The Audit Committee (the “Committee”) is appointed by the Board of Directors (the “Board”) to provide assistance to the Board in fulfilling its oversight responsibility with respect to (i) the integrity of the Company’s financial statements, (ii) the Company’s compliance with legal and regulatory requirements, (iii) selecting, and evaluating the qualifications and independence of, the Company’s independent registered public accounting firm (the “Independent Auditor”), (iv) evaluating the performance of the Company’s internal audit function and the Independent Auditor, and (v) the Company’s internal controls and procedures.
Committee Membership & Qualifications
The Committee shall be comprised of no fewer than three members of the Board. Except as permitted by the applicable rules of The NASDAQ Stock Market (“NASDAQ”) and the provisions of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations promulgated thereunder, each member of the Committee shall satisfy the independence and experience requirements of the applicable listing standards of NASDAQ and the Exchange Act. Each member of the Committee must be able to read and understand fundamental financial statements and must not have participated in the preparation of the financial statements of the Company or any current subsidiary of the Company during the past three years. In addition, at least one member of the Committee shall have “financial sophistication” under NASDAQ rules and be an “audit committee financial expert” under Item 407(d)(5) of Regulation S-K.
Committee members shall be appointed by the Board. No Committee member shall serve simultaneously on the audit committees of more than two other public companies unless the Board determines that such simultaneous service would not impair the ability of the Committee member to serve on the Committee effectively. The Board may, at any time with or without cause, remove any member of the Committee and fill the vacancy created by such removal. The Committee’s chairman shall be appointed by a majority of the full Board or the full Committee.
Scope of Oversight
Notwithstanding the foregoing, the Committee’s responsibilities are limited to oversight. Management is responsible for the preparation, presentation and integrity of the Company’s financial statements as well as the Company’s financial reporting process, accounting policies, internal audit function, internal accounting controls and disclosure controls and procedures. The Independent Auditor is responsible for performing an audit of the Company’s annual financial statements, expressing an opinion as to the conformity of such annual financial statements with generally accepted accounting principles (“GAAP”) and reviewing the Company’s quarterly financial statements. It is not the responsibility of the Committee to plan or conduct audits or to determine that the Company’s financial statements and disclosure are complete and accurate and in accordance with GAAP and applicable laws, rules and regulations.
Each member of the Committee shall be entitled to rely on the integrity of those persons within the Company and of the professionals and experts (including the Company’s internal auditor or others responsible for the internal audit function (including contracted non-employee or audit or accounting firms engaged to provide internal audit services), if any, and the Independent Auditor) from which the Committee receives information and, absent actual knowledge to the contrary, the accuracy of the financial and other information provided to the Committee by such persons, professionals or experts.
Further, auditing literature, particularly Statement of Accounting Standards No. 71, defines the term “review” to include a particular set of required procedures to be undertaken by independent auditors. The members of the Committee are not independent auditors, and the term “review” as used in this Charter is not intended to have that meaning and should not be interpreted to suggest that the Committee members can or should follow the procedures required of auditors performing reviews of financial statements.
Committee Authority & Responsibilities
The following shall be the principal recurring responsibilities of the Committee. These responsibilities are set forth as a guide, with the understanding that the Committee may alter or supplement them as appropriate to enable the Committee to carry out its duties, to the extent permitted by applicable laws and listing standards.
- Appointment and Oversight: The Committee shall be directly responsible for the appointment, compensation, retention and oversight of the work of the Independent Auditor (including resolution of any disagreements between Company management and the Independent Auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work or performing other audit, review or attestation services for the Company, and the Independent Auditor shall report directly to the Committee.
- Pre-Approval of Services: Before the Independent Auditor is engaged by the Company or its subsidiaries to render audit or non-audit services, the Committee shall pre-approve the engagement. Committee pre-approval of audit and non-audit services will not be required if the engagement for the services is entered into pursuant to pre-approval policies and procedures established by the Committee regarding the Company’s engagement of the Independent Auditor, provided the policies and procedures are detailed as to the particular service, the Committee is informed of each service provided and such policies and procedures do not include delegation of the Committee’s responsibilities under the Exchange Act to the Company’s management. The Committee may delegate to one or more designated members of the Committee the authority to grant pre-approvals, provided such approvals are presented to the Committee at a subsequent meeting. If the Committee elects to establish pre-approval policies and procedures regarding non-audit services, the Committee must be informed of each non-audit service provided by the Independent Auditor. Committee pre-approval of non-audit services (other than review and attestation services) also will not be required if such services fall within available exceptions established by the Securities and Exchange Commission (the “SEC”).
- Independence of Independent Auditor: The Committee shall, at least annually, review the independence and quality control procedures of the Independent Auditor and the experience and qualifications of the Independent Auditor’s senior personnel that are providing audit services to the Company. In conducting its review:
The Committee shall obtain and review a report prepared by the Independent Auditor describing (a) the auditing firm’s internal quality-control procedures and (b) any issues raised by the most recent internal quality-control review, or peer review, of the auditing firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the auditing firm, and any steps taken to deal with any such issues.
The Committee shall ensure that the Independent Auditor prepares and delivers, at least annually, a written statement delineating all relationships between the Independent Auditor and the Company, consistent with Public Company Accounting Oversight Board (“PCAOB”) Rule 3526, “Communications with Audit Committees Concerning Independence.” The Committee shall actively engage in a dialogue with the Independent Auditor with respect to any disclosed relationships or services that, in the view of the Committee, may impact the objectivity and independence of the Independent Auditor. If the Committee determines that further inquiry is advisable, the Committee shall take appropriate action in response to the Independent Auditor’s report to satisfy itself of the Independent Auditor’s independence.
The Committee shall confirm with the Independent Auditor that the Independent Auditor is in compliance with the partner rotation requirements established by the SEC.
The Committee shall, if applicable, consider whether the Independent Auditor’s provision of any permitted information technology services or other non-audit services to the Company is compatible with maintaining the independence of the Independent Auditor.
Annual Financial Statements and Audit
- Meetings with Management, the Independent Auditor and the Internal Auditor
The Committee shall meet with management, the Independent Auditor and the internal auditor, if any, in connection with each annual audit to discuss the scope of the audit, the procedures to be followed and the staffing of the audit.
The Committee shall review and discuss with management and the Independent Auditor: (a) major issues regarding accounting principles and financial statement presentations, including any significant changes in the Company’s selection or application of accounting principles, and major issues as to the adequacy of the Company’s internal controls and any special audit steps adopted in light of material control deficiencies; (b) any analyses prepared by management or the Independent Auditor setting forth significant financial reporting issues and judgments made in connection with the preparation of the Company’s financial statements, including analyses of the effects of alternative GAAP methods on the Company’s financial statements; and (c) the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the Company’s financial statements.
The Committee shall review and discuss the annual audited financial statements with management and the Independent Auditor, including the Company’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
- Separate Meetings with the Independent Auditor
The Committee shall review with the Independent Auditor any problems or difficulties the Independent Auditor may have encountered during the course of the audit work, including any restrictions on the scope of activities or access to required information or any significant disagreements with management and management’s responses to such matters. The Committee shall obtain from the Independent Auditor assurances that Section 10A(b) of the Exchange Act (required response to audit discoveries) has not been implicated.
The Committee shall discuss with the Independent Auditor the report that such auditor is required to make to the Committee regarding: (a) all accounting policies and practices to be used that the Independent Auditor identifies as critical; (b) all alternative treatments within GAAP for policies and practices related to material items that have been discussed among management and the Independent Auditor, including the ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the Independent Auditor; and (c) all other material written communications between the Independent Auditor and management of the Company, such as any management letter, management representation letter, reports on observations and recommendations on internal controls, Independent Auditor’s engagement letter, Independent Auditor’s independence letter, schedule of unadjusted audit differences and a listing of adjustments and reclassifications not recorded, if any.
The Committee shall discuss with the Independent Auditor the matters required to be discussed under the standards and related rules of the PCAOB, including Statement on Auditing Standards No. 114, as it may be amended or superseded from time to time.
- Recommendation to Include Financial Statements in Annual Report: The Committee shall, based on the review and discussions in paragraphs 4(iii) and 5(iii) above, and based on the disclosures received from the Independent Auditor regarding its independence and discussions with the Independent Auditor regarding such independence pursuant to paragraph 3(ii) above, determine whether to recommend to the Board that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year subject to the audit.
Quarterly Financial Statements
- Meetings with Management, the Independent Auditor and the Internal Auditor: The Committee shall review and discuss the quarterly financial statements with management and the Independent Auditor, including the Company’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
- Appointment: The Committee shall review the appointment and replacement of the head of the internal audit department.
- Separate Meetings with the Internal Auditor: The Committee shall meet with the Company’s internal auditor no less than quarterly to discuss the responsibilities, budget and staffing of the Company’s internal audit function, the adequacy of the Company’s internal accounting controls, reports on completed audits (including management responses), status of implementation of internal audit recommendations, status of audits in-process and planned, and any issues that the internal auditor believes warrant audit committee attention. The Committee shall discuss with the internal auditor any significant reports to management prepared by the internal auditor and any responses from management.
- Internal Audit Plan: The Committee shall review and approve the annual internal audit plan, including internal audit assignments and budget.
Other Powers & Responsibilities
- The Committee shall discuss with management and the Independent Auditor the Company’s earnings press releases (with particular focus on any “pro forma” or “adjusted” non-GAAP information), as well as any other disclosure of financial information and earnings guidance. The Committee’s discussion in this regard may be general in nature (i.e., discussion of the types of information to be disclosed and the type of presentation to be made) and need not take place in advance of each earnings release or each instance in which the Company may provide earnings guidance.
- The Committee shall review all related party transactions on an ongoing basis and all such transactions must be approved by the Committee.
- The Committee shall set a policy for the hiring of employees or former employees of the Independent Auditor.
- The Committee shall discuss with management and the Independent Auditor any correspondence from or with regulators or governmental agencies, any employee complaints or any published reports that raise material issues regarding the Company’s financial statements, financial reporting process, accounting policies or internal audit function, if any.
- The Committee shall discuss with the Company’s chief legal officer, if any, or outside counsel any legal matters brought to the Committee’s attention that could reasonably be expected to have a material impact on the Company’s financial statements.
- The Committee shall review (as appropriate) and monitor compliance with the Company’s Code of Business Conduct and Ethics and the Company’s compliance processes in general, and shall investigate any matters pertaining to the integrity of management or adherence to the Code.
- The Committee shall discuss with management the Company’s policies with respect to risk assessment and risk management. The Committee shall discuss with management the Company’s significant financial risk exposures and the actions management has taken to limit, monitor or control such exposures.
- The Committee shall establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters. The Committee shall also establish procedures for the confidential and anonymous submission by employees regarding questionable accounting or auditing matters.
- The Committee shall provide the Company with the report of the Committee with respect to the audited financial statements for inclusion in each of the Company’s annual proxy statements.
- The Committee, through its chairman, shall report regularly to, and review with, the Board any issues that arise with respect to the quality or integrity of the Company’s financial statements, the Company’s compliance with legal or regulatory requirements, the performance and independence of the Independent Auditor, the performance of the Company’s internal audit function, if any, or any other matter the Committee determines is necessary or advisable to report to the Board.
- The Committee shall perform a review and evaluation, at least annually, of the performance of the Committee and its members, including by reviewing the compliance of the Committee with this Charter. In addition, the Committee shall review and reassess, at least annually, the adequacy of this Charter and recommend to the Board any improvements to this Charter that the Committee considers necessary or valuable. The Committee shall conduct such evaluations and reviews in such manner as it deems appropriate.
The Committee may retain any independent counsel, experts or advisors (accounting, financial or otherwise) that the Committee believes to be necessary or appropriate. The Committee may also utilize the services of the Company’s regular legal counsel or other advisors to the Company. The Company shall provide for appropriate funding, as determined by the Committee, for payment of compensation to the Independent Auditor for the purpose of rendering or issuing an audit report or performing other audit, review or attestation services, for payment of compensation to any advisors employed by the Committee and for ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties.
The Committee will meet no less than quarterly and more frequently as the Committee deems desirable, with at least two face-to-face meetings with the Independent Auditor. A majority of the members of the Committee shall constitute a quorum for the transaction of business, and, if a quorum is present, any action approved by at least a majority of the members present shall represent the valid action of the Committee. The chairman of the Committee will preside at each meeting and, in consultation with the other members of the Committee, will set the frequency and length of each meeting and the agenda of items to be addressed at each meeting. The Committee may form subcommittees and delegate authority to them or to one or more of its members when appropriate.
The Committee may, at its discretion, include in its meetings members of the Company’s management, representatives of the Independent Auditor, the internal auditor, if any, any other financial personnel employed or retained by the Company or any other persons whose presence the Committee believes to be necessary or appropriate. Notwithstanding the foregoing, the Committee may also exclude from its meetings any persons it deems appropriate, including, but not limited to, any non-management director who is not a member of the Committee.
The Committee will maintain written minutes of its meetings, which minutes will be filed with the minutes of the meetings of the Board.