality work, we believe in connecting with the external environments that have supported us for over 100 years. We therefore support a variety of local-office led initiatives that allow our professionals to give back through being socially conscious citizens in doing good deeds and supporting initiatives that sustain our communities.

Building a global organization that serves clients in a wide range of industries around the world.

BDO USA, LLP BDO Alliance, USA BDO Global Network

OFFICE LOCATIONS

TOTAL PERSONNEL

PARTNERS/OWNERS

REVENUE

60+ (U.S.)

550+ (U.S.)

1,500+ in 162 countries

563 1,861 6,110

6,461 13,574 73,854

$1.41b $2.17b $8.1b

2017 STATISTICS

U.S. and International financial statistics for the years ended 6/30/2017 and 9/20/2017, respectively

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 16

BDO’s Industry Focus

Natural Resources Nonprofit and EducationManufacturing and Distribution

Life Sciences

Retail and Consumer Products

Technology

Government ContractingFinancial Services Gaming, Hospitality and Leisure

Healthcare

Public SectorPrivate Equity Real Estate and Construction

Restaurants

Top Entry Level Employers for 2018 CollegeGrad.com

Working Mother 100 Best Working Mother magazine

When Work Works Award When Work Works

World at Work, Work-Life Seal of Distinction World at Work

IAB Network of the Year Award International Accounting Bulletin

Vault Accounting 50; Top Internship Program Vault Accounting

Best Places to Work For National Association for Business Resources

Best and Brightest in Wellness National Association for Business Resources

NAFE Top Company for Executive Women National Association for Female Executives

What we are proud of

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 17

Developing Exceptional PeopleAny top-tier audit firm will tell you that their people are their most important asset and that attracting and retaining a diverse collection of the industry’s best talent are essential to a firm’s success. At BDO, we wholeheartedly agree with these principles and consider our people to be the core of audit quality. We believe that the success of an audit is dependent on “actively engaging” people with high caliber skills, knowledge, and judgment. This is why we have a rigorous plan in place for how we recruit, invest in, nurture, and inspire this talent.

Fourteen hundred new staff members, of who 57% are assurance professionals, were recruited from 195 top colleges and universities and included participants from our highly successful Pathway to Success program. Close to 300 experienced Assurance hires are drawn from both the profession and industry to expand the depth within specialty areas, including cybersecurity, income tax, and accounting and reporting advisory services.

Find out more about Careers at BDO.

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 18

We are extremely proud of the auditing team that we have built at BDO, a team made up of distinctive and talented individuals who are dedicated to the craft of auditing and passionate about serving their clients. We are excited to share some of the ways that we are empowering our people to continually expand their skills and their ability to serve our clients.

A CULTURE THAT DEMANDS DIVERSE THINKING AND FOSTERS EXCELLENCE

Our clients, and the industry, expect excellence in every audit that we perform. We hold our people to this same standard. As a result, we are in the business of finding talented auditors and equipping them with a diverse yet inclusive environment that welcomes new ideas and perspectives and is supported by industry-leading education, resources, and guidance.

An important part of this education is helping our auditors develop a deep well of professional skepticism. We teach them to ask the right questions and view everything they encounter during an audit engagement with the “mindset of an evaluator.” Another way that we help them achieve excellence is through our sustainable and compliant audit delivery system that provides consistency in each engagement. No matter what the circumstances, our people follow the same process with the same rigor. Outside of individual audit engagements, our people are fully involved in firm-wide efforts to drive innovation in the audit process, anticipate market needs, and cultivate our best-in-class organization.

This work has paid off handsomely. Our people have the skills, tools, and knowledge our clients expect and they apply them using the right frame of mind. Our people adhere to extremely high standards of professionalism and exhibit independence from our clients—in fact, in appearance, and in thought. Our people focus on listening and collaborating to deliver sound solutions that have been tested and considered from multiple perspectives.

We are extremely proud of the progress we continue to make in building a diverse workplace environment. Our workplace combines diversity in gender, race, and ethnicity with diversity in thought and experience in order to break down barriers that inhibit innovative solutions and problem solving.”

CATHY MOY Chief People Officer

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 19

BDO ASSURANCE PRACTICE

Partners

Directors

Seniors

Staff

Senior Managers/ Managers

As of 6/30/2015 As of 12/31/2016 As of 6/30/2017TOTALS 2,310 2,869 2,725

240 294 304

171167142

460

694 876 849

774 962 891

570 510

ASSURANCE STAFF DIVERSITY STATISTICS

2017 2016 2015

Women Minority

46% 43% 43%

33% 32% 30%

A DIFFERENTIATED APPROACH TO PERFORMANCE MANAGEMENT

The cornerstone of our performance management philosophy is providing our people with clear goals and timely feedback at all levels in the organization. We teach our professionals to set meaningful goals that directly tie to measurable performance objectives aligned with audit quality. We empower our leaders to provide feedback and coaching to help individuals achieve their performance objectives and increase each auditor’s engagement in their work.

To create an environment that fosters our shared commitment to audit quality, our audit partners and leaders undergo regular quality assessments, conducted by our Audit Quality Committee3. Each partner’s compensation, engagement supervision, and workload assignments are based, in large part, on his or her audit quality ratings.

Continuous learning is another central element of our approach to performance management. Education and training is recognized by all of our professionals as essential to staying on top of evolving auditing and accounting standards as well as latest industry trends. Over the past year, our over 2,700 Assurance professionals have earned more than 160,000 Continuing Professional Education (CPE) hours inclusive of accounting, auditing, business acumen, and industry focus, among other professional topics. Annual hours ranged from 30 to 42 hours of recommended level-specific accounting and auditing curriculum, which approximated sixty percent of total CPE delivered to our Assurance professionals. The rest of that time represents our people going above and beyond professional requirements4 to increase their knowledge and capabilities.

As a firm, we are continually evaluating our learning curriculum and coursework to make sure they reflect current accounting, reporting, and auditing standards. All of our professionals are expected to take a core curriculum focused on both issuer and non-issuer client engagements. For our professionals who work on issuer engagements, we have established certification requirements where, in addition to mandatory learning assignments, they must additionally complete at least 200 cumulative hours of issuer audit experience every two years.

During our most recent annual learning cycle, we achieved a 99.7% completion rate for mandatory learning assignments.

3 Our Audit Quality Committee is comprised of a complement of National Assurance Office professionals and audit practice leaders who assess our partners through both a technical and a client-service lens.

4 The American Institute of Certified Public Accountants (AICPA) requires CPAs to complete 120 hours or its equivalent of continuing professional education (CPE) over a three-year reporting period.

Assurance Annual Curriculum

Foundational Curriculum Accounting, auditing, and reporting coursework delivered by level on a progressive nature by role

Emerging Issues Emerging and dynamic issues coursework

Audit Quality / Current Practice Matters Specific audit quality or practice matters coursework identified through inspection processes, or intended as continual reinforcement of underlying subject matter

Industry Focus Custom content to foster and enhance industry proficiency and knowledge

1 to 7.9 Partner to Staff Ratio

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 20

EMPOWERING PEOPLE THROUGH EMERGING OPPORTUNITIES

BDO’s work in shaping the audit of the future is yielding tremendous benefits for our people. Being at the front lines of technologies like blockchain, data analytics, and other emerging forces that are shaping the auditing industry creates important opportunities for our team members to expand their skillsets and tackle new challenges. Our professionals’ eagerness to learn is illustrated by the consistently overwhelming interest from internal applicants whenever we create new jobs or teams related to these and other emerging areas.

Our people can also choose among plentiful secondment opportunities. Assurance professionals may apply for opportunities lasting from three months to two years. These opportunities involve working within various departments of our National Assurance Office to cultivate technical and consulting skills before bringing that knowledge back to their local practices. Other professionals gain international experience by leveraging our BDO International network for a two-year assignment abroad. We believe that this cross-disciplinary exposure fundamentally increases our auditors’ skills in their core practice areas and allows enhanced technical and global perspectives to spread throughout our firm.

All of these opportunities, and the resulting excitement, create a virtuous cycle for our firm and our clients. It further serves as an effective attraction and retention strategy in cultivating the types of professionals who are motivated by continuous learning—exactly the kinds of people who make great auditors.

BDO INTERNATIONAL SECONDMENTS

FY2018:

56 Inbound26 Outbound

FY2017:

64 Inbound35 Outbound

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 21

BUILDING FLEXIBILITY, CONSISTENCY, AND SUSTAINABILITY

The success of our efforts to attract, retain, and nurture the best audit talent is measured, in part, by the flexibility and stability of our workforce. We are fully supportive of a flexible yet connected work environment that allows our professionals to continue to pursue rewarding careers while managing personal commitments. This, combined with the strategies discussed above, has led to strong retention rates, particularly at the more experienced levels.

Strong talent retention allows us to build long-term relationships with clients and maintain continuity through engagement team members on client assignments year after year. The result is a consistent experience that minimizes service disruptions and allows our professionals to draw on institutional knowledge about the client and its industry. At a time marked by significant changes in standard-setting and rapid changes to technologies being deployed in our audits, we can reassure our clients that some things will remain the same.

We also believe that our focus on building deep relationships—with clients, peers throughout the industry, and each other—is a vital part of our quality-centric culture. Client relationships thrive on frequent contact, idea sharing, and deep discussions about clients’ business challenges, goals, and requirements. Strong relationships with colleagues based on mutual respect and trust are crucial to professional growth and learning. Relationships with peers outside of BDO help our professionals gain valuable perspective on the future of audit work and the evolving demands being placed on the industry. All of these relationships, and the knowledge we gain from them, enhance our ability to serve clients.

ANNUAL ASSURANCE RETENTION RATES

2017 2016 2015

Staff Manager Director Partner

78%82%

92% 91%

76% 79%85%

94%

77%84%

93% 93%

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 22

Leading By AccountabilityAs a leader in the audit profession, BDO is committed to providing the same level of transparency to our stakeholders as our clients provide to theirs. In that spirit of transparency, we believe it is valuable for us to share the highlights from our ongoing review of our audit practice.

We have become highly disciplined in reflecting on our own operations to ensure we are living up to our core values and identifying ways to improve. A central part of that accountability includes surveying our people to ask for their feedback and input on how to serve clients more effectively. Given their close relationships with clients and the countless hours they spend getting to know clients’ businesses, our people have an invaluable perspective to add as we determine whether the actions of our leaders and our firm are aligned with clients’ goals and the audit profession’s standards.

We believe in supporting the integrity of capital markets through the attestation services we provide. We task our

leaders with the important responsibility of continually identifying opportunities to enhance audit quality.

CHRISTOPHER TOWER National Assurance Managing Partner, Audit Quality & Professional Practice

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 23

TAKING OUR PULSE

Our annual firm-wide Pulse survey provides important feedback for our leaders. This survey shows how our people perceive the tone and content of leadership’s messages about quality. The survey also gauges how well the firm is supporting our professionals in their work. We rely on survey results to help guide our journey as a best-in-class organization.

The most current Pulse survey, conducted in 2017, indicated that as a firm, BDO is performing particularly well in communication, employee development, and articulating expectations during client engagements.

In a profession that is highly focused on retaining high-caliber employees, this finding shows that we are making significant progress toward keeping our people satisfied with their work and career prospects within BDO. This, in turn, provides stability and continuity for our clients.

There were also areas where we saw opportunities to grow and improve as a firm. With these results in mind, we immediately began developing plans to implement changes and then measure and report our progress. For example, we saw a clear need to tie audit quality metrics to everything BDO does, from leadership messaging to individual performance goals at all levels.

Surveys like this serve two purposes—to help ensure that we do not overlook problems or issues that need to be addressed and to develop a baseline of performance and a means to measure progress over time in critical areas of our operations. The power of this survey and the honest, insightful feedback it generates cannot be overstated. That is why leaders within our National Assurance Office recently added a second survey to the mix—to gain specific insight from the Assurance practice with respect to various elements of audit quality.

The first Audit Quality and Operational Excellence Survey was conducted this past year, asking questions of Assurance managers through partners. While the feedback was overwhelmingly positive and indicated that our people believe our leadership is focusing on the right priorities, the survey also proved to be a gold mine of ideas about how we can improve our audit work and the practice itself.

The most valuable part of the survey was the more than 700 substantive written suggestions we received. These suggestions emphasized both what we should keep doing and what we can do to continually improve. Many of these suggestions have already become the basis for adjustments to our way of doing things and have inspired a variety of initiatives designed to strengthen certain areas of operations and client engagement. Others are being proactively woven into near-term plans. Refer to Figure 2 for a snapshot of complete and ongoing activities noted throughout this report.

of our professionals feel that their development is a priority for at least one of the leaders in their practice or department

93%

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 24

Assessing Our StrengthsOur annual Pulse survey and our newly launched Audit Quality and Operational Excellence Survey provide valuable insight from our professionals about how the firm is fulfilling its commitment to best-in-class service. Highlights from the surveys include:

PULSE SURVEY

BDO professionals across our firm either agree or strongly agree with the following:

92% Our engagement teams and leaders clearly communicate expectations and are committed to executing high quality work for our clients

90% Firm and office leadership communicate clearly and often to our staff about BDO’s commitment to quality

93% At least one of the leaders in their practice or department cares about their development

92% I am empowered to use my own judgment to make decisions

95% I understand how my role contributes to the firm’s success

AUDIT QUALITY AND OPERATIONAL EXCELLENCE SURVEY

Our Assurance professionals specifically rate BDO as “very good” to “excellent” on the following statements on a five point scale:

Audit Quality and Operational Excellence

4.4 I understand what is expected of me with respect to audit quality

4.4 My Office Managing Partner is aligned with my executing audits with audit quality being a significant priority of the firm

Our Commitments

4.5 I believe my most direct supervisor demonstrates an effective commitment to audit quality

4.7 I believe I am personally responsible for our delivery of audit quality

Audit Quality Assessment Process

4.4 I believe the Audit Quality Assessment Process is necessary for achieving our firm’s strategic objectives

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 25

LEADING INTO THE FUTURE

We believe that our efforts to maintain a nimble and responsive organization are critical to our role as a leader in the auditing profession. With leadership who listens to our people and empowers change, we can more deftly identify opportunities for improvement and continually look for new and better ways to serve our clients. Our commitment to remaining a best-in-class organization depends on our ability not only to adjust to change as it happens but to anticipate change before it occurs. Our people on the front lines of audits are in the best position to help us accomplish that.

Figure 2. Identifying Areas for Growth

Getting feedback from our professionals is just one step on our path to audit quality. We are committed to turning what we find into action. Below are some of the key priorities that have emerged from our survey results and the steps we are taking to turn these ideas into tangible results.

Areas of Focus Actions We Should Continue Areas for Improvement Significant Actions In Process

Alignment of audit quality and operational excellence strategy

X Strong alignment of messaging and support from firm leadership

X Establishment of clear expectations for individuals in regard to both audit quality and operational excellence

X Include audit quality metrics in individual goal-setting

X Require all professionals to make Audit Quality Commitments

X Expand learning around operational audit quality throughout the year

X Series of live presentations delivered by National Assurance leaders at 2017 and 2018 National Training Conferences

X Audit Quality Initiatives session delivered during 2017 New Partner Workshop

X Audit Quality webinars delivered to the Assurance Practice in July 2017

X Set of Audit Quality Commitments issued to Assurance professionals in November 2017

Maximize value of National Assurance efforts and resources for professionals working on client engagements

X Alignment with investments in people and approaches of National Assurance

X Confidence in tools and learning programs provided

X Communicate more extensively about plans for the Audit of the Future

X Create greater distinction in audit response for issuer and nonissuer clients

X Evaluation of curriculum and overall audit tools to identify and implement enhancements to align specifically with different types of client audit engagements

X Separation of internal audit guidance into issuer and non-issuer auditing guidance

X Creation of our Private Company Audit Innovation (“PCAI”) initiative

Create an Audit Quality Assessment process for partners

X Strong agreement on both need for and alignment with the firm’s strategy

X Develop clear criteria for identifying both positive and negative quality events

X Increase number of partners on the Audit Quality Committee responsible for finalizing partner quality assessments

X Enhanced criteria for Audit Quality Events (AQEs)

X Delivered National Assurance communications to partners regarding 2017/2018 AQE evaluation process

X Included Assurance partners as part of the Audit Quality Committee responsible for making overall decisions as to partner quality assessments in 2017

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 26

Acting on Our Audit Quality Intent Any structure is only as strong as its foundation. The initiatives discussed in this report

are supported by the many investments in time, energy, and resources we have made over many years to create and sustain a best-in-class organization at BDO.

Our work in building an auditing practice that continually stays at the leading edge of our clients’ needs and the industry’s demands will never be finished. In 2017 and into 2018, we continue to sharpen our focus on performance management and accountability, with an emphasis on further enhancements to our audit approach and the development of our professional skepticism framework. In addition to these and other initiatives, we continually improve in other areas of our operations. In particular, we are committed to expanding our skillsets and adding the leadership necessary to bring a fresh perspective to the challenges facing the audit industry and our clients.

EXPANDING THE REACH OF OUR NATIONAL ASSURANCE OFFICE

BDO’s National Assurance Office is the centerpiece of ensuring our continued excellence in audit. The resources we have invested in National Assurance have led to an increase in staff of 74% since 2014, which has helped to transform the office into a hub for all of our audit quality efforts to benefit both our clients and our entire Assurance practice. National Assurance further serves as a clearinghouse of consultative and technical knowledge, professional coaching and development support, and education. This group also plays a major role in innovation, monitoring, and accountability.

54 56

6975

98NATIONAL ASSURANCE HEADCOUNT GROWTH

7/1/14 7/1/15

7/1/167/1/17

5/31/18

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 27

NATIONAL ASSURANCE ORGANIZATION

BDO’s National Assurance has been defined along operational areas overseen by our National Assurance Managing Partner of Audit Quality and Professional Practice, who directly reports to BDO’s Chief Executive Officer. This reporting structure helps to ensure that our CEO is directly dialed into audit quality processes and is better able to operationally support and convey important messaging about audit quality expectations to all of our BDO professionals.

CEO

Communications and Governance

Communications& Governance

Regional Technical PartnerGroup*

** Assistant Regional Technical Partners/ Directors (ARTP/D)

** Audit Quality

Directors (AQD)

Accounting and Financial Reporting

Accounting & Reporting Advisory Services

SEC ServicesAccounting Independence Risk Management

Inspections

Regional Technical PartnersAudit Quality Assessment & Remediation

Quality Control, Monitoring, Independence and Risk Management

QualityControl

Chief Compliance Officer

National Assurance Managing Partner -Audit Quality and Professional Practice

National Audit Quality Resource Team

Auditing

ICFR Audit, Coaching & Engagement Remediation

Client Entrepreneurial

Services, Expansions, & Alliance Support

Audit Methodology

& Consultation

Employee Benefit Plan

(EBP) Services Technical Support

Internal Learning,

Deployment & Change

Management

Service Organization

Controls (SOC)Services

Technical Support

Not for Profit Services

External Engagement &

Standard Setters

Global Offerings

Audit Tools, Technology, Templates & Approaches

Audit Transformation & Innovation

National Assurance Managing Partner - Auditing

*The Lead Regional Technical Partner will also report to the National Managing Partner-Auditing for Auditing related matters.

**These individuals represent practice office professionals who are allocated between 20–50% in support of these roles.

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 28

We have also made important changes to the operational audit areas overseen by National Assurance. This demonstrates how seriously we take our commitment to our clients and our client-serving professionals. Click on a tab below to learn more.

National Audit.

In July 2017, we reorganized oversight of our audit operations under a new National Assurance Managing Partner of Auditing and created distinct partner-led areas of focus relative to:

X Internal Control Over Financial Reporting (ICFR) Audits

X Focused Coaching

X Engagement Enhancement and Remediation

X Audit Methodology and Consultation

X Audit Tools, Technology, Templates and Approaches

X Internal Learning, Deployment and Change Management

This alignment, coupled with our newly introduced National Audit Development Cycle (see Figure 3), allows us to create and deliver practice solutions within a rigorous, continuous improvement framework worthy of a best-in-class organization.

Figure 3. National Assurance Development Cycle BDO’s consistent development approach that encompasses necessary steps from scoping to deploying initiatives, tools, and guidance yields tremendous benefits for our audit practice.

Scope

Scope the activity, including key work streams, dependencies, objectives, and considerations of impacts of the activity; proceed once scope is agreed.

Design

Design the elements defined in the activity scoping, and assign responsible parties and a timeframe.

Develop and Test

Develop and field test the activities, make adjustments as needed.

Deploy

Deploy the results to the targeted engagements.

Monitor

Monitor use and measure impact of use of the result of the activities by the targeted engagements.

Continually Improve

Make adjustments as needed, provide input into continuous improvement for future years guidance.

Audit Quality Network

The ability to adapt to change and then implement new approaches across all client engagements are critical skills for auditing firms today. As an extension of National Assurance, our Audit Quality Network5 provides a direct communication channel between our local offices and the National Assurance practice, increasing the flow of information and feedback throughout the firm. This model further leverages our Audit Quality Directors (AQDs), increased in 2017 to 30 select senior managers, directors, and partners who promote audit quality in their local offices and on a regional level. The AQDs support projects in key areas, including ICFR execution, data analytics, audit methodology and consultations, and audit tools, technology, and methods.

AQDs provide over

16,000 hours per year in support of audit quality.

5 BDO’s Audit Quality Network consist of local office seniors, managers, and partners who serve to enhance communications on a real-time basis between our National Assurance Office and our local offices to improve audit quality and increase operating effectiveness and efficiencies.

Accounting Excellence

Our best-in-class National Accounting Group is led by the National Managing Partner of Accounting, a former SEC Fellow. The Accounting Group provides state-of-the-art accounting guidance to the audit practice and consists of seasoned technical professionals who share a commitment to excellence and quality. Recent enhancements to our accounting practice include:

X Requiring dual reviewers on significant judgment areas.

X Aligning National Accounting consultations by subject matter expertise.

X Fully implementing a consultation database to facilitate information sharing and trend analysis for both the practice and our clients.

X Emphasizing ongoing and timely education for our clients on significant new accounting standards, including revenue recognition, lease accounting, current expected credit loss (CECL) and changes to U.S. tax laws.

Regional and Assistant Regional Technical Partners and Directors

Certain professionals serve as direct extensions of National Assurance in our practice offices. As part of National Assurance, these leaders report to the Quality Control group and are tasked with helping to communicate tone for audit quality and maintaining the firm’s standards of technical competence and risk management in accounting and auditing within their regions and offices.

Independence

As our clients expand their businesses domestically and internationally, ensuring auditor independence is more important—and more difficult—than ever. In a global business environment, we continually assess and adapt our protocols for maintaining our independence in every audit engagement. Investments in and activities led by our National Independence practice are powerful evidence of our commitment to checking and avoiding potential conflicts in our auditing work.

Our Independence practice, newly led by the former Senior Director of Professional Ethics at the American Institute of Certified Public Accountants (AICPA), helps our professionals and partners understand their role in maintaining auditor independence. More specifically, our National Partner of Independence is spearheading efforts to enhance our conflict-checking system, establish new independence sanctioning guidelines, focus on education by refreshing annual training, and lauch a quarterly publication covering important and timely independence issues. Our specialty practices that provide tax and cybersecurity services are also getting involved by updating policies to maintain our independence during all client engagements.

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 29

PROMOTING AUDIT QUALITY AT THE ENGAGEMENT AND FIRM LEVELS

At BDO, we measure audit quality at both the client engagement level as well as the firm level.

Audit Milestones

Recognizing the impact on audit quality of an orderly, timely, and sequenced audit process that occurs over a predictable time period, we follow a series of audit milestones when executing our audits. The use of audit milestones forces discipline into and throughout the audit process by fostering earlier risk identification and assessment. This, in turn, enables appropriate planning, design, and performance of audit work in a sequence to allow more structured time for areas requiring significant judgment.

Engagement Support

Issuing an audit opinion is an enormous responsibility. To support audit teams in performing a high quality audit that provides confidence to those who rely on our report, we require all audit teams to engage in activities which continually reassess and reaffirm the design of the audit and its effective execution. For example, engagement teams reconsider their risk assessments and audit response designs prior to concluding the audit to confirm that decisions made earlier in the audit cycle remain relevant. Our coaching programs, which leverage professionals from the National Assurance Audit Quality Team, provide audit teams with real-time feedback on risk assessment and audit execution.

In providing support to non-issuer audits, we intentionally align and distinguish resources—professionals, policies, tools and templates, education and methodology—to be distinctive in the work we do on private company audits. For example, our Private Company Audit Innovations (PCAI) team continually surveys our auditors to identify opportunities to increase efficiencies without sacrificing quality through streamlining, standardizing, and focusing audit procedures, while simultaneously ensuring adherence to relevant AICPA auditing standards. Efforts by the PCAI team emphasize differentiation and modification from public company engagements, with a focus on audit tools, guidance, and education for private company audit engagement teams. This will continue to be a key priority as our PCAI team accelerates its work this year.

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 30

Quality Control System

Turning our own auditing and analytical capabilities to matters of quality, we continue to execute a robust Quality Matters Process6 in support of our firm’s system of quality control to further drive audit quality accountability throughout our firm. Our assessment of the audit quality of our audit partners requires identified partner Audit Quality Events (AQEs), along with regional and office leadership accountability components, to be separately and distinctly evaluated as part of the annual performance management process. These evaluations are directly correlated to both a professional’s compensation considerations as well as his/her client engagement assignments.

For example, we rigorously examine all AQEs (both positive and negative) that occur during audits. Positive quality events often highlight an auditor’s independence, professional judgment, backbone, and accountability. Our auditors are steadfast in their commitment to reaching the correct accounting or auditing result regardless of client or internal pressure—even to the point of refusing to release an audit report if a client will not modify an improper accounting treatment that might be material to the financial statements.

6 BDO’s Quality Matters Process is a formal process designed to identify, evaluate, and provide evidence of the causes of both engagement-specific and system audit quality events and develop actions to improve audit performance.

Positive/Negative Quality Events We have pre-established certain criteria for both for positive quality events and negative quality events—to assess these events when they arise in practice. Here are a few examples:

POSITIVE

X Resolute determination was displayed to reach the correct accounting or auditing result regardless of client or internal pressures.

X Significant, active involvement in an engagement which demonstrated a focus on critical accounting and auditing areas and a tone with respect to audit quality.

X Effective display of strong accounting and auditing knowledge and ability to support conclusions reached.

X An inspection occurred and evidence of strong audit quality was present.

NEGATIVE

X Poor tone has been demonstrated with respect to a continued and biased support of a client’s improper accounting or disclosure position.

X Substantial lack of involvement in an engagement was identified with regard to critical accounting and audit areas and/or poor tone with respect to audit quality.

X Substantial lack of involvement on significant technical matters was identified during an audit.

X An inspection occurred and a significant finding was made or restatement occurred.

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 31

Inspection Process

We gain significant insight from our internal and external inspection processes and use this knowledge to continuously adapt our firm-wide system of quality control.

Internal InspectionsOur internal inspection teams comprise partners, directors, and senior managers with appropriate technical knowledge, industry experience, and training to conduct a formal risk-based inspection of the firm’s assurance practice under the direction of the National Partner of Inspections.

A partner may be selected for inspection in any given year, and generally partners are subject to review at least once every three years. These reviews are conducted to:

X Determine the quality of work performed

X Confirm that our work complies with professional standards and firm policies and procedures

X Monitor the effectiveness of remedial actions

The inspection team reviews, on a sample basis, the working papers and reports of each selected assurance engagement. The firm’s inspection program also includes a review of compliance with our quality control policies and procedures in other areas, including ethics, client acceptance and continuance, consultations, human resources, and other matters. These reviews involve focus group sessions with professional staff to help ensure the firm’s quality control procedures are properly understood.

During 2017, we internally inspected 150 audit engagements—26 issuer clients, 99 non-issuer clients, and 25 employee benefit plan audits. This represents approximately 5.8% of the firm’s total assurance hours.

External Inspections As a registered public accounting firm conducting over 300 issuer audit engagements, we must comply with annual inspection requirements of the PCAOB. The PCAOB’s inspection reports consist of two parts:

X Part I: Public Portion: This section reports findings relating to specific audit engagements in which audit deficiencies may affect a firm’s ability to support its audit opinion. In addressing these findings, a firm takes appropriate corrective actions, including possible additional documentation or audit procedures (known as engagement remediation), and/or in rare cases revises its report. The inspection report and our response to the report can be found at: pcaobus.org/Inspections/Reports/Documents/104-2017-030-BDO.pdf.

Key findings in BDO’s 2015 report, the most current report available, align with findings across the profession and center primarily on testing of internal controls over financial reporting, management’s estimates, sampling, use of substantive analytical procedures and journal entries.

X Part II: Non-Public Portion: This portion includes the PCAOB’s observations relating to a firm’s audit performance and quality controls where improvements are recommended. In evaluating a firm’s quality controls, the PCAOB assesses the following areas as part of that inspection:

• Management structure and processes, including tone at the top

• Practices for partner management, including allocation of partner resources and partner evaluation, compensation, admission, and disciplinary actions

• Policies and procedures for considering and addressing the risks involved in accepting and retaining clients

• Processes related to the firm’s use of audit work that the firm’s foreign affiliates perform on the foreign operations of the firm’s U.S. issuer audit clients

• The firm’s processes for monitoring audit performance, including processes for identifying and assessing indicators of deficiencies in audit performance, independence policies and procedures, and processes for responding to weaknesses in quality control

2017:inspected 150

engagements across

88% of our Assurance practice

offices

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 32

Our most recent completed remediation activities that the PCAOB have assessed relate to the 2013 inspection of audits of 2012, for which the remediation period ended in October 2015. The PCAOB has accepted our remediation activities with respect to that period.

We consider the PCAOB inspection process along with our internal inspections to be valuable components of our firm’s overall approach to enhancing audit quality. Accordingly, we take inspection comments with the utmost seriousness, giving them prompt consideration. As outlined in this current and prior Audit Quality reports (2016, 2017) shared publicly, we have made, and continue to make, significant enhancements to our audit quality process, including investments in appropriate national resources, tools, training and communication, as well as in the design of specific action plans and monitoring of such plans. We are confident that these improvements are addressing all matters raised in the inspection reports. We expect our increased diligence and attention to audit quality on our current year-end audits will lead to further improvement in 2018.

Other Inspections. BDO is subject to periodic Quality Assurance Reviews (QARs) on behalf of BDO International. The objective of a QAR is to provide assurance that BDO member firms adhere to, and comply with, applicable professional standards, as well as BDO International’s standards. Such reviews are conducted on a rotating basis. We have received a draft of our report which reflects an acceptable level of performance in all functional areas.

As a member of the AICPA, we are subject to triennial external peer reviews of the portion of our auditing practice applicable to non-issuer engagements. Our most recent completed Peer Review was conducted in 2015 for which we received a “pass” rating. We are currently undergoing Peer Review to be concluded in the fall of 2018.

We view inspections as critically important to informing our overall audit process and take the process and the resulting findings extremely seriously. In comparing our firm findings, we find a strong correlation with overall profession findings by the PCAOB, AICPA and peer reviews. We monitor these trends closely. Our careful analysis as to the causes of issues revealed by these inspections help to pinpoint any problem areas we need to address on a firm-wide basis, such as enabling communications, enhancing tools or providing of additional guidance and education. Many of these enhancements have been previously described.

Monitoring and Remediation. We vigilantly monitor and remediate any issues brought to light during an audit or during the inspection process. The areas where we have focused significant effort include:

X Executing deep and specific risk assessment activities and linking them to effective controls and substantive responses

X Demonstrating a deep and applied knowledge of ICFR

X Performing a detailed audit focus on:• revenue-related topics • inventory• estimates

Operationally, we have gained insight from our cause analysis, monitoring and remediation, as well as from other inputs, including our National Assurance Survey, Quality Matters Process, Performance Management, and engagement team outreach. This insight has helped us to improve the timing of data collection and procedures to assess whether audit teams are applying tools and guidance in a timely way and to implement changes to learning programs in time to improve current year audit engagements.

# of Engagements Inspected

PCAOB Internal Inspections

Year Issuer Issuer Nonissuer

2017 23 26 99

2016 23 25 89

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 33

SUSTAINING A BEST-IN-CLASS ORGANIZATION

Defined activities allow us to act on our Audit Quality Statement of Intent (See Figure 4). The following is intended as a high-level summary of actions discussed in our current report where we have focused and will continue to focus on our unrelenting pursuit of audit quality.

Our quest to maintain a best-in-class organization involves many moving parts. It begins with our culture and the mindset of our people and extends to our leadership, our approach to innovation, and our responsiveness to the market. We are not relaxing our efforts. We continue to take specific and constructive steps every day to drive audit quality and shape the future of the audit.

Figure 4. Acting on Our Audit Quality Intent Scorecard

FIRM-WIDE INVESTMENTS TONE

Growth of National Assurance Office

Change in National Assurance leadership role and reporting structure

Quality Matters Process

Senior leadership messaging throughout the year

Expanded Audit Quality Director Network

New and expanded responsibilities for the Audit Quality Committee

Partner performance management accountability

PARTNER PERFORMANCEMANAGEMENT PROFESSIONAL SKEPTICISM ENHANCED LEARNING

Rewards and penalties for Quality Events

Audit quality ratings at regional and local office levels

Professional judgment framework

Audit milestone learning programs

BDO Professionals:

Refreshed level/role appropriate curriculum

Issuer certification

BDO Clients:

Increased and continual topical content: webinars, self-study courses, and in-person events

NATIONAL AUDIT NATIONAL ACCOUNTING NATIONAL INDEPENDENCE AUDIT QUALITY TEAM

New leadership

Re-organized operational areas of oversight:

• ICFR

• Audit methodology & consultation

• Audit Tools, technology, templates & approaches

• Internal learning, deployment and change management

Enhanced consultation policies by subject matter

Emphasized timely education around new significant accounting standards

Expanded technical resources

New leadership

Emphasized education, policies, and monitoring

Team captains with specific issuer inspections experience

Increase internal inspections skills training and analytical resources

Shortened time frame for development and execution of corrective actions

Performed expanded cause analyses

ISSUER ENGAGEMENT MILESTONES

RESPONDING TO AUDIT ASSESSMENTS

ROOT CAUSE ANALYSIS MONITORING

Greater discipline on timing of engagement risk assessment and development of audit responses

Real-time engagement coaching

Enhanced process with respect to remediation design

Enhanced focus on timely and effective completion of remediation procedures

Completion of negative event level cause analysis within 90 days

More timely annual systemic analysis

More effectiveness monitoring of data, tools, templates, and guidance

Prioritized activities around:

Risk assessment linked to effective controls and substantive responses

Demonstrate deep and applied knowledge of ICFR

Detailed audit focus on:

• Revenue-related topics

• Inventory

• Estimates

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 34

2018 DELIVERING ON OUR AUDIT QUALITY INTENT / 35

BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, and advisory services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through more than 60 offices and over 550 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 73,800 people working out of 1,500 offices across 162 countries.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information please visit: www.bdo.com.

Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your needs.

© 2018 BDO USA, LLP. All rights reserved.

People who know, know BDO.SM