Audit Committee Report

Reporting period

This report covers the 2011 calendar year. Activities from January 1, 2012 to March 31, 2012 are also included in as much as activities undertaken relate to the 2011 consolidated financial statements or to the tender for audit services.

Power and authorities

The tasks of the Committee are determined by the Regulations on the Audit Committee of the Board of Directors of OAO TMK. The Regulations can be found on the corporate website at http://tmk-group.com/files/audit_e.pdf.

The main tasks of the Committee include:

  • Review of the Company’s and of the group’s financial statements;
  • Review of the Company’s standards and procedures for internal control and risk management;
  • Review of the annual plan and periodic and annual reports of the Internal Audit Service;
  • Cooperation with the Company’s Revision Commission;
  • Making recommendations to the Board of Directors on the appointment and/or re-appointment of the external auditor;
  • Review of plan and scope of the audit;
  • Active discussion with the external auditor of matters arising from the audit;
  • Overseeing the independence of the external auditor;
  • Overseeing the appointment of independent appraisers and review of any independent appraisers’ reports.

Audit Committee in 2011

Townsend, G. Chairman of the Audit Committee and Member of the Nomination and Remuneration Committee, Independent director
Eskindarov, M.A. Member of the Committee and Chairman of the Nomination and Remuneration Committee, Independent director
Khmelevskiy, I.B. Member of the Committee, Non-executive director

The Board considers that I. Khmelevskiy is independent in substance while not in form. Article 3.2 of the Regulations on the Audit Committee permits his membership.

The Board of Directors considers that Chairmen of the Committee G. Townsend has recent and relevant financial experience as required by the Guidance on Audit Committees published by the Financial Reporting Council (UK) in December 2010.

Participation in committee meetings

In general, members of the Board of Directors are invited to attend meetings of the Audit Committee. However, the Committee holds at least two meetings per year which are closed to other Board members. The closed meetings include sessions with the external auditor.

Independent legal advice

Pursuant to the regulation given in clause 2.14 of the Guidance on Audit Committees published by the Financial Reporting Council, the Audit Committee may solicit impartial legal advice as deemed necessary. During 2011 the Committee did not solicit such services.

Committee oversight of the external audit of the 2011 financial statements

The Audit Committee oversaw on the external audit of the Company’s consolidated financial statements for 2011 (IFRS) and the parent company’s financial statements prepared according to Russian accounting standards for 2011. Most of this work was carried out in 2012.

The external auditor’s opinion on the consolidated financial statements is key to external investors.

The external auditor discussed his audit plans with the Committee before the commencement of the audit. During the course of the audit the external auditor discussed potential problems and their resolution with the Audit Committee. Once the audit was completed, the external auditor presented the following to the Audit Committee:

  • a summary on the audit adjustments proposed by the auditor and accepted by TMK;
  • a summary on the audit adjustments proposed by the auditor and not accepted by TMK. Management considers that the non-acceptance of these proposed adjustments to be immaterial to the consolidated financial statements of the Company, taken as whole, and the auditors concur with such assessment in the context of forming an opinion on the financial performance and financial position of the Company as shown by the financial statements..

The auditor issued an unqualified audit opinion on TMK’s IFRS consolidated financial statements. Furthermore, the Audit Committee reviewed OAO TMK’s statutory financial statements prepared in accordance with Russian accounting standards and concluded that these statements are consistent with the IFRS consolidated financial statements given the differences in accounting standards and the fact that statutory financial statements are unconsolidated and include only OAO TMK accounts.

As a result of its work on the oversight of the external audit, the Audit Committee believes that the audit was performed professionally and that there are no material conflicts of interest, and recommends to the Board of Directors that the financial statements be submitted for the approval of shareholders at the annual General meeting.

Internal control

The Audit Committee is active in this area through its oversight of the Risk Management Committee and the Internal Audit Service.

Non-audit services provided by the external auditor

The provision of all non-audit services by the external auditor is subject to prior approval by the audit committee. In 2011 the audit committee also approved consulting services in relation to transfer pricing and also two minor projects concerning VAT in Romania.

External audit tender

In accordance with the policy on the appointment of the group’s external auditor, the audit committee conducted a tender in the period October 2011 until March 2012. Because certain loan covenants restrict the choice of auditor to the Big Four, the invitation to tender was restricted to the Big Four. All Four participated and submitted bids.

The invitation to tender included a list of matters which should be considered carefully by bidders and which would probably be key factors in the evaluation of bids. Bidders were given a two month period in which to familiarise themselves with the business of the group whereupon they submitted bids consisting of technical and financial sections. There was then a period of two months for the evaluation of the technical proposals; the audit committee took soundings from management on its views of the technical proposals. The committee then carried out its own evaluation of the technical proposals and only after this were the financial proposals opened. Final evaluation was performed by creating a weighted total of the technical and financial scores. The winner of the tender was Ernst & Young.

Audit Committee therefore recommended that the board recommends to the shareholders at the AGM the appointment of Ernst & Young as external auditor for the 2012 financial year.

Nomination and Remuneration Committee

In 2011, the Committee worked with the following composition:

Eskindarov, M.A. Chairman of the Committee, member of the Audit Committee, independent director
Papin, S.T. Member of the Committee, non-executive director
Townsend, G. Member of the Committee, Chairman of the Audit Committee, independent director

During the reporting period the Committee operated in compliance with the Regulation on the Committee approved by the Board of Directors, annual corporate plan and orders of the Board of Directors.

The main goals of the Committee are to create favorable conditions for the employment of qualified managers in the Company and incentives for their effective work, as well as to improve the corporate governance system and keep it within best international practice.

In 2011, the Committee reviewed and presented to the Board of Directors recommendations on the following key matters:

  • Candidacy of senior managers and members of OAO TMK management bodies;
  • Key performance indicators for executives and directors of TMK’s main business units in accordance with established areas of responsibility and the conditions set forth in personal contracts;
  • Incentive program for executives and directors of TMK’s main business units;
  • TMK’s Code of Corporate Management;
  • TMK’s HR Strategy 2020;
  • Implementation of TMK’s HR policy;
  • Corporate structure, management system, and social policy of the Company’s divisions and special-purpose facilities;
  • Key indicators of the number of employees and salary for TMK’s 2012 budget calculation;
  • Personnel changes at TMK Oilfield Services and Trade House TMK.

Strategic Development Committee

On June 28, 2011, there was a change in the composition of the Strategic Development Committee: M. Alekseev joined the Committee since J. Marous due to his appointment to an executive position at the Company.

Shokhin, A.N. Chairman of the Committee, independent director
Alekseev, M. Yu. Member of the Committee, independent director
Shiryaev, A.G. Member of the Committee, CEO and President, Chairman of the Management Board

The Committee’s tasks are to develop recommendations on issues concerning the formulation of the Company’s business priorities and its development strategy, as well as to present these recommendations to the Board of Directors.

In 2011, the Committee reviewed and presented to the Board of Directors recommendations on the following key matters:

  • Fulfillment of metal usage and quality indicators by TMK facilities;
  • TMK’s Business Plan 2011-2015;
  • TMK’s Investment Program projects for 2012;
  • TMK’s anti-corruption activities;
  • Recommendations on M&A transactions, sales of assets and establishment of joint enterprises.

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