Internal Audit Service
The key objective of RusHydro’s internal audit function is to assist the Board of Directors and executive bodies of RusHydro Group in enhancing the Group’s management efficiency and improving its operations, including by adopting a systematic and consistent approach to the analysis and evaluation of the risk management, internal control and corporate governance systems.
The Internal Audit Service is RusHydro’s standalone business unit that reports to the Board of Directors through the Audit Committee and has an administrative reporting line to the Chairman of the Management Board – General Director of RusHydro. The Head of the Internal Audit Service was approved by resolution of RusHydro’s Board of Directors.
The Internal Audit Service has the following objectives and functions:
- to conduct regular audits of business units, Company’s branches/subsidiaries, processes, lines of business, projects of the Company/subsidiaries, collect and analyze audit evidence for an independent assessment and expression of opinion on the reliability and effectiveness of the:
- internal control system;
- risk management system;
- corporate governance system.
- to liaise with the Audit Committee of the Company’s Board of Directors;
- to liaise with local executive authorities of the Russian Federation, Accounts Chamber of the Russian Federation, the Company’s Internal Audit Commission, and other supervisory bodies in connection with internal control issues and in the course of audits and inspections of the Company or its subsidiaries conducted by such bodies.
The general principles of, and approaches to the Company’s internal audit system are set forth in the Internal Audit Policy approved by RusHydro’s Board of Directors. The Policy is aligned with RusHydro’s Corporate Governance Code, Methodological Guidelines and Instructions of the Federal Agency for State Property Management and is designed, inter alia, to contribute to the compliance of RusHydro’s Internal Audit Service with the International Professional Standards of Internal Audit. In 2018, the Internal Audit Service worked to update internal regulations applicable to the Internal Audit Service and Audit Committee, and to this end:
- updated the Regulations on the Audit Committee of the Board of Directors;
- updated the Regulations on the planning and implementation of control activities of the Internal Audit Service;
- updated the Regulations on the Internal Audit Service;
- developed and implemented the methodology of annual independent assessment of the corporate governance system by the Company’s Internal Audit Service.
The schedule of control activities is approved by the Audit Committee on an annual basis and defines the priorities of the internal audit work subject to RusHydro Group’s objectives, resources available, and risk-based approach to control activities.
The control activities involved an assessment of effectiveness of internal controls over RusHydro Group’s activities aimed at ensuring reliable and safe operation of RusHydro Group’s facilities and the stable development of electricity generation, including:
- investment program efficiency as regards rehabilitation & modernization at existing generation facilities;
- implementation efficiency of investment projects involving construction of new generation facilities;
- R&D efficiency of the Company’s subsidiaries (RusHydro Group institutes).
In 2018, the Internal Audit Service assessed the Company’s system of internal control, risk management, corporate governance, and non-core asset management. The Board of Directors reviewed the Internal Audit Service’s assessment of the internal control, risk management and corporate governance systems of the Company and recommendations on their improvement.
The Internal Audit Service submits its quarterly report on the control activities to the Audit Committee of the Company’s Board of Directors. The report describes key/system weaknesses identified in RusHydro Group’s internal control system and gives recommendations on possible improvements.
The results of the control activities carried out by the Internal Audit Service are used by RusHydro Group’s management to design and roll out a corrective action plan to address the identified gaps, improve the internal control system efficiency, and avoid repeated violations. The Internal Audit Service is also involved in the coordination and follow-up control of corrective actions. Corrective actions taken after inspections by supervisory authorities are monitored in a similar manner.
The Internal Audit Service is also responsible for the liaison with supervisory authorities, if and when examinations and inspections are carried out at RusHydro Group. In 2018, the Internal Audit Service worked with supervisory authorities (Accounts Chamber of the Russian Federation, Prosecutor General’s Office, and Russia’s Ministry of Energy) in the course of nine audits conducted by them.
In accordance with the approved Internal Audit Quality Assurance and Improvement Program, in order to ensure adequate control and assessment of the internal audit function and to identify improvement areas, the Internal Audit Service conducted an annual self-assessment of the internal audit function based on which the Audit Committee recognized that the internal audit function performed by the Company’s Internal Audit Service “meets the relevant requirements”.
Internal audit system development plans
In 2019, further steps will be taken to enhance the Company’s internal audit function, including:
- update of the regulatory framework of the Internal Audit Service in compliance with the International Professional Practices Framework (IPPF);
- further automation of RusHydro’s internal audit function, including in terms of follow-up control of corrective actions based on internal or external audits.
A third-party independent assessment of the Company’s internal audit system is planned to be held in 2019–2020 to ensure its compliance with the International Professional Practices Framework governing internal auditing.
Assessment of the effciency of internal and external audit by the Audit Committee of RusHydro Board of Directors
On a quarterly basis, the Audit Committee reviews the report on the implementation of the schedule of control activities prepared by Head of the Internal Audit Service. Report describes material violations, flaws and gaps identified in the operations of RusHydro and its subsidiaries, includes information on substantial risks and issues of controls and corporate governance, and provides recommendations on remedial actions and improvement of internal controls.
According to feedback received on control activities, the internal audit function performed very effectively in 2018 in terms of identifying matters to be resolved in order to mitigate or eradicate any negative factors impairing the efficiency of RusHydro and its subsidiaries.
Throughout 2018, the Company’s auditor regularly reported to the Audit Committee on plans and results of the audits, shared its vision on important qualitative aspects of RusHydro’s accounting practices, including its accounting policy, estimates, and disclosures in financial statements, and raised matters that based on the auditor’s professional judgment are important for the oversight over the financial reporting process.
In 2018, The Audit Committee assessed the performance of the Company’s auditor (including the auditor’s reports) and the effectiveness of external audit as a process. Based on the assessment, the Audit Committee found the process to be effective. The Company’s auditor is unbiased and independent from RusHydro, has no conflict of interest or any circumstances that might challenge its independence. Materials that the external auditor prepares and presents to the Audit Committee are informative and enable the Audit Committee to control the quality of the auditor’s performance.