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Result of Internal Investigation into Improper Accounting Practices at Consolidated Subsidiary Companies (Interim Report)


Seiko Epson Corporation (“Epson”) today announced the interim results of its internal investigation into the improper accounting practices at consolidated subsidiary companies announced on January 27. The internal investigative committee, headed by President Minoru Usui, has reported on the causes of the incidents and on measures to be taken to avoid a reoccurrence.

Epson will take the opportunity to review and overhaul its management of subsidiary companies as it seeks to prevent a repetition. The Company asks for the support and understanding of all its stakeholders as it continues to work towards its goal of achieving trust-based management.
1. Outline of results of internal investigation

The initial investigation was carried out with the assistance of external experts commissioned by Epson’s regional headquarters for the Americas, with the details, processes, and results reviewed by Epson’s internal investigative committee, which also carried out on-site checks.
An outline of the results of the internal investigation is as follows.
(1) Brazilian subsidiary companies

* Outline of incident
o Three staff members involved
o Over-reported profit by US$42 million over nine years including the current fiscal year by over-reporting accounts receivable and manipulating financial reports*.
* Includes the related impact of under-reporting of allowance for doubtful accounts also uncovered as part of this investigation.
* Analysis of motive
o The incident was triggered by an error made when carrying out necessary adjustments caused by differences between Brazilian and U.S. accounting standards. In order to cover up the mistake, the staff involved over-reported accounts receivable with the purpose of protecting their positions.

(2) Mexican subsidiary company

* Outline of incident
o One staff member involved
o Over-reported profit by US$4.1 million over four years by over-reporting accounts receivable.
* Analysis of motive
o Manipulated the accounts to give the false impression that the total amount for overdue accounts was declining. It is believed that the staff member involved did so with the purpose of protecting his position.

2. Prevention of reoccurrence

As stated above, the direct cause of the improper accounting practices is believed to be the desire of those involved to protect their positions. However, this situation was made possible by the weakness of internal controls at Epson companies in Brazil and Mexico, and issues with the management of subsidiary companies by both Epson and the regional headquarters for the Americas, which is directly responsible for the subsidiaries in question.

An outline of the measures to be taken is as below. More detailed measures, which will be implemented as a result of the findings of the internal investigation, are now under consideration.
(1) Brazilian and Mexican subsidiaries

There were the following common issues with the internal controls of the two companies.

* Local management had a low level of interest in accounting processes, and failed to carry out routine management of such processes
* A weak IT environment, allowing improper manipulation of accounting systems

The local management of each subsidiary company is fully aware of the gravity of this situation, and will implement the following measures to prevent repetition.

* Increase oversight of accounts
* Introduce appropriate accounting processes for management of accounts receivable, and reorganize both the process for compiling financial reports and the accounting system
* Based on the J-SOX program, implement, operate and evaluate a companywide internal control system encompassing IT, and companywide financial reporting processes and work process controls

(2) Parent company of subsidiaries in question (regional headquarters for the Americas)

In light of the internal control issues highlighted by these incidents, Epson acknowledges the necessity of strengthening governance at its Latin American subsidiaries and will implement the following measures to prevent a reoccurrence.

* Improve the human resources evaluation system and effectively operate this system, introduce a whistleblower system at subsidiary companies, and improve management education programs
* Reorganize the accounting function at each Latin American subsidiary company
* Improve the qualification requirements for staff involved in accounting, and improve standards governing work conduct
* Implement an effective internal control system based on J-SOX guidelines
* Strengthen the monthly report and review system at each subsidiary company and the regional headquarters for the Americas
* Strengthen and enhance the internal audit system
* Expand the scope of the review carried out at the quarterly business review meeting

(3) Epson

Epson acknowledges issues with the internal controls at the companies mentioned above. However, as the Company did not find evidence of similar issues when it carried out emergency investigations at its other Latin American subsidiaries, it concludes that the outlined issues are particular to the subsidiary companies in question.

However, Epson has also concluded that the number of subsidiary companies under the regional headquarters for the Americas, in addition to the differences in culture and distances involved is partly responsible for the lack of operational control. In light of this, Epson believes it is necessary for its Head Office departments to implement and roll out the following structural reforms.

* Conduct follow-ups of the above-mentioned improvement programs at each company, and provide support.
* Reevaluate management policy at each major subsidiary company.

3. Disciplinary action against those responsible and management responsibility

Those responsible at the Brazilian and Mexican subsidiaries have been dismissed or demoted. Epson also plans to take appropriate measures internally and at the regional headquarters for the Americas. Details will be disclosed when they have been decided.
4. Financial impact of the incidents

The internal investigation has revealed the total amount involved in the improper accounting practices to be approximately 4.4 billion yen (impact from previous fiscal years (extraordinary loss): 3.1 billion yen; impact from current fiscal year: 1.3 billion yen).

Because the impact of this amount on results from previous fiscal years is minimal, the financial processing of this amount will take place in the current fiscal year in the form of a single extraordinary loss.


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