Completion of Investigation by the Internal Investigation Committee and Formulation of Measures to Prevent Recurrence

Regarding the "Recording of Provision for Doubtful Accounts Overseas" announced in the consolidated financial results for the second quarter of the fiscal year ending March 2026, we established an investigation committee and have been proceeding with the investigation of the causes and the formulation of measures to prevent recurrence. We hereby announce that the investigation by the committee has been completed and the measures to prevent recurrence have been formulated as follows.

We take the cause analysis and the recommendations for preventive measures by the investigation committee very seriously. We are committed to steadily implementing the formulated preventive measures, promptly improving and strengthening our group governance system, and making company-wide efforts to restore the trust of all stakeholders.

1. Overview of the Incident and Establishment of the Internal Investigation Committee

   Due to the deterioration of the business conditions and cash flow of Company Z, a customer of our overseas subsidiary (hereinafter "Company K"), the payment of construction fees to Company K was delayed and became an overdue receivable. In the consolidated financial results for the second quarter of the fiscal year ending March 2026, we recorded a provision for doubtful accounts of approximately 830 million yen.

   For the purpose of investigating the causes of this incident and proposing measures to prevent recurrence, the Board of Directors established the Internal Investigation Committee

   (hereinafter the "Committee") in November 2025. The Committee, chaired by an Independent Director and including an Audit & Supervisory Board Member as a member, analyzed the causes of this incident-in which overdue receivables were not appropriately managed-by reviewing relevant documents, interviewing related parties, and, as necessary, conducting questionnaires that included other overseas subsidiaries and some domestic branches/subsidiaries. Based on these findings, the Committee proposed measures to prevent recurrence.

2. Investigation Results of the Facts regarding Company K

   ・Received orders for 10 projects from Company Z since December 2022.

   ・A three-month payment delay occurred in the first project, and subsequently, delays of one to four months became normalized. Although debt collection efforts were made by the accounting and engineering staff, no reports were submitted to the managers.

   ・In October 2024, although the managers recognized the long-term overdue receivables, the issue was not reported to Company K's management because the accounting staff did not express any concerns regarding collection.

   ・In February 2025, a report was submitted to Company K's management, the head office, and the regional control department. However, since the receivables were reported as "expected to be collected," no specific instructions were issued.

   ・Negotiations began at the manager level from the end of March 2025, and at the top management level in late April. However, as the customer requested an extension of the payment deadline due to deteriorating cash flow, the discussions were entirely focused on the payment schedule.

   ・During the above period, construction continued because there were no contractual clauses or internal rules regarding the suspension of construction, and also to avoid standby costs associated with suspending operations.

   ・As the auditing firm of Company Z added a note regarding going concern uncertainties in Company Z's quarterly financial results, Company K recorded a provision, and we also recorded a provision for doubtful accounts in our consolidated financial results for the second quarter of the fiscal year ending March 2026.

3. Cause Analysis

   ・At Company K, sensitivity and awareness regarding overdue receivables and counterparty credit risks were low, particularly among managers. In particular, the fact that Company Z was a listed company and originally a Japanese-affiliated company created a strong "normalcy bias" where no one anticipated its bankruptcy.

   ・Under such circumstances, there were communication bottlenecks and a dilution of the sense of urgency during transmission across multiple levels, such as between staff and managers, between managers and management, and among internal bases. Payment reminders were left entirely to the staff in charge, and even after information about the overdue receivables was provided by the managers, the response at the management level was delayed.

   ・Furthermore, credit investigations and evaluations commensurate with risks, such as transaction amounts and delinquency status, were not conducted regularly.

   ・In the contract with Company Z, despite the stipulation of progress payments, the postponement of debt collection, such as lump-sum payments upon completion, had become normalized due to operational burdens. Additionally, there were no rules, regulations, or contractual provisions for actually suspending on-site operations in the event of payment delays.

4. Recommendations for Preventive Measures by the Committee

   "How could this incident have been prevented?"

   In short: If the fact of payment delays had been recognized as an "abnormal situation," information had been shared primarily among managers, the customer's situation had been closely monitored, and management and below had conducted resolute negotiations early on, including the suspension of construction, it is highly likely that this incident could have been largely prevented.

   [Recommendations for Preventive Measures]
   1. Thorough Fundamental Awareness

      • All employees must reaffirm the risk that payment delays, overdue receivables, and bad debts can occur even with major customers.

      • Thoroughly implement credit management at the time of contracting and post-contracting,

        and continuously monitor the customer's situation.

   2. Immediate Grasp of Information

      • Enable management and relevant personnel to recognize the occurrence of overdue receivables in real-time.

   3. Prompt Action by Management
   4. Provisions in Contracts

      • Contracts should basically be based on scheduled progress payments to minimize the amounts of overdue receivables in the event of customer bankruptcy.

      • Clearly include in the contract the measures that can be taken when overdue receivables occur (such as suspending construction to prevent additional damages, compensating for related damages due to suspension, etc.) in accordance with the other party's credit status.

   To achieve the above, we will promote the establishment of rules and regulations, internal training, and the development of a data infrastructure and system enhancements.

5. Implementation of Preventive Measures

Based on the cause analysis and recommendations for preventive measures by the Committee, the Company will establish regulations related to transactions (credit management, estimation/contract management, collection management, etc.) and improve and strengthen risk evaluation, control environment, information communication, control activities, and monitoring in terms of operation, thereby preventing the recurrence of this incident within the Sankyu Group. The preventive measures are as follows:

1. Establishment and Thorough Implementation of Regulations and Rules, and Thorough Improvement of Contract Contents

   • Newly establish Customer Management Regulations, centralizing, organizing and refining rules related to customer management that are currently dispersed across existing regulations, ensuring their thorough enforcement both domestically and internationally.

2. Strengthening of Customer Credit Risk Management System

   • Conduct investigations, evaluations and monitoring according to risks such as transaction amounts and delay status before starting transactions (before concluding contracts/submitting estimates) and after starting transactions.

   • Expand means of credit risk investigation (financial details, ratings, stock price trends, reputation among peers, etc.).

3. Education on Receivables Management and Customer Credit Risk Management across the Group.
4. Systematization of Sharing Information on Overdue Receivables

   • Review the reporting items and methods directed to the Regional Control Departments and Headquarters.

   • Introduce a system equipped with a data sharing platform at the detailed level of overdue receivables and alert notifications according to the delay period and amount.

5. Practice of Collection and Preservation Activities Based on Rules and Guidelines

   • Do not leave the collection of overdue receivables solely to national staff or on-site personnel, management must get involved at an early stage to ensure collection and preservation, including making decisions to suspend construction based on the contract as necessary.

6. In-depth Verification by the Internal Audit Department.

We will clarify the departments responsible for implementing the above measures, set clear deadlines, and ensure their steady execution.

For inquiries regarding this matter, please contact:

Corporate Accounting Department，Sankyu Inc.(sankyukeiri@sankyu.co.jp)