Internal Control

Internal control at TMK is a system of procedures that is implemented by the Board of Directors, executive and supervisory bodies, officials and other employees of TMK. They aim to ensure the effectiveness of TMK’s operational and investment activities, the reliability of all types of reporting, compliance with laws and internal TMK regulations.

TMK’s Internal Control System is built on the following principles:

  • continuity: allows for timely discovery of deficiencies and implementation of preventative measures to avoid their occurrences in the future;
  • reporting: the quality of everyone’s performance of duties is monitored by other participants of the internal control system;
  • separation of duties: the same individual is not allowed to fulfill duties related to approval of asset activities, asset accounting, assurance of asset soundness and physical inventory;
  • appropriate approval of activities;
  • organizational insulation of Internal Audit Service and its reporting to the Board of Directors through the Audit Committee;
  • cooperation with all subdivisions and departments of TMK;
  • continuous development of internal control system;
  • timely notification of discovered non-conformances with the purpose of their elimination.

Control over financial and business activities is exercised by the Board of Directors, the Audit Committee, Revision Commission, as well as the Company’s independent auditor.

The Board of Directors approves internal control procedures and ensures effective control over the Company’s finance and business activities.

The Audit Committee enhances the effectiveness of the internal control and risk management systems based on its assessment and its formulation of corresponding recommendations.

The Revision Commission oversees the Company’s financial and business activities on behalf of shareholders and, on the basis of its review, provides the General Meeting of Shareholders a conclusion on the adequacy of accounting data, as well as information on deficiencies or violations detected in the Company’s activities. In 2011, four meetings of the Revision Commission were held.

Members of the Revision Commission Year of Birth Year of Election to the Revision Commission
Maksimenko, A.V.
(Chairman)
1955 2005
Vorobyev, A.P. 1957 2005
Pozdnyakova, N.V. 1979 2009

The Internal Audit Service operates on the basis of the Regulations of the Internal Audit Service, which has been approved by the Board of Directors (http://www.tmk-group.ru/files/pol_sva.pdf), and implements internal audit reviews of the systems of corporate governance, internal control and risk management. Independence and objectivity of Internal Audit Service is ensured by the fact that it functionally reports to the Audit Committee and administratively reports to the CEO of OAO TMK. The annual Audit Plan is approved by the Audit Committee and is confirmed by the CEO. In 2011, members of the Internal Audit Service, whose structure also includes the regional internal audit departments at TMK production facilities, conducted 142 reviews of the Company’s business units.

The regional location of Internal Audit Service subdivisions allows prompt reaction to any changes in the audited systems and evaluating the impact level of TMK facilities’ risks on the possibility to achieve Company’s strategic goals. Based on the audit results, Management makes necessary corrections to the Internal Audit Control System in order to manage detected risks, which allows improving processes and the quality of corporate management.

According to the new revision of OAO TMK’s Provision on Insider Information, approved by the Board of Directors in December 2011, the Internal Audit Service also monitors the Company’s managing bodies’, executive officers’ and employees’ adherence to insider information laws, as well as reports to the Audit Committee.

The external auditor expresses an opinion on the fairness of the Company’s financial statements prepared in accordance with accounting rules, national and international financial reporting standards (RAS and IFRS).

By decision of TMK’s Annual General Meeting of Shareholders on June 28, 2011, OOO Ernst & Young, a member of the non-profit partnership Russian Chamber of Auditors, was approved as the Company’s auditor for 2011.

The candidature of the external auditor is suggested to the executive management of OAO TMK and is discussed by the Audit Committee and Board of Directors.

The process for the appointment, reappointment and analysis of the external auditor who is carrying out the audit of the Company’s reporting under IFRS, is regulated by the policy to select the Group’s external auditor of the consolidated financial statements (http:// http://www.tmk-group.ru/files/external_auditor_policy_ru.pdf), and approved by the Board of Directors.

In order to reduce the effects of long-term relationships on the external auditor’s independence, members of the audit and the lead partner responsible for the audit are rotated.

The auditor’s remuneration for auditing the annual accounts and interim accounts review (including audit reports of some local TMK facilities) for 2011 amounted to U.S.$ 4.8 million, for other audit-related services - U.S.$ 0.4 million, for non-audit services - U.S.$ 0.3 million.

In 2011, the Committee on Regulating Compliance Risks was created. The Committee reports to the CEO of OAO TMK and coordinates Company departments’ activities on fulfilling legislative requirements related to corruption resistance, recommendations of international organizations for legalizing illegally obtained income and financing terrorism. The Committee develops and ensures introduction of preventative measures, localization and elimination of compliance risks.

As a tool of public control at TMK a “Hot Line” was created. This information system includes a full range of communication channels — telephone lines, fax, email, postal mail, which the Company’s employees and counterparties can use to communicate information on corrupt practices and violations.

Internal control over financial reporting

TMK’s management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS.

The company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS and that expenditures are being made only in accordance with authorizations of the Company’s management; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have an effect on our financial statements.

Throughout 2011, and to date, the Company has had an operational system of internal control which provides reasonable assurance of effective and efficient operations covering all controls, including financial and operational controls, as well as compliance with laws and regulations.

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