CHAPTER 4
CORPORATE GOVERNANCE

4.3 Audit and control

PJSC RusHydro has a system for monitoring financial and business activities, which consists of local regulatory documents, current practices, procedures and methodology, and key stakeholders:

• Audit committee
• External Auditor
• Audit Committee under the Board of Directors
• Internal Audit Service

The main principles, goals, tasks, methods and processes of the control system are defined in the documents approved by the General Meeting of Shareholders and the Board of Directors of PJSC RusHydro:

• Regulations on the Audit Commission,
• Code of Corporate Governance,
• Internal Control and Risk Management Policy,
• Internal Audit Policy,
• Regulations on the Audit Committee under the Board of Directors,
• Code of Corporate Ethics,
• Anticorruption policy.

The Audit Commission of the Company is accountable to the General Meeting of Shareholders. The conclusion of the Audit Commission is the subject of consideration of the Audit Committee. The opinion of the Audit Commission on the results of the audit of the Annual Report is a mandatory document provided to the General Meeting of Shareholders.

The opinion of the Auditor is the subject of consideration by the Audit Committee and the Audit Commission. The Audit Committee reviews the auditor’s plan for analyzing the Group’s activities.

The Audit Committee performs functional management of the Internal Audit Service, including approving the annual Control Schedule and quarter implementation reports.

The number of members of the Audit Committee is five.

In 2016, the Audit Committee conducted an audit of the financial and economic activities of PJSC RusHydro based on the results of its activities for the year 2015²⁷. Conclusions of the Committeeon the results of the audit were submitted to the annual General Meeting of Shareholders on June 27, 2016. The audit confirmed that the data contained in the Company’s reports and financial documents are reliable, accounting and financial reporting are carried out in compliance with the requirements of the current legislation and internal regulations, financial and economic activities are conducted in compliance with the interests of the Company and its shareholders..

4.3.2 External Auditor

PJSC RusHydro annually conducts an independent external audit of financial (accounting) reports in accordance with the Russian and international standards. Selection of an external auditor who independently reviews the accounting (financial) statements of PJSC RusHydro under RAS and IFRS for 2015-2017 was conducted in the manner of an open tender. The organization and procedure for the procurement were determined in accordance with the Regulation on the procedure for regulated purchases of goods, works and services approved by the decision of the Board of Directors of the Company based on the decision of the Central Purchasing Committee of PJSC RusHydro of 04.12.2014 No. 470.

As a result of the procurement procedure, the PricewaterhouseCoopers Audit JSC (PvK Audit JSC) was recognized as the winner of the tender and approved by the annual General Meeting of Shareholders on June 26, 2015 and the annual General Meeting of Shareholders on June 27, 2016 by the auditor of the financial (accounting) statements for 2015 and 2016.

In 2016, PwC Audit JSC conducted an independent audit of the Company’s accounting (financial) statements for the year 2015, compiled in accordance with the Russian Accounting Standards and the Consolidated Financial Statements for the year 2015, drawn up in accordance with International Financial Reporting Standards. In addition, PwC Audit JSC conducted a review of the consolidated interim financial statements of the issuer for the six months ending June 30, 2015.

4.3.3 Internal Audit Service

The main objective of the internal audit activity of PJSC RusHydro is to assist the Board of Directors and the executive bodies of the RusHydro Group in improving the management of the Group and improving its operations, including through a systematic and consistent approach to the analysis and evaluation of the risk management system, internal control and corporate governance.
The Internal Audit Service is a separate structural unit of PJSC RusHydro, which is subordinate to the Board of Directors in the person of the Audit and Administrative Subordination Committee to the Chairman of the Management Board – CEO of PJSC RusHydro. The head of the Internal Audit Service was approved by the decision of the Board of Directors of PJSC RusHydro.

The tasks and functions of the Internal Audit Service include:

• Organization and holding of internal audits of the Company and its subsidiaries, processes and activities;
• Assessment of the effectiveness of the internal control system, risk management system, corporate governance of the Company and subsidiaries;
• Organization of methodological support and control over the activities of the Company’s representatives in the audit commissions of subsidiaries;
• Interaction with the Audit Committee under the Company’s Board of Directors.

The priorities of the Company’s internal audit in accordance with the objectives of the RusHydro Group, taking into account the available resources, as well as the risk-oriented approach to planning control activities, are determined by the Control Schedule, which is approved annually by the Audit Committee.

During the year of 2016, 16 scheduled monitoring activities were carried out and 10 unscheduled inspections and official investigations were conducted / participated in the course of which audit evidences werecollected and analyzed in order to assess the effectiveness of the internal control, risk management and corporate governance system, including:

• inspections of branches and subsidiaries engaged in the construction, operation, repair of generation facilities;
• thematic audits aimed at identifying opportunities to improve the business processes of the Company and activities of key subsidiaries;
• assessment of the Company’s critical risks management performance.

Based on the results of the control activities, the Company’s and subsidiaries’ management develops and implements corrective actions aimed at adjustment of the identified remarks, increase ofthe effectiveness of the internal control system, prevention of the further violations, application ofg disciplinary measures to persons who committed violations. Internal auditors carry out the follow-up control over the corrective actions.

The Audit Committee quarterly reviews the report of the Head of the Internal Audit Service on the implementation of the Control Schedule, which contains a brief description of the identified material violations, comments and deficiencies in the Company’s operations and its Subsidiaries, including information on significant risks, control and corporate governance problems, and as well as recommendations for their elimination, improving the effectiveness of the internal control system.

Based on the results of the evaluation (feedback) of the audit, in 2016, the internal audit performance was highly efficient in terms of identification of shortcomings, that would reduce / exclude the impact of negative factors on the efficiency of the Company and its subsidiaries if eliminated.

The general principles and approaches to the Company’s internal audit system are fixed in the Internal Audit Policy approved by the Board of Directors of PJSC RusHydro. The policy takes into account the requirements of the Corporate Governance Code of PJSC RusHydro, the Methodological Recommendations and the instructions of the Federal Property Management Agency, and it is aimed, among other things, at increasing the compliance of the Internal Audit Service of PJSC RusHydro with the International Professional Standards of Internal Audit.

During 2016, the Internal Audit Service was working to update local regulations governing the activities of the Internal Audit Service and the Audit Committee.

The main directions of the current development of the internal audit function are:

• implementation of the Program of guarantees and improvement of the internal audit quality;
• actualization of local normative acts that determine the principles for building the general group functioning as an internal audit of RusHydro Group;
  implementation of programs and methodologies for annual independent evaluation of corporate governance, evaluation of the internal control and risk management system effectiveness.

Evaluation of the internal audit process effectiveness by the Audit Committee

The Audit Committee reviews and evaluates / approves, the reports of the Internal Audit Service on the monitoring activities carried out and their results on a quarterly basis.