Epson 2009 Annual Report Download - page 26

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(20) Epson is vulnerable to certain risks in internal control over financial reporting
Epson has established and operates internal control with the aim of ensuring the effectiveness and
efficiency of business operations, reliability of financial reporting, compliance with applicable laws and
regulations relevant to business activities and safeguarding of assets. In accordance with the Japanese
Financial Instruments and Exchange Act, Epson also submits an Internal Control Report that assesses the
effectiveness of internal control over financial reporting.
To respond to this, Epson has positioned the establishment and operation of internal control as an
important management issue. However, in the fiscal year ended March 2009, the Company discovered
that improper accounting practices had been employed in Latin American subsidiaries affecting the fiscal
year in question and also previous years. The resulting investigation into the causes of the improper
accounting practices and the process of making appropriate adjustments to the final accounts settlement
were time consuming and meant that Epson was unable to submit its third quarterly report for fiscal 2008
(ended March 2009) and certification by the deadline prescribed by the Financial Instruments and
Exchange Act. As a result of its internal investigation, Epson concluded that part of the cause of the
improper accounting practices and the delay in discovering these practices were deficiencies in internal
control over financial reporting. In the Internal Control Report submitted at the same time as its Annual
Report, Epson stated that its internal control over financial reporting was ineffective.
As it seeks to prevent a recurrence, Epson is presently working on a Group level to review and improve its
management of subsidiary companies. To maintain the effectiveness of its measures to prevent a
recurrence, Epson has established a monitoring committee and will carefully review the progress of the
improvements.
However, in the case that Epson’ s improvements are not effective, or if there are further deficiencies or
material weaknesses in the internal control, there is the risk that it could adversely affect the reliability of
Epson’ s financial reporting.
21. Epson is vulnerable to risks inherent in its tie-ups with other companies
One of Epson’ s business strategy options is to enter business tie-ups with other companies. If there is any
review of the arrangements of the tie-up between the parties, however, there is a possibility the tie-ups
will be dissolved or be subject to changes. There is also no assurance that the business strategy through
the tie-ups will succeed or contribute to Epson’ s results exactly as expected.
22. Epson might be severely affected in the event of a natural disaster
Epson is undertaking a global expansion of its sites for research and development, procurement,
manufacturing, logistics, sales and services. It is possible that the regions concerned could be affected by
any number of unpredictable events, such as a natural disaster, computer virus, outbreak of an influenza
pandemic, act of terrorism or war, and that Epson’ s results might consequently be affected.
In particular, the central area of Nagano Prefecture, where Epson has sites for its primary businesses, is a
region at particularly high risk of earthquakes. There are numerous cities and towns in that region
designated as “Areas Requiring Enhanced Measures to Respond to Disasters in Earthquakes” due to high
degree of risk of a large-scale disaster in the event of an earthquake in the Tokai region; and an active
fault line also traces the Itoigawa Shizuoka geotectonic line through the middle of the Nagano Prefecture
region.
The areas classifiable as Areas Requiring Enhanced Measures to Respond to Disasters in Earthquakes
were revised in April 2002, so Epson had to revise its earthquake-response policy, look into strengthening
numerous buildings that were not built to resist earthquakes, take measures to avoid losses of materials for
important parts, and create plans to prevent damage from earthquakes. Epson is also conducting other
countermeasures such as partially dispersing its manufacturing sites throughout other regions.
However, if a major earthquake occurs in the central Nagano Prefecture region, it is possible that, despite
these countermeasures, the effect on Epson could be extreme.
Although Epson is insured against physical damage in the event of an earthquake, there is still a limit on
the amount up to which Epson is covered for such damage.
23. There are risks related to Epson’s major shareholders
The Hattori family, who founded Epson, and individual shareholders related to the Hattori family, as well
as the companies whose major shareholders are the Hattori family or such individual shareholders, have
the power, if they jointly exercise their voting rights in Epson, to influence to a significant degree the
outcome of resolutions of a general meeting of shareholders, such as those for the election of directors.