Audit Committee Report

Reporting period

This report covers the 2010 calendar year. Activities from January 1, 2011 to March 31, 2011 are also included in as much as activities undertaken relate to the 2010 consolidated financial statements.

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

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 2010

Townsend, G. Chairman, Independent director
Eskindarov, M.A. Chairman of the Nomination and Remuneration Committee, Independent director
Khmelevskiy, I.B. 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 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 2010 the Committee did not solicit such services.

Areas of focus in 2010

The Audit Committee recommended to the Board, and the Board subsequently adopted:

  • TMK anti-corruption policy;
  • TMK policy on the appointment of the group’s external auditor;
  • TMK policy on the provision of non-audit services by the group’s external auditor.

The Audit Committee has paid particular attention to reporting issues arising from the issue of the convertible bond, to exchange rate risk management, to liquidity and to compliance with loan covenants.

Committee oversight of the external audit of the 2010 financial statements

The Audit Committee oversaw on the external audit of the Company’s consolidated financial statements for 2010 (IFRS) and the parent company’s financial statements prepared according to Russian accounting standards for 2010. Most of this work was carried out in 2011. 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 nonacceptance 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.

External auditor

As noted above, the Audit Committee has recommended to the Board, and the Board has adopted, policies on the appointment of the group’s external auditor and on the provision of non-audit services by the group’s external auditor.

The group’s external auditor is appointed for one year at a time. In the event of dissatisfaction with either the work or the proposed fees, the Company may put the contract for audit services to competitive tender by the Big Four (limitation to the Big Four is required, inter alia, by various loan covenants). Furthermore, even in the event of full satisfaction with the work and fees of the audit services, the Company will invite tenders every three years. The first tender will be for the 2012 audit.

The group’s external auditor provides audit services in relation to the audit of the annual consolidated financial statements and the review of the six-monthly consolidated financial statements (from 2011, the review of the quarterly consolidated financial statements).

In 2010 the Audit Committee approved the appointment of the group external auditor to undertake a “fast close” project designed to significantly improve the timeliness of quarterly and annual financial reporting to shareholders. The Audit Committee was satisfied that the external auditor had taken sufficient steps to isolate project management from the audit team, and had thus avoided a potential conflict of interest.

The Committee has recommended that the Board of Directors propose to the shareholders the reappointment of Ernst & Young as external auditor for the 2011 financial year.

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