Monitoring Business and Financial Performance

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.

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 2010, 4 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, and implements internal audit reviews of the systems of corporate governance, internal control and risk management. The annual Audit Plan is approved by the Audit Committee and confirmed by the CEO. In 2010, members of the Internal Audit Service, whose structure also includes the regional internal audit departments at TMK production facilities, conducted 137 reviews of the Company’s business units. The results of the reviews and proposals to enhance the effectiveness of the audited systems were reviewed by the managing directors at the plants, the CEO of OAO TMK and the Audit Committee.

The centralized Internal Audit Service is directly subordinate to CEO, and its director regularly reports on the performance of the service to the Audit Committee.

The main functions of the Internal Audit Service that are stated in the Code of Corporate Governance include:

  • assessment of the soundness of TMK assets;
  • assessment of the quality of processes for compiling all types of accounting;
  • assessment of how the Company, TMK’s production facilities, its business units and employees adhere to the requirements of Russian legislation, internal corporate documents, and the decisions of management bodies;
  • assessment of how internal corporate documents adhere to legislation, global best practice, the Company’s strategic goals and the interests of shareholders;
  • assessment of the extent of lost profits or damage to the Company by the actions of employees and third parties.

In the course of reviews conducted in 2010, the Internal Audit Service studied, tested and evaluated the existing audit and internal control systems for:

  • the reliability of accounting and reporting information,
  • implementation of legislative and corporate requirements,
  • safekeeping of TMK production facilities’ property,
  • compliance with technical standards for metal consumption in the production process,
  • reliability of information technology,
  • functioning of the risk management system.

The Internal Audit Service presents recommendations on eliminating all deficiencies that have been detected, as well as improving the existing internal control system.

The external auditor verifies the adherence of the Company’s financial statements to accounting rules and international financial reporting standards and expresses an opinion on the truthfulness of the financial statements based on an audit conducted in accordance with International Auditing Standards.

By decision of TMK’s Annual General Meeting of Shareholders on June 22, 2010, OOO Ernst & Young, a member of the non-profit partnership Russian Chamber of Auditors, was approved as the Company’s auditor for 2010.

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

On August 28, 2010, the Board of Directors approved the policy to select the Group’s external auditor of the consolidated financial statements, which defines 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.

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 review (including audit reports of some local TMK facilities) for 2010 amounted to U.S.$ 3.728 million dollars, for other audit-related services- U.S.$ 0.8 million and for non-audit services — U.S.$ 0.2 million.

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