5.6 INTERNAL CONTROL SYSTEM

The Company’s existing internal control system over its financial and administrative activities is aimed at ensuring investors trust in the Company and its management bodies.

Objective: to identify and reduce the risk of situations that negatively impact the Company’s ability to achieve its aims and results in losses, to ensure protection for the Company’s assets, to effectively utilize available resources and to ensure compliance with Russian legislation and decisions made by management bodies and the Company’s internal documents.

The internal control system is based on the Regulations on the Internal Control System of Federal Grid Company, approved by a decision of the Board of Directors, which was made 28 February, 2008 (Minutes No. 55).

Participants in the Internal Control System

The Audit Commission

The Audit Commission is elected annually by the General Shareholders Meeting and consists of five members. Its scope of responsibility includes:

  • Ensuring the reliability of data contained in the Company’s annual report, accounting balance sheet and profit and loss statement;
  • Analyzing the Company’s financial state, identifying opportunities for financial upgrades and developing recommendations for management bodies;
  • Organizing and conducting probes (audits) for the Company’s financial and administrative activities.

The Audit Commission acts in accordance with the Federal Law “On Joint Stock Companies,” Russian legislation and the Company’s internal documents: the Articles of Association, Code of Corporate Governance and Regulations on the Audit Commission.

In 2010 the Company had two different convocations of the Audit Commissions (one in 2009 and one in 2010).

The Audit Commission elected by the Annual General Shareholders Meeting on 30 June, 2009, was dissolved 29 June, 2010.

Name Primary position held
Tatiana Zlydareva Consultant, Federal Agency for State Property
Management
Victor Lebedev Head of the State Tariff Regulation and Infrastructure
Reform Department of the Ministry of Economic
Development
Dmitry Kozlov Deputy Department Head, Ministry of Energy
Evgeny Krylov Head of the Management Department, Federal Agency for State Property Management
Maria Tikhonova Chief of the Department of Economic Regulation and Property Relations in the Fuel and Energy Complex of the Russian Ministry of Energy

On 29 June, 2010, the Annual General Shareholders Meeting elected new members of the Company’s Audit Commission, including (positions held at the time of election):

Name Primary position held
Vladimir Raspopov Chairman
Head of IT, Department for Financial and Logistical
Support and Government Contracts at the Federal
Agency for State Property Management
Anna Drokova Secretary
Chief Specialist, Expert on Fuel, Power Energy and
Coal Industry in the Department for Infrastructural
Industries and Military Industry of the Federal
Agency for State Property Management
Maria Tikhonova Director of the Department of Economic Regulation
and Property Relations in the Fuel and Energy
Complex of the Russian Ministry of Energy
Dmitry Gorevoy Leading Specialist, Expert in the Department for Electricity
Sector Development of the Ministry of Economic Development
Andrey Kolyada Head Specialist, Expert of the Management Department,
Federal Agency for State Property Management

Members of the Audit Commission hold no shares in the Company.

Internal Control Sub-Divisions

Remuneration to members of the Audit Commission is paid based on the Regulations on Compensation and Remuneration to Members of the Audit Commission, as approved by Federal Grid Company’s General Shareholders Meeting (dated 30 June, 2008). In 2010 no remuneration was paid to members of the Audit Commission due to the fact that all members of the Audit Commission are public servants.

Board of Directors

The Board of Director’s areas of competency within the internal control system involve:

  • Initiating audits into the Company’s performance via the Chairman of the Company’s Management Board;
  • Considering and making decisions on internal control procedure reports submitted by the Chairman of the Company’s Management Board or the Audit Committee;
  • Considering conclusions made by the Audit Commission;
  • Efficiently evaluating the internal control system.

Audit Committee of the Board of Directors

The Audit Committee’s areas of competency within the internal control system involve:

  • Overseeing the internal control system with respect to accounting and finances;
  • Overseeing preparation of the Company’s Reports by its executive bodies and ensuring that the Reports are unbiased.

Chairman of the Management Board

The Chairman of the Management Board ensures the enforcement of internal control procedures through internal control departments within the Company and makes decisions based on internal investigations.

The Company’s internal control departments:


Control and Audit Department

Key responsibilities:

  • Organizing control procedures over the Company’s financial, production and administrative activities, as well as for its subsidiary and dependent companies (SDCs), aimed at preventing, revealing and eliminating violations in monetary resources and funds management and at remedying consequences of said violations; organizing investigations into cases of abuse (fraud);
  • Interacting with external control bodies;
  • Administratively supporting the Company’s Audit Commission and controlling the enforcement of its recommendations and decisions.

Technical Oversight and Audit Department:

Key responsibilities:

  • Engaging in selective efficiency control of the production and technical performance of structural departments of the Company’s executive bodies, branches and SDCs, including the internal technical control system, and evaluating their compliance with existing requirements;
  • Identifying problem areas, analyzing and forecasting existing and potential risks, reasons and possible consequences of negative trends, and developing remedy measures related to the Company’s production and technical performance;
  • The establishment and technical oversight over existing power facilities and quality control over technical maintenance and repairs;
  • Selective technical oversight at facilities undergoing reconstruction, technical upgrades or new construction (including new-generation facilities), aimed at checking their compliance with existing requirements;
  • Controlling and evaluating production safety compliance with existing requirements.

Internal Control Division

Key responsibilities:

  • Developing and upgrading the methodology, organization and performance principles of Federal Grid Company’s internal control system, efficiently analyzing the internal control system across all areas of operations and developing recommendations on efficiently improving the internal control system;
  • Establishing ongoing internal control procedures for Federal Grid Company’s accounting, regular internal inspections for accounting and operational information, establishing prompt control procedures for information about the planned and actual performance figures for Federal Grid Company’s departments and SDCs;
  • Identifying and analyzing Federal Grid Company’s risks, developing and updating the Risk Matrix and developing recommendations to reduce and prevent risks;
  • Promptly controlling and efficiently analyzing the accounting processes for Federal Grid Company and its SDCs;
  • Efficiently analyzing a system for authority distribution across management levels of Federal Grid Company;
  • Developing and updating the Authority Delegation Matrix and overseeing authority distribution principles.

In 2010 as part of internal control procedures, the internal control departments of Federal Grid Company carried out probes in accordance with approved annual targets in respective responsibility areas.

2011 plans include developing and approving the Financial Control Policy and the Authority Delegation Policy. In 2011 Federal Grid Company will also update egulations on the Internal Control System.