Fortifying Internal Control

(1) The Board of Directors of LY Corporation has resolved on the "systems for ensuring the properness of business activities" as stipulated in the Companies Act and Regulation for Enforcement of the Companies Act, established this internal control system in its Basic Policy for Internal Control, and designated "internal audit" as a role to check various controls from within the company.
In addition, for the purpose of ensuring the reliability of its financial reports and fulfilling the obligation as a responsible listed company, LY Corporation conducts SOX assessments in line with the internal control report system required by the Financial Instruments and Exchange Act.

(2) The Internal Audit Office, which reports directly to the President and Representative Director, CEO, is established, and the Finance Internal Control Department, which reports to the CFO, have been established as internal audit and SOX assessment departments, respectively. LY Corporation receives reports from these two departments on a regular basis, and shares information and cooperates with its Audit and Supervisory Committee members and accounting auditors to realize even more effective and efficient internal control.

Audit Functions

LY Corporation, in its Regulations for Internal Audits, has set forth the following definition and purposes of internal audit, in accordance with the Internal Audit Standards (Chapter 1: The Essence of Internal Audit (1.0.1)) set by The Institute of Internal Auditors-Japan:

"For the purpose of contributing to the effective achievement of the management objectives of the organization, and from the perspective of legitimacy and rationality and standpoint of fairness and independence, internal audit consists of: assurance activities that evaluate the performance of management activities related to governance processes, risk management, and controls, conducted with an attitude of compliance with the discipline of an internal auditor, and that provide objective opinions, advice, and recommendations based on these evaluations; and advisory activities that provide assistance to specific corporate management activities."

The basic approach to governance in the LY Corporation Group is to create a multifaceted supervisory system that provides the best combination of "horizontal governance" (an autonomous governance structure based on the Three-Line Model in each company, which is tailored to the business situation of each company) and "vertical governance" (governance structure centralized across the entire Group, which responds to the global business environment).

The Internal Audit Office is responsible for the "Third Line" in the Three-Line Model. As part of the "horizontal governance," it conducts internal audits. As part of the "vertical governance," it provides advice, monitors, and evaluates the establishment and operation of internal audit systems for the entire Group. It reports the results of these activities to the Board of Directors and the Audit and Supervisory Committee.

SOX Assessments

LY Corporation has formulated its "Basic Plans and Policies for Establishing Internal Control over Financial Reporting" in line with the "Standards and Practice Standards for Management Assessment and Audit concerning Internal Control Over Financial Reporting" set by the Financial Services Agency.

The company redefines the scope of assessments according to the status of its business operations every fiscal year; develops and operates company-level control, financial closing & reporting process control, process-level control, and IT control; prepares the internal control report related to financial reporting; and submits them to an independent auditor for their internal control audit.