Amended and Restated Audit Committee Charter
The primary purpose of the Audit Committee (the “Committee”) is to assist the Board of Directors of Psychiatric Solutions, Inc. (the “Company”) in fulfilling its oversight responsibilities with respect to the Company’s financial reporting process, financial reports and other financial information, the Company’s systems of internal accounting and financial controls and the annual independent audit of the Company’s financial statements. The Committee shall be directly responsible for the appointment, compensation, and oversight of the work of the independent auditor employed by the Company for the purpose of preparing or issuing an audit report or related work. While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that the Company’s financial statements are complete and accurate and are in accordance with generally accepted accounting principles. This is the responsibility of management and the independent auditor.
In discharging its oversight role, the Committee is authorized to investigate any matter related to its responsibilities with full access to all books, records, facilities and personnel of the Company. The Committee shall have the authority to retain special legal, accounting or other consultants to advise the Committee. The Company shall provide appropriate funding, as determined by the Committee, to (a) compensate the Company’s independent auditor, (b) compensate any independent legal counsel or other advisors engaged by the Committee and (c) pay ordinary Committee administrative expenses that are necessary and appropriate in carrying out its duties.
The Committee shall review and reassess the adequacy of this Charter at least annually and recommend any proposed changes to the Board for approval.
The Committee will consist of at least three members appointed by the Board. Each member of the Committee shall meet the independence and financial experience requirements of the Nasdaq Stock Market and the rules and regulations of the Securities and Exchange Commission. Thus, each member of the Committee shall be financially literate and able to read and understand fundamental financial statements. Additionally, at least one member of the Committee shall have past employment experience in finance or accounting, requisite professional certification in accounting or any other comparable experience or background which results in such member’s financial sophistication. Committee members shall not simultaneously serve on the audit committees of more than two other public companies.
The Committee shall be responsible for the oversight of the relationship of the Company with its independent auditor. With respect to this responsibility, the Committee shall:
• Hire, evaluate the performance of and, when appropriate, replace the independent auditor. The Committee shall only engage a registered public accounting firm as the Company’s independent auditor. The independent auditor shall report directly to the Committee.
• Determine the compensation to be paid to the independent auditor and, in its sole discretion, approve all audit engagement fees and terms. The Committee shall pre-approve all auditing and non-auditing services of the independent auditor, subject to certain de minimus exceptions relating to non-audit services expressly set forth in Section 10A(i)(B) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
• Receive periodic reports from the independent auditor regarding the auditor’s independence and discuss such reports with the auditor. The report must include a formal written statement delineating all relationships between the auditor and the Company, consistent with Independence Standards Board Standard No. 1, and disclose any relationships or services which may impact the objectivity and
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independence of the auditor. After reviewing such reports and discussing the reports with the auditor, the Committee will take the appropriate action to oversee the independence of the auditor.
• Establish guidelines consistent with Section 10A(l) of the Exchange Act for the Company’s hiring of employees or former employees of the independent auditor who participated in any capacity in the Company’s audit during the one-year period preceding the date of the initiation of the audit.
• Review with the independent auditor any problems or difficulties the independent auditor may have encountered and any material written communications between the independent auditor and management, such as any management letter or schedule of unadjusted differences, and resolve disagreements between management and the independent auditor regarding financial reporting. Such review should include any difficulties encountered in the course of the audit work, including any restrictions on the scope of activities or access to required information, any disagreements with management, any changes required in the planned scope of the internal audit and any disagreement regarding the internal audit department responsibilities, budget and staffing.
The Committee shall review the financial statements of the Company with management. In connection with this responsibility, the Committee shall:
• Review and discuss with management and the independent auditor (a) the audited financial statements to be included in the Company’s Annual Report on Form 10-K (or the Annual Report to Stockholders if distributed prior to the filing of the Form 10-K), (b) the quarterly financial statements to be included in the Company’s Quarterly Report on Form 10-Q, (c) the Company’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and (d) the quarterly earnings press releases and financial information and earnings guidance provided to analysts and rating agencies.
• The Committee also shall discuss with the independent auditors the matters required to be discussed by Statement of Auditing Standards (“SAS”) No. 61 and No. 90, as may be modified or supplemented, relating to the conduct of the audit as well as matters affecting the quality of the Company’s financial reporting and the fairness of the presentation in the financial statements of the financial condition and financial risks of the Company. Based on such review and discussion, the Committee shall consider whether to recommend to the Board that the audited financial statements be included in the Company’s Annual Report on Form 10-K.
• Review with management and the independent auditor the significant financial reporting issues and judgments made in connection with the preparation of the Company’s financial statements, including (a) all critical accounting policies and practices to be used, (b) all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management officials of the Company, (c) the ramifications of the use of these alternative disclosures and treatments, and (d) the treatment preferred by the independent auditor and the reasons for favoring that treatment. This shall include a review with management and the independent auditor of the effect of regulatory and accounting initiatives as well as off-balance sheet structures on the Company’s financial statements.
• Ensure that the independent auditor performs an interim financial review as required under SAS No. 100. Review and discuss with management and the independent auditors the Company’s interim financial results to be included in the Company’s quarterly reports to be filed with the Securities and Exchange Commission. This review will occur prior to the public release of such quarterly financial results and prior to the Company’s filing of its Form 10-Q.
The Committee shall review and oversee the Company’s internal reporting and controls and compliance programs. In connection with this responsibility the Committee shall:
• Meet periodically with management to review the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures and to review major changes to the Company’s auditing and accounting principles and practices as suggested by the independent auditor, internal auditors or management.
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• Review the appointment and replacement of the director of internal audit.
• Review the significant reports to management prepared by the internal auditing department and management’s responses.
• Review and discuss with management, the independent auditor and internal auditors the adequacy and effectiveness of the Company’s internal controls (including any significant deficiencies and significant changes reported to the Committee by the independent auditor or management), the Company’s audit procedures and the adequacy and effectiveness of the Company’s disclosure controls and procedures.
• Review and discuss with management all existing related-party transactions and approve any proposed related-party transactions to ensure that they are in the Company’s best interest. “Related-party transactions” will include, but not be limited to, those transactions described in Item 404(a) of Regulation S-K under the federal securities laws. Only members of the Committee who will derive no direct or indirect benefit from a specific related-party transaction may discuss that transaction with management or vote to approve it.
• Advise the Board with respect to the Company’s policies and procedures regarding compliance with applicable laws and regulations and with respect to the adoption and implementation of a Code of Conduct for the Company.
• Establish and monitor procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters.
The Committee shall also, with consultation with internal and external experts:
• Prepare the audit committee report required by the rules of the Securities and Exchange Commission to be included in the Company’s annual proxy statement.
• Review with the Company’s legal counsel matters that may have a material impact on the financial statements, the Company’s compliance policies and any material reports or inquiries received from regulators or governmental agencies.
• Meet at least quarterly and make regular reports to the Board. Meet at least quarterly with the Chief Accounting Officer, the director of internal audit and the independent auditor in separate executive sessions. The Committee may request that an officer or employee of the Company, the Company’s outside counsel or independent auditor attend a meeting of the Committee or meet with any members of, or consultants to, the Committee. The Committee shall cause adequate minutes to be prepared for all of its proceedings.