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 auditors). 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 and accounting documents, etc. In addition, 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 External Audit & Supervisory Board member Nobuyuki Kobayashi and Noriko Koike are 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 and Contents of Audit & Supervisory Board Meeting

The Audit & Supervisory Board is held every month, on the same day as the Board of Directors meeting and as necessary. The resolutions, reports, and discussions below were held during FY2023.

Resolutions: Consent to the appointment of Audit & Supervisory Board members, audit reports, reappointment of the accounting auditor, consent to revisions to the remuneration of the accounting auditor, audit plans, selection of the chairperson of the Audit & Supervisory Board, selection of full-time and specific Audit & Supervisory Board members, etc.

Report : Status of audits (monthly), evaluation of the effectiveness of the Audit & Supervisory Board, results of quarterly reviews, status of key audit matters (KAM) reviews, year-end audit schedule, etc.

Priority Audit Items of FY2023

• Achievement of priority issues at each department of the Medium-Term Management Plan (2023 - 2025)
• Risk management system for diversifying revenue sources, group governance, and internal controls for the Group
• Initiatives to further improve sustainable management
• Reasonableness of the accounting audit

Major Activities of Audit & Supervisory Board Members

In addition to attending important meetings, such as the Audit & Supervisory Board and the Board of Directors as well as auditing the proceedings and content of resolutions, and expressing opinions as necessary, the Audit & Supervisory Board members collect information that contributes to improving internal controls by reviewing important approval documents and checking the status of business execution with department managers. The board members then apply the information to their day-to-day auditing work.

• *1 The number of meetings attended in the fiscal year since being appointed as an Audit & Supervisory Board member on March 23, 2023.
• *2Attended as an observer without voting rights and expressed opinions.
• *3This meeting, held quarterly to share information about risk management and issues at each company, includes Audit & Supervisory Board members of affiliated companies that have full-time Audit & Supervisory Board members. In addition, our full-time Audit & Supervisory Board members also serve as Audit & Supervisory Board members at major affiliated companies. By working to ensure effective audits throughout the fiscal year, we verify the efficiency of the internal control system within the Hulic Group.
• *4Participants exchange opinions on important matters learned during everyday auditing work and make recommendations, as necessary, to improve the effectiveness of corporate governance.
• *5Participants exchange information on recent audits and other topics every six months.

Coordination and Collaboration with Audit & Supervisory Board Members and the Accounting Auditor

The accounting auditor provides detailed explanations throughout the year, including each quarter, on the Hulic Group’s consolidated financial statements and accounting audits. In particular, these discussions have been deepened by having the accounting auditor provide reports, review the content of the reports and exchange questions, opinions, etc., on items identified as key audit matters (KAM) for FY2023.

Evaluation of the Effectiveness of the Audit & Supervisory Board

In FY2023, we conducted a self-evaluation using the survey form on the effectiveness of the Audit & Supervisory Board to review auditing methods and reflect them in the next fiscal year’s audit plan. After each Audit & Supervisory Board member provided their own evaluations. The Audit & Supervisory Board discussed the results and concluded that the audits for FY2023 were “effective.”

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.

Continuous Audit Period

From 2003 onwards
Due to significant research difficulties prior to 2002, the period of continuous audits may exceed such period.
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.

(FY2022)
Non-audit services provided to the Company include tasks such as drafting comfort letters related to corporate bonds issuances.

(FY2023)
Non-audit services provided to the Company include tasks such as drafting comfort letters related to corporate bonds issuances.

Compensation for Ernst & Young Member Firms

(FY2022)
Non-audit services at the Company involved tax-related outsourcing and others.
Non-audit services at consolidated subsidiaries involved tax-related outsourcing and others.

(FY2023)
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

Regarding the internal audits, the Corporate Audit Department, which is independent from other business activities conducts internal audits of the Company and its group companies. Specifically, the Corporate Audit Department conducts internal audits in accordance with the "Basic Plan for Internal Audits" systematically, and give them some advice, guidance and corrective recommendations to solve the problems. Also, the results of internal audits of the Company and group companies conducted by the Corporate Audit Department are reported to the Board of Directors on a quarterly basis.