Initiatives Relating to Auditing

Audit method of the Audit & Supervisory Board

The Audit & Supervisory Board Members are entrusted by shareholders to audit Directors' execution of duties from an independent standpoint, aiming to achieve the sound and sustainable growth of Kao Group and establish governance that meets the trust of stakeholders. We provide in a detailed explanation of the activities of the Audit & Supervisory Board in FY2022 under review to enhance the transparency of audits and the effectiveness of dialogue with stakeholders as below

Audit Policies

In FY2022, we conducted auditing activities with a shared sense of urgency and the necessity of reforms recognized by management with regard to the status of implementation of corporate strategy and the status of response to management environmental risks. We adopted a policy which recognizes that stakeholders are demanding a higher level of effective governance and an active disclosure of information.

Particularly important points in Audit & Supervisory Board Members' activities

Lively exchange of opinions

The Audit & Supervisory Board Members attend important meetings and put emphasis on decision-making process for reaching resolutions, and express their opinions as appropriate.

Dialogue with people at the actual sites (Genba)

In addition, the Audit & Supervisory Board Members conduct on-site audits and interviews of each division and subsidiary and affiliates. By placing importance on dialogue with people at the Genba, they confirm the degree of how well corporate strategy is being shared and whether proactive efforts are being made. They also identify any issues that occur at Genba. At least one Outside Audit & Supervisory Board Member has participated in approximately 70% of the interviews.

On-site audits and interviews at Wakayama Plant

Composition and execution of duties of the Audit & Supervisory Board

The Audit & Supervisory Board consists of two Full-time Audit & Supervisory Board Members with internal execution experience and diverse knowledge and three Outside Audit & Supervisory Board Members with respective expertise and abundant experience.
In January 2022, the Office of the Audit & Supervisory Board (with five members) was newly established, to assist the Audit & Supervisory Board Members with their duties and to allow the members to serve concurrently as Auditors of subsidiaries.

Please find the link below for Audit & Supervisory Board Members.

Leadership: Audit & Supervisory Board Members

Deliberations by the Audit & Supervisory Board

Number of meetings held: 9 / Attendance rate: 100%
Duration: Average of 2 hours and 14 minutes

17 resolutions: Audit policy, division of duties, critical auditing items, annual plan, audit report, internal control matters, Accounting Auditor matters (including agreement on compensation, deliberation on reappointment, and non-assurance services), appointment and compensation of Audit & Supervisory Board Members, evaluation of effectiveness, etc.
38 matters considered: Audit findings on critical auditing items, group governance (the Group's structure of Auditors and the direction of future governance), closely monitoring issues concerning internal control, non-assurance services by the Accounting Auditor, exchange of opinions with Representative Directors and Outside Directors, etc.

Evaluation of the effectiveness of the Audit & Supervisory Board: The evaluation is made once a year. Discussions at the Audit & Supervisory Board based on the results of the questionnaire led to the conclusion that the system at the Board as a whole was functioning effectively during FY2022.

Major contents of the evaluation

The Audit & Supervisory Board conducts frank exchanges of opinions.
The agenda items are proactively selected matters to be considered.
Information sharing and support by the newly established Office of the Audit & Supervisory Board have been also strengthened.

Going forward, we hope to deepen discussions on the skill matrix of the Audit & Supervisory Board, which aims for greater diversity

Key audit items, achievements and evaluation of effectiveness

Key audit items	Audit method	Activity results and evaluation of effectiveness	Audit role
Key audit items	Audit method	Activity results and evaluation of effectiveness	Full-time	Outside
Status of execution of duties by Directors	Attend meetings of the Board of Directors to confirm the status of deliberations	All Audit & Supervisory Board Members attended all meetings. All of them actively expressed their opinions	✓	✓
	Attend important meetings such as the Management Board to confirm decision- making process and request explanations as necessary	Attendance rate was 100%, reviewed decision-making process and commented on matters to be considered.	✓	N/A
	Exchange opinions with Management	Representative Directors of Kao (5 times); Outside Directors (2 times); Executive Officers with titles (6 times), Representative Directors of important subsidiaries (3 times); Recognition of management issues and future governance were shared through frank exchanges of opinions	✓	✓
	Conduct On-site audits and interviews of worksites, divisions, domestic and overseas subsidiaries and affiliates (including confirmation of priority audit items such as internal control.)	114 cases Emphasis on dialogue (1,136 comments from Audit & Supervisory Board members) Confirmation of improvement status at a later date for completion of audit findings. Share with executive officers along with excellent on-site initiatives	✓	✓
	Attend the Committee for the Examination of the Nominees for Directors and Audit & Supervisory Board Members and Compensation Advisory Committee for Directors and Executive Officers	11 times	N/A	✓
Effectiveness of the Group governance	Systematize and improve the effectiveness of the Kao Group's structure of Audit & Supervisory Board Members. (Kao, subsidiaries, affiliates) Improve the effectiveness of audit activities under the group management	Commenced a system in which members of the Office of the Audit & Supervisory Board concurrently serve as Auditors of subsidiaries All Auditors of subsidiaries and affiliates regularly exchanged opinions to identify and review risks (6 times) Introduced effectiveness evaluation of the Audit & Supervisory Board to important subsidiaries, and provided training to improve their skills	✓	At any time
Effectiveness of the Group governance	Exchange opinions between the Accounting Auditor and Audit & Supervisory Board Members and report accounting audit results to Meetings of Board of Directors	Exchanged opinions (21 times); Reported to Meetings of Board of Directors (2 times) Audit plan, accounting audit results, key audit matters, non-assurance services management, audit quality, etc. Held global meetings to exchange opinions with domestic and overseas auditors	✓	✓
Development and operation of internal control	On-site audits and interviews of worksites, divisions, domestic and overseas subsidiaries and affiliates	Confirmed results of self-inspections and external audit, and also the status of development and operation of internal control systems	✓	At any time
	Conduct Interviews with the departments in charge of the second line of internal control Attend or check minutes of Internal Control Committee and each affiliate committee Check the response status of the Compliance hotline	Conducted quarterly or semi-annually Self-inspections and monitoring are taking hold, and responses to issues to deal with have been handled appropriately in principle. Timely reports are also made to Audit & Supervisory Board Members.	✓	At any time
	Exchange information with the Department of Internal Audit which is the division responsible for internal auditing	4 times	✓	At any time
	Evaluate the construction and operation status of the internal control system using a checklist	Generally valid	✓	N/A
Proactive disclosure	Evaluated the Company's disclosure status by investigating external requests and disclosure status.	Recommended the points that can be evaluated and points for improvement when exchanging opinions with Management and to related departments. Confirmed the development of the promotion system and the information disclosure status Proactively disclosed activities of the Audit & Supervisory Board Members	✓	N/A

Internal Audit Status

The Department of Internal Audit reports directly to the President and Chief Executive Officer. It conducts internal audits on management activities of Kao and Kao Group companies in general from the perspective of complying with laws and regulations, the appropriateness of financial reporting and administrative effectiveness and efficiency. Besides providing reasonable assurance as to the effectiveness of the company's internal controls, the department also aims to further enhance the internal controls system by proposing improvements. The results of internal audit activities are reported to the Management Board and the Board of Directors at regular intervals.
Regarding management of subsidiaries, the Group Company Policy Manual stipulates which items subsidiaries are required to obtain approval for from Kao in advance, and which items they are required to report to Kao. In accordance with the policy manual, the findings of internal audits conducted by the Department of Internal Audit, as well as initiatives implemented in response and the outcomes of such initiatives, are shared with the board of subsidiaries.
The Department of Internal Audit exchanges information and opinions regarding the current state of internal audit activities with Audit & Supervisory Board Members on a regular basis and as needed. In addition, with regard to the development or evaluation of internal controls relating to financial reporting and the current state of related internal audit activities, the Department of Internal Audit shares information as appropriate with the Accounting Auditor, and strives for effective mutual coordination with the Accounting Auditor.