Investigation ReportSection 2. Outline of the business of TICC, etc. Section 3. Outline of the overseas group companies, etc. Chapter 2. Facts Relating to the Fraud . Section 1. Facts

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To: Toyo Ink SC Holdings Co., Ltd.

December 11, 2019 (Translation)

Investigation Report (Public version)

Investigating Committee

Chair of the Committee: Kimito Amari Committee Member: Ken Arahari Committee Member: Kaku Hirao

This report describes the results obtained as the result of an investigation and analysis, etc. conducted as appropriately as possible within the allotted time and conditions, but there is the possibility that the conclusion will change if new facts are uncovered in the future. In addition, it should be noted that this report does not guarantee the decision of the courts and the relevant authorities, etc. (This English translation of the Investigation Report was prepared by Toyo Ink SC Holdings Co., Ltd. for reference purposes only. It was NOT provided by the Investigating Committee.) *Personal names withheld are represented in the text by capital letters of the alphabet, in italic font.

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I. Outline of the Investigation Chapter 1. Background Leading to the Investigation Chapter 2. Purpose of the Investigation Chapter 3. Structure and Period of the Investigation Chapter 4. Investigation Methods

Section 1. Collection of relevant materials Section 2. Conducting the interviews Section 3. Digital forensic investigation Section 4. Constraints faced in the investigation

II. Investigation Results

Chapter 1 Facts as the Premise of the Investigation Section 1. Outline of the business of Toyo Ink HD Section 2. Outline of the business of TICC, etc. Section 3. Outline of the overseas group companies, etc.

Chapter 2. Facts Relating to the Fraud Section 1. Facts revealed in the internal investigation through checking the financial

and accounting materials Section 2. Details of A’s explanation, etc. Section 3. Conducting of an investigation in light of A’s refusal to cooperate with the

investigation Section 4. Status of the checks and monitoring of TICC

Chapter 3. Existence of Fraudulent Acts Other Than the Fraud, etc. Section 1. Existence of fraud other than the Fraud at TICC Section 2. Existence of similar cases at Toyo Ink HD overseas subsidiaries other than

TICC III. Financial Impact

Chapter 1. Method of Calculation of the Impact Section 1. Premise Section 2. Method of calculation of the impact Section 3. Method of calculation of the impact by account

Chapter 2. Amount of Impact

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IV. Analysis of the Cause of Fraud Section 1. Black-box accounting of TICC’s financial and accounting work

1. TICC officers and employees, including previous presidents, depended on A for finance and accounting related work

2. Parallel accounting work through ERIC and manual work using the auxiliary books (Excel file)

3. Insufficiencies in the management of financial and accounting documents and data at TICC

Section 2. Previous TICC management should have been more aware of the importance of ensuring the accuracy of the financial reports

Section 3. Room to improve the method in order to achieve more effective internal audits Section 4. Room for improvement in the mechanism of escalation of risk information

V. Recurrence Prevention Measures

Section 1. Improve the situation where the financial and accounting operations depend on simple one person in charge

Section 2. Systematization of the business processes relating to the settlement of accounts and financial reports

Section 3. Thorough management of financial and accounting documents and data Section 4. Proactive understanding of the status of establishment and operation of internal

controls relating to the financial reports Section 5. Renewed review of the implementation policy for internal audits Section 6. Build a system to enable the sharing of risk information throughout the group

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I. Outline of the Investigation Chapter 1. Background Leading to the Investigation

On August 14, 2019, B, the president of Toyo Ink Compounds Corp. (hereinafter referred to as “TICC”) located in the Philippines, which is a subsidiary of Toyo Ink SC Holdings Co., Ltd. (hereinafter referred to as “Toyo Ink HD”) consulted with the person in charge at Rizal Commercial Banking Corporation (hereinafter referred to “RCBC”), a local bank in the Philippines, about refinancing away from the Bank of the Philippine Islands (hereinafter referred to as “BPI”), whereupon the same person in charge told him that TICC was already borrowing from RCBC. In addition, on the following day on August 15, B was told by the same person in charge that, as of that date, the outstanding loans payable from RCBC came to 4.7 million USD.

Since B was not aware that TICC was borrowing funds from RCBC, he requested RCBC to provide all of the balance transactions over the past three years in order to be able to check the details. As a result, he received documents relating to three years’ worth of end-of-month loan balances from RCBC, and he also received a sample of the promissory notes, which had been signed by A, Senior Manager of the Finance and Accounting Division, who was the person in charge of the same division, and by B. According to the explanation given by RCBC, RCBC’s loans to TICC were based on promissory notes.

On August 26, 2019, B reported the abovementioned facts to Toyo Ink HD, and subsequently, under the direction of Toyo Ink HD, he proceeded to check the facts, and it was discovered that with regard to the loans payable from Mizuho Bank (hereinafter referred to as “Mizuho”) as well, the amount of the actual loans payable was 700,000 USD more than the borrowed amount reported through the consolidation package.

Reacting to the abovementioned situation, Toyo Ink HD proceeded to check the facts with A, and A came to explain that, in order to avoid a financial deficit, from at least 2004, he had under-reported the cost of goods sold (raw material costs) and he had borrowed off-the-books in order to cover the cost of raw materials to be paid to the supplier (hereinafter, A’s improper settlement of accounts is referred to as “Fraud”). In response to A’s explanation, Toyo Ink HD set up an investigating committee consisting of outside experts as well as the outside directors (hereinafter referred to as “Committee”) in order to conduct a highly transparent and effective investigation, and asked the Committee to conduct an investigation for the purpose of clarifying the facts pertaining to the Fraud and ascertaining the impact, etc. of the Fraud on Toyo Ink HD’s consolidated financial statements (hereinafter the investigation conducted by the Committee is referred to as “investigation” and the related facts are referred to as “case”). Chapter 2. Purpose of the Investigation

The Committee conducted this investigation with the following objectives: - To investigate the facts relating to the fraud. - To check whether there were any other cases similar to this fraud. - To establish the impact of the fraud on the consolidated financial statements. - To determine the cause of the fraud and make proposals to prevent recurrence.

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Chapter 3. Structure and Period of the Investigation

The composition of the Committee was as follows. Chair: Kimito Amari (independent outside director, Professor of the Division of Law, Sophia University, attorney) Committee Member: Ken Arahari, (CPA, EY Japan Forensic & Integrity Services) Committee Member: Kaku Hirao (attorney, Nishimura & Asahi)

The Committee members, Ken Arahari and Kaku Hirao, are members who have no vested

interest in Toyo Ink HD or any of the group companies under Toyo Ink HD, including TICC. The Committee engaged the services of Masatsugu Kaneko, CPA; Yasutaka Yoshida,

CPA; Mariko Higashi; and 50 others from Ernst & Young ShinNihon LLC, and Yusuke Suzuki, attorney; Ryo Akiyoshi, attorney; and three others from Nishimura & Asahi as assistants in the investigation.

The Committee conducted an investigation over the period of September 24 to December 8, 2019, convening 10 times.

In addition, since it became difficult for Toyo Ink HD to submit the report for the third quarter for the fiscal year ending December 2019 by the initial deadline of November 14, 2019, it filed an application for approval to the Kanto Local Finance Bureau to extend the deadline for submission of the same quarterly report on the 13th of the same month and received approval from the Kanto Local Finance Bureau on the following day, the 14th. As a result, the deadline for submitting the quarterly report was extended until December 16th of the same year. Chapter 4. Investigation Methods Section 1. Collection of relevant materials The Committee collected relevant materials to the extent necessary for this investigation, and examined and verified the contents. The following are the principal relevant materials which were collected.

- TICC organization chart, employee list - Workflow, internal regulations, manuals - TICC financial and accounting documents1 - Documents describing the results of the internal investigation by Toyo Ink HD prior

to this investigation - Documents relating to the internal audits - Letters exchanged between TICC and A

1 Details of the collected financial and accounting documents will be described later in Ⅱ, Chapter 2, Section 3.

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Section 2. Conducting the interviews <Toyo Ink HD, Toyocolor Co., Ltd.2>

Interviewee3 Title / Affiliation4 Date of interview5

C

Chief Business Management Group Group Finance Division Toyo Ink HD

September 19

D

Group Leader Coloring Planning Management Group International Business Division TL

September 19 November 21

E General Manager International Business Division TL

September 19 November 20

F

Director General Manager Group Finance Division Toyo Ink HD

October 21

G Managing Executive Office Manager, Group Audit Office Toyo Ink HD

November 19

H Group Audit Office Toyo Ink HD November 19

I Group Audit Office Toyo Ink HD November 19

2 Hereinafter referred to as “TL”. 3 The titles are omitted in the following table. 4 Title and affiliation at the time of interview. 5 All were conducted in 2019.

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<TICC6, Toyo Ink (Philippines) Co., Inc.7> Interviewee Title / Affiliation8 Interview date9

B President TICC

September 20 October 24

J Supervisor Finance & Accounting / TICC

September 26

K Finance & Accounting TICC September 26

L Logistics / Manager TICC


M

Director, Office General Manager, Corporate Supply Chain Chairman TICC


N Employee TIP September 27

O Former TICC President October 3

P Former TICC President October 16

Q Supervisor Human Resources & Administration TICC

October 23

6 Including previous presidents. 7 Hereafter referred to as “TIP”. 8 Title and affiliation at the time of interview. 9 All were conducted in 2019.

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R Manager Customer Service TICC

October 25

S Manager Sales TICC

October 25 October 31

T General Manager Production & Technical TICC

October 25

U Former TICC President November 25

V Former TICC President November 26

＜TICC’s Lending Banks＞

Bank Interview date10 Mitsubishi UFJ Bank11 October 25

Mizuho October 25

RCBC October 25

Banco De Oro Universal Bank12 October 25

BPI November 15

Section 3. Digital forensic investigation

The Committee preserved the mail server data of 20 TICC officers and employees (including some who had retired) and Toyo Ink HD officers and employees which it deemed necessary, and preserved the electronic data in the computers of 17 people, the mobile devices of 10 people and the shared folders of the TICC Finance Division. Of these, based on the results of the interviews with the relevant parties, the Committee selected the data collected from the mail servers of 12 officers and employees and from the computers of 9 people, which were considered to be particularly important in relation to this investigation, for review as given in the table below.

10 All were conducted in 2019. 11 Hereinafter referred to as “MUFG”. 12 Hereinafter referred to as “BDO”.

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No. Interviewee Title / Affiliation Email data

Computer Investigation period

1 A Sr. Manager Finance & Accounting TICC

Yes Yes Preserved For the entire period

2 M Office General Manager Director, TICC


3 B President TICC Yes Yes From July 1, 2016

4 W Finance & Accounting TICC Yes Yes

Preserved For the entire period

5 J Sr. Supervisor Finance & Accounting TICC


6 K Finance & Accounting TICC Yes Yes Preserved

For the entire period

7 N Officer and employee TIP Yes Yes


8 P Former TICC President Yes Yes Preserved For the entire period

9 L Logistics /Manager TICC Yes Yes


10 O Former TICC President Yes － Preserved For the entire period

11 V Former TICC President Yes － Preserved For the entire period

12 F General Manager Group Finance Division Tokyo Ink HD

Yes － October 1, 2018 - September 30, 2019

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In addition, taking into account the results of the interviews, etc. of the relevant persons, the Committee conducted extraction work to extract data from a total of 797,510 units of data, such as emails and files using a keyword search. Then, each reviewer reviewed a total of 40,894 units of data that had been extracted through the keyword search tagging them as either “Relevant” or “Not Relevant”. As a result, a total of 173 units of data that were thought to be related to the fraud were extracted and used as materials for fact-finding in the investigation as necessary. Section 4. Constraints faced in the investigation

The Committee was subject to some constraints in proceeding with the investigation. As a result, this investigation had its limitations. In particular, the following were the major constraints in relation to this investigation.

- Despite repeated requests from the Committee, A refused to cooperate with the investigation. As a result, the Committee had to clarify the methods and motives of the fraud in a situation where no statements could be obtained from the perpetrator of the fraud.

- In the Philippines, the statutory period for storing bank transaction records is five years from the transaction date, and the status of storage by the bank of documents in excess of five years differs depending on the bank. As a result, it was not always possible to obtain a bank balance certificate before this period, and therefore, the Committee had to narrow down the period subject to investigation.

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II. Investigation Results Chapter 1. Facts as the Premise of the Investigation Section 1. Outline of the business of Toyo Ink HD

Toyo Ink HD was founded in 1896 as a privately-operated store named “Kobayashi Ink Store” currently located in Nihonbashi-Hongokucho, Chuo-ku, Tokyo. After being reorganized as a limited partnership company in 1905, it was reorganized as a joint-stock company in 1907 and the trade name was changed to “Toyo Ink Manufacturing Co., Ltd.”. Subsequently, the company was listed in the second section of the Tokyo Stock Exchange in October 1961, and in the first section of the Tokyo Stock Exchange in August 1967.

In 2011, Toyo Ink Mfg. Co., Ltd. established Toyo Ink Co., Ltd. (hereinafter referred to as “TI”) and Toyochem Co., Ltd. (hereinafter referred to as “TC”) in an incorporation-type company split, and transferred both companies to a holding company as core operating companies, and the trade name was changed to “Toyo Ink SC Holdings Co., Ltd.”, up to the present day. As of the end of November 2019, the Toyo Ink HD Group comprises a conglomerate consisting of 62 consolidated subsidiaries and seven equity-method affiliates.

Toyo Ink HD’s businesses comprise (1) color and functional materials business, (2) polymers and coatings business, (3) packaging materials business, (4) printing and information business, (5) other businesses, and (6) sales. Specifically, the main business contents in (1) the color and functional materials business are the development and production of colors used in printing inks and functional colorants to be used in various containers and automobiles, etc., in (2) the polymers and coatings business are the development and production of adhesives used for film packaging and adhesive tapes used for double-sided tape, in (3) the packaging materials business are the development and production of gravure ink used for film packaging, and in (4) the printing and information business are the development and production of offset inks used in books and inkjet inks used in billboard advertising.

In addition, the major overseas group companies engaging in each abovementioned business for Toyo Ink HD will be described later in 3(1). Section 2. Outline of the business of TICC, etc. 1. Outline of the business of TICC

TICC was established in the Philippines in 1997. TICC’s business is categorized as Toyo Ink HD’s business of (1) color and functional materials business. TICC’s business model can be broadly divided into (a) toll processing format (direct sales), (b) toll processing format (sell back), (c) direct sales, (d) trading company colors and (e) exports, and toll processing accounts for about 80% of TICC’s sales. TICC does not have many new customers, and the majority of orders come from existing customers. The major customers of TICC are manufacturing subsidiaries of Company A, Company B and Company C, etc., and the sales in terms of these customers account for the majority of the total sales.

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In addition, TICC is located in a special economic zone known as PEZA (Philippine Economic Zone Authority), and enjoys the privilege of receiving preferential tax benefits due to PEZA (four years from the start of operations up to a maximum of eight years, exemption from corporate income tax of 30%). On the other hand, the movement of goods from PEZA to outside the PEZA zone is strictly controlled. For example, when taking goods out of the PEZA zone, it is necessary to file an application with the PEZA management office in relation to the quantity being transported and the transport destination, and a third-party contact investigation will be conducted to confirm the delivered amount in relation to the counterparty entered in the application as the transport destination. Effective management is ensured by imposing a sanction so that the preferential tax benefits will not be available in the following year if the number given as the quantity being transported does not match the number given in the delivered amount. 2. Changes in previous presidents

Name Term of appointment as president

X 1997 to April 2003

V April 2003 - January 2005

U January 2005 - January 2007

O January 2007 - April 2011

P April 2011 - January 2017

B January 2017 - present day 3. Changes in TICC’s business performance

TICC did not see its orders increase as much as expected for a while following its establishment in 1997, and until about 2003, the accumulated loss increased year after year. However, from around 2004, the volume of orders increased and the accumulated loss gradually came to be eliminated.

Since TICC’s main business model is the processing fee business based on toll processing, TICC’s performance is hugely impacted by the end manufacturer’s production plan and performance relating to the final product. In 2007, as Company A moved its production base to outside of the Philippines, the volume of TICC’s orders dropped significantly. At this time, aside from TICC, some competitors, who had entered the market in the Philippines, decided to withdraw from the Philippines. Later, Company A returned its production base to the Philippines, and from around 2009, TICC’s business performance saw an upturn, and in around 2011, the volume of orders recovered to a level of about double compared with 2007.

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Section 3. Outline of the overseas group companies, etc. 1. Outline of the overseas group companies

The overseas group companies in the Toyo Ink HD Group (consolidated subsidiaries and equity-method affiliates; the same shall apply hereinafter) are composed of 33 in Asia, 9 in Europe, 5 in the Americas, and 1 in Africa.

The following is a list of the major overseas group companies divided into Toyo Ink HD’s business categories.

Business category Overseas group companies

(1) Color and functional materials business

TICC, Toyo Ink Compounds Vietnam Co., Ltd. Zhuhai Toyocolor Co., Ltd, Toyo Advanced Science Taiwan Co., Ltd., Toyo Ink Europe Specialty Chemicals S.A.S. Hanil Toyo Co., Ltd., etc.

(2) Polymers and coatings business

Toyo Ink (Thailand) Co., Ltd., Shanghai Toyo Ink Mfg. Co., Ltd. Sam Young Ink & Paint Mfg. Co., Ltd, etc.

(3) Packaging materials business

Toyochem Specialty Chemicals, PT. Toyo Ink Indonesia, Jiangmen Toyo Ink Co., Ltd. Toyo Printing Inks Inc., LioChem Inc., etc.

(4) Printing and information business

Toyo Ink India Pvt. Ltd., Tianjin Toyo Ink Co., Ltd., Toyo Ink Europe N.V., Toyo Ink America, LLC, etc.

(5) Other businesses TIPPS, Toyo Ink Far East Ltd., Toyo Ink International Corp, etc.

(6) Sales Toyo Ink Asia Ltd., etc.

2. Overview of overseas group company management by Toyo Ink HD

In Toyo Ink HD, the departments responsible for overseeing the overseas group companies are TL’s International Management Division, TC’s International Management Division, and TI’s Global Business Head Office.

Basically, the overseas group companies operating (1) the color and functional materials business are managed by TL’s International Management Division, the overseas group companies operating (2) the polymers and coatings business are managed by TC’s International Management Division, and the overseas group companies operating (3) the packaging materials business and (4) the printing and information businesses are managed by TI’s Global Business Head Office.

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Regarding TICC which is where the fraud occurred, TL’s International Management Division is the supervising division, and the status of management of TICC by this division will be described later in Chapter 2, Section 4-2. Chapter 2. Facts Relating to the Fraud Section 1. Facts revealed in the internal investigation through checking the financial and accounting materials Toyo Ink HD and TL carried out an internal investigation from August 27 to September 11, 2019. During the process, financial and accounting materials were collected, and the following facts were found.

First, C of the Group Finance Division of the Toyo Ink HD and D of TL’s International Management Division compared the balance certificate collected from each of the banks of MUFG, Mizuho, BPI , RCBC and BDO with the consolidation packages submitted by TICC to Toyo Ink HD, and discovered that, as of August 2019, a total of about 13.3 million USD existed as off-the-books loans payable borrowed from these banks.

In addition, when C and D compared TICC’s accounts payable ledger and the amount of accounts payable-Trade in the consolidation package submitted by TICC to Toyo Ink HD, they discovered the existence of about 2 million USD as off-the-books accounts payable-Trade.

Furthermore, when C and D compared the table listing the results of the physical inventory at the end of 2018 created by L and the valuation of the inventory in the consolidation package submitted by TICC to Toyo Ink HD, only inventory worth approximately 7.6 million USD was recorded in the table created by L, while approximately 14.3 million USD’s worth of inventories was recorded in the consolidation package submitted by TICC to Toyo Ink HD, and an overstating of about 6.7 million USD’s worth of inventories was found. Section 2. Details of A’s explanation, etc. 1. Details of A’s explanation at the time of the internal investigation E of TL’s International Management Division visited TICC from August 27 to August 30, 2019 as part of an internal investigation into the fraud and interviewed A in the presence of B and others on three occasions on August 28, 29 and 30. In addition, C and D also interviewed A on September 2. The details of A’s explanations about the fraud in the series of interviews are as follows. (1) Details of A’s explanation at the time of the interview on August 28, 2019 According to E, A initially stated, “Since the borrowing from RCBC is a recent event, the amount borrowed from RCBC has not been reflected in the financial statements”. However, in fact, records show that TICC had been borrowing from RCBC since around 2014, and when E pointed this out, A changed the explanation he had previously given up to this point and admitted that money had been borrowed from RCBC from around 2014. In addition, A said,

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“From the time of V acting as TICC’s president until 2016, the raw material costs and loans payable were manipulated to appear less than the actual amounts, and the figures were manipulated so that the retained earnings appeared larger than the actual amounts.” When E asked about the exact method of Fraud, A fell silent and since he would no longer speak, E decided to ask about the exact method of Fraud in an interview on the following day and later, and therefore, the August 28th interview was terminated. (2) Details of A’s explanation at the time of the interview on August 29, 2019

According to E, when asked about the exact method of Fraud, A explained in the interview of August 29, 2019, “Each month, if the actual profit in the income statement was small, looking at the main transactions, if the gross operating profit of a transaction was 3% or less, the raw material costs were condensed and the profits inflated. An amount equivalent to the inflated profits was squeezed out by recording the appraised value of the inventory for each month at an inflated amount more than the actual appraised value. As a result, where there was a discrepancy between the valuation of the actual inventories and the valuation of inventories on the books, at the time of the settlement of the accounts in December, the appraised value of the inventory was devalued to the actual appraised value while some of the loans payable were recorded as off-the-books loans, and by recording the loans payable on the books as lower than the actual borrowed amount, a balance was achieved on the balance sheet.” In response to A’s explanation, E asked, “If each month from January to November, the inventories were overstated, and you made adjustments at the end of the period by under-reporting the loans payable with regard to the overstated amount, how did you ensure consistency with the borrowing breakdown for each bank for each quarter?” to which A changed the explanation he had previously given up to this point and stated, “Actually, rather than making adjustments to the loans payable, I adjusted the accounts payable-Trade.”

Since A’s explanation had changed and the exact method of the Fraud appeared complicated, E instructed A to write up a chronologically organized report showing the exact method. (3) Details of A’s explanation at the time of the interview on August 30, 2019

A sent a report (hereinafter referred to as “A’s report”) to B on August 30, 2019 by email. A description was given in this report that from 2005 to 2016, in a form in line with the profit targets, the raw material costs mainly for the products for Company A’s Philippine subsidiary were recorded as less than the actual amount of the raw material costs, and the appraised inventories were recorded as greater than the actual amount and an amount equivalent to the overstated amount was adjusted at the end of the period by under-recording the accounts payable-Trade, and this accumulated loss (5.5 million USD) was concealed with off-the-books loans.

However, since A’s report did not give the exact method of Fraud, E instructed A to resubmit a report describing the exact method of the Fraud. Nonetheless, to date, A has not submitted a report on the exact method of fraud.

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(4) Details of A’s explanation at the time of the interview on September 2, 2019

C and D conducted an interview with A at the time of their visit to TICC on September 2, 2019. According to D, A explained in the same interview that “in and before 2016, (1) after properly recording the loans payable through the journal entry “(Debits) Cash / (Credits) Loans payable”, (2) he suppressed the cost of goods sold by recording an adjusting journal entry of “(Debit) Inventory / (Credit ) Cost of Goods Sold” in order to increase the profits in the P&L, and (3) in order to reduce the value of the inventory, he recorded an adjusting journal entry of “(Debit) Accounts payable-Trade / (Credit) Inventory” or “(Debit) Loans payable / (Credit) Inventory”. On the other hand, from 2017 onwards, in order to balance off the loans payable, he recorded the adjusting journal entries of (1) and (3)”. In this regard, although A was asked about the exact method of the fraud, such as the reason for making the journal entry of (3) and the timing of the journal entry processing of (1) to (3), A did not give a reasonable explanation. (5) Documents discovered on A’s work computer

The documents discovered on A’s work computer as a result of a digital forensics investigation describe his feelings of regret with regard to the fraud such as feeling ashamed at having to explain the fraud in the case to E at the time of being interviewed for the internal investigation, how he fell silent because of the anguish he felt, how he had considered committing suicide and how he was prepared to resign from the company. In addition, the documents found on A’s work computer contained the following (i) to (iii) giving a rough outline of the method of Fraud.

(i) The inventories, accounts payable-Trade and loans payable at the time of July 2019 had been fraudulently manipulated.

(ii) The monetary value of the inventory had been fraudulently manipulated in order to overstate the profits. Correspondingly, in order to ensure consistency on the balance sheet, some of the accounts payable-Trade and loans payable were fraudulently manipulated and processed off-the-books.

(iii) At the time of 2002 when A joined TICC as Finance Manager13, the amounts of the inventories and accounts payable-Trade already differed from the actual amounts. At the end of the year of 2002, A forcibly adjusted the difference between the monetary values of the inventories and the accounts payable-Trade.

13 In fact, A joined TICC as an Assistant Finance Manager in 1999 and was promoted to Finance Manager in 2002.

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2. Exchanges with A at the time of the Committee’s first visit to the Philippines (1) Background leading to the first visit to the Philippines

Since A admitted in the internal investigation that he had committed the Fraud, TICC suspended A from work for a period from September 3 to October 3, 201914.

Based on this, A complained in a letter dated September 4 that TICC had shut him out of his office and had seized the documents and computer in his office. TICC instructed A in a letter dated September 11th to submit the TICC documents and data that he had in his possession, and A explained in a letter dated September 13th that he did not have any TICC documents or data in his possession and stated to the effect that he would cooperate with the investigation into the fraud in the case. (2) Exchanges at the time of the interview on September 26, 2019

Based on the fact that A had said in the letter dated September 13, 2019 that he would cooperate with the investigation into the Fraud, the attorneys of Nishimura & Asahi and the certified public accountants of Ernst & Young ShinNihon LLC, who are the investigation assistants of the Committee (hereinafter referring to the team in charge of the Philippine local investigation as the “Philippine investigation team”) together with the local attorneys in the Philippines of SyCip Salazar Hernandez & Gatmaitan, (hereinafter referred to as “SyCip”) and the certified public accountants of EY Philippines interviewed A and A’s attorney. The Philippine investigation team asked A to cooperate with the investigation in the case, whereupon A’s lawyer made a demand that unless a non-prosecution agreement was issued in writing describing to the effect that A would not be prosecuted in either a criminal or civil case, A would not be able to cooperate with the investigation such as with an interview or the provision of documents.

After the Philippine investigation team passed on Toyo Ink HD’s intention of not agreeing to non-prosecution, the attorneys of SyCip attempted to persuade A to cooperate with the investigation, but since A and his attorney did not change their stance of refusing to cooperate with the investigation, the Philippine investigation team abandoned the attempt at that time to interview A. 3. Exchanges with A at the time of the Committee’s second visit to the Philippines (1) Exchanges at the time of the interview on October 23, 2019 After the interview on September 26, 2019, since a letter arrived from A addressed to B, the President of TICC to the effect that he would explain the Fraud on condition of access to the financial and accounting materials stored by the company and provision of materials15, the Philippine investigation team together with the SyCip attorneys and EY Philippines certified public accountants carried out an interview with A and A’s attorney on October 23, 2019.

In the interview, A and A’s attorney stated that A would cooperate with the interview if copies and the electronic data of the Costing Worksheet, Bank Reconciliation Statement 14 It should be noted that TICC extended A’s suspension from work from October 3 to November 3. 15 Letter from A to B dated October 1, 2019 and letter dated 6th of the month.

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(USD), Cash Receipts Statement (USD), Consolidation Package and Business Plans Worksheet from 1998 to 2019 were provided in advance.

The Philippine investigation team requested that A give an outline of his claims before the copies of the documents and data were handed over, but A’s side rejected the request and demanded that copies of all of the abovementioned paper documents and electronic data be handed over first. The Philippine investigation team presented a compromise to the effect that “since identifying the documents and preparing copies of the paper documents would take time, we will provide copies of the paper documents in turn after they have been made. We would like to first provide just the electronic data and conduct the interview after the provision of the electronic data”, but A’s side replied that they could not agree to an interview unless all of the copies of the paper documents and data had been received.

As a result of the negotiations between the Philippine investigation team and A’s side, an agreement was reached between the Philippine investigation team and A that (1) copies of the paper documents16 A thought to be particularly important would be provided at the interview on October 23rd, (2) copies of other paper documents and data would be prepared by the time of the second meeting on October 25th and provided to A’s side, and (3) A would comply with an interview after checking the contents of the prepared documents at the commencement of the interview on October 25th. (2) Exchanges at the time of the interview on October 25, 2019

At the interview of October 25, 2019, unlike in the original plan, A’s attorney did not attend and A responded to the Philippine investigation team through receiving advice from his attorney over the phone. The Philippine investigation team provided A with copies of the paper documents and data that he had requested and on conveying to the effect that some of the paper documents and data that A had requested were not stored in the storage location specified by A or on the server, A stated that if not all of the documents were there, he had to check what was missing, and so he started to check each page of each document.

In addition, A requested that he be allowed to check the server for the document data since backup data should have been saved on the TICC server. In the presence of the Philippine investigation team, A checked the data on the server but backup data had not been saved on the server. A stated to the effect that “backup data would have been saved on an external storage medium such as J’s flash drive or a DVD”, but according to J, he had never saved backup data on an external storage medium. In the end, Q, a SyCip attorney and J searched for an external storage medium containing the backup data, but did not manage to find one.

The Philippine investigation team explained that it was impossible to provide documents that were not currently stored at TICC, but continued to prepare and collect the documents requested by A, and attempted to persuade A to at least give an outline of the catalyst and timing of the fraud and the existence of other participants. However, A refused to be interviewed by reason that he would not comply with the interview unless copies of the documents and data were all available. The Philippine investigation team warned A that if he stuck to demanding the provision of all of the documents, they would have to abort the interview and would not be providing A 16 The documents were contents approved by the TICC President for the payment of a commission to specific TICC customers.

19

with any of the documents or data, and since A did not change his stance of refusing to be interviewed, the Philippine investigation team broke off A’s interview. 4. Exchanges with A at the time of the disciplinary procedure

In the process of A refusing to cooperate with the investigation, TICC decided to dismiss A and in a letter dated October 25th, conveyed that the Fraud was an act sufficient to ensure loss of confidence in A and was grounds for termination of his contract, and also demanded that A submit a written document giving his account within five days of the arrival of the letter and also attend a hearing on October 31.

A stated in a letter dated October 29, 2019 that the reason why he had not recorded some of the loans payable was in order to make out that TICC was seeing a profit, but these off-the-books loans payable were borrowed with the approval of former TICC presidents including the current president, and that it was not true that he had borrowed without obtaining the approval of the president. In addition, in the same letter, A stated to the effect that he would give an explanation about the Fraud at the hearing on October 31st so long as the copies of the documents and data that he had requested on October 23rd were provided.

Subsequently, A and his attorney came to the hearing of October 31st, but only A’s attorney spoke, and he simply asserted that the cause for why the investigation was not proceeding was not due to A not cooperating with the investigation, and an explanation of the Fraudwas not given.

In response, TICC dismissed A on November 4, 2019.

Section 3. Conducting of an investigation in light of A’s refusal to cooperate with the investigation

As described in 2 above, despite repeated requests from the Committee, A refused to cooperate with this investigation. For this reason, the Committee clarified the details of the Fraud through interviews with relevant parties other than A and a digital forensic investigation, and also through the collection and analysis of materials, including financial and accounting documents.

In particular, from the results of the internal investigation in the abovementioned 1, and the details of A’s explanation in the abovementioned 2, the under-reporting of the off-the-books loans payable and accounts payable-Trade and the overstating of the inventories by A were suspected and an investigation was conducted mainly of the account headings of loans payable, accounts payable-Trade and inventories. 1. Workflow pertaining to TICC’s financial statements and financial reports

In order to clarify the details of the Fraud, the Committee conducted interviews with the applicable persons in charge in order to understand the basic premise of the workflow relating to each account of TICC’s loans payable, accounts payable-Trade and inventories as well as the workflow relating to the financial statements and financial reports, and also collected and analyzed the financial and accounting documents discovered in the digital forensic investigation.

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(1) About ERIC

TICC has an accounting system known as “ERIC”, and the finance and accounting staff use this system to create and aggregate the journal entries.

ERIC is a system based on the Philippine peso, and all the input data is stored having been converted into equivalent Philippine pesos. In addition, the aggregated results, including the journal vouchers are stated and output in equivalent Philippine peso. On the other hand, TICC currently uses USD as its functional currency and prepares all of its financial statements and consolidation packages in USD. Therefore, the person in charge at TICC creates and aggregates journal entries using ERIC and then converts these aggregated results into USD to prepare the financial statements and consolidation packages.

The reason why the currency of TICC’s accounting system and its functional currency have become inconsistent is as follows.

Initially, TICC used the Philippine peso as its functional currency, but in terms of monetary value, most of TICC’s transactions were conducted in USD, and since the value of the Philippine peso tended to decline against the USD, this was presumed to have a significant impact on TICC’s business performance, and therefore in around June 2003, V, who was the TICC president at the time, decided to change TICC’s functional currency from the Philippine peso to USD. As a result, at TICC, the accounting system which is used is based on the Philippine peso, while the functional currency is USD.

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(2) Workflow relating to the financial statements and financial reports

An outline of TICC’s workflow relating to the financial statements and financial reports is as given below. It should be noted that TICC’s fiscal year end is December, and the accounting period is from January 1 to December 31.

Operations Person in charge17

Outline

Recording of journal

entries

Finance & Accounting18

Supervisor (J)

- Collects various documents relating to transactions from each relevant division, enters them into ERIC’s General Ledger (hereinafter referred to as “GL”), and then generates the journal vouchers from ERIC19.

Preparing and

recording of closing

journal entries

A - Prepares journal vouchers for closing journal entries and sends them to the FA Division Supervisor.

FA Division Supervisor

(J)

- Enters the journal vouchers prepared by A into ERIC’s GL (does not check the accuracy of the journal vouchers).

Prepares and

reports the financial

statements


(J)

- Closes the books every month within the following 8 to 15 business days, enters journal vouchers in USD into the file, and creates a journal entry list in USD. - Aggregates the USD journal entry list and prepares a trial balance (USD) on the basis of the aggregated results. - Based on the trial balance (USD), prepares financial statements (USD) in an Excel file and sends it to A.

A - Checks the contents of the financial statements (USD). - Creates a consolidation package on a monthly basis and sends it to the TICC president.

TICC President

- Approves the consolidation package.

17 The current person in charge is shown in parentheses. The same applies in the tables describing the business flow. 18 Hereinafter referred to as the “FA Division”. 19 Each division or person in charge at TICC sends various documents related to transactions to FA Division. Each person in charge in FA Division enters these documents into ERIC. However, various documents related to deposit transactions and cost accounting are not entered directly into ERIC, but are first entered into an Excel file for aggregation, then on a monthly basis, each person in charge in FA Division aggregates the data that has been recorded in the Excel file, creates a journal entry, and enters the journal entry into ERIC. After these journal entries have been made, the person in charge in the FA Division finalizes the journal entries in ERIC. Once the journal entries have been finalized, the entered data cannot be changed, and if necessary, it is corrected by entering the adjusting journal entries in the following month.

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In order to check whether improper accounting practices had been used in the course of the preparation of the consolidation package after the creation of the trial balance (USD), the Committee checked whether the amounts were consistent between TICC’s trial balance (USD) for fiscal years 2015, 2016, 2017 and 2018 and the Philippine statutory audited financial statements, and between aforementioned financial statements and the consolidation package balance sheet and P&L statement, and if there was a difference, checked the reason for the difference with the person in charge in the Group Finance Division of Toyo Ink HD. As a result, there were no differences where the reasons were unclear. In other words, it was confirmed that the fraud was conducted at a stage prior to the creation of the trial balance with totals (USD). 2. Off-the-books loans payable (1) Outline of the loans payable

As of the end of June 2019, TICC has transactions with five banks: MUFG, Mizuho BPI, RCBC, and BDO (hereinafter referred to as “5 Banks”). The loans payable from these 5 Banks were as of the end of June 2019 of two types: (1) short-term loans payable using promissory notes20 and (2) short-term loans payable related to import trade referred to as trust receipts.

Overseas subsidiaries, including TICC, are able to attach a guarantee from Toyo Ink HD for their debt obligation when borrowing from banks. There is a ceiling on the total amount guaranteed by Toyo Ink HD, and the total amount for which TICC was able to receive a guarantee from Toyo Ink HD was 4.6 million USD as of the end of June 2019. TICC had attached a guarantee of a total of 4.6 million USD from Toyo Ink HD for its loans payable from MUFG and BPI using promissory notes, and other loans payable had no guarantee. According to the persons in charge at the 5 Banks, in the case of a subsidiary company of a reputable Japanese company, it is possible to grant a loan even if there is no guarantee.

In addition, Toyo Ink HD set a ceiling on the total amount to be borrowed from the banks in 2017 for all of its overseas group companies. The TICC ceiling was 15.2 million USD as of the end of June 2019.

20 There are two types of loans payable using promissory notes: new borrowing and renewal of borrowing, but the promissory note used in the two is the same.

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(2) Workflow relating to loans payable and recording of loans payable The outline of the workflow relating to TICC’s loans payable and recording of loans payable is as shown in the table below.

Operations Person in

charge Outline

Loans payable

FA Division Person in Charge21

(K)

- Based on A’s instructions, prepares a promissory note or trust receipt and sends it to the authorized signatories22.

Authorized signatories

- Signs the promissory note or trust receipt23.

(Bank) - Deposits funds into TICC’s bank account24

Recording of loans payable

A <Promissory Note> - Enters the data relating to the loans payable into the

BR25. <Trust Receipt> - Enters the data into ERIC’s Accounts Payable Voucher module (hereinafter referred to as “APV module”).

21 From April 2016 onwards, K prepared a promissory note or trust receipt based on A’s instructions and obtained the necessary signature. Meanwhile, up until April 2016, A prepared the promissory note or trust receipt, and signed it himself, and depending on the amount of the loans payable, obtained the signature of M or the TICC president at the time. 22 In the Philippines, before a company is able to issue a promissory note and borrow from a bank, a letter called a Secretary’s Certificate that states the right to sign the promissory note or trust receipt must be submitted to the bank. Banks will not lend money unless the promissory note or trust receipt has the signature of the signatory listed in the Secretary’s Certificate. According to the Secretary’s Certificate issued by TICC, in the case of (a) borrowing up to 25 million Philippine pesos, the signatures of A and M were required, and in the case of (b) borrowing of 25 million Philippine pesos or more, in addition to the signature of A or M, the signature of the President of TICC was required, and the required signatures were submitted to each bank. 23 Until the fraud by A was discovered, B mistakenly believed that the promissory note was not for borrowing but was drawn on payments to suppliers. Therefore, B stated that if a promissory note got mixed into the bundle of documents that had been passed on by K, he thought that as with checks, it was required for the payment to the customer, and he signed it after checking the amount listed in the promissory note. On the other hand, other previous presidents stated they were aware that they had signed the required documents for borrowing, but they do not remember whether the documents were promissory notes. 24 In the case of such new loans payable and renewals using a promissory note, they are deposited into TICC’s bank account, but in the case of a trust receipt, they are not deposited into TICC’s bank account. 25 Abbreviation for Bank Reconciliation. In general, the BR is a table to ascertain the difference between the deposit balances of the account books at the end of the month and the balance certificates of the banks and to properly adjust the differences. However, the BR created by A contained various details such as the payment of foreign currency-denominated debt and interest, and in effect, played the role of a bank deposit book. A aggregated the data entered in the BR and created journal entries on a monthly basis. The contents of the journal entries are, as described in 1, (2) above, entered by the person in charge of FA Division into the GL.

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Operations Person in

charge Outline

A

System (Automatic)

<Promissory Note> Aggregates the data entered in BR on a monthly basis to create a journal voucher. <Trust Receipt> - The APV module aggregates the data entered on a monthly basis, automatically creates journal entries, and records them in the GL.


(J)

<Promissory Note> - Enters the journal voucher created by A into ERIC.

(3) Existence of off-the-books loans payable A. Sending and collection of a balance confirmation letter, and obtaining a balance certificate

In order to ascertain the amount of loans payable that had not been recorded in the books, the Committee sent a balance confirmation letter (reference date of end of December 2018 and end of June 2019) to the 5 Banks, and checked the balance of the loans payable for the end of December 2018 and end of June 2019. And, the Committee requested, via TICC, the materials stating the balance of loans payable, such as a balance certificate, for prior to the end of December 2018.

In this regard, the statutory period for storing bank transaction records in the Philippines is five years from the transaction date, and since the status of storage by the bank of materials in excess of five years differs depending on the bank, the status of acquisition of materials from the five banks differed.

The table below shows the earliest time for when the Committee was able to ascertain the amount of loans payable from materials such as the balance certificates obtained from the 5 Banks and the digital forensic investigation.

Bank Timing

MUFG December 2012 Mizuho December 2013

BPI December 2014 RCBC March 2013 BDO December 2012

In addition, in order to confirm whether or not there were loans payable from banks other

than the five banks, the Committee made inquiries by email to a total of 41 universal banks and commercial banks in the Philippines other than the 5 Banks about the existence and details of loans to TICC. As a result, there were no reports of the existence of any loans made to TICC.

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As stated above, loans payable from banks other than the five banks were not found. B. Changes in off-the-books loans payable

The table below shows the changes in the off-the-books outstanding loans payable from the end of December 2014 found as a result of this investigation.

In this regard, in order to calculate the off-the-books outstanding loans payable, it was necessary to ascertain the balances of all 5 Banks at each point in time, but since the balances of all five banks could only be ascertained from December 2014 onwards, the table below shows the balance of off-the-books loans payable only from December 2014. Moreover, the table below does not show the breakdown of the balance of off-the-books loans payable for each bank. This is because in order to ascertain the balance of off-the-books loans payable borrowed per bank, it is necessary to deduct the outstanding loans payable on the books from the true outstanding loans payable for each bank, and although it was possible to ascertain the balance of the true outstanding loans payable per bank through the investigation, TICC’s financial and accounting materials were not sufficient to ascertain the balance of loans payable per bank26.

Unit: million USD Changes in the balance of off-the-books loans payable

December

2014 December 2015

December 2016

December 2017

December 2018

June 201927

Bank balance certificate

(correct amount) 24.7 26.5 24.0 25.7 26.6 28.4

Consolidation package balance 13.4 13.8 12.9 14.1 14.2 15.2

Balance of off-the-books loans

payable 11.4 12.7 11.1 11.7 12.4 13.1

As stated in the table above, as of December 2014, the balance of off-the-books loans

payable was approximately 11 million USD, and later until December 2018, the balance of off-the-books loans payable shifted slightly between the range of approximately 11 million USD and 13 million USD. On the other hand, at the time of March 2019, the balance of off-the-books loans payable had increased by about 1.5 million USD from about 12.4 million

26 Specifically, it was not possible to ascertain the loans payable balance for each bank on the books due to the fact that (1) borrowing and repayment journal entries did not have bank-specific codes, (2) there were no bank-specific subsidirary ledgers for loans payable and interest calculation, and the contracts and vouchers relating to interest payments were not stored in one place, and (3) there were no ledgers for managing the borrowing balances by bank, the borrowing balance for each bank on the book could not be ascertained. 27 As of March 2019, the bank balance certificate (the correct amount) was 28.1 million USD, the consolidation package balance was 14.2 million USD, and the off-the-books loans payable balance was 13.9 million USD.

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USD to about 13.9 million USD. (4) Methods of off-the-books loans payable A. Interviews with relevant persons and the digital forensic investigation

In order to clarify the methods used in the off-the-books loans payable, as described in I, Chapter 4, Section 2 above, the Committee conducted interviews of the TICC-related persons, but all of the interviewees stated that they were not aware of the existence of off-the-books loans payable until the time of this investigation, and it was not possible to obtain a statement that directly led to clarification of the methods used in the off-the-books loans payable through the interviews.

In addition, the Committee conducted a digital forensic investigation targeting TICC-related persons as described in I, Chapter 4, Section 3 above, but did not find any emails that directly connected to the clarifying of the methods used in the off-the-books loans payable.

As a result of the digital forensic investigation, it was found that (i) A had sent a balance certificate to the person in charge at the Group Finance Division on May 7, 2019 for the purpose of collecting information for the foot notes of consolidated financial statements for the first quarter of the fiscal period ending December 2019 and since there was a discrepancy between the loans payable in the balance certificate and the amount in the consolidation package, the person in charge at Toyo Ink HD had sought clarification from A; (ii) later, the TL International Management Division had proceeded to check the reason why the amount of the loans payable in the balance certificate differed from the amount in the consolidation package, and on the 31st of the same month, a letter of apology in the name of BPI addressed to the TL International Management Division apologizing for the fact that there was an error in the balance certificate was sent to the TL International Management Division together with a revised balance certificate; and (iii) it was discovered that A had received an editable Word file in a similar format as a BPI balance certificate from a TICC employee on April 29th of the same year. When the Committee interviewed BPI, the person in charge at BPI stated that the abovementioned revised balance certificate and letter of apology had not been issued by BPI. From the above, there is the possibility that A forged the balance certificate using the abovementioned format in order to prevent the fraud from being detected from the inconsistency in the contents of the consolidation package and the balance certificate. However, Toyo Ink HD and TICC were not aware that there was the possibility of a forgery until the time of this investigation.

In addition, the abovementioned TICC employee who sent the format of the BPI balance certificate to A has already retired, and could not be interviewed. B. Collection and analysis of the financial and accounting materials

As described in (3) above, based on the fact that the balance of the off-the-books loans payable had seen a relatively large increase from 12.4 million USD to 13.9 million USD from December 2018 to March 2019, the Committee collected and analyzed such materials as the BR, USD denominated journal entry list and the promissory notes discovered in the emails in order to clarify the methods used in the off-the-books loans payable, and conducted an

27

investigation into the status of loans payable in March 2019 and the status of subsequent journal entries and records. The facts revealed as a result were as follows. (A) Status of loans payable in March 2019

On March 7, 2019, K sent a promissory note signed by B and A to the person in charge at BDO by email and asked to borrow 600,000 USD. The borrowing date, repayment date and interest rate and other details were not given in the promissory note, and only the amount of 600,000 USD was described, and at a later date, a communication was received from the person in charge at BDO with respect to the interest rate, etc.

On March 13, 2019, K sent a promissory note to the person in charge at BDO by email and requested an additional loan of 300,000 USD.

On March 18, 2019, K sent a promissory note signed by B and A to the person in charge at Mizuho by email and asked to borrow 700,000 USD. The promissory note gave the amount and also the borrowing date, repayment date interest rate and other details. The total amount of the three loans payable of 1.6 million USD was deposited into TICC’s USD bank account that had been opened at each bank28. (B) Status of account processing

The loans payable described in the abovementioned (A) were properly recorded in the BR as “(Debit) Cash in Bank of 1.6 million USD / (Credit) Borrowing of 1.6 million USD”.

However, later on March 31, 2019, the following adjusting journal entries were booked at the time of making closing journal entries, which resulted in an increase in inventory, a decrease in loans payable, an increase in accounts payable-Trade and a decrease in cost of goods sold, and loans payable of 1,434,746.20 USD became off-the-books.

Adjusting journal entries Unit: USD Item Debit Credit

Finished Goods 798,609.89

Raw materials 724,365.39

Accounts payable-trade

1,332,615.78

Loans payable 1,434,746.20

Cost of goods sold 176,374.92

Total 2,233,356.09 2,233,356.09

28 In order to ascertain whether the loans payable had not been recorded in the books at the time of the borrowing (for example, whether the loans payable had been deposited to a bank account that TICC did not know about) and had been fraudulently diverted outside of the company, the Committee obtained deposit transaction statements from the 5 Banks and with regard to the bank deposits and withdrawals (since January 2018) compared and analyzed the monthly total amounts and the deposit and withdrawal total amounts on the accounting books, and it was not found that money had been illegally diverted outside of the company.

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The reason why A made the adjusting journal entries at the time of making the closing

journal entries for the fiscal year ending March 2019 is not clear, but as a result of the adjusting journal entries, some of the loans payable became off-the-books and since the profits increased in line with the decline in the cost of goods sold, it is very likely that the adjusting journal entries were made with the intention of making some of the loans payable off-the-books and manipulating the profits.

In addition to the adjusting journal entries in March 2019, adjusting journal entries recording loans payable as a debit was also found in closing journal entries at other times. Although unlike the closing journal entries at the time of the adjusting journal entries in March 2019, the breakdown is not necessarily clear, these adjusting journal entries are also presumed to be accounting practices conducted for the intention of making some of the loans payable off-the-books. (C) Analysis of the BR

As described in (2) above, when TICC borrowed loans from a bank using a promissory note, A entered data on the loans payable into the BR. In this regard, since the data entered into the BR can be rewritten at a later date, due to the possibility that A had altered the BR figures and made the loans payable off-the-books, the Committee acquired the bank statements and checked them as well as the journal entries relating to loans payable, repayments and interest payments recorded in the BR.

As a result, as described in (a) below, there is the suspicion that the interest payments were understated in the BR, but there was no evidence that the amount of loans payable had been altered aside from this. (a) Account processing pertaining to the interest expense

At TICC, if interest was paid for a loan, A recorded a journal entry of “(Debit) Interest expense / (Credit) Cash in Bank” in the BR. However, in 2018, while the total amount of interest to be paid for the year to BPI should have been 190,275 USD, only an interest expense of 19,096 USD (payment for June 2018) was recorded. In other words, only a part of the amount actually paid as interest to BPI was recorded as the interest expense by A and the difference was recorded as a decline in the accounts payable-Trade and a decline in the loans payable. The reason why A processed the accounts in this way is not clear, but the following situations arose due to this processing.

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(b) Relationship between the balance of loans payable, interest expense and calculated interest rates for 2018

The table below shows the balance of loans payable, interest expense and calculated interest rates for 2018.

Balance of loans payable at the end of 2018 Unit: million USD

Loans payable amount Fiscal year ending

December 2018

On the books 14.2 A

Correct amount 26.6 B

Off the books 12.4

Impact of understating interest expense Unit: million USD Fiscal year

ending December 2018

Interest expense on the books (understated) 0.5 C

Correct interest expense 0.7 D

Calculated interest rate

Interest expense on the books / loans payable on the books 3.8％ C/A

Correct interest expense / loans payable on the books 4.6％ D/A

In cases where there are off-the-books loans payable, if all of the interest expense are

recorded properly, the interest rate calculated by dividing the interest payments recorded in the books by the balance of loans payable on the books will be greater than the actual borrowing rate, and there is the risk that the off-the-books loans payable will be discovered, but by understating the interest expense, it is possible to lower the calculated interest rate on the books and bring it closer to the actual borrowing rate.

In view of the above effects caused by understating the interest expense, it is presumed that the accounting process where only part of the actual amount paid is recorded as the interest expense, and the difference is recorded as a decline in accounts payable-Trade and a decline in loans payable was undertaken in order to understate the interest expense and avoid detection of the off-the-books loans payable. C. Summary

From the above, it is highly likely that the method of borrowing off-the-books was an accounting process in which the adjusting journal entry recorded loans payable as a debit at the time of making closing journal entries. In addition, since an interview with A was not conducted and not all of the accounting process relating to the loans payable could be

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examined due to the state of preservation of the financial and accounting materials, etc., as well as the accounting process in which the adjusting journal entry recording loans payable as a debit, the possibility cannot be denied that borrowing was also made off-the-books through some other accounting process.

In addition, A may have understated the interest expense in the BR in order to avoid the off-the-books loans payable being discovered. (5) Participants involved in understating the off-the-books loans payable and borrowing rate

The Committee interviewed the TICC officers and employees who had some involvement in any of the workflow relating to borrowing and recording loans payable, the workflow relating to recording the payment of interest for the loans payable or the workflow relating to the financial closing and financial reporting, namely the former TICC presidents, M, K and J, and all of the interviewees denied their involvement in the off-the-books loans payable and stated that they had not been aware of the existence of the off-the-books loans payable up until the time of this investigation29.

As described in I, Chapter 4, Section 3 above, the Committee carried out a digital forensic investigation, but no emails were found suggesting that TICC officers or employees other than A were involved in the off-the-books loans payable. To begin with, as described in 1(2) above A was in charge of preparing the adjusting journal entries, and moreover, the person in charge in the FA Division had entered the data in ERIC without checking the contents of the adjusting journal entries. As a result, A was able to prepare an adjusting journal entry recording loans payable as a debit for the purpose of making the loans payable off-the-books and record them without being checked by anyone else. Therefore, it cannot be said to be odd that no others aside from A were involved in the off-the-books loans payable.

In addition, A was in charge of entering the data into the BR and preparing journal vouchers based on the BR, and moreover, the person in charge in the FA Division recorded the journal vouchers without checking the contents. Therefore, A was able to tamper with the contents of the BR with the intention of understating the interest, prepare journal vouchers based on the altered BR, and record them without anyone checking them.

From the above, it is reasonable to think that no others aside from A were involved in understating the off-the-books loans payable or interest for the loans payable. 3. Understating of the accounts payable-Trade (1) Workflow relating to recording the accounts payable-Trade 29 At the time of the interview on October 23, 2019, as described in Section 2-3(1) above, when the Committee asked A’s attorney whether any other person in addition to A had been involved in the fraud, the attorney answered “Yes”. However, because the specific name of the person and the degree and content of the involvement were not given, the intent of the statement is unclear. In light of the fact that no suspects have been discovered, it is understood that rather than meaning that there was a person aside from A who intentionally contributed to the fraud, the remark was based on his defense that, for example, “Since previous TICC presidents had checked and approved the contents of the account settlement documents, they must have implicitly allowed the fraud by A.

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An outline of the workflow relating to recording the accounts payable-Trade at TICC is given in the table below.

Operations Person in charge

Outline

Recording of accounts

payable-Trade

【1】 Logistics Division Manager

(L)

- Checks the documents relating to purchase such as purchase orders, receiving reports, invoices, B/Ls, and after signing them, sends the documents to the FA Division.

【2】 FA Division person in

charge (W)

- Enters the contents of the purchase into the ERIC APV module based on the document sent. - Generates the journal vouchers from ERIC and sends them to FA Division Supervisor30 for confirmation.

【3】 System (automatic)

- The APV module automatically aggregates the data for the current month, and enters the following journal entries in the GL. [Debit] Raw materials (or supplies inventory) [Credit] Accounts payable-Trade (in foreign currency) Accounts payable-Non Trade (in equivalent Philippine peso)

Management of payables 【4】 FA Division

person in charge (W)

<Philippine peso> - Enters information on accounts payable-Trade and accrued accounts payable-Non Trade in the Centralized Accounts Payable Monitoring31 and sends it to FA Division supervisor for confirmation.

【5】 A < Foreign currency > - Enters the supplier’s name, invoice number, payment deadline, amount in foreign currency, etc. in the accounts payable ledger32

Recording of payments

( Philippine peso)


charge (K)

- Following the instructions of FA Division Supervisor, using ERIC’s check voucher module, generates the checks. When the checks are generated, the data relating to the payments is automatically entered into ERIC.

30 Currently, J. 31 This is an Excel file for managing debts denominated in Philippine peso, and the contents of each account payable (supplier, amount, payment deadline, etc.) are recorded. Hereinafter referred to as “CAPM”. 32 TICC uses an Excel file called “Notes Payable and Letter of Credits” as an accounts payable ledger.

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Operations Person in charge

Outline


- ERIC automatically aggregates the data relating to payments made by check for the current month and enters the following journal entries into the GL. [Debit] Accounts payable - Non Trade [Credit] Cash in Bank

【8】 FAD Division person in

charge (K)

- Receives the check receipt from the payment recipient and records the check delivery date and check number in CAPM. - Checks the withdrawal of the check in the bank statement, etc., and enters the withdrawal date in CAPM.

Recording of payments (foreign

currencies)

【9】 A

- Prepares bank wire transfer documents and sends them to the authorized signatory.

【10】 Authorized signatories33

- Signs bank wire transfer documents.

【11】 A - Transfers money to business customers through online banking or a bank counter. - Enters data relating to payments in the BR. - Enters the date of payment and the name of the source bank in the accounts payable ledger. - Aggregates the data entered into the BR on a monthly basis, creates journal vouchers, and sends them to FA Division Supervisor.

【12】 FA Division Supervisor

(J)

- Enters the contents of the journal vouchers into ERIC.

(2) Existence of the understating of accounts payable-Trade

The Committee crosschecked the accounts payable-Trade balance in the consolidation package against the data recorded in the accounts payable ledger in order to ascertain whether the amount of accounts payable-Trade had been understated. It should be noted that since accounts payable ledgers have not been found for June 2015 or earlier, the estimated value of the accounts payable-Trade balance for December 2014 to June 2015 was calculated through estimating the timing and period for which payments were thought to have been recorded as accounts payable-Trade based on the payment terms for each payment recipient.

The following table shows the changes in the balance of off-the-books accounts

33 USD payments of up to an equivalent of 25 million Philippine pesos require the signatures of A, the Senior Manager of the FA Division and M, the Director, or the president’s signature in place of both the signatures, and USD payments in excess of an equivalent of 25 million Philippine pesos require the signature of the president.

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payable-Trade from the end of December 2014.

Unit: million USD Changes in the understated accounts payable-Trade

December 201434

December 2015

December 2016

December 2017

December 2018

June 2019

Accounts payable ledger

(Correct amount)

7.9 5.9 7.1 11.2 11.2 8.4

Consolidation package balance

7.4 4.6 4.8 9.7 7.9 5.1

Understated amount 0.5 1.3 2.3 1.6 3.2 3.4

In addition, on the premise of cross-checking the accounts payable-Trade balance in the

consolidation package and the data that had been recorded in the accounts payable ledger, the Committee crosschecked the year-end accounts payable ledger for 2015 to 2018 against the payment records entered in the BR. As a result, some cutoff errors35 were found for the end of December 2015, 2017 and 2018, but the others were confirmed to be recorded accurately. When calculating the amount of the effect, the cut-off error was re-recorded in the proper accounting period.

In addition, the Committee sent a balance confirmation letter to its six major suppliers36 (the reference date was end of December 2018 and end of June 2019), and checked consistency between the responses from the suppliers and the accounts payable ledger. When a difference was found in the two, the voucher was viewed and the reason for the difference was checked. As a result, no differences were found aside from the cut-off error found in the difference in the crosscheck between the abovementioned accounts payable ledger and the payment records entered in the BR.

(3) Method of understating the accounts payable-Trade A. Interview with the relevant parties and the digital forensic investigation

The Committee conducted interviews with TICC-related persons as described in the

34 Since the off-the-books outstanding loans payable could only be ascertained for December 2014 onwards, the balance of the accounts payable could also only be verified from December 2014 onwards. 35 Refers to the figures not reported for the accounting period in which they should have been recorded. Details of the amounts are 48,000 USD for December 2015, 267,000 USD for December 2017 and 141,000 USD for December 2018. 36 The total amount of accounts payable-Trade of the balance confirmation letters at the end of December 2018 and the end of June 2019 were 87% and 80% respectively of the total amount of accounts payable-Trade on the accounts payable ledger, except for the accounts payable-Trade to the Group companies, and had considerable coverage.

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abovementioned I, Chapter 4, Section 2 in order to clarify the method of understating the accounts payable-Trade, but all of the interviewees stated that they had not been aware that the accounts payable-Trade had been understated until the time of the investigation, and it was not possible to obtain a statement through the interviews that would directly lead to clarifying the method of understating the accounts payable-Trade.

In addition, the Committee conducted a digital forensic investigation targeting TICC-related persons as described in I, Chapter 4, Section 3 above, but did not find any emails that directly led to clarifying the method of understating the accounts payable-Trade. B. Collection and results of analysis of the financial and accounting materials

The end-of-period accounts payable-Trade balance is calculated using the following formula. [Accounts payable-Trade balance at the beginning of the period + Amount of accounts payable-Trade incurred for the current period - Amount of accounts payable payments for the current period ± adjusting journal entries]

Therefore, the Committee decided to check whether an accounting process had been employed with the intention of understating the accounts payable-Trade in the amount of accounts payable-Trade incurred for the current period, the amount of accounts payable payments for the current period and in the process of recording the adjusting journal entries. (A) Accounts payable-Trade incurred for the current period

As stated in the workflow chart [3] described in (1) above, the amount of accounts payable-Trade incurred for the current period is recorded in the ledger through the APV module data being entered into the GL. Therefore, the Committee crosschecked the amount of accounts payable-Trade incurred for the current period in the journal entry list denominated in USD and the contents of the APV module from December 2014 to June 2019, and a match was confirmed between the two. In addition, as stated in the workflow chart [2] mentioned in (1) above, since the person in charge in the FA Division enters the information relating to purchases into ERIC’s APV module and generates a journal voucher, it is considered difficult to commit fraud at the stage of entering data into the APV module.

As described above, evidence of improper accounting in the process of recording the accounts payable-Trade were not found, and moreover, the likelihood of the accounts being processed in this way is considerably low. (B) Accounts payable payments for the current period

As described in workflow chart [11] mentioned in (1) above, the amount of accounts payable payments for the current period is recorded in the ledger through preparing a journal voucher based on the data entered into the BR and entering the contents of this journal voucher into the GL. Therefore, when the Committee cross matched the amount of the accounts payable payments for the current period in the list of journal entries denominated in USD from December 2014 to June 2019 against the contents of the BR, the two figures

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matched, but the amount of accounts payable payments in the BR, as described in 2(4)B(C)(a) above included some amounts which should have been recorded as interest expense. Aside from this, the payment amounts of the accounts payable-Trade on the BR matched the payment amounts of the accounts payable-Trade in the journal entry list denominated in USD (amount recorded in credit).

In addition, the Committee crosschecked the bank account deposit/withdrawal records against the data entered into the BR for January 2018 onwards for which bank statements could be obtained in order to verify whether false data had been entered in the BR indicating to the effect that payments had been made even though no actual payments had been made, and the two were found to be consistent.

As described above, no traces were found indicating that there had been improper account processing in the course of recording the payment amounts of the accounts payable-Trade, and moreover, the possibility that such accounts processing had been carried out was considerably low. (C) Adjusting journal entries When the Committee checked the adjusting journal entries recorded in the list of journal entries denominated in USD, it was confirmed that A had made several adjusting journal entries recording accounts payable-Trade as a debit or credit at the time of making closing journal entries.

Other persons in charge in FA Division had little awareness of the contents of these kinds of adjusting journal entries, and since the related documents had not necessarily been preserved, it is not clear why the adjusting journal entries were made. In addition, since it was not always the case that the total amount of adjusting journal entries recording accounts payable-Trade as a debit was greater than the total amount of adjusting journal entries recording accounts payable-Trade as a credit, for example, December 2014 and December 2017 were corrected by the method of overvaluing the accounts payable-Trade on the ledger, it was not possible to deduce fraudulent intentions simply from the adjusting journal entries alone. However, as described in (A) and (B) above, if the possibility of improper accounting at the time of recording the accounts payable-Trade incurred for the current period and recording the payment of the accounts payable-Trade was considerably low, there is a strong likelihood that the adjusting journal entries recording accounts payable-Trade as debits were made with the intention of understating the accounts payable-Trade. C. Summary

From the above, there is a strong possibility that the method of understating the accounts payable-Trade used an accounting process in which adjusting journal entries recording accounts payable-Trade as a debit were made at the time of making closing journal entries. In addition, since it was not possible to interview A, and not all of the accounts process implemented in relation to the accounts payable-Trade could be examined due to the status of preservation of the financial and accounting materials, etc., there is the possibility that as well as the abovementioned accounting process in which adjusting journal entries recording accounts payable-Trade as a debit, the accounts payable-Trade were understated through some other accounting process.

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(4) Participants involved in understating the accounts payable-Trade

Out of the TICC officers and employees involved in the workflow relating to the recording of accounts payable-Trade, the Committee interviewed the previous presidents of TICC, M, L and J, but all of the interviewees denied any involvement in the understating of the accounts payable-Trade and stated that they had not been aware of the existence of the understating of accounts payable-Trade up until the time of this investigation.

In addition, as described in I, Chapter 4, Section 3 above, the Committee carried out a digital forensic investigation, but no emails etc. were found that suggested the involvement of any TICC officers or employees other than A.

In the first place, as described in 1, (2) above, A was in charge of preparing the adjusting journal entries, and moreover, the person in charge in FA Division recorded the adjusting journal entries without checking them. Therefore, A was able to prepare the adjusting journal entries recording accounts payable-Trade as a debit, with the intention of understating the accounts payable-Trade and to record them as they were without them being checked by another person. Accordingly, it is not odd that no one other than A was involved in the understating of the accounts payable-Trade. Therefore, from the above, it is rational to think that no others aside from A were involved in the understating of the accounts payable-Trade.

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4. Overstating of the inventories (1) Workflow relating to the inventories

The outline of the workflow relating to TICC’s inventories is shown in the table below.

Operations Person in charge Outline

Recording of the warehousing of inventories and raw materials Entering the quantity of

goods received in

the warehouse

【1】 Warehouse Division person in

charge

- After checking the quantity of raw materials received in the warehouse and performing an inspection, enters the quantity of goods received in the warehouse in ERIC’s Inventory Management module37. - After the receiving documents (receiving report, purchase order, invoice, etc.) have been sent to the Manager of the logistics Division to be checked, sends them to FA Division.

Entry of purchase of

raw materials


charge (W)

- Enters the receiving documents into ERIC’s APV module. - Generates the journal vouchers from ERIC, and sends them to FA Division’s Supervisor38 for approval.


-The APV module automatically aggregates the data for the current month and enters the following journal entries into ERIC’s GL. [Debit] raw materials / [Credit] accounts payable-Trade

Calculation of the monthly

moving average unit price of raw


(J)

- Enters the contents of the receiving documents and the incidental costs for transportation in the Landed Cost Sheet39, and calculates the unit cost of purchase of the raw materials.

37 The ERIC Inventory Management module records and manages the quantity of raw materials and products, etc., and does not function to calculate costs. For this reason, TICC calculates costs using an Excel file instead of ERIC. 38 Currently, J. 39 This is an Excel file used in calculating the unit purchase price of raw materials, and records the quantity and amount of goods received, the incidental costs of purchase, etc.

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materials 【5】 FA Division

person in charge

(Y)

- Enters the unit price of purchase, etc. into the Stock Card40 and calculates the monthly moving average unit cost of the raw materials.

Recording of the withdrawal of raw materials and manufacturing costs Entering of the quantity withdrawn

【6】 PPC Division41

- Enters the items necessary for manufacturing the ordered goods (product name, necessary raw materials, etc.) in the Batch Ticket 42 and sends them to the Production Division.

【7】 Production Division person in

charge

- Checks the Batch Ticket and enters the necessary raw materials into the MRD43 and after sending it to the Warehouse, receives the raw materials.

【8】 Warehouse Division person in

charge

- Enters the quantity withdrew based on the MRD into ERIC’s Inventory Management module.

Entering the quantity of

finished products


charge

- After creating the FGTS44, sends it to the QC Division to obtain a pass mark.

- Enters the quantity of finished products based on the FGTS after passing the test into ERIC’s Inventory Management module.

Calculating the

manufacturing cost


charge

- Enters the amount of raw materials used in manufacturing into the Batch Ticket and sends it to the FA Division.

40 This is an Excel file used for calculating the monthly moving average unit cost of raw materials and products, and records the raw materials and product balance at the end of the previous month, the quantity received in the current month, and the purchase and product unit cost, etc. 41 Abbreviation for Production Planning and Material Control Division, which is responsible for production management. 42 Documents used to enter the items necessary for manufacturing the product (product name, required raw materials, manufacturing method, etc.) and the quantity of raw materials used in the manufacturing. 43 Abbreviation for Material Requisition Document, which is the document required to receive the raw materials withdrawn from the Warehouse Division, and describes the contents of the material to be withdrawn. 44 This is an abbreviation of Finished Goods Transfer Slip, and is a document to ascertain the accepted products, item name, date of manufacture, lot number, quantity, etc. It is printed on carbon paper and there are three copies: one is attached to the product, one is kept by the QC Division and the remaining sheet is returned to the Production Division after verification.

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charge (Y)

- Enters the content in the Batch Ticket45 into the MOC and calculates the manufacturing costs. - Enters the purchase cost and manufacturing costs, etc. into the CPR46, and calculates the product unit price and manufacturing costs.

Recording the manufacturing

cost


charge (Y)

- Prepares the following journal entry, and after obtaining FA Division Senior Manager’s approval, enters it into ERIC’s GL. [Debit] Finished Goods / [Credit] Raw materials Manufacturing expenses

Calculation of the monthly

moving average unit cost of the products


charge (Y)

- Enters the necessary information such as product unit cost into the Stock Card, and calculates the monthly moving average unit cost of the products.

Records the shipments and cost of goods sold

Entering of quantity of shipments

【14】 Customer Division person in

charge

- Prepares Pick List using ERIC47 and sends it to Warehouse Division.

【15】 Person in charge in

Warehouse Division

- Based on the Pick List, enters the quantity of shipments, etc. into ERIC’s Inventory Management module.

Calculation of the cost of goods sold

【16】 Person in charge in Warehouse Division

- Prepares Delivery Receipts 48 and sends them to FA Division.

45 Abbreviation for Manufacturing Overhead Computation, and it is an Excel file for allocating manufacturing expenses. Production volume, working hours, personnel costs, depreciation costs, utility costs, etc. are recorded. 46 Abbreviation for Cost Production Report, and it is an Excel file for calculating product unit cost and production costs. Purchase costs and manufacturing expenses are recorded. 47 This is a list that describes the name and quantity of products to be shipped. 48 A document that plays the role of an invoice, and includes a shipping destination name, shipping date, shipping item, quantity, etc.

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charge (Y)

- Prepares invoices based on Delivery Receipt and the sales prices obtained from the Customer Service Division.

- Enters the sales volume, sales unit price, and monthly moving average unit cost of the products and calculates the sales and cost of goods sold in the GPR based on copies of the invoices (original copy sent to the customer) and Stock Cards49.

- Prepares the following journal entries and sends them to A along with the GPR.

[Debit] Accounts receivable / [Credit] Sales [Debit] Cost of goods sold / [Credit]

Finished goods Recording of cost of goods sold and Sales

【18】 A - Checks the journal entries and GPR.


(J)

- Enters the journal entries which have been checked by A into ERIC’s GL.

49 An abbreviation for Gross Profit Report, and it is an Excel file for recording sales details and calculating cost of goods sold, and records sales volume, sales unit price, monthly moving average unit cost of products, etc.

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(2) Workflow relating to the physical stocktaking and inventory discrepancies

TICC conducts a physical stocktaking twice a year, but the entire amount of physical inventory is only counted at the end-of-period, and the entire amount of the physical inventory is not checked at mid fiscal year. Some stock such as non-movable stock is not checked at that time.

The outline of the workflow at TICC relating to the physical stocktaking and recording of inventory discrepancies is shown in the table below. Operations Person in

charge Outline

Physical stocktaking

Warehouse Division person in

charge

- Performs a physical stocktaking and enters the inventory quantity into ERIC. - Outputs the stock quantity data from ERIC and prepares a stock list (hereinafter referred to as “warehouse stock list”).

Calculating the physical inventory

discrepancies

PPC Division person in

charge

- Obtains the stock cards from the FA Division, enters the moving average unit cost in the warehouse stock list, and calculates the stock value at the end of the period, the quantity of stock discrepancies, and the value of the inventory discrepancies. The value of the inventory discrepancies is recorded in the summary sheet of the warehouse stock list.

Logistics Manager

(L)

- Checks the warehouse stock list and sends them to A and M by email.

Recording the physical inventory

discrepancies

A - Prepares adjusting journal entries to record the inventory discrepancies and sends them to FA Division person in charge.


(J)

- Enters the adjusting journal entries created by A without checking them.

(3) Whether the inventories are overstated A. Changes in the overstated value of inventories

In order to determine whether inventories had been overstated and their value, the Committee crosschecked the balance of the inventories (raw materials, semi-finished products, finished goods, supplies materials) in the consolidation package against the balance recorded in the warehouse stock list.

The changes in the overstated inventories value from December 2014 onwards are as shown in the table below.

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Unit: million USD

Changes in the overstated inventories value December

2014 December

2015 December

2016 December

2017 December

2018 June 2019

Warehouse stock list (Correct amount) 7.1 6.8 6.2 8.3 7.9 8.1

Consolidation package balance 12.0 12.1 12.6 16.2 14.4 13.3

Overstated amount 4.9 5.3 6.4 7.8 6.5 5.1

B. Verification of the accuracy of the warehouse stock list

The Committee attended the physical stocktaking at the end of September 2019, and confirmed that on crossmatching the results of the physical stocktaking against the stock volume listed in the warehouse stock list, the difference was only about 4%, and that out of the stock volume recorded in the warehouse stock list, the stock volume pertaining to the stock held by TICC was generally consistent with the actual volume.

In addition, the Committee sent a balance confirmation letter (the reference date was the end of December 2018 and the end of June 2019) to confirm the volume of TICC’s stock at two subcontractors appointed to manufacture the products, and checked for consistency between the responses from the subcontractors and the warehouse stock list. As a result, although there were differences between the two, it was due to the difference between the timing of the delivery from TICC to the subcontractor and receipt by the other party, or the timing of delivery from the subcontractor and the inspection of receipt at TICC, and it was found that the differences were resolved after each inspection.

In addition, to confirm the accuracy of the unit cost entered in the warehouse stock list, the Committee crosschecked the unit cost entered in the warehouse stock list at the end of each quarter from the end of December 2014 to the end of June 2019 against the Stock Card, it was confirmed that the two were consistent.

Based on the above, the Committee determined that the balance listed in the warehouse stock list was generally correct. (4) Method of overstating the inventories A. Interviews with the relevant parties and the digital forensic investigation

The Committee conducted interviews with TICC-related persons as described in I, Chapter 4, Section 2 above, in order to clarify the method of overstating the inventories, but all of the interviewees stated that they had not been aware the inventory had been overstated up until the time of this investigation and it was not possible to obtain a statement that would

43

lead directly to clarifying the method of overstating the inventories. The Committee also conducted a digital forensic investigation targeting TICC-related

persons as described in I, Chapter 4, Section 3 above. As a result, no emails, etc. were found that led directly to clarifying the method of overstating the inventories, but the following two mails were discovered. (A) Emails to prevent the revision of the stock volume in ERIC and the books by others

In an email sent by A to the Supervisor of PPC Division on September 26, 2013, in response to the Supervisor of PPC Division attempting to adjust the inventory discrepancies in ERIC, A requested that no revisions be made to the stock volume in ERIC and accounting books without A’s approval.

From the email, it is presumed that A had previously prevented other people from interfering with the inventories balance. (B) Email sending a false stock list to the accounting auditor

In an email dated January 9, 2019, A sent a stock list which gave figures that matched the inventories balance (14 million USD) of the trial balance (USD) to the accounting auditor. In this regard, as described in (3) above, since the inventories balance in TICC’s consolidation package was overstated, as described in 1(2) above, the contents of the consolidation package and the trial balance (USD) were confirmed to be consistent. Therefore, the inventories balance in the trial balance (USD) was also overstated, and despite the fact that a stock list which matched the content of the trial balance (USD)should not have existed, due to the fact that it matched, it can be said that the stock list must have been a false stock list whose contents differed from the actual state.

In addition, when the Committee interviewed J, the Supervisor of FA Division, J stated that although he was aware that the Warehouse Division created the warehouse stock list based on the results of the physical stocktaking, he did not know the numbers in the warehouse stock list and that the list was being sent to A. B. Collection and analysis of the financial and accounting materials

The balance of inventories is calculated by the following formula. [Inventories balance at the beginning of the period + purchase of raw materials for the current period + manufacturing cost for the current period (finished goods and work in process) - manufacturing cost (raw materials and work in process) - Cost of goods sold ± Adjusting journal entries (including inventory discrepancies)]

Therefore, the Committee decided to check whether the accounts were being processed in such a way that the inventories were being overstated in the course of recording purchases of raw materials for the current period, the manufacturing costs for the current period, the cost of goods sold and the adjusting journal entries (including the inventory discrepancies).

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(A) Recording of raw material purchases for the current period

As indicated in workflow table [3] described in (1) above, the raw material purchases for the current period are recorded in the accounting book through the APV module data being entered into the GL. Therefore, when the Committee crosschecked the raw material purchases for the current period recorded in the journal entry list denominated in USD from December 2014 to June 2019 against the content of the APV module, it was confirmed that the figures for the two were consistent.

In addition, as indicated in workflow chart [2] described in (1) above, FA person in charge generates the journal vouchers after entering the information relating to the purchases into ERIC’s APV module, and then obtains confirmation of the contents from the Supervisor of FA Division, and therefore, it would appear to be difficult to commit fraud at the stage of entering the data into the APV module.

In light of the above, it is considered that the possibility of account processing where the inventory is overstated in the course of recording the raw material purchases for the current period would be considerably low. (B) Recording of manufacturing costs for the current period

As indicated in workflow table [12] described in (1) above, the manufacturing costs for the current period (finished goods, work in process, raw materials) are recorded in the accounting book through the creation of a journal voucher based on the CPR data and through entering the content of the journal voucher in the GL. In this regard, since the CPR refers to the manufacturing expenses, the moving average unit cost of the raw materials listed in the MOC and Stock Cards for the calculation formula, the Committee verified the integrity of the CPR, MOC and Stock Cards for December 2018 using a sample, and was able to confirm their integrity. In addition, when the Committee checked to see whether the calculation results in the CPR matched the figures in the journal vouchers in the GL, the figures were confirmed to match. Therefore, it is considered that the possibility of account processing where the inventory is overstated in the course of preparing the journal vouchers based on the CPR and the course of recording the contents of these journal vouchers in the GL would be considerably low. (C) Recording the cost of goods sold As indicated in workflow table [17] described in (1) above, the cost of goods sold is recorded in the accounting book through the contents of the journal voucher that was created based on the GPR being entered in the GL.

In this regard, since A stated in the internal investigation to the effect that he understated the cost of goods sold by tampering with the data in the GPR, the Committee extracted the GPR stored in A’s personal folder on the server and checked the contents through a digital forensic investigation, and found a sheet entitled “Original” and a sheet entitled “Final”, and it was discovered that the cost of goods sold listed in the sheet entitled “Final” was less than the cost of goods sold listed in the sheet entitled “Original”.

In this regard, when consistency between the sales figures given in the sheet entitled “Original” and the sales figures described in the trial balance (USD) was checked, the two

45

were found to match. In addition, to check the accuracy of the cost of goods sold entered in the sheet entitled “Original”, the contents of the Stock Cards were checked for consistency using a sample, and the two were found to match. Therefore, it is presumed that the sheet entitled “Original” contains the correct cost of goods sold.

Therefore, since it would appear the cost of goods sold that had been entered in the sheet entitled “Final” had been tampered with, the Committee crosschecked the cost of goods sold in the journal entry list denominated in USD against the contents entered in the sheet entitled GPR’s “Final” for December 2014 to June 2018, and the figures for the two were confirmed to match.

From the above, it is recognized that the cost of goods sold was understated in the trial balance (USD) through falsifying the original values entered in the GPR. (D) Adjusting journal entries

When the Committee checked the adjusting journal entries that had been recorded in the journal entry list denominated in USD, it was confirmed that adjusting journal entries had made inventories in credit or debit.

Of these, if a normal and proper accounting process had been applied, some of the adjusting journal entries would have been recorded for the purpose of adjusting the discrepancies in the inventory, but when the Committee crosschecked the adjusting journal entries for the year-end of 2014 to the year-end of 2018 against the figures of the inventory discrepancies listed in the warehouse stock list, there was not even one adjusting journal entry that matched the figures of the inventory discrepancies listed in the warehouse stock list.

In addition, since adjusting journal entries recording inventories as a credit or debit were made at other times of the year aside from the year-end, the purchase unit price and sales unit price would often undergo change at TICC after the end of the period, but since this was covered by making adjusting journal entries, it is assumed that the adjusting journal entries contained journal entries such as price adjustments that should have been recorded, but only A knows the contents and it was not possible to judge whether all of the contents of the adjusting journal entries were appropriate.

Based on the above, there is the possibility that the adjusting journal entries that record inventories as a credit or debit include those intended for the purpose of overstating the inventory.

Incidentally, as described above, since no adjusting journal entries were found that matched the figures of the inventory discrepancies in the warehouse stock list, it is thought that A must have created the adjusting journal entries using figures that differed from the figures of the inventory discrepancies listed in the warehouse stock list and sent these to the person in charge in FA Division, which suggests that the results of the physical stocktaking were not properly reflected in the TICC ledgers. C. Summary

From the above, (i) there is the possibility that the inventories were overstated as a result of falsified data being entered into the GPR and the cost of goods sold being understated, or (ii) there is the possibility that the inventories were overstated due to account processing in which the adjusting journal entries recorded inventories as a debit at the time of the

46

end-of-period adjusting journal entries, or both possibilities. In addition, since it was not possible to interview A and not all of the accounting process

relating to the inventories could be examined due to the state of preservation of the financial and accounting materials, etc., the possibility cannot be denied that inventories were overstated through a method other than the abovementioned accounting process. (5) Participants involved in overstating the inventories

Of the TICC officers and employees who were involved in the workflow relating to the recording of inventories, the Committee interviewed L and J as well as the previous presidents of TICC and M, but all of the interviewees denied their involvement in overstating the inventories and stated that they had not been aware of the inventories being overstated up until the time of this investigation

In addition, as described in Ⅰ, Chapter 4, Section 3, the Committee carried out a digital forensic investigation, but no emails etc. were found that suggested the involvement of TICC officers or employees other than A in the overstating of inventories50.

In the first place, as described in 1(2) above, A was in charge of creating the adjusting journal entries, and the person in charge in FA Division recorded the adjusting journal entries without checking them. Therefore, A was able to create a journal voucher recording inventories as debits as for the purpose of overstating the inventories, and record it as it was without anyone checking it. Therefore, it is not odd that there was no one other than A involved in the overstating of inventory through making adjusting journal entries relating to the inventories.

Therefore, from the above, it is rational to think that no others aside from A were involved in the overstating of inventories.

Meanwhile Y was also involved in management of the GPR, but Y stated that he created the GPR sheet entitled “Final” under A’s directions after the start of the internal investigation. In addition, Y stated that he was not aware of the details of the intended use of the sheet, and the results of the digital forensic investigation also showed that no emails, etc., were found contrary to his testimony, and therefore, Y is not deemed to have been involved in overstating the inventories.

From the above, it is rational to think that no others aside from A were involved in the overstating of inventories. (6) Illegal diversion of stock

As described in (3) above, since the inventories had been overstated, the Committee considered it possible that A or other TICC officers and employees had been illegally diverting the TICC stock, and in order to conceal this, had overstated the inventories, and therefore, the Committee conducted an investigation into the illegal diversion of stock through interviews and a digital forensic investigation.

50 As a result of the digital forensic investigation, it was found that the warehouse stock list was also sent by L to M. Therefore, in an interview with M, this point was confirmed, and M stated that he received the warehouse stock list from L, but did not match this to the financial statements, and that he did not realize the TICC financial statements for the end-of-period December 2018 recorded an inventories balance of about double the actual inventory amount. No emails that are contrary to M’s statement have been found.

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In this regard, no one mentioned the fact or possibility of the illegal diversion of stock by A nor were any emails, etc. found to suggest the illegal diversion of stock.

On the other hand, since as a result of the digital forensic investigation, emails, etc. were found that suggested the possibility that M had been involved in the illegal diversion of stock, the Committee conducted an interview with M. As well as denying his involvement in the illegal diversion of stock, with regard to the emails, etc. discovered through the digital forensic investigation, he was able to give a reasonable explanation that the email was not suggestive of him illegally diverting stock. As a result, the Committee concluded that M was not involved in the illegal diversion of stock.

No evidence was found through the interviews and the digital forensic investigation of any other TICC-related persons other than M being suspected of being involved in the illegal diversion of stock.

As stated above, no statements or evidence were found to support any facts that A or any other TICC officers or employees had been illegally diverting TICC stock. 5. Methods employed in the Fraud

Based on the above, of A’s fraudulent acts, (i) there is the strong likelihood that the method of borrowing off-the-books was an accounting process in which the adjusting journal entries recorded loans payable as a debit at the time of making closing journal entries, (ii) there is a strong likelihood that the method of understating the accounts payable-Trade was an accounting process in which the adjusting journal entries recorded accounts payable-Trade as a debit at the time of making closing journal entries, (iii) there is the possibility that the method of overstating the inventories was an accounting process in which the adjusting journal entries recorded inventories as a debit at the time of making closing journal entries, or there is the possibility that the cost of goods sold was understated due to falsification of the data in the GPR.

In this regard, A explained some of the exact methods of committing fraud in the internal investigation. Specifically, at the interview on September 2, 2019, he explained that he had recorded the adjusting journal entries of “(Debit) Cash in Bank / (Credit) Loans payable”, “(Debit) Inventories / (Credit) Cost of goods sold”, “(Debit) Accounts payable-Trade / (Credit) Inventories”, “(Debit) Loans payable / (Credit) Inventories”. In addition, at the time of the interview of September 6, 2019, he stated that, in order to lower the cost of goods sold, he tampered with the GPR figures. The abovementioned results of the investigation by the Committee match the explanations given by A of specific methods.

However, since it was not possible to interview A and not all of the accounting process relating to the inventories could be examined due to the state of preservation of the financial and accounting materials, etc., there is the possibility that methods other than the abovementioned method exist. 6. Possible motives

In the interview conducted during the internal investigation, A explained to the effect that his motive for committing the fraud was that, due to pressure from top management such as former TICC presidents and others to improve business performance (hereinafter referred to as “Pressure to improve performance”) when the business performance was not as expected,

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he committed fraud in order to increase the profits. However, A was in the position of supervising the Finance and Accounting Division and was not in a position to directly receive Pressure to improve performance. In this respect, one of the former TICC presidents stated, “If TICC’s business performance declines, all A can do is arrange refinancing from another bank with a lower interest rate in order to recover performance, and A’s explanation that Pressure to improve performance was his motive for committing fraud is extremely hard to believe.”

In addition, former TICC presidents have stated with regard to Pressure to improve performance from the Head Office and the TL Global Business Management Division, which is the division supervising TICC, “I have never felt that kind of pressure” or “It’s not that there isn’t any pressure at all since, if the business performance deteriorates, there will be some encouragement to improve the business performance, and as a profit-making company, it is natural for the Head Office etc. to apply some pressure on its subsidiaries, but there was no strong pressure exceeding the pressure that would normally be expected.” Meanwhile, with regard to Pressure to improve performance from the TICC president to the TICC officers and employees, previous TICC presidents stated, “I am not aware of ever having exerted strong Pressure to improve performance”51. In fact, based on the Committee’s digital forensic investigation, no emails, etc. were found that suggested (a) the officers and employees of Toyo Ink HD and the TL Global Business Management Division, which was the principal supervising division, exerted strong Pressure to improve performance on A or former TICC presidents, or that (b) the former TICC presidents applied especially strong Pressure to improve performance on A.

In this way, it was A himself who stated that Pressure to improve performance was the motive for committing fraud, but the TICC-related persons including the previous TICC presidents denied the possibility that Pressure to improve performance was the motive for the fraud, and no emails were found in the digital forensic investigation, that indicated the presence of particularly strong Pressure to improve performance from Toyo Ink HD, the TL Global Business Management Division or former TICC presidents, and in order to clarify the motive, specifically, from the viewpoint of whether the fraud was motivated by Pressure to improve performance, an analysis of TICC’s finances was conducted. An outline of the financial analysis is as follows.

51 A previous president stated that when business performance deteriorated, some pressure was applied to the officers and employees to improve their business performance. However, even based on this president’s statement, the fact of the Pressure to improve performance being so strong as to being driven to fraud was not recognized.

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(1) The gross profit margin remained constant even if the sales increased or decreased significantly depending on the year Changes in the sales and cost of goods sold (quarterly) Unit: million USD

TICC is a processing business and has low profit margins, but even if the sales amount were to increase or decrease to a large extent, the gross margin remains constant.

TICC’s labor union is also very powerful and it is also difficult to envisage the fixed costs such as the workers’ labor costs varying hugely, but it is possible to assume that if the sales amount declines, then it would not be possible to cover the fixed costs and so normally the profit margin would fall, but there is a somewhat unusual situation in that the gross profit margin has remained constant. (2) Changes in TICC’s budgeted and actual results The following, as described in Chapter III below, is a table that summarizes the changes in the PL budget and performance (unit: million USD) and the difference between the budgeted and actual results, which include the amount of impact after reflecting the impact calculated by taking the BS balance in the original figures and calculating the differences in budget and performance.

[Amount of impact]

Budget Performance Difference between Budget and Performance

2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018Sales 45.0 36.8 28.5 35.5 35.8 28.1 40.2 50.6 -9.1 -8.7 11.7 15.1Cost of goods sold 42.3 34.4 26.5 33.0 33.3 25.8 37.9 47.0 -9.0 -8.6 11.4 14.0Gross profit 2.6 2.4 2.0 2.6 2.5 2.2 2.3 3.7 -0.1 -0.1 0.3 1.1Operating Profit 0.9 0.7 0.5 0.8 0.7 0.8 0.6 1.4 -0.2 0.1 0.0 0.6Ordinery income 0.6 0.4 0.3 0.4 0.4 0.4 0.3 0.9 -0.2 0.0 0.0 0.5Income before income taxes 0.6 0.4 0.3 0.4 0.4 0.4 0.3 0.9 -0.2 0.0 0.0 0.6

Increase or Loans payable -1.3 -1.6 -0.5 -0.7decrease in Inventories -0.4 -1.0 -1.5 1.3cost of goods Accounts payable-trade -0.7 -1.0 1.0 -1.8sold Total -2.4 -0.5 -1.0 -1.2

Sales

Cost of goods sold

Gross profit

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The plus or minus sign for the amount of impact is described as the impact on profit. [Profit after adding the amount of impact and difference between the budget and performance]

It is possible to see from this table that before this fraud was discovered, TICC had earned a profit and had achieved the budget, but when the impact of this fraud is added, in fact, TICC had deficit and did not achieve the budget for a number of years. (3) Changes in the quarterly operating profit Changes in the sales and operating profit (quarterly)

Based on the financial report before the discovery of the fraud, TICC recorded a profit for the first three quarters and a deficit for the fourth quarter. In light of these trends, it would appear that at the time of the fourth quarter A tried to level out the fraudulent profits created up until the third quarter, so that profits would not be unnaturally recorded throughout the entire year.

From the above financial analysis, in fact, for many years, TICC had a deficit and had not been able to achieve the budget, but by committing fraud, A had been able to make out that there were stable profits. In light of this, it is natural to think that A committed fraud in order to make TICC appear to be profitable.

In addition, as described in 4(5) above, evidence was not found in this investigation of illegal gains by A such as the illegal diversion of stock, and there were no traces of illegal personal gains by A. Moreover, no evidence was found of A committing fraud for the benefit of a third party or due to having been threatened by a third party.

Therefore, it is highly probable as A himself explains that Pressure to improve performance was the motive for fraud.

Certainly, as described above, A does not appear to be directly in the position of being subject to Pressure to improve performance judging from the contents of his work. However, in light of A’s business activities, it does not necessarily seem irrational to think that the motive for fraud was Pressure to improve performance.

For example, it is possible A committed fraud in order to conceal his failed finance policy.

Operating profit -1.8 0.3 -0.4 0.2 -2.7 -0.4 -1.0 -0.6Ordinery income -2.1 -0.1 -0.7 -0.3 -2.7 -0.5 -1.0 -0.7Income before income taxes -2.1 -0.1 -0.7 -0.3 -2.7 -0.5 -1.0 -0.7

Sales volume

Operating profit

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Specifically, as described in (1) above, when consideration was being given to changing TICC’s functional currency from the Philippine peso to USD, A created a simulation of how business would improve if the functional currency were to be changed to USD, and due to the fact the simulation showed a certain degree of business improvement could be expected, in around June 2003, the TICC president at the time, V decided to change TICC’s functional currency from the Philippine peso to the USD. As a result, seen from the books, TICC’s performance rose upwards and moved in the direction of eliminating the accumulated losses. However, at that time, there was no verification of the actual business improvement effect due to the change in the functional currency. In fact, even after the change in the functional currency, TICC suffered losses, and there is the possibility that A felt unable to disclose the failure of his financial policy and moved towards the fraud so that the profit which A had envisaged in the simulation was achieved.

Also, in around 2003 shortly after A was promoted to Finance Manager, judging from the fact that TICC had accumulated losses of a total of at least 2.2 million USD, there is the possibility that A, fearing he would lose his job if TICC were to withdraw from the Philippines, made out that TICC was profitable and committed fraud in order to circumvent TICC’s withdrawal. These suppositions about why A felt Pressure to improve performance are based on speculation since the Committee could not interview A but it seems highly likely that he started to commit fraud because, for some reason, he felt strong Pressure to improve performance. In addition, once he started to borrow off-the-books, a structure would have been created where he would have had to keep repeating the Fraud, including the off-the-books loans payable in order to pay the interest on the off-the-books loans payable and to conceal this fact, and that due to this, it is highly probable that A came to repeat the fraud over a prolonged period of time. Section 4. Status of checks and monitoring of TICC 1. Management of TICC by the previous presidents

From the time of its establishment up until the present time, human resources with overseas expatriate experience of working at the overseas group companies have been sent by the Head Office to TICC to serve as president, and the Head Office also sent Japanese employees with technical knowledge and experience to TICC’s Production Management Division. On the other hand, Japanese employees were never dispatched from the Head Office to the Finance and Accounting Division of TICC, and as a rule, primary control over the Finance and Accounting Division was expected to be enforced through local hiring of finance and accounting managers by the former TICC presidents.

The former TICC presidents did not have work experience in the Finance and Accounting Division of the Head Office or of a Toyo Ink HD Group company and were not necessarily familiar with the work of the Finance and Accounting Division. In fact, many of the previous presidents stated in the interview conducted by the Committee that they were not necessarily familiar with finance and accounting, and the responsibility for finance and accounting was left to the locally hired finance and accounting managers. In this regard, these previous presidents believed the accuracy of the financial reports by the financial and accounting manager was to be guaranteed through the accounting audits by the accounting auditors, and

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they were not aware that a particular situation had arisen casting suspicion on the accuracy of the financial reports. In addition, at the time of the discovery of the fraud, A had been in the position of financial and accounting manager at TICC for the lengthy period of over 15 years, and none of the previous presidents had thought there was a need for personnel changes to be made in relation to A or the need for a mutual check mechanism in relation to this lengthy appointment as financial and accounting manager. 2. Management of TICC by the Division with primary responsibility

The reports to Toyo Ink HD Head Office from TICC were primarily submitted in accordance with the following reporting lines: (1) “Overseas group company (President) → Person in charge in the TL Global Business Management Division → Managing Director of the TL Global Business Management Division → each division of the Toyo Ink HD Head Office”, or (2) without passing through the TL Global Business Management Division, “Overseas group company (President) → each division of Toyo Ink HD Head Office”. In addition, at TICC, in order to perform certain matters such as obtaining an increase in the borrowing limit, capital investment exceeding 100 million yen, and important changes to the articles of incorporation, a proposal for approval must be drafted in advance by the TL Global Business Management Division and approval must be obtained from TL and Toyo Ink HD Head Office.

The TL Global Business Management Division receives documents from TICC which describe the state of sales as well as documents giving the financial information in the monthly consolidation package submitted by TICC to the Group Finance Division and future earnings prospects, and then analyzes the business issues and provides support based on the analysis. In addition, if an abnormal value is detected as a result of the analysis of the financial information, monitoring is performed such as inquiring about the reason. For example, if there is an abnormal increase or decrease in SG&A expenses or cost of goods sold, the reasons for this are always checked with the local staff. Since Toyo Ink HD had set a ceiling on the amount of loans payable for each overseas group company, TL Global Business Management Division kept track of the balance of the loans payable of each overseas group company by checking the consolidation packages submitted to Toyo Ink HD by the overseas group companies including TICC. If the maximum limit was close, a warning would be issued and an inquiry made about the future outlook, and if necessary, an increase in the maximum limit would be considered.

In recent years, TICC’s performance had been relatively stable, and abnormal values had not been detected for the various numerical values relating to the financial information. Except for union issues, TICC was thought not to have any particularly large problems or concerns. 3. Internal audits by the Toyo Ink HD Group (1) General flow of internal audits by the Group Audit Office

In the Group Audit Office of Toyo Ink HD, it is the Audit Group which is mainly responsible for auditing. In terms of the Financial Instruments and Exchange Act, the Audit Group implements audits on the establishment and operation of internal controls pertaining to

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company level internal controls and work processes and evaluates the effectiveness of the internal controls pertaining to the financial reports. In relation to the Companies Act, audits are conducted not only for internal control over the financial reports, but also for internal control in general, and compliance and business risks are evaluated and analyzed52.

There are two types of internal audits: (a) questionnaires, and (b) visiting audits. In the audit using (a) questionnaires, the Audit Group distributes a questionnaire every

year to all the group companies under Toyo Ink HD53 and collects responses and evidence supporting the responses. The questionnaire includes (i) questions regarding company level internal controls, (ii) questions regarding the settlement of account and financial processes, (iii) questions regarding general IT controls, and (iv) questions regarding business audits. The Audit Group checks the answers to these questions and the contents of the evidence and checks the status of internal control maintenance and operation.

In addition, in (b) the Audit Group conducts a visiting audit of each business location with the following frequency and conducts research on evidence of the facts relating to the question items described in the questionnaire through interviews and the submission of evidence.

(i) Significant domestic business locations54: Every year (ii) Significant overseas business locations: Every other year (iii) Others: About once every 3 years

The Audit Group submits an audit report describing the problems and improvements to be made found through the audit to the audited business location approximately one month after the visit. The business site that receives the audit report creates an improvement plan for dealing with the improvements to be made described in the report, and makes improvements and tackles the problems.

In this regard, (ii) significant overseas business locations of Toyo Ink HD are the following three companies: Toyo Advanced Science Taiwan Co., Ltd., Tianjin Toyo Ink Co., Ltd., and Toyo Ink (Thailand) Co., Ltd. TICC was not selected as an significant business location. At these significant business locations, a so-called “set of three documents” (hereinafter referred to as “3 Documents”): a workflow diagram, business description, and a risk control matrix has been created. In addition, for the business sites in (iii) above, the order of visits is determined in consideration of the transfer of the president, the period of time since the last internal audit, and other various circumstances.

In terms of the significant business locations, in addition to surveys to provide supporting evidence for the responses to the questionnaire, internal control audits relating to the business processes (hereinafter referred to as “business process control audits”) are conducted, in

52 In the following, the internal audit conducted in relation to the Companies Act is referred to as “business audit”. 53 Excludes dormant companies, minority-investment joint ventures, newly established companies and paper companies. 54 Toyo Ink HD, based on the “Revisions to the Standards and Practice Standards for Management Assessment and Audit concerning Internal Control Over Financial Reporting (Council Opinions)” implemented control audits by selecting significant business locations out of all the business locations and targeting only those significant business locations. Specifically, the significant business locations are those selected because they are high in monetary value judging from such factors as revenue, and reach a certain percentage of the total of revenue (approximately 2/3).

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other words, verifying whether work is being performed as described in the 3 Documents and whether key control is functioning effectively by means of sampling, etc. (2) Internal audits of TICC by the Group Audit Office The Audit Group conducted visiting audits of TICC in 2011, 2013 and 2018. At the time of the visiting audits, mostly A alone was responsible for answering the questions about finance and accounting. No particular problems were found in any of the visiting audits, and the Group Audit Office did not deem TICC to be a high-risk company / location until the fraud was discovered. Since TICC is not an significant business location, 3 Documents was not created and it was not subject to business process control audits. Therefore, detailed verification was not performed. 4. Audits by accounting auditors

Deloitte Touche Tohmatsu LLC (hereinafter referred to as “Tohmatsu”) conducts the audits under the Companies Act of Toyo Ink HD (audit based on Article 436, paragraph (2), item (i) and Article 444, paragraph (4) of the Companies Act) and the audits under the Financial Instruments and Exchange Act (audit based on Article 193-2, paragraph (1) of the Financial Instruments and Exchange Act). When conducting the audit of the consolidated financial statements, Tohmatsu had TICC down as a structural unit other than a significant structural unit, and did not direct the TICC auditors to conduct an audit of TICC’s financial information or an audit of specific account balances or transaction types, etc. On the other hand, Navarro Amper & Co., a member firm of Deloitte Touche Tohmatsu LLC, has been conducting local statutory audits of TICC from the past. Chapter 3. Existence of Fraudulent Acts Other Than the Fraud, etc. Section 1. Existence of fraud other than the Fraud at TICC

Some interviewees pointed out the possibility of compliance violations at TICC in the interviews, etc., but after checking the facts through a digital forensic investigation and interviews, the Committee did not find any objective materials proving the existence of compliance violations, and as a result, no illegal acts other than this fraud were found at TICC. Section 2. Existence of similar cases at Toyo Ink HD overseas subsidiaries other than TICC 1. Method of selecting the Toyo Ink HD overseas subsidiaries to be investigated

In view of the possibility that incidents similar to the Fraud may have been committed at the overseas subsidiaries other than TICC, the Committee decided to conduct an investigation of Toyo Ink HD overseas group companies other than TICC. However, it was not realistic to conduct an exhaustive investigation of all of the Toyo Ink HD overseas group companies (33

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companies)55 other than TICC. Therefore, in light of the characteristics of the Fraud, only the group companies that were considered to have a high risk of the occurrence of similar incidents were investigated. As the basis for the selection of companies to be investigated, a questionnaire for risk assessment was sent out to the 33 overseas Toyo Ink HD group companies other than TICC.

Since the Fraud occurred through A serving as the financial and accounting manager for many years, and the previous presidents entrusting the handling of the financial accounts to A, the probability of a similar case of fraud occurring at (i) a company whose financing and accounting manager had been in the position for less than five years, (ii) a company where the president who was qualified as a certified public accountant, and was a person with sufficient accounting knowledge, was considered not to be high, and such companies were excluded from the investigation. Similarly, (iii) holding companies that did not actually manage a business, (iv) companies that had just started their business, and (v) companies that did not actually manage a business, such as being in the liquidation stage, were excluded from the investigation. As a result, out of the 33 overseas group companies other than TICC, the following 7 companies were investigated for the existence of similar cases. - TIPPS Pte. Ltd. - Toyo Ink (Philippines) Co., Inc. - Toyo Ink Vietnam Co., Ltd. - Shanghai Toyo Ink Co., Ltd. - Shanghai Toyo Ink Mfg. Co., Ltd. - Toyo Ink Brasil Ltda. - Sam Young Ink & Paint Mfg. Co., Ltd. 2. Existence of similar cases in the investigated subsidiaries

In the investigation of similar cases in the 7 companies above, the following verification was conducted of the loans payable, accounts payable-Trade and inventories. (1) Regarding the loans payable The investigation into the loans payable was conducted in the form of checking for consistency between the total amount of the loans payable balance corresponding to the “short-term loans payable”, the “long-term loans payable with repayment within one year” and “long-term loans payable” listed in the consolidation package of each subsidiary company subject to the investigation, and the amount on the loans payable balance certificate as of the end of September 2019 collected from each company by Toyo Ink HD. As a result, it was not confirmed that there was a risk that the abovementioned seven companies had off-the-books loans. 55 As well as TICC, there are 43 Toyo Ink HD overseas group companies (excluding four affiliates accounted for through the equity method ), including indirectly-owned subsidiaries companies, and of these overseas group companies, 10 indirectly-owned subsidiaries are sub-consolidations of the subsidiaries of Tianjin Toyo Ink Co., Ltd., PT. Toyo Ink Indonesia, and TIE International. Since the financial results of such indirectly-owned subsidiaries are reflected in the consolidated financial statements of the subsidiary of sub-consolidated sites, only 33 subsidiaries or indirectly-owned subsidiaries qualified as candidates for the investigation of similar cases.

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(2) Regarding the accounts payable-Trade

The investigation into the accounts payable-Trade was conducted in the form of checking for consistency between the accounts payable-Trade balance listed in the consolidation package of each subsidiary company subject to investigation and the amount given in the accounts payable-Trade balance list as of the end of December 2018 collected from each company by Toyo Ink HD. As a result, it was not confirmed that there was a risk that the abovementioned seven companies had understated their accounts payable-Trade. (3) Regarding the inventories

The investigation into the inventories was conducted in the form of checking for consistency between the valuation of the inventories listed in each company’s consolidation package and the value of the stock itemized details (figures reflecting the results of the physical inventory at the end of December 2018)56 as of the end of December 2018 collected by Tokyo Ink HD from each subsidiary company subject to investigation with regard to the subsidiary companies that had carried out a physical inventory at the end of December 2018. As a result, it was not confirmed that there was a risk that the abovementioned seven companies had overstated their inventories. III Financial Impact Chapter 1. Method of Calculating the Impact Section 1. Premise

On this occasion, despite repeated requests from the Committee, A refused to cooperate with the investigation, and therefore the contents of the Fraud could not be wholly clarified. However, the amount of the impact was calculated based on ascertaining the balance that should have been on the balance sheet, taking the differences between this balance and the original balance sheet, and recording these differences in the profit and loss statement.

It should be noted the Committee did not take into account the items of derivative revisions such as matters relating to the valuation of the inventories or matters relating to the impairment of fixed assets occurring as a result of revising the amount of impact. Section 2. Method for calculating the impact

TICC’s principal balance sheet accounts items are as follows. Unit: million USD

56 Since some companies conducted a physical inventory at the end of October 2018, consistency between the valuation of the inventories in the consolidation packages and the monetary value in the stock statement at the time of the end of December 2018 collected by Toyo Ink HD from each of the investigated subsidiaries was checked, and the investigated subsidiaries were made to check that, following the physical inventory at the end of October 2018, the changes in the inventories in the stock statement up until the end of December 2018 reflected the actual changes in the inventories, and to prepare a declaration to such effect.

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Main BS items of December 2018

Cash deposits 2 Accounts payable-Trade 8 Accounts receivable 7 Loans payable 14

Inventories 14 Others 0.3 Tangible fixed assets 3 Capital 4

Others 1 Retained earnings 0.7 Total assets 27 Liabilities and net assets 27

Looking at the above figures, most of the balance sheet is covered by the three accounts of

loans payable, inventories and accounts payable-Trade, which are described as having been subject to fraud by A in A’s report. Therefore, the amount of impact was calculated using the three accounts of loans payable, inventories and accounts payable-Trade. Section 3. Method for calculating the impact by account 1. Loans payable

It was considered that the balance of off-the-books loans payable should be recorded in the cost of goods sold, and the increase or decrease in the balance of off-the-books loans payable was considered to be the amount of the annual impact. Assuming that the cost of goods sold was understated when the off-the-books loans payable increased, and assuming the cost of goods sold was overstated if a negative amount of impact on profits occurred and the off-the-books loans payable declined, a positive amount of impact would have occurred in terms of the profits. 2. Accounts payable-Trade As described in II, Chapter 2, Section 3-3 (2), the accounts payable ledger was accurate except for a few cutoff errors, and considering the accounts payable ledger to be the correct accounts payable-Trade balance, it was compared to the accounts payable-Trade balance in the consolidation package, and if the accounts payable-Trade were understated, it was considered that they should have been recorded as the cost of goods sold, and the increase or decrease in the understated accounts payable-Trade was considered to be the amount of the annual impact. Assuming that the cost of goods sold was understated if the amount of the understated accounts payable-Trade increased, and assuming the cost of goods sold was overstated if a negative amount of impact on profits occurred and the amount of the understated accounts payable-Trade declined, a positive amount of impact would have occurred in terms of profits. 3. Inventories

As described in II, Chapter 2, Section 3-4, (3)B, since the quantity and unit price in the warehouse stock list were generally accurate, the inventory balance in this list was taken to be the correct inventory balance and compared to the stock balance in the consolidation package (supplies materials, raw materials, work in process, semi-finished products, finished goods);

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and if the inventories were overstated, it was considered that they should have been recorded as cost of goods sold, and the increase or decrease in the overstated amount of inventories was considered to be the amount of the annual impact. Assuming that the cost of goods sold was understated if the amount of the overstated inventories increased, and assuming the cost of goods sold was overstated if a negative amount of impact on profits occurred and the amount of the overstated inventories declined, a positive impact would have occurred in terms of the profits. Chapter 2 Amount of Impact

The following is a summary (unit: million USD) of changes in the amount of understated or overstated loans payable, accounts payable-Trade and inventories.

Summary of changes

December 2014

December 2015

December 2016

December 2017

December 2018

June 2019

Amount of understated loans payable

11.4 12.7 11.1 11.7 12.4 13.1

Amount of understated accounts payable-Trade

0.5 1.3 2.3 1.6 3.2 3.4

Amount of overstated inventories

4.9 5.3 6.4 7.8 6.5 5.1

Others -0.0 -0.0 -0.0 -0.3 -0.1 -0.0

Total 16.8 19.3 19.8 20.8 22.0 21.6

The amount of impact (unit: million USD) by TICC fiscal year that was calculated based

on the above changes is as follows. Debit is stated as positive and credit as negative. Please refer to the Appendix for impacts per quarter.

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The retained earnings declined to 16.8 million USD at the beginning of Fiscal Year 2015

(end of December 2014) due to an increase in the loans payable of 11.4 million USD, an increase in the accounts payable-Trade of 0.5 million USD and a decline in the inventories by 4.9 million USD. In Fiscal Year 2015, the loans payable increased by 1.3 million USD and the cost of goods sold increased by the same amount. The accounts payable-Trade increased by 0.8 million USD, others increased by 0.0 million USD, and cost of goods sold increased by 0.7 million USD. The inventories declined by 0.4 million USD and the cost of goods sold increased by the same amount.

In Fiscal Year 2016, the loans payable declined by 1.6 million USD and the cost of goods sold declined by the same amount. The accounts payable-Trade increased by 1.0 million USD, others declined by 0.0 million USD, and cost of goods sold increased by 1.0 million USD. The inventories declined by 1.0 million USD and the cost of goods sold increased by the same amount. In Fiscal Year 2017, the loans payable increased by 0.5 million USD and the cost of goods sold increased by the same amount. The accounts payable-Trade declined by 0.7 million USD, others increased by 0.3 million USD, and cost of goods sold declined by 1.0 million USD. The inventories declined by 1.5 million USD and the cost of goods sold increased by the same amount.

In Fiscal Year 2018, the loans payable increased by 0.7 million USD and the cost of goods sold increased by the same amount. The accounts payable-Trade increased by 1.7 million USD, others declined by 0.1 million USD, and cost of goods sold increased by 1.8 million USD. The inventories increased by 1.3 million USD and the cost of goods sold declined by the same amount.

Retained earnings 11.4Loans payable -11.4 -1.3 1.6 -0.5 -0.7Cost of goods sold 1.3 -1.6 0.5 0.7Retained earnings 0.5Accounts payable-trade -0.5 -0.8 -1.0 0.7 -1.7Cost of goods sold 0.7 1.0 -1.0 1.8Others 0.0 -0.0 0.3 -0.1Retained earnings 4.9Inventories -4.9 -0.4 -1.0 -1.5 1.3Cost of good sold 0.4 1.0 1.5 -1.3Retained earnings 16.8Loans payable -11.4 -1.3 1.6 -0.5 -0.7Inventories -4.9 -0.4 -1.0 -1.5 1.3Accounts payable -0.5 -0.8 -1.0 0.7 -1.7cost of goods sold 2.4 0.5 1.0 1.2Others 0.0 -0.0 0.3 -0.1

BeginningFiscal

Year 2015Fiscal

Year 2016Fiscal

Year 2017Fiscal

Year 2018Accont Name

Loans Payable

Accountspayable-trade

Inventories

Total

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IV Analysis of the Cause of Fraud

The main cause of the Fraud seems to stem from the fact that TICC had created an opportunity for A to commit the Fraud as a result of black-box accounting of financial and accounting work. Another contributing factor is that previous TICC management had little awareness of the importance of ensuring the accuracy of the financial reports. Section 1. Black-box accounting of TICC’s financial and accounting work Regarding TICC’s financial and accounting work, it seems that the black-box accounting started due to multiple factors as given below. The black-box accounting of financial and accounting work made it difficult for the check function to work so that officers and employees other than A would be able to check the Fraud, and as a result, this made the Fraud possible. 1. TICC officers and employees, including previous presidents, depended on A for financial and accounting related work

A had been in charge of financial and accounting work at TICC for more than 15 years since assuming the post of manager of TICC’s Finance and Accounting Division in 2002 and since previous presidents were not necessarily familiar with the financial and accounting work, these operations were left exclusively to A.

In this regard, some of the previous presidents had admitted that they signed the financial and accounting documents that A had prepared without fully checking their content; they had not even particularly checked the accuracy or the evidence of A’s report on the cash flow, etc.

In addition, M, who was the Director of TICC, was originally in a position to receive reports directly from A, who was in charge of the financial and accounting work, but M’s focus lay in the work of TICC’s Sales Division, and he left the finance and accounting work to A.

In this way, the previous Japanese presidents and the local directors, as A’s superiors, did not fully serve the function of checking A’s financial and accounting work, and moreover, since A had been in charge of the Finance and Accounting Division for many years, there were many procedures and documents that could not be tracked or understood by the staff working in the Finance and Accounting Division other than A. At TICC, the reliance on A within the Finance and Accounting Division also grew because there were few personnel transfers between the Finance and Accounting Division and other divisions.

As a result, with regard to the processing of closing journal entries, which is thought to be how the Fraud was committed, staff other than A could not track or understand its contents, and a situation arose where it was possible for A to process the closing journal entries without a thorough effective check by other staff or his supervisors. 2. Parallel accounting work through ERIC and manual work using the auxiliary books (Excel file)

TICC has an accounting system called “ERIC”, and the finance and accounting staff use this system to create and aggregate journal entries. However, for transactions relating to

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deposits and cost accounting, instead of typing them directly into ERIC, the work flow was such that the data was first entered into an Excel file for aggregation and then each person in charge in the FA Division would aggregate the recorded data in the file, create a journal voucher, and enter the contents of the journal voucher into ERIC.

Unlike ERIC where once the data had been finalized by the person in charge, it was impossible, in principle, to make changes, changes could easily be made to the content in the Excel files and it was difficult for others to check them, and in actuality, A committed the Fraud by altering part of the Excel files. In this regard, the staff in the Finance and Accounting Division prepared a trial balance (USD) based on the premise that the contents of the Excel file that had been altered by A were, in fact, correct. 3. Insufficiencies in the management of financial and accounting documents and data

at TICC

The Committee endeavored to clarify the tactics used in the Fraud but was unable to clarify them in their entirety and were only able to clarify some of the methods used. The reason why it was not possible to achieve complete clarification was due to such circumstances as the time constraints of the investigation, the physical constraints imposed by the period of storage of the documents of the banks in the Philippines and the fact that A refused to be interviewed, but in addition, the management of the accounting documents and data was insufficient at TICC. For example, as described in II, Chapter 2, Section 3-2 (3) B above, it was not possible to ascertain the changes in the borrowings balance for each bank even through this investigation due to such reasons as there being no auxiliary books for the borrowings or calculation of interest per bank at TICC and not all of the contracts and vouchers for interest payments were stored in one place.

In this way, if the financial and accounting documents and data are inadequate, as was the case in the investigation by the Committee, it becomes difficult for a third party to verify and analyze the accuracy and appropriateness of the financial and accounting work, and it is clear that the situation was such that the check mechanism against fraud was not functioning properly.

Section 2 Previous TICC management should have been more aware of the importance of ensuring the accuracy of the financial reports

The reason behind the black-box accounting of the financial and accounting work at TICC is that previous management at TICC should have been more aware of the importance of ensuring the accuracy of the financial reports.

As described in Section 1-1 above, previous presidents were not necessarily familiar with the financial and accounting work, and relied exclusively on A for these operations. In addition, previous TICC presidents explained in the interview conducted by the Committee, “Nothing was picked up in the accounting audit and so I thought that there weren’t any problems.”

However, the settlement of accounts is primarily the responsibility of the company itself, and the accuracy of the financial reporting should be ensured first by the company’s internal controls, and the accounting audit by the accounting auditors is based on the premise that, in principle, the financial information provided by the company is accurate.

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Of course, it is not necessary for the TICC president to be familiar with the minutiae of the financial and accounting work, and the practical work may be left to the applicable person in charge, but as the person with decision-making authority, the president is required to endeavor to understand and keep track of the work of the person in charge of finance and accounting and to check whether the work contents are appropriate through the approval processes.

From the results of the interview, it appears that most of the previous TICC management (M included) trusted A’s work attitude and even when giving approval, trusted the content of A’s reports without thoroughly looking into them, and did not take the stance of asking questions about the contents of the reports.

It is undeniable that such stance of TICC’s previous management itself created a consciousness in A’s mind that “no fraud would be detected”.

In addition, if a person who was not familiar with the financial and accounting operations had been appointed president of TICC, Toyo Ink HD could have thought of ways of supplementing this insufficiency, for example, sending Japanese staff who were familiar with finance and accounting to TICC with more initiative taken on the part of Toyo Ink HD. Section 3 Room to improve the method in order to achieve more effective internal audits

The Toyo Ink HD’s Group Audit Office conducts annual surveys of TICC based on questionnaires, which include (i) questions regarding company-level controls at TICC, and (ii) questions regarding period-end financial process. The internal audit which uses these questionnaires is conducted for all of the Toyo Ink HD Group locations based on the Financial Instruments and Exchange Act and Companies Act. In addition, in 2011, 2013, and 2018, internal audits were also conducted for TICC through a visiting audit in order to support the contents of the responses to the questionnaires.

In this regard, it was seen through this investigation that the awareness of the TICC presidents and officers was weak in internal controls, and there was the problem that TICC’s company-level controls relied on A alone in relation to the accounting work and there were insufficiencies in the management of the financial and accounting-related documents and data, but these problems could not be detected through the questionnaires and visiting audits conducted by the company.

The Committee obtained and checked the contents of the documents relating to the internal audits conducted in 2018. The internal audit items described in the questionnaire were extremely diverse, and the visiting audit of TICC in 2018 was carried out through a two-person structure and completed in one day. Prior to the visiting audit, preparations were made such as checking the materials of the local company in advance, but when considering the high risk of fraud in the Philippines, there is the possibility that the visiting audit of TICC in 2018 was lacking in the time and personnel required to detect the issues and internal audits were not conducted in sufficient depth. Section 4 Room for improvement in the mechanism of escalation of risk information

Among the TICC officers and employees, there were some officers and employees who had had some sense of the Fraud such as “it was unnatural the monthly reporting of the cash flow by A was not linked to manufacturing performance and sales trends”, but these concerns

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were not shared with the previous TICC presidents or communicated to Toyo Ink HD. Originally, such risk information should have been escalated according to the normal

reporting line, and if escalation via the normal reporting line was difficult, there should have been a structure in place allowing Toyo Ink HD to ascertain the risk information such as through a whistleblowing system.

If a risk information escalation mechanism involving Toyo Ink HD had been fully in place at TICC in addition to the normal reporting line, it is thought that there would have been the possibility that the Head Office would have been able to ascertain the risk information related to the Fraud earlier on. V. Recurrence prevention measures

Based on an analysis of the cause of the Fraud described in IV above, the Committee recommends the following measures to prevent recurrence. Section 1 Improve the situation where the financial and accounting operations depend on simply one person in charge

As described in IV, Section 1 above, TICC’s financial and accounting work became black-box accounting because of an excessive reliance on A, and it was difficult for the check mechanism of officers and employees other than A to function in relation to the Fraud. First of all, it is necessary to review the system in which such financial and accounting work depends on simply one person in charge, and to ensure the check mechanism is able to function.

Specifically, it is necessary to increase the personnel flow in the organization within TICC by, for example, rotating personnel between the Finance and Accounting Division and other divisions. However, in light of the expertise required in the financial and accounting work, there is a limit to what can be achieved through simply rotating the personnel within TICC, and measures such as regularly alternating the financial and accounting staff and CFO between TICC and TIP is one conceivable idea.

In addition, although financial and accounting knowledge is considered essential for proper management of the overseas group companies, despite the problem of limited human resources, such measures are required as dispatching human resources with some financial and accounting knowledge or experience to overseas group companies that are considered to have a high risk of fraud, or conducting intensive training on finance and accounting before their appointment. If the TICC management is not familiar with financial and accounting operations, Japanese staff who are familiar with financial and accounting work should be assigned, and support and communication should be provided by the Finance Division of the Head Office. Through these measures, it is important to establish a system that enables effective checking of the financial and accounting work. Section 2 Systemization of the business processes relating to the settlement of accounts and financial reports

TICC has an accounting system called “ERIC”, but certain transactions are managed manually using an Excel file, making it easy to tamper with the numerical values.

Given the importance of ensuring the accuracy of the financial documents and financial

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statements, although the cost will become higher commensurate with the introduction and maintenance of an appropriate system, the manual work in the business processes pertaining to the settlement of accounts and financial reports should be eliminated to the greatest extent possible and an accounting system in which the auxiliary books and general ledgers are automatically linked should be brought in and an appropriate business flow should be established for the remaining manual work.

In order to ensure the accuracy of the data entered into the accounting system, a system needs to be developed where someone other than the person who entered the data checks the consistency between the entered data and the original books/vouchers. In particular, in the case of manual work, it is particularly important to perform double checks of the entered data and crosscheck them against the original books/vouchers.

In addition, Toyo Ink HD and the supervising divisions should endeavor to the greatest extent possible to understand the situation of the finance and accounting divisions in the overseas groups, and to provide support and advice as necessary if there is concern about the shortage of personnel. Section 3 Thorough management of the financial and accounting documents and data

Company-wide common rules are stipulated by Toyo Ink HD in relation to finance and accounting. Nevertheless, at TICC, the management of the financial and accounting documents and data is not thorough, and it is difficult for a third party, including the accounting auditors, to check and analyze the accuracy and appropriateness of the financial and accounting operations, and as a result, the situation is such that the check mechanism to prevent fraud does not function.

Therefore, there is a need to provide fresh guidance and education under the leadership of Toyo Ink HD in order to ensure everyone is familiarized with the rules concerning the storage and management of financial and accounting documents. In addition, staff needs to be thoroughly aware that disciplinary action will be taken if those rules are violated, and appropriate measures should be taken if there is an act that violates the rules. Section 4 Proactive understanding of the status of establishment and operation of internal controls relating to the financial reports

Previous management at TICC did not have any suspicions about the effectiveness of the internal controls pertaining to the accuracy of the financial reports at TICC and did not think there was a need to assess the effectiveness themselves because the accounting audits are conducted by accounting auditors. However, in order to make the internal controls function effectively, it is important not to rely on “the belief that human nature is fundamentally good” and to be aware that there are limitations to what the audits by the accounting auditors can achieve, and to take responsibility in order to adopt a stance of ascertaining the status of the maintenance and operation of the internal controls and wanting to improve their effectiveness. In addition, if any suspicion arises, it is necessary to take appropriate measures so that the internal controls functions effectively, for example, by personally taking measures or instructing a suitable person to do so.

In addition, even if accounting fraud takes place in an overseas group company that, judging from the business scale, is not considered to be an significant business locations, as

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was true in this case, there may be a serious impact on the entire company, and therefore, Toyo Ink HD should also be aware more than ever that there is a strong expectation that the Head Office will support the establishment of internal control over financial reporting of the overseas group companies. Not simply Toyo Ink HD, but the overseas group companies often point out physical and psychological distances from the Head Office, and therefore aside from the visiting internal audits, there is also a need for enhanced communication during normal times, such as regular visits by the persons in charge at the Finance Division of the Head Office to the overseas group companies. Section 5 Renewed review of the implementation policy for internal audits

As described in IV, Section 3 above, the questionnaires and visiting audits of TICC that were carried out by the company were unable to detect the problem of the weak awareness of the TICC president and officers relating to the internal controls, the problem of TICC’s company-wide internal controls where the accounting operations were dependent on only A or the problem of how the management of the financial and accounting documents and data was insufficient.

In order to prevent accounting fraud such as the Fraud or to detect it at an early stage, it is effective to conduct a more in-depth audit. Therefore, when conducting internal audits, the risk of each site should be determined without relying solely on sales measurements but based on the inherent risks of the country or region in which the site is located, the frequency of the internal audits and the length of appointment of the president and officers, etc., and it is also necessary to review the main points and procedures of the audits so that internal audits at a depth corresponding to the relevant risks can be carried out, and to consider scheduling and the introduction of personnel so that they can be properly implemented. Section 6 Build a system to enable the sharing of risk information throughout the group

As described in IV, Section 4, there were some officers and employees of TICC who felt that there something odd about the cash flow and thought they may have seen signs of the Fraud, but since this was not recognized to be fraud, it did not lead to its early detection.

If fraud is being carried out in this way, there are signs of fraud everywhere, but it is difficult to determine the existence of fraud simply from the signs themselves, which means ultimately a situation arises where the opportunity to detect fraud at an early date is missed. Therefore, it is important to build a system in order for risk information, including signs of fraud, to be picked up and consolidated so that signs of fraud may be linked to the early detection of fraud. For example, in order to enable the Head Office to ascertain signs of fraud discovered at an overseas subsidiary in a timely manner, one strategy is to introduce a whistleblowing system geared to overseas subsidiaries and to promote proactive use of it, together with the existing domestic whistleblowing system.

End

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Appendix

Beginning of

FY20151Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

Retained earnings 11.4Loans payable -11.4 0.6 -1.0 -1.7 0.8 -0.6 1.1 -1.0 2.0 -2.9 0.1 0.3 2.0 -0.1 -0.8 -0.2 0.4 -1.5 0.8Cost of goods sold -0.6 1.0 1.7 -0.8 0.6 -1.1 1.0 -2.0 2.9 -0.1 -0.3 -2.0 0.1 0.8 0.2 -0.4 1.5 -0.8Retained earnings 0.5Accounts payable-trade -0.5 -1.1 0.1 1.3 -1.1 -0.3 -0.7 0.2 -0.2 -0.1 0.1 1.3 -0.5 -0.2 -0.1 -0.1 -1.3 1.5 -1.6Cost of goods sold 1.1 -0.1 -1.3 1.1 0.4 0.7 -0.2 0.2 0.1 -0.1 -1.3 0.2 0.4 0.1 0.1 1.2 -1.3 1.6Others 0.0 0.0 0.0 0.0 -0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 -0.3 0.0 0.0 0.1 -0.1 0.0Retained earnings 4.9Inventories -4.9 1.2 -1.2 1.1 -1.5 0.7 -1.2 0.4 -1.0 2.5 -0.1 -0.9 -3.0 0.2 0.3 1.0 -0.1 0.3 1.1Cost of good sold -1.2 1.2 -1.1 1.5 -0.7 1.2 -0.4 1.0 -2.5 0.1 0.9 3.0 -0.2 -0.3 -1.0 0.1 -0.3 -1.1Retained earnings 16.8Loans payable -11.4 0.6 -1.0 -1.7 0.8 -0.6 1.1 -1.0 2.0 -2.9 0.1 0.3 2.0 -0.1 -0.8 -0.2 0.4 -1.5 0.8Inventories -4.9 1.2 -1.2 1.1 -1.5 0.7 -1.2 0.4 -1.0 2.5 -0.1 -0.9 -3.0 0.2 0.3 1.0 -0.1 0.3 1.1Accounts payable -0.5 -1.1 0.1 1.3 -1.1 -0.3 -0.7 0.2 -0.2 -0.1 0.1 1.3 -0.5 -0.2 -0.1 -0.1 -1.3 1.5 -1.6cost of goods sold -0.7 2.1 -0.8 1.8 0.2 0.7 0.5 -0.9 0.5 -0.0 -0.6 1.2 0.3 0.5 -0.6 1.0 -0.1 -0.2Others 0.0 0.0 0.0 0.0 -0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 -0.3 0.0 0.0 0.1 -0.1 0.0

Fiscal year 2016 Fiscal year 2017 Fiscal year 2018 Fiscal year 2019

Accountspayable-trade

Loans Payable

Accont Name

Inventories

Total

Fiscal year 2015