FSK - Annual Report 2015 - Systemic Control at all Levels of Governance

Internal Control and Risk Management System

The internal control and risk management system of Federal Grid Company is an important component of the Company’s governance system. It includes a set of procedures, methods and tools aimed at obtaining reasonable assurance that the Company achieves its objectives in the following areas

Effectiveness and efficiency of activity arrangements
Compliance with applicable legislation and internal regulations of the Company
Identification and mitigation of risks in key areas of activities
Prevention of fraud and other irregularities on the part of the Company’s employees and third parties with respect to its assets
Accuracy, completeness and timeliness of all types of the Company reporting

Information on the Federal Grid’s risk management system is available in section GOVERNANCE AND DEVELOPMENT/ Risk Management

Improving internal control and risk management system in 2015 with regard to recommendations of the Russian Corporate Governance Code
To improve the effectiveness of internal control and risk management system, a separate structural unit has been set up in Federal Grid Company – Internal Control and Risk Management Department	To perform a regular assessment of the effectiveness and reliability of the internal control and risk management system, a separate structural unit has been set up in the Company – Internal Audit Department, and its independence has been ensured through separate lines of functional and administrative reporting to the Board of Directors and the Chairman of the Management Board respectively	The responsibilities of the Audit Committee have been extended in order to improve the Board performance with respect to oversight of the Company’s financial and business operations: a list of matters to be considered by the Committee has been considerably expanded in the area of financial reporting, internal audit. Internal control and risk management

KEY PRINCIPLES OF INTERNAL CONTROL SYSTEM

We strive to ensure the implementation of internal controls in each stage of the process of managing the Company in accordance with the COSO internal control integrated framework, while maintaining the neutrality and transparency of the procedures and methods for all activities

Consistency
Timeliness
Uniformity of approaches
Continuity
Division of responsibilities and powers
Documentation of procedures and results
Practicability
Interaction between all ICS participants
Consideration of changes in external environment

Internal Control

Internal control as an integral part of the internal control and risk management system of Federal Grid Company is aimed at ensuring long-term financial sustainability and effective performance of the Company.

The Company’s internal control is subject to the provisions of the Regulations on Internal Control System of Federal Grid Company approved by the Board of Directors (Minutes No. 170 dated 02 August 2012). The above Regulations set out objectives, tasks and principles of the Internal Control System (ICS) and its components.

The full text of the Regulations on Internal Control System is available on the corporate website www.fsk-ees.ru in section Shareholders and Investors / Corporate Governance / Constituent and Internal Documents

Authorities and Responsibilities of the Participants of the Internal Control System

High Level – Strategic Management
Audit Commission	Confirms the reliability of data contained in the Company’s annual report, accounting balance sheet, and profit and loss statement; performs audits of the Company’s financial and business operations
Board of Directors	Ensures the creation, monitoring of performance and setting the overall strategy of the ICS, initiates audits of the Company’s operations, reviews results of internal control, performs regular review of the ICS’s effectiveness and ensures constant improvement of the internal control procedures
Audit Committee	Carries out reviews of the Company’s Internal Control System, makes recommendations to the Board of Directors on its further improvement; plans the internal audit schedule and considers audit results; performs the Company’s financial statement analysis and the analysis of the external audit results; assesses candidates for the position of the Company’s auditor, makes recommendations to the Board of Directors regarding the appointment of external auditors, the conduct of annual independent audit and external auditors’ fees
Chairman of the Management Board	Provides organisational support and scheduling of internal controls, makes decisions based on the outcomes of the controls; makes proposals to the Board of Directors regarding the improvement of internal control procedures
Mid-Level – implementing, maintaining and monitoring the effectiveness of ICS
Internal Audit Department	Conduct regular independent assessment of the effectiveness and reliability of the ICS
Department for Operational Controlling Compliance Procedures	Implements the Federal Grid’s Anti-Corruption Policy, measures aimed at managing risks related to financial security of counterparties’ obligations, ensures monitoring of compliance with the requirements of the RF legislation and Federal Grid’s internal documents with respect to procurement procedures
Internal Control and Risk Management Department	Provides overall coordination of internal control and risk management processes in the Company, operational control over the implementation of policies in the area of internal control and risk management, as well as preparation of summary reports on internal control and risk management systems
Other units that perform control functions	The Executive Office performs strategic, guidance and control functions subject to the Company’s HR Management Policy Pursuant to the Order No. 353 dated 01 September 2015 “On the Division of Responsibilities between Officers of the Federal Grid’s Executive Office”, members of the Management Board and Deputy Chairmen of the Management Board perform activity-specific control functions with respect to the Federal Grid branches, subsidiaries and associates
Basic Level – implementing control procedures and monitoring their effectiveness
Owners of Control Procedures	Organise and implement control procedures within business processes in accordance with job descriptions and provisions of the Company’s regulatory and administrative documents

Highlights of 2015

The internal auditor assessed the effectiveness of the internal control system with further identification of system weaknesses and risks. The Board of Directors considered the results of the assessment at the meeting on 29 May 2015 (Minutes No. 270 dated 01 June 2015) and instructed the executive bodies to ensure the implementation of recommendations contained in the Report on the effectiveness of the Internal Control System of Federal Grid Company
In order to improve the internal control and risk management system, pursuant to the instructions of the Board of Directors (Minutes No. 270 dated 01 June 2015), a Programme (‘road map’) for enhancing the quality of the internal control system of Federal Grid for 2015–2017 has been developed and approved (Executive Order No. 16 dated 20 January 2016.

Plans for 2016

Updating the Regulations on Internal Control System
Improving internal control over functional areas of the Company’s operations: Procurement, Project Management and Capital Construction
Updating control matrixes for business processes of accounting, tax accounting and preparing accounting (financial) statements
Drafting proposals on key performance indicators aimed at measuring the implementation of internal control procedures and reducing the Federal Grid’s key risks to an acceptable level, to be further included in the system of KPIs for the Company’s senior management

Dmitry Shishkin

Systemic Control at all Levels of Governance