light house, Sample Audit Committee Charter

Analysis

Sample audit committee charter

This sample audit committee charter is based on a review of selected Fortune 1000 company charters, as well as SEC requirements and NYSE and NASDAQ corporate-governance listing standards.

Audit committee of the board of directors—charter

Purpose and authority

The audit committee is established by and among the board of directors for the primary purpose of assisting the board in:
  • Overseeing the integrity of the company‘s financial statements [NYSE Corporate Governance Rule 303A.07(b)(i)(A)] and the company‘s accounting and financial reporting processes and financial statement audits [NASDAQ Corporate Governance Rule 5605(c)(1)(C)]
  • Overseeing the company‘s compliance with legal and regulatory requirements [NYSE Corporate Governance Rule 303A.7(c)(i)(A)]
  • Overseeing the registered public accounting firm‘s (independent auditor‘s) qualifications and independence [NYSE Corporate Governance Rule 303A.7(c)(i)(A) and NASDAQ Corporate Governance Rule 5605(c)(1)(b)]
  • Overseeing the performance of the company‘s independent auditor [NYSE Corporate Governance Rule 303A.7(c)(i)(A) and NASDAQ Corporate Governance Rule 5605(c)(1)(b)] and internal audit function [NYSE Corporate Governance Rule 303A.7(c)(i)(A)]
  • Overseeing the company‘s systems of disclosure controls and procedures, internal controls over financial reporting, and compliance with ethical standards adopted by the company

The audit committee should encourage continuous improvement, and should foster adherence to the company‘s policies, procedures, and practices at all levels. The audit committee should also provide for open communication among the independent auditor, financial and senior management, the internal audit function, and the board of directors.

Composition and meetings1

The audit committee will comprise three or more directors as determined by the board [NYSE Corporate Governance Rules 303A.06 and .07(a) and NASDAQ Corporate Governance Rule 5605(c)(2)(A)].

Committee members will be appointed by the board at the annual organizational meeting of the board to serve until their successors are elected. Unless a chairman is elected by the full board, the members of the committee may designate a chairman by majority vote.

Each audit committee member will meet the applicable standards of independence and the determination of independence will be made by the board and as defined by applicable standards listing [Section 10A of the Exchange Act, NYSE Corporate Governance Rules 303A.06 and .07(a) and NASDAQ Corporate Governance Rule 5605(c)(2)(A)].

All members of the committee must comply with all financial literacy requirements of the securities exchanges on which the company is listed. To help meet these requirements, the audit committee will provide its members with annual continuing education opportunities in financial reporting and other areas relevant to the audit committee2. At least one member will qualify as an “audit committee financial expert” as defined by the SEC and determined by the board and appropriate disclosure will be made [Item 407(d)(5) of Regulation S-K, NYSE Corporate Governance Rule 303A.07(a), and NASDAQ Corporate Governance Rule 5605(c)(2)(A)]3.

The board will determine that a director‘s simultaneous service on multiple audit committees will not impair the ability of such member to serve on the audit committee4.

1 Consideration also should be given to the amount of time members of the audit committee can devote to the role. While there are currently no regulations limiting the number of public-company audit committees on which an individual may serve, some companies have included such limitations in the audit committee charter. Furthermore, the NYSE-required disclosures state: “If an audit committee member simultaneously serves on the audit committee of more than three public companies, the board must determine that such simultaneous service would not impair the ability of such member to effectively serve on the listed company‘s audit committee and disclose such determination either on or through the listed company‘s website or in its annual proxy statement, or if the company does not file an annual proxy statement, in its annual report on Form 10-K filed with the SEC.”

2 Although the existence of a continuing education program for the board and audit committee is not a requirement, NYSE Corporate Governance Rule 303A.09 requires companies to adopt and disclose guidelines for corporate governance that address their policies for directors‘ continuing education.

3 NYSE Corporate Governance Rule 303A.07(a) requires all audit committee members to be “financially literate” as interpreted by the business judgment of the company‘s board, or to become financially literate within a reasonable period after being appointed to the committee. In addition, at least one member must have “accounting or related financial management expertise” as interpreted by the board. NASDAQ Corporate Governance Rule 5605(c)(2)(A) requires all audit committee members to be able to read and understand financial statements at the time of their appointment to the committee and requires at least one audit committee member to be “financially sophisticated.” The SEC requires an issuer to disclose whether at least one audit committee financial expert serves on the audit committee or whether it does not have an audit committee financial expert serving on its audit committee [Item 407 (d)(5)(i)(A)(1) and (2) of Regulation S-K].

4 The disclosure requirement of NYSE Corporate Governance Rule 303A.07(a) requires that if an audit committee member simultaneously serves on the audit committees of more than three public companies, the board must determine that such simultaneous service does not impair the ability of such member to effectively serve on the listed company‘s audit committee and must disclose such determination either on or through the listed company‘s website, in its annual proxy statement, or, if the listed company does not file an annual proxy statement, in its annual report on Form 10-K filed with the SEC.

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Responsibilities and duties

To fulfill its responsibilities and duties, the audit committee will engage in the following activities:
  • Documents/reports/accounting information review
  • Independent auditor
  • Financial reporting processes, accounting policies, and internal control structure
  • Internal audit
  • Ethical compliance, legal compliance, and risk management
  • Reporting
  • Other responsibilities
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For more information, contact auditcommittee@deloitte.com.

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