In 2021, two KPMG member firms were engaged to perform audit procedures
in support of my team’s group audit of an SEC issuer audit client.
As the group audit engagement team, we reviewed the draft component engagement letters
from both member firms relating to their work on the group audit to confirm that
they contained no prohibited indemnification or limitation of liability provisions.
Shortly after issuing our Sentinel Approval Number, the KPMG member firms
executed their component engagement letters and performed the services.
The following year, during the firm’s internal independence review process,
it was identified that we had in fact failed to identify and remove certain impermissible clauses
within the component engagement letter’s general terms,
which resulted in an independence violation that we had to report to our client’s Audit Committee.
These impermissible clauses limited the KPMG member firm’s liability
and indemnified them from claims brought by third parties.
To rectify the violations, the member firms rescinded the indemnification and
limitation of liability provisions contained in the engagement letters.
When KPMG member firms are involved in a group audit, the language in their
component engagement letters may be different from the standard terms used in the US,
resulting in violations if impermissible clauses are not identified and removed prior to the
commencement of work. As the US audit engagement team of the client,
it was our responsibility to ensure that the engagement letter did not contain
indemnification or limitation of liability provisions. This experience made me realize
that when a service request comes from a non-US member firm,
we need to be extra diligent and carefully review component engagement letters
to understand the intended service and deliverables,
and to ensure that the language and clauses are permissible.