Severstal Annual Report 2015 Home > Governance > Corporate Governance Statement > The Audit Committee

The Audit Committee

Who is on our Audit Committee?

The Audit Committee consists of three Independent Non-Executive Directors. Currently they are:

  1. Alun Bowen (Chairman),
  2. Philip Dayer, and,
  3. Vladimir Mau.

Details of the above Audit Committee members can be found in their biographies.

In accordance with its terms, the Committee has sufficient recent relevant financial experience, and the overall skills required for financial statements, business risk analysis and financial management skills. No senior executive of the company can be a member of the Audit Committee.

What is the role of the Audit Committee and what are its key responsibilities?

The Audit Committee assists the Board of Directors in monitoring the company’s risk management processes and control environment, and in reviewing the company’s annual and quarterly financial statements and audit.

In its work, the Audit Committee also:

  1. Exercises control to ensure completeness, accuracy and adequacy of the Company’s financial statements,
  2. Ensures the independence and objectivity of the external and internal auditors,
  3. Evaluates candidates put forward as the company’s external auditors and makes recommendations to the Board regarding the selection of external auditors,
  4. Develops recommendations to the Board regarding external auditors’ fees,
  5. Reviews the scope and results of the auditors’ work and their opinions, the efficiency of their processes and their objectivity. Monitors the independence of the external auditor, taking into account the applicable requirements of professional and regulatory bodies in Russia and the UK,
  6. Reviews the company’s quarterly and annual financial statements, changes in accounting policies and practices, as well as material adjustments, if any, arising from the audit, before the financial statements are submitted to the Board for approval and publication,
  7. Reviews any other statements to be published which may relate to the financial performance of the company, prior to their recommendation to the Board for approval,
  8. Oversees the reliability and efficiency of risk management, internal control and corporate governance systems,
  9. Monitors the internal audit function,
  10. Monitors and controls the compliance policy for auditors supplying non-audit services,
  11. Controls the efficiency of the company’s whistleblowing system for potential frauds from the company’s employees (including dishonest use of insider or confidential information) and third parties, as well as any other violations in the company’s activities; control actions taken by the company’s executive management within such a system,
  12. Analyses material changes to applicable law that affect the company’s financial statements, and any findings of supervisory bodies and court proceedings.

Individual attendance of the Audit Committee meetings by its members is shown on page The Board of Directors.

The report by Alun Bowen, Chair of the Audit Committee, on the activity during 2015 is set out below.

“This is my first report as Chair of the Audit Committee of Severstal, having taken over from Martin Angle in June 2015. Martin and his colleagues have done a good job in establishing the audit committee processes in the years since Severstal’s listing, my role is to continue their evolution and ensure that they are “fit for purpose” and in accordance with leading international practice to support the next stage of Severstal’s evolution.

Our primary focus during the year has been to ensure that the financial reporting is appropriately scrutinised. The Audit Committee continues to debate and challenge the assumptions and estimates made by management, particularly this year in respect of impairment reviews and provisions. We also spent time on ensuring that the internal and external audit processes were effective.

My Audit Committee colleagues and I have a programme of visiting Severstal’s significant steel and mining operations, I also spend time every quarter with the directors and emerging talent at Severstal’s headquarters, discussing the issues and challenges facing the group and sharing experiences. I continue to be impressed with the quality of people at Severstal and their willingness to adopt new thinking and also their relentless focus and attention to detail in delivering Severstal’s strategy.

I have regular, timetabled telephone discussions with Alexey Kulichenko the CFO and Nikolay Lavrov the Chief Audit Executive, as well as ad hoc communication between meetings and calls. I also meet Larissa Kiseleva, the external audit partner from KPMG, in her office once a quarter.

Financial reporting

The most significant issues regarding the 2015 financial statements and how the Audit Committee dealt with them are set out below:

Area of focusRole of the Audit CommitteeConclusion/Action taken
Impairment reviews: the significant drop in global steel, iron ore and coking coal prices has meant that a number of Severstal’s cash generating units had impairment indicators and some of them required their value in use to be assessed.The Audit Committee scrutinised the assumptions and estimates that management used in their assessment of those cash generating units that had displayed impairment indicators.
The Audit Committee also discussed the work carried out by the external auditors in their challenge of management’s assumptions and estimates
The Audit Committee agreed that the work carried out by management, supported the carrying value of the majority of cash generating units. An additional provision of $80 million was required, in relation to the mine at Olcon. Also due to the uncertain prospects of the Liberian iron ore asset, the carrying value was reduced to $nil, requiring an additional impairment provision of $100 million.
Tax provisions: the Russian tax environment, in common with many other jurisdictions, is undergoing a period of considerable uncertainty, with new laws having been recently introduced.The Audit Committee discussed the changes introduced with effect from 1 January 2015 in legislation regulating transactions with foreign companies and their activities.
The Audit Committee has also discussed the issue with tax specialists from the external auditors and their assessment of the requirement, if any, for provisions.
The Audit Committee agreed that the treatment adopted in the financial statements was appropriate and the related disclosures were fair and balanced.
Lucchini claim: in December 2015 Severstal received a claw-back claim of some $142 million from the extraordinary commissioner of Severstal’s former subsidiary in Italy – Lucchini.The Audit Committee discussed management’s view of the claim and the legal advice it had received.
The Audit Committee also discussed the review of the claim carried out by the external auditors and the views expressed by their member firm in Italy.
It was decided that no provision against the claim was required based on the available information and the advice that had been received.

The Audit Committee also reviewed the relevant disclosure to ensure that the issue was reported in a fair, balanced and understandable way.

External audit

The Audit Committee debated and agreed the key areas of focus for the external audit, which included impairment, taxation issues, fraud and the preparation and presentation of the financial statements with an accelerated deadline.

Severstal carries out a review of its external audit arrangements on a three-year basis and a formal tender process took place in 2015. The Audit Committee considered Severstal’s external audit requirements and, given the geographical spread of Severstal’s activities, its listing in Moscow and London, determined that only firms in the so-called “Big 4” were in a position to service Severstal’s needs.

The Audit Committee received proposals from three firms including its current external auditors. After an analysis of each firm’s proposal and discussion with each firm the Audit Committee decided to reappoint KPMG as its external auditor to carry out the audits for the three years ending 31 December 2018. The Audit Committee’s key measures were the experience and availability of the proposed Lead Audit Engagement Partner; the strength of his or her supporting team; and how the firm would help the Audit Committee deliver its responsibilities for Audit Quality.

Internal Audit

An external review of the internal audit function, which is carried out once every five years, was carried out in 2015 by Deloitte. The report was positive and the overwhelming majority of the recommendations for improvement had been implemented by the end of 2015.

Management demonstrated an increasing willingness to implement internal audit’s recommendations and there has been a significant reduction during the year in the number of agreed recommendations, which have not yet been implemented.

The Audit Committee meets with Nikolay Lavrov, the Chief Audit Executive, without the presence of management, on a regular basis and, once a year, holds a half-day session with him. In 2015 it was held in London, to discuss the following year’s internal audit plan and give him the opportunity for an extended discussion of issues, such as Severstal’s culture, internal audit resourcing and his perspectives of the business.

I also made a presentation at the annual meeting of the internal audit team of my expectations, as Chair of the Audit Committee, of the internal audit function.

Control environment

The Audit Committee has supported management’s efforts to improve the control environment during the year. The Audit Committee specifically asked for a report on Severstal’s risk of a cyber attack, particularly in the light of a successful denial service attack on a German steel mill. The nature and geographical location of Severstal’s activities makes similar attacks more difficult. Its supply chain and logistics, however, are more exposed and a number of the report’s recommendations have already been implemented. The Audit Committee encourages management to be vigilant as new types of cyber threats are continually emerging.

Looking ahead

The Board has asked that Alexey Kulichenko and the Audit Committee carry out a comprehensive review of the external reporting carried out by Severstal and how it compares with international best practice. During 2016 the Board will consider management’s proposals for delivering enhanced annual external reporting”.

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