On February 9, 2010, LAWSON, INC. reported the alleged misappropriation of large sums of money by two former directors of consolidated subsidiary LAWSON ENTERMEDIA INC. (LEM) in a press release titled “Discovery of Misconduct by Two Directors of LAWSON ENTERMEDIA.” Following this discovery, a third party investigating committee made up of outside experts was established and this committee has been verifying the facts of the alleged misconduct and looking at ways to improve business practices. Today, the third party investigating committee released its final report on the matter. LAWSON and LEM have decided to take the measures outlined below based on the report’s findings. We offer our sincerest apologies for any concern caused to shareholders, other investors, business partners and other stakeholders.  

1. Course of Events Leading Up to the Final Report

  On January 24, 2010, LAWSON and LEM were informed by two former LEM directors that Plaisir Co., Ltd., a company that should have paid ticket fees to companies planning concerts, was facing financial difficulties as it had misappropriated certain money and that the two former directors had paid ticket fees on behalf of Plaisir without authorization. LAWSON and LEM immediately set up an internal investigating committee, which began investigations with the cooperation of outside legal counsel and an accounting firm. As a result of this internal investigation, the committee discovered that the two former LEM directors had inappropriately paid money to Plaisir and that this caused estimated losses of approximately 15.0 billion yen. This matter was made public on February 9, 2010. At the same time, disciplinary action was taken against internal personnel. (For details, please see the aforementioned press release issued on February 9.) On the same day, February 9, a third party investigating committee made up of outside experts was formed. This committee submitted an interim report on March 11, which was subsequently made public in full along with emergency measures to prevent a reoccurrence of this incident. (For details, please see the statement "Status of Response to Discovery of Misconduct by Two Former Directors of LAWSON ENTERMEDIA" released on March 11 (in Japanese only).) On March 23, LAWSON and LEM announced that total losses had been quantified at up to approximately 14.4 billion yen and that the total amount would be booked an extraordinary loss, as there were no prospects for recovery. (For details, please see the press release dated March 23 titled “Notice Concerning Extraordinary Losses and Impact on Prior-Year Results at a Subsidiary, and Revision of Fiscal 2009 Forecasts.”) Today, April 12, the third party investigating committee submitted its final report following the completion of investigations.  

2. Final Report of the Third Party Investigating Committee

Chairman: Toshio Takano (Attorney; Head of Takano Law Firm; Former Superintendent Public Prosecutor of Nagoya High Public Prosecutors’ Office) Michio Masaki (Attorney; Partner of City-Yuwa Partners) Toshifumi Takaoka (Certified public accountant; Executive Director and Partner of KPMG FAS Co., Ltd.)

3. Preventative Measures

LAWSON and LEM recognize the importance of preventing such an incident from occurring again in the future, and will therefore steadily implement the following measures.

(1) Emergency Countermeasures
After discovering the alleged misappropriation of money, LEM implemented the following emergency countermeasures.
1) Elimination of Concentration of Authority
LEM dispersed authority because the concentration of authority in one division or the directors in charge was identified as having facilitated the misconduct. Specifically, authority was taken away from the Management Division and split among the Finance and Accounting Division, the General Affairs Division, the Internal Audit Division and the Management Planning Office, and a person with responsibility was appointed in each division. This created a system of checks and balances among divisions.
2) Stronger Supervision of Payments
LEM established a new system for checking payment applications in the General Affairs Division, in addition to the Finance and Accounting Division. The system relates to advance payments and other extraordinary transactions.  

(2) Fundamental Countermeasures
LEM will now also take the following fundamental countermeasures based on the final report of the third party investigating committee.
1) Enhancement of Legal Compliance Top management is committed to preventing a reoccurrence of this incident. LEM will maintain and strengthen the existing compliance training for all executives and employees in order to ensure that awareness of legal compliance is thoroughly instilled. Furthermore, starting this fiscal year, LEM will conduct a regular annual awareness survey of all executives and employees to gauge their understanding and awareness of legal compliance.
2) Recognition and Prevention of Transaction Risks
LEM will identify risks relating to trading partners and transactions, and reflect preventative measures in business manuals as well as ensure that all executives and employees understand them. These measures will be implemented before the end of the first six months of the current fiscal year.
3) Emphasizing an Organizational Over Individual Approach
One of the characteristics of LEM’s industry is the emphasis on individual connections, which tends to result in individualized work practices. Beginning in the first half of the current fiscal year, LEM will therefore work to ensure that individual work practices are more visible within the organization and encourage regular personnel rotation in order to ensure that business is handled in a more systematic manner.
4) Enhanced Management of the Sales Division
The General and Legal Affairs Division and the Finance and Accounting Division already conduct credit screening of trading partners and regularly verify transactions. Going forward, however, over the medium term, LEM plans to strengthen management functions in the Sales Division in line with organizational growth, and to install control functions in applicable divisions.
5) Stronger Supervision
Along with establishment of the Internal Audit Division as an emergency response measure, LEM also increased the number of dedicated internal audit staff to two, creating a system for comprehensive evaluation of internal risk. Going forward, LEM will rebuild its systems, including the finance and accounting systems, in order to promote more visible work practices and conduct continuous and effective monitoring.
6) Encourage Use of Internal Whistleblower System
Through compliance training and other programs, LEM encourages active use of the internal whistleblower system. Going forward, the management team will also directly implore employees to use such systems at morning meetings and via in-house communications.
7) Monitoring of Preventative Measure Implementation
LEM will monitor the implementation status of preventative measures. Specifically, it will designate the Risk Management and Compliance Committee as the group in charge of promoting implementation of preventative measures. This Committee will regularly report the results of its monitoring work to the board of directors.  

(3) Countermeasures in the LAWSON Group
When this incident was discovered, LAWSON conducted inspections of accounting at Group companies (Ninety-nine Plus Inc. and LAWSON ATM Networks, Inc.) as an emergency measure, confirming that no other misappropriation of funds had occurred. LAWSON also evaluated risk management at Group companies based on the factors that facilitated the alleged misconduct at LEM (concentration of authority and insufficient risk awareness) and confirmed that no similar issues were present. Looking ahead, the LAWSON Group as a whole will enforce risk management in order to prevent such an incident from recurring.
1) Dispersion of Authority・
LAWSON has confirmed that individuals with responsibilities in a given division do not hold concurrent positions that could hinder the functioning of internal controls.
・ LAWSON confirmed its system of double checks on payment procedures.
・ LAWSON will strengthen monitoring of the systems described above.
2) Stronger Risk Management System
Committees to oversee compliance and risk management have been established at LAWSON Group companies, and these committees will work with LAWSON’s Compliance and Risk Office to enforce risk management.

4. Future PlansOn April 14, LAWSON and LEM plan to disclose corrections to flash reports for the year ended February 28, 2010 and prior-year results.