Auditing Mechanism

Auditing Mechanism

The Company enhances the effectiveness and efficiency of audits through mutual cooperation and regular exchange of information among the Audit & Supervisory Board members, the Accounting Auditor, and the Corporate Audit Department.

Status of Audits by the Audit & Supervisory Board Members

Organization, Personnel and Procedures

Hulic is a company with an Audit & Supervisory Board, which comprises five Audit & Supervisory Board members (two are full-time auditors and three are External Auditor pursuant to the Companies Act and Ordinance for Enforcement of the Companies Act). In audit conducted by the Audit & Supervisory Board members, auditors monitor the operations of the internal control system and the status of its implementation through audit of the execution of duties by directors, managing officers and each division in accordance with the audit basic policy and the audit basic plan formulated by the Audit & Supervisory Board. These audits consist of attendance at the Board meetings as well as other meetings and committees when required, interviews on the execution of duties by directors and managing officers, and reviewing important documents, approval documents and accounting documents, etc. In addition, the Board responds promptly to any wrongdoing identified as well as deficiencies and issues pointed out by the Accounting Auditor after receiving a report from an Audit & Supervisory Board member. The Audit & Supervisory Board Office has been established to support the duties of Audit & Supervisory Board members.

Furthermore, the Audit & Supervisory Board members receive reports on the results of audits performed by the Corporate Audit Department and exchange information regularly to enhance the effectiveness and efficiency of audits by both the Audit & Supervisory Board members and Corporate Audit Department, which performs internal audits.
Note that Shigeo Nakane, Full-Time Audit & Supervisory Board member, has served as Executive Managing Officer, General Manager of the Accounting Department of the Company, and that Nobuyuki Kobayashi, External Audit & Supervisory Board member, is registered as a certified public accountant. Both members have considerable knowledge of finance and accounting.

Status of Activities by Audit & Supervisory Board Members and the Audit & Supervisory Board

Frequency of Audit & Supervisory Board Meeting

The Audit & Supervisory Board meets at an appropriate frequency and actively exchanges opinions on management issues of the Company and important risks pertaining to accounting audits.

Priority Audit Items of FY2020

  • Achievement of priority issues at each department in the first year of the new Medium- and Long-Term Management Plan
  • Risk management mechanism for business diversification and internal control of the Group
  • Status of ESG-conscious business operations, value creation process in integrated report

Major Activities of Audit & Supervisory Board Members

  • Regular meetings with the representative directors (approximately four times each year)
  • Attendance at important meetings such as the meetings of the Board of Directors (External Audit & Supervisory Board members hold discussions at the Audit & Supervisory Board meetings through information sharing with full-time Audit & Supervisory Board members who attend important meetings other than the Board of Director meetings and mutual confirmation based on interviews with key officers.)
  • Review important approval documents, etc.
  • Verify the effectiveness of the Group internal control system (full-time Hulic Audit & Supervisory Board members concurrently serve as Audit & Supervisory Board members at most of the affiliated companies, and in addition to conducting effective audits during the term, Group Audit & Supervisory Board Liaison Meetings are held every three months to share information on the risk management and issues at each company.)
  • Collaborate with external directors (twice annually to exchange information on recent audits and topics.)
  • Exchange information with accounting auditors (approximately 10 times a year; receive reports on the status of audit quality from the audit firm, and address the independence of the accounting auditor, the status of quality control, the appropriateness of the job execution system, and the risk of fraud, and confirm the state of implementation of accounting audits of the auditing fiscal year.)
  • Cooperate with three-way audits (twice annually)
  • Evaluate the effectiveness of the Audit & Supervisory Board (annually)

Status of Accounting Audit

Name of Accounting Auditor

Ernst & Young ShinNihon LLC

The Company enters into an agreement with the Accounting Auditor that limits liability for damages resulting from the neglect of duties based on Article 427, Paragraph 1 of the Companies Act and Article 41, Paragraph 2 of the Company’s Articles of Incorporation. The maximum amount of liability under the agreement is the higher of an amount predetermined by the Company and the amount stipulated by law.
The certified public accountants engage in Hulic accounting operations changes regularly based on the Certified Public Accountants Act, and auditors are engaged to conduct audits for no more than seven consecutive years.

Policy and Reason for Selecting the Accounting Auditor

When it is necessary to select a certified public accountant to perform audits, the Audit & Supervisory Board examines and confirms the following items through interviews and questions with the certified public accountant and an exchange of opinions with business execution divisions before making a comprehensive judgment.

  • Status of quality control
  • Independence
  • Expertise
  • Appropriate member configuration
  • Audit plan considering risk
  • Appropriateness of audit fees

The Accounting Auditor will be dismissed based on agreement among all Audit & Supervisory Board members when they have judged that there is a reason for dismissal as provided for in Article 340, Paragraph 1 of the Companies Act. The Audit & Supervisory Board determines the proposal for dismissal or non-reappointment of the current Accounting Auditor when it concluded that they are not appropriate due to such reasons as violation of the Certified Public Accountants Act, etc., and based on that decision, the Board of Directors will submit the proposal at the general meeting of shareholders.

Evaluation of the Accounting Auditor by the Audit & Supervisory Board and Its Members

The Audit & Supervisory Board performed an evaluation of the Accounting Auditor from the perspectives of quality control, independence of the audit team, exercise of professional distance, appropriateness of audit fees, effectiveness of communication with management and the Audit & Supervisory Board, and handling of Group audits and fraud risk, after receiving a report on the status of the audit quality from Ernst & Young ShinNihon LLC. As a result, it was determined appropriate to reappoint Ernst & Young ShinNihon LLC as the Accounting Auditor.

Details of Audit Fees, etc.

Compensation for Audit by a Certified Public Accountant, etc.

(JPY million, consolidated basis)

Category FY2019 FY2020
Compensation based on audit and attestation services Compensation based on non-audit services Compensation based on audit and attestation services Compensation based on non-audit services
Hulic 52 6 52 9
Consolidated subsidiaries 23 - 45 1
Total 76 6 97 11

(FY2019)
Non-audit services at the Company were comfort letter preparation work related to issuing corporate bonds.

(FY2020)
Non-audit services at the Company were comfort letter preparation work related to issuing corporate bonds.
Non-audit services at the Company’s consolidated subsidiary were comfort letter preparation work related to issuing corporate bonds.

Compensation for Ernst & Young member firms

Category FY2019 FY2020
Compensation based on audit and attestation services Compensation based on non-audit services Compensation based on audit and attestation services Compensation based on non-audit services
Hulic - 4 - -
Consolidated subsidiaries - 0 - 6
Total - 4 - 6

(FY2019)
Non-audit services at the Company involved offering tax advice.
Non-audit services at consolidated subsidiaries involved tax-related outsourcing.

(FY2020)
Non-audit services at consolidated subsidiaries involved tax-related outsourcing and others.

Compensation for Other Important Audit Attestation Services

None.

Policy for Determining Audit Fees

Audit fees for the certified public accountant are determined with the consent of the Audit & Supervisory Board in accordance with laws and regulations and in consideration of such factors as the size and characteristics of the Company and the number of days spent for the audit.

Reasons the Audit & Supervisory Board Gave Consent to Compensation of the Accounting Auditor

The Audit & Supervisory Board performs necessary checks regarding the details of the audit plan of the Accounting Auditor, the performance status of accounting audit duties and the basis for calculating compensation estimates, and has given consent for the compensation paid to the Accounting Auditor.

Status of Internal Audit

The Corporate Audit Department, which reports directly to the President and works independently from other business activities, carries out internal audits of the Company and the Company’s affiliates. Specifically, the Corporate Audit Department systematically conducts internal audits in accordance with the internal audit basic plan, which is resolved by the Board of Directors, and reports the findings to the President. The department also provides advice, guidance and recommendations for improvements to the audited departments to help resolve issues. The President, who oversees the Corporate Audit Department, reports important matters related to the internal audits regularly to the Board of Directors.
Additionally, the Corporate Audit Department strives to enhance audits and improve the effectiveness of internal controls by reporting audit findings to Audit & Supervisory Board members and accounting auditors, as well as exchanging opinions with each other.

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