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In 2021, two KPMG member firms were engaged to perform audit procedures

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in support of my team’s group audit of an SEC issuer audit client.

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As the group audit engagement team, we reviewed the draft component engagement letters

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from both member firms relating to their work on the group audit to confirm that

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they contained no prohibited indemnification or limitation of liability provisions.

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Shortly after issuing our Sentinel Approval Number, the KPMG member firms

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executed their component engagement letters and performed the services.

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The following year, during the firm’s internal independence review process,

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it was identified that we had in fact failed to identify and remove certain impermissible clauses

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within the component engagement letter’s general terms,

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which resulted in an independence violation that we had to report to our client’s Audit Committee.

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These impermissible clauses limited the KPMG member firm’s liability

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and indemnified them from claims brought by third parties.

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To rectify the violations, the member firms rescinded the indemnification and

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limitation of liability provisions contained in the engagement letters.

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When KPMG member firms are involved in a group audit, the language in their

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component engagement letters may be different from the standard terms used in the US,

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resulting in violations if impermissible clauses are not identified and removed prior to the

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commencement of work. As the US audit engagement team of the client,

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it was our responsibility to ensure that the engagement letter did not contain

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indemnification or limitation of liability provisions. This experience made me realize

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that when a service request comes from a non-US member firm,

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we need to be extra diligent and carefully review component engagement letters

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to understand the intended service and deliverables,

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and to ensure that the language and clauses are permissible.

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