Seo Koatsu kogyo Co.,Ltd

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Basic Policies on Internal Control over Financial Reporting

1.Purposes of basic policies on internal control over financial reporting

  • (1)These Basic Policies shall establish basic principles for internal control over financial reporting, within the framework of establishing internal control systems stipulated in the Companies Act and the Financial Instruments and Exchange Act.
  • (2)Internal control over financial reporting shall be established and implemented in accordance with these Basic Policies.

2.Roles and responsibilities in proper establishment and implementation of internal control

  • (1)The Representative Director shall be responsible for proper evaluation and report of establishment and implementation of internal control over financial reporting, and required to structure the optimal business execution system.
  • (2)The Board of Directors shall have supervisory responsibility for the establishment and implementation of internal control over financial reporting, performed by the Representative Director.
  • (3)The General Affairs Department shall review and evaluate the establishment and implementation status of the internal control as part of the monitoring function constituting a basic element of the internal control, and recommend any improvement.
  • (4)Officers other than those stipulated in (1) through (3) above shall also need to actively cooperate in establishment and implementation of internal control over financial reporting.

3.Positioning of the Basic Policies on internal control over financial reporting

These Basic Policies shall be positioned within the framework of our corporate management and business operations, and in relation with the relevant laws and regulations, as indicated below.

  • (1)Positioning in regard to corporate management
    Proper establishment and implementation of internal control over financial reporting shall contribute to enhancement of our sound and appropriate corporate management, and constitute an important component of our corporate governance system, the basic concepts of which are clearly indicated in these Basic Policies.
  • (2)Relationship with internal audit
    As an internal audit is an important implementation tool for independent evaluations, it shall be put into practice with proper consideration of the purport of these Basic Policies.
  • (3)Relationship with corporate auditor
    Information of activities concerning internal control over financial reporting, as stipulated in these Basic Policies, shall be properly reported to corporate auditors on a timely basis.

4.Action policies on proper establishment and implementation of internal control

  • (1)With the strong emphasis placed on implementation of proper and reliable financial reporting, the entire system shall be structured and operated in accordance with the six basic elements of internal control (control environment, risk evaluation and response, control activity, information and communication, monitoring, and IT utilization). Furthermore, constant attention should also be given to maintenance of reliability and appropriateness of financial reporting in our daily operations.
  • (2)The sequential action cycle of planning, evaluation, and improvement, etc. for internal control over financial reporting shall be properly implemented.
  • (3)The series of actions for internal control shall be implemented in orderly, systematic, continuous, timely, comprehensive, and active manners.
  • (4)In determination of accounting policies, proper attention shall be given to truthfulness, clarity, continuity, maintainability, soundness, and importance, so that the policies can contribute to reliable and appropriate financial reporting.

5.Construction of control environment

For proper establishment and implementation of internal control over financial reporting, careful attention shall be given to the following points in structuring the control environment that can support the foundation of organizational management.

  1. Honest and ethical foundation
  2. Intention and vision of the Representative Director
  3. Management policies and management strategies
  4. Functions to be performed by the Board of Directors
  5. Organizational structure and accepted organizational practices
  6. Authority and duty
  7. Securing and nurturing human resources in planned systematic manners

6.Risk evaluation and response

  • (1)In order to enhance reliability of financial reporting, any factors that may affect and hinder attainment of organizational targets shall be identified, analyzed, and evaluated as risks, against which proper responses and countermeasures shall be implemented accordingly.
  • (2)In risk evaluations, risk inside and outside of an organization shall be classified into those affecting the overall organizational targets and those affecting individual operations. Each risk shall be analyzed in terms of magnitude, as well as occurrence possibility and frequency, etc., in accordance with the intrinsic nature, to ensure proper evaluations.
  • (3)Necessary responses and countermeasures shall be implemented against the evaluated risks, including avoidance, mitigation, transfer, or acceptance, etc.
  • (4)Risk evaluation and response measures shall be implemented continuously in every business period.
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7.Control activities

  • (1)To ensure reliable financial reporting, clear segregation of duties, internal check, maintenance of continuous records, and physical asset management activities, etc., including timely on-site inspections, etc., shall be systematically organized. These activities shall be effectively incorporated and implemented in our daily operations.
  • (2)To prevent any false entries due to fraudulent and erroneous acts and to ensure reliable financial reporting, the responsibilities of managers in charge of individual operations and those of workers/operators shall be clearly defined with the categories of tasks and approval procedures, as well as the relevant operational procedures, properly established, so that control activities can be promoted in a fair and transparent manner.

8.Information and communication

  • (1)To ensure reliable financial reporting, a system for appropriate and timely identification, understanding, and process of information necessary for individual tasks shall be established and properly implemented.
  • (2)The system shall be properly structured so that necessary information can be not only conveyed but also correctly understood by intended receivers and shared by all who need the information.

9.Monitoring

  • (1)A system of routine monitoring and independent evaluation shall be properly established for continuous evaluation of effective functioning of the internal control.
  • (2)It is necessary to establish a system of ensuring that problems, flaws and serious defects in internal control can be communicated to directors, auditors, officers, and persons in charge of relevant tasks, depending on the seriousness, in proper and timely manners, so that corrective actions can be taken as required.

10.IT utilization

  • (1)In order to ensure that the basic elements of internal control, that is, control environment, risk evaluation and response, control activity, information/communication, and monitoring, can function properly, IT shall be effectively and efficiently utilized.
  • (2)In order to ensure effective and efficient utilization of IT, the characteristics of the information systems shall be adequately understood, and the procedures for introduction, implementation, and verification, etc. of the information systems shall be established in accordance with applicable policies.

11.Management and report

  • (1)The Representative Director shall regularly confirm that the internal control over financial reporting is properly established and implemented, and request the relevant implementation departments to submit proper reports.
  • (2)For compilation of reports, including business reports and accounting statements, as required by the Companies Act, the establishment and implementation status of the internal control shall be properly considered.
  • (3)The status of the internal control shall be reported in writing to the Board of Auditors and the Board of Directors.