Internal Control and Audit

06

PhosAgro’s internal control and audit is part of the Company’s corporate governance process. It is incorporated into
the activities of the Company and is aimed at improving the efficiency of risk management, control and corporate governance,so as to achieve the following:

  • effective and efficient activities and operations, protecting the Company’s assets and achieving profit;
  • reliability and accuracy of financial reporting;
  • compliance with applicable legislation and the regulations governing the Company’s activity.

PhosAgro’s internal control system is designed to ensure:

  • protection of the Company’s assets, cost-effective and efficient use of its resources;
  • compliance with current legislation and internal policies, standards and procedures;
  • implementation of the Company’s business plans;
  • the completeness and accuracy of the Company’s accounting records, financial statements and management data;
  • timely identification and analysis of risks;
  • planning and risk management during the Company’s activities, including timely and appropriate decisions to mitigate any risks the Company faces;
  • establishing and maintaining PhosAgro’s good reputation in the business community and among customers and investors.

Internal control within PhosAgro is undertaken by:

  • the Review Committee;
  • the Audit Committee of the Board of Directors;
  • the Board of Directors;
  • the Chief Executive Officer;
  • the Internal Audit Department.

The Company has set out in internal documents the key parameters for the organisation of the internal control and audit systems, the main standards and the operational principles of internal audit, and the allocation of accountabilities and responsibilities. One of the components of the internal control system is the corporate IT platform based on the Oracle E-Business Suite software. The system enables the Company quickly to generate management accounting, and to prepare information for internal and external auditors in a short timeframe.

The Review Committee

The Review Committee, whose activities are governed by the Law on Joint Stock Companies, the Company’s Charter and the Statute of the Review Committee, oversees and coordinates audits of the Company’s financial and economic activity. The principal duties of the Review Committee are: to conduct internal audit and to report the results and findings to PhosAgro’s Board of Directors and the CEO; to ensure that the Company’s operations comply withapplicable laws and that the Company’s accounting procedures comply with Russian Accounting Standards (RAS); and to identify any violations of laws, the provisions of the Company’s Charter or internal regulations. Moreover, before the Annual General Shareholders Meeting, the Review Committee prepares a report on the results of operations of the Company for the prior year, and gives its opinion on whether the Company’s financial statements are true and accurate.

The Review Committee may commence internal audit procedures either on its own initiative, or pursuant to the decision of the General Shareholders Meeting or the Board of Directors, or at the request of shareholders owning at least 10% of the shares of the Company.

The General Shareholders Meeting elects the members of the Review Committee for the period until the next Annual General Shareholders Meeting. The Review Committee comprises three members and is led by the Chairman of the Review Committee. Members of the Committee cannot at the same time be on the Company’s Board of Directors, nor may they hold positions in the Company’s executive bodies.

The Audit Committee of the Board of Directors

The Audit Committee of the Board of Directors, whose activities are governed by the Company’s Charter, the Statute of the Board of Directors and the Statute of the Audit Committee, improves the efficiency and quality of work of the Board of Directors in the area of internal control. The Committee considers issues and provides recommendations to the Board of Directors on issues such as: external audit of the Company; internal audit; the accuracy and efficiency of internal control procedures; management accounting and financial reporting; risk management and how risks are reflected in the Company’s reporting.The Committee also supervises the Internal Audit Department.

More detailed information about the composition and activity of the Audit Committee can be found in the Board Committees section.

The Board of Directors

The Board of Directors determines how the internal control system operates and approves various actions and policies relating to it. The Board of Directors also reports annuallyto the General Shareholders Meeting on the reliability and efficiency of PhosAgro’s internal control system. The Board constantly strives to improve internal control procedures.

More detailed information about the composition and activity of the Board of Directors can be found in the relevant section.

The Chief Executive Officer

The CEO is responsible for the functioning of PhosAgro’s internal control system. The CEO implements internal control procedures, and ensures that they are put into practice. The CEO also promptly informs the Board of Directors of any significant risks faced by the Company or any major weaknesses in the Company’s internal control system, and tells the Board what measures have been or will be taken to address these issues and the results of these actions.

More detailed information about the activity of the Executive Body can be found in the relevant section.

Internal Audit Department

PhosAgro’s Internal Audit Department was established in 2011. Its activities are governed by Russian legislation, the Statute of Internal Control, the Statute of the Department and International Standards for the Professional Practice of Internal Auditing. The Internal Audit Department is an independent department within the Company and is responsible for conducting internal audit and providing independent and objective evaluation of the activities of PhosAgro and its subsidiaries. These activities relate to internal control, risk management, corporate governance and information systems. The Department assists the Company’s Board of Directors and the management team in their responsibilities to achieve PhosAgro’s strategic objectives, increase the Company’s value and improve its performance.

The Internal Audit Department independently and objectively assesses the Company’s internal control and risk management system, including overseeing the compliance of PhosAgro’s financial and economic operations with Russian legislation and the Company’s Charter, as well as the completeness and reliability of the Company’s accounting and financial reports. The Department also evaluates the efficiency and effectiveness of the Company’s business processes, including its use of resources. It also participates in the creation and development of unified elements of the control system within PhosAgro. It develops recommendations on strategic changes within the Company, which are related to the improvement of the internal control system, risk management and corporate governance, and develops and promotes corporate internal control policies.

To ensure the independence and fairness of the officers of the Internal Audit Department, its Head reports on a functional basis to the Audit Committee, and reports on an administrative basis to the CEO. The Head of the Department provides regular reports to the Audit Committee and to the CEO on the results of internal audits. It is the Audit Committee that recommends the Head of the Department to the Board of Directorsfor appointment.

In 2011, the main duties of the Department included the formation of the structure of the Department, and various audit projects.

The Independent Auditor

PhosAgro appoints an independent professional auditor to externally audit and to verify the compliance, in terms of accuracy and completeness, of the Company’s annual financial statements with IFRS. The Company ensures the independence of the external auditor in accordance with the Federal Law on Audit and International Standards on Auditing, including verifying that the external auditor has no proprietary interests in the Company, and that there is no affiliation between the external auditor and the Company or members of the Company’s executive bodies.

The independent auditor reports directly to the Audit Committee of the Board of Directors. Based on an inspection of the financial and commercial operations of the Company and the internal control system, the independent auditor prepares a report, which is submitted to the Audit Committee at least once a year. In case of a disagreement between the management of the Company and the independent auditor, the Audit Committee oversees the resolution of the disagreement.

PhosAgro appoints an external auditor on a contractual basis.The external auditor is responsible for the auditing and inspection of the consolidated financial statements of the Company prepared in accordance with IFRS. In December 2011, based on the recommendation of the Audit Committee and the Board of Directors, the Company appointed ZAO KPMG to conduct the audit of PhosAgro’s 2011 IFRS financial statements.