This Charter of the Audit Committee of the Board of Directors of Advanced Neuromodulation Systems, Inc. (the “Company”) was adopted and approved by the Company’s Board of Directors on June 4, 2003.
I. PURPOSE AND SCOPE OF RESPONSIBILITIES
The primary function of the Audit Committee is to assist the Board of Directors in overseeing the Company’s financial reporting process and its outside auditors as required by the federal securities laws. The Audit Committee’s primary duties and responsibilities are to:
II. MEMBERSHIP REQUIREMENTS AND STRUCTURE
The following shall constitute the membership requirements of the Audit Committee from and after June 14, 2001:
The Audit Committee will consist of three or more directors as determined by the Board, each of whom shall be independent directors, and free from any relationship that, in the business judgment and sole discretion of the Board, would interfere with the exercise of such director’s independent judgment as a member of the Audit Committee. Examples of such relationships are described in Exhibit A. All members of the Audit Committee will be able to read and understand fundamental financial statements, including a balance sheet, income statement and cash flow statement, or will become able to do so within a reasonable period of time after such person’s appointment to the Audit Committee. At least one member of the Audit Committee will have past employment experience in finance or accounting, professional certification in accounting, or any other comparable experience or background that results in the person’s financial sophistication, including without limitation having served as a company’s chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities.
The members of the Audit Committee will be elected by the Board annually, until their resignation or until their successors are duly elected and qualified. Unless a Chair is elected by the full Board, the members of the Audit Committee may designate a Chair by majority vote of the full Audit Committee membership.
The Audit Committee shall meet at least four times annually, or more frequently as they may choose. Any member of the Audit Committee may represent the entire Audit Committee for purposes of any meeting or review.
The Audit Committee will have all necessary power and authority as it deems appropriate to allow it to fulfill its purpose and scope as set forth in Section I above. The Audit Committee will, in furtherance of its purpose and scope as set forth in Section I above, have the power and authority to:
Review of Reports
1. Review and assess the adequacy of this Charter.
2. Review with the Chief Financial Officer or other members of the Company’s financial management the audited financial statements of the Company.
3. Require the outside auditors to provide a formal written statement delineating all relationships between the auditor and the Company, consistent with Independence Standards Board Standard I attached hereto as Exhibit B.
4. Discuss with the outside auditor any disclosed relationships or services that may affect the objectivity and independence of the auditor.
5. Take appropriate action, or recommend to the Board of Directors to take such action, to oversee the independence of the outside auditor.
6. Recommend to the Board of Directors the selection or replacement of the outside auditor, based on the Audit Committee’s evaluation of the outside auditor in its sole discretion.
Financial Reporting Processes
7. Require that the outside auditor review the financial information included in the Company’s Quarterly Reports on Form 10-Q prior to the Company’s filing of such reports with the Securities and Exchange Commission.
8. Recommend to the Board of Directors, based on the review and discussions described above, whether the audited financial statements should be included in the Company’s Annual Report on Form 10-K for the last fiscal year for filing with the Securities and Exchange Commission.
Proxy Statement Report
9. Provide a Report of the Audit Committee in the Company’s annual proxy statement, which Report shall state whether the Audit Committee has (i) reviewed and discussed the Company’s audited financial statements with management, (ii) discussed with the outside auditor the matters required to be discussed by Statement on Auditing Standards No. 61 (attached hereto as Exhibit C) as it may be modified or supplemented; and (iii) received from the outside auditor disclosures regarding the auditor’s independence required by Independence Standards Board Standard No. 1, as it may be modified or supplemented, and discussed with the outside auditor the auditor’s independence. The Report of the Audit Committee shall also (i) state whether, based on the review and discussions noted above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the last fiscal year for filing with the Securities and Exchange Commission, and (ii) name each member of the Audit Committee. The following legend or a similar legend shall appear immediately before or after the Report of the Audit Committee in any proxy statement containing such Report:
The Report of the Audit Committee and the information contained in the Report shall not be deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C of the Securities Act of 1933, as amended, other than as provided in Item 306 of Regulation S-K thereunder, or subject to the liabilities of Section 18 of the Securities and Exchange Act of 1934, as amended, and shall not be deemed incorporated into any filings of the Company other than this proxy statement except as specified by the Company.
10. Perform any other activities consistent with this Charter, the Company’s By-laws and governing law, as the Audit Committee or the Board deems necessary or appropriate.
IV. AUTHORITY AND OUTSIDE AUDITORS
11. The outside auditor’s ultimate accountability is to the Company’s Board of Directors and the Audit Committee, as representatives of shareholders. The Board of Directors and the Audit Committee will have the ultimate authority and responsibility to select, evaluate and, if appropriate, replace the outside auditor, or to nominate the outside auditor to be proposed for shareholder approval in any proxy statement of the Company.
12. The Audit Committee will have full authority to retain such advisors and counsel as it deems necessary to fulfill its purpose and scope.
13. Nothing in this Charter will, or will be deemed, to increase, expand or modify in any manner adverse to any member of the Audit Committee the duties, obligations, or responsibilities of any such member of the Audit Committee, it being the intent and purpose of this Charter to grant enabling power to the Audit Committee.
14. Nothing in this Charter will, or will be deemed to, decrease or modify in any manner adverse to any member of the Audit Committee, such member’s right to rely on statements and certifications made by the Company’s officers, employees, agents, counsel, experts and auditors.
15. Nothing in this Charter will, or will be deemed to, adversely affect in any manner the rights of members of the Audit Committee to indemnification and advancement of expenses under the Articles of Incorporation or Bylaws of the Company or under any contract, agreement, arrangement or understanding benefiting such member.
16. Notwithstanding any other provision of this Charter, no provision
of this Charter will, except to the extent required by applicable law, be construed to create any duty, liability or obligation on
the part of the Audit Committee or any of its members.
Members of the Audit Committee shall be considered independent if they are not officers or employees of the Company and, in the business judgment of the board of directors, they have no relationship to the Company that would interfere with the exercise of their independent judgment in carrying out the responsibilities of a director. The following are not independent:
A director who has one or more of these relationships (but is not a current
employee or an immediate family member of an employee) may be appointed to the
audit committee if the Board of Directors, under exceptional and limited
circumstances, determines that membership on the committee by the individual is
required by the best interests of the Company and its shareholders, and the
board discloses, in the next annual proxy statements subsequent to such
determination, the nature of the relationship and the reasons for that
1. This standard applies to any auditor intending to be considered an independent accountant with respect to a specific entity within the meaning of the Securities Acts (“the Acts”) administered by the Securities and Exchange Commission. At least annually, such an auditor shall:
a. disclose to the audit committee of the company (or the board of directors if there is no audit committee), in writing, all relationships between the auditor and its related entities and the company and its related entities that in the auditor’s professional judgment may reasonably be thought to bear on independence;
b. confirm in the letter that, in its professional judgment, it is independent of the company within the meaning of the Acts; and
c. discuss the auditor’s independence with the audit committee.
2. The above communications are required with respect to audits of companies with fiscal years ending after July 15, 1999, with earlier application encouraged. Auditors and audit committees of first-time registrants shall have these communications prior to the company’s initial offering of securities to the public. These communications shall cover all audits of financial statements for periods subsequent to the effective date of this standard, included in a registration statement for an initial public offering of securities, whether performed by the current or a predecessor auditor.
3. In adopting this standard, the Board does not intend that an isolated and inadvertent violation of the standard’s requirements would constitute a per se impairment of the auditor’s independence, provided that the auditor is in compliance with all other independence rules. The Board believes, however, that in such circumstances the auditor must remedy violations of the standard’s requirements promptly upon discovery.
Background and Basis for Conclusions
4. In May 1998 the ISB issued an Invitation to Comment (ITC 98-1) regarding a proposed recommendation to the Executive Committee of the SEC Practice Section (SECPS) of the American Institute of Certified Public Accountants. The proposed recommendation would have required audit firms that are members of SECPS to confirm annually to the audit committee (or board of directors) of each public company audit client, each year, that the firm was independent of the client. In the confirmation the auditor would also offer to meet with the audit committee to discuss independence matters.
5. The Board received twenty-six letters in response to the ITC. Most of the letters were supportive, but some urged the Board to go further and require communication to the audit committee of the important matters considered in each particular situation in reaching a conclusion that independence was maintained.
6. After deliberation, the Board concluded that it agreed with those who suggested that the proposal be expanded, and it also decided that it would itself address the matter as a proposed standard, rather than ask the Executive Committee of SECPS to do so. Consequently, the proposal was converted from an Invitation to Comment to an Exposure Draft of a Board pronouncement. In addition, the Board decided that the discussion about independence between the auditor and the audit committee should be required, rather than encouraged by the auditor’s written communication.
7. The revised proposal was re-exposed as an Exposure Draft of an ISB standard. Comment was specifically solicited from those that had responded to the initial invitation to comment, and from several groups representing investors. Twenty-two comment letters were received, and most supported the proposal. The Board believes that the proposed pronouncement will improve corporate governance by affording to audit committees a mandated opportunity to deepen their understanding of auditor independence issues. Companies are required by the Acts to engage "independent" accountants, and this proposal will assist directors in satisfying themselves that the company has met that requirement. The Board also believes that a mandate that audit firms describe and discuss the judgmental matters that might impact on independence will bring more focus within firms on this important issue.
8. Some suggested that the Board provide guidance on how an auditor could “cure” a failure to comply with the standard. The Board did not believe it was appropriate to comply with that request, but it did add the “Official Comment” to clarify its intent in the event of an isolated and inadvertent violation.
9. Some respondents objected to the provision in the exposure draft that would seem to have imposed a requirement on audit committees to discuss independence with the auditor, on the basis that the Board did not have such authority. Without concluding on that question, the Board decided that it would revise the provision to impose the discussion requirement solely on the auditor. The Board recognizes, however, that the auditor could withhold his or her audit report until such discussion took place with the audit committee so that the auditor was in compliance with this professional requirement.
10. The Board considered whether to require that the discussion between the audit committee and the auditor take place before any substantive audit procedures had begun. There are clear benefits to the audit committee to obtaining satisfaction about independence before the audit is started. The Board recognizes, however, that many audit committees have established meeting schedules which would not accommodate such a discussion before the audit begins, and it concluded that imposing such a requirement was not essential to achieving the objectives of this pronouncement.
11. The Board recognizes that every additional requirement imposes costs, but the Board believes that the costs to implement this pronouncement would be small when compared with the benefits.
12. This standard was adopted unanimously by the members of the Board.
Members of the
William T. Allen, Chair
John C. Bogle
Robert E. Denham
Manuel H. Johnson
Philip A. Laskawy
Barry C. Melancon
James J. Schiro
STATEMENT ON AUDITING STANDARDS NO. 61*
Communication With Audit Committees
1. This Statement establishes a requirement for the auditor to determine that certain matters related to the conduct of an audit are communicated to those who have responsibility for oversight of the financial reporting process. For purposes of this document, the recipient of the communications is referred to as the audit committee. The communications required by this Statement are applicable to (i) entities that either have an audit committee or that have otherwise formally designated oversight of the financial reporting process to a group equivalent to an audit committee (such as a finance committee or budget committee) and (2) all Securities and Exchange Commission (SEC) engagements.
2. This Statement requires the auditor to ensure that the audit committee receives additional information regarding the scope and results of the audit that may assist the audit committee in overseeing the financial reporting and disclosure process for which management is responsible. This Statement does not require communications with management; however, it does not preclude communications with management or other individuals within the entity who may, in the auditor’s judgment, benefit from the communications.
3. The communications may be oral or written. If information is communicated orally, the auditor should document the communication by appropriate memoranda or notations in the working papers. When the auditor communicates in writing, the report should indicate that it is intended solely for the use of the audit committee or the board of directors and, if appropriate, management.
4. The communications specified by this Statement are incidental to the audit. Accordingly, they are not required to occur before the issuance of the auditor’s report on the entity’s financial statements so long as the communications occur on a timely basis. There may be occasions, however, when discussion of certain of the matters (specified by paragraphs 6 through 14 below) with the audit committee prior to the issuance of the report may, in the auditor’s judgment, be desirable.
5. It may be appropriate for management to communicate to the audit committee certain of the matters specified in this Statement. In such circumstances, the auditor should be satisfied that such communications have, in fact, occurred. Generally, it is not necessary to repeat the communication of recurring matters each year. Periodically, however, the auditor should consider whether, because of changes in the audit committee or simply because of the passage of time, it is appropriate and timely to report such matters. Finally, this Statement is not intended to restrict the communication of other matters.
Matters to Be Communicated
The Auditor’s Responsibility Under Generally Accepted Auditing Standards
6. An audit performed in accordance with generally accepted auditing standards may address many matters of interest to an audit committee. For example, an audit committee is usually interested in the internal control structure and in whether the financial statements are free of material misstatement. In order for the audit committee to understand the nature of the assurance provided by an audit, the auditor should communicate the level of responsibility assumed for these matters under generally accepted auditing standards. It is also important for the audit committee to understand that an audit conducted in accordance with generally accepted auditing standards is designed to obtain reasonable, rather than absolute, assurance about the financial statements.
Significant Accounting Policies
7. The auditor should determine that the audit committee is informed about the initial selection of and changes in significant accounting policies or their application. The auditor should also determine that the audit committee is informed about the methods used to account for significant unusual transactions and the effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or concensus. For example, significant accounting issues may exist in areas such as revenue recognition, off balance sheet financing, and accounting for equity investments.
Management Judgments and Accounting Estimates
8. Accounting estimates are an integral part of the financial statements prepared by management and are based upon management’s current judgments. Those judgments are normally based on knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ markedly from management’s current judgments. The auditor should determine that the audit committee is informed about the process used by management in formulating particularly sensitive accounting estimates and about the basis for the auditor’s conclusions regarding the reasonableness of those estimates.
Significant Audit Adjustments
9. The auditor should inform the audit committee about adjustments arising from the audit that could, in his judgment, either individually or in the aggregate, have a significant effect on the entity’s financial reporting process. For purposes of this Statement, an audit adjustment, whether or not recorded by the entity, is a proposed correction of the financial statements that, in the auditor’s judgment, may not have been detected except through the auditing procedures performed. Matters underlying adjustments proposed by the auditor but not recorded by the entity could potentially cause future financial statements to be materially misstated, even though the auditor has concluded that the adjustments are not material to the current financial statements.
Other Information in Documents Containing Audited Financial Statements
10. The audit committee often considers information prepared by management that accompanies the entity’s financial statements. An example of information of this nature would be the “Management’s Discussion and Analysis of Financial Condition and results of Operations” that certain entities that file reports with the SEC are required to present in annual reports to shareholders. SAS No. 8, Other Information in Documents Containing Audited Financial Statements (AICPA, Professional Standards, vol. 1, AU sec. 550), establishes the auditor’s responsibility for such information. The auditor should discuss with the audit committee his responsibility for other information in documents containing audited financial statements, any procedures performed, and the results.
Disagreements With Management
11. Disagreements with management may occasionally arise over the application of accounting principles to the entity’s specific transactions and events and the basis for management’s judgments about accounting estimates. Disagreements may also arise regarding the scope of the audit, disclosures to be included in the entity’s financial statements, and the wording of the auditor’s report. The auditor should discuss with the audit committee any disagreements with management, whether or not satisfactorily resolved, about matters that individually or in the aggregate could be significant to the entity’s financial statements or the auditor’s report. For purposes of this Statement, disagreements do not include differences of opinion based on incomplete facts or preliminary information that are later resolved.
Consultation With Other Accountants
12. In some cases, management may decide to consult with other accountants about auditing and accounting matters. When the auditor is aware that such consultation has occurred, he should discuss with the audit committee his views about significant matters that were the subject of such consultation.
Major Issues Discussed With Management Prior to Retention
13. The auditor should discuss with the audit committee any major issues that were discussed with management in connection with the initial or recurring retention of the auditor including, among other matters, any discussions regarding the application of accounting principles and auditing standards.
Difficulties Encountered in Performing the Audit
14. The auditor should inform the audit committee of any serious difficulties he encountered in dealing with management related to the performance of the audit. This may include, among other things, unreasonably delays by management in permitting the commencement of the audit or in providing needed information, and whether the timetable set by management was unreasonable under the circumstances. Other matters that the auditor may encounter include the unavailability of client personnel and the failure of client personnel to complete client prepared schedules on a timely basis. If the auditor considers these matters significant, he should inform the audit committee.
15. This Statement is effective for audits of financial statements for periods beginning on or after January 1, 1989. Early application of the provisions of this Statement is permissible.
The Statement entitled Communication With Audit Committees was adopted by the assenting votes of nineteen members of the board, of whom four, Messrs. Dodson, Gunther, Johnson, and Ten Eyck, assented with qualifications. Messrs. Clancy and Compton dissented.
Messrs. Dodson, Gunther, Johnson, and Ten Eyck qualify their assents because they believe the audit engagements to which this Statement applies, as described in paragraph 1, are too limited. Mr. Ten Eyck believes that, as a result of this limited applicability, communication of matters described in this Statement are not required for many audit engagements where such matters are also relevant. He also believes that this limited applicability is inconsistent with the objective of improving auditor communications that is the basis for issuing this Statement.
Messrs. Johnson and Dodson believe that communication of the matters described in this Statement is important in assisting in the oversight of the financial reporting and disclosure process in many entities that do not have a designated audit committee or other oversight group. Mr. Johnson believes that governmental and not for profit entities are two major categories of such entities. Accordingly, he believes that this Statement should be applicable to independent audits of all entities other than those that are owner managed. Mr. Dodson believes that this Statement should be applicable to all banks, thrifts, and credit unions.
Messrs. Clancy and Compton dissent to the issuance of this Statement because they do not believe that the applicability of Statements on Auditing Standards should be established on the basis of specific attributes of the audited entity. Mr. Clancy also believes that the requirements of this Statement should be applicable to all audit engagements.