This charter of the Audit Committee (this "Charter") has been recommended by the Audit Committee and adopted by the Board of Directors on November 2, 2005

 

I. ORGANIZATION

II. COMPOSITION AND SELECTION

III. STATEMENT OF PURPOSE

IV. COMMITTEE AUTHORITY AND RESPONSIBILITIES

   Financial Statements and Disclosure Matters

   Oversight of the Company's Relationship with the Independent Auditor

   Oversight of the Company's Internal Audit Function

   Compliance Oversight Responsibilities

   Other Matters

V. MEETINGS

VI. OUTSIDE ADVISORS

VII. SAFE HARBOR STATEMENT

 

 

 

ORGANIZATION

There shall be constituted a standing committee of the board of directors (the "Board") of KKR FINANCIAL CORP. (the "Company") to be known as the audit committee (the "Audit Committee").

 

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COMPOSITION AND SELECTION

The Audit Committee shall be comprised of three or more directors, each of whom shall meet the independence requirements of the New York Stock Exchange for Audit Committee members.

 

All members of the Audit Committee shall be financially literate, as determined by the Board. At least one member of the Audit Committee shall be an "audit committee financial expert," as determined by the Board in accordance with Securities and Exchange Commission rules. No member of the Audit Committee may serve on the audit committees of more than three public companies.

 

The members of the Audit Committee shall be appointed by the Board, based upon the recommendation of the Nominating and Corporate Governance Committee, at the Board's annual meeting and may be removed by the Board. Each member of the Audit Committee shall serve for one year or until his or her successors is duly elected and qualified. The full Board shall elect a Chairman of the Audit Committee, and if a Chairman is not elected by the full Board, the members of the Audit Committee shall designate a Chairman by majority vote of the full Audit Committee.

 

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STATEMENT OF PURPOSE

The primary function of the Audit Committee shall be to represent and assist the Board in discharging its oversight responsibilities relating to: (1) the reliability and integrity of the Company's financial statements, accounting policies, and financial reporting and disclosure practices; (2) the internal control systems of the Company and its subsidiaries; (3) the Company's compliance with legal and regulatory requirements; (4) the independent auditor's qualifications, independence and performance; and (5) the staffing, qualifications and performance of the Company's internal audit function. In performing its duties, the Audit Committee will maintain effective working relationships with the Board, management, and the independent auditor. To effectively perform his or her role, each Audit Committee member will be responsible for obtaining an understanding of the responsibilities of Audit Committee membership as outlined in this Charter as well as of the Company's business, operations, and risks.

 

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COMMITTEE AUTHORITY AND RESPONSIBILITIES

Among its specific duties and responsibilities, the Audit Committee shall:

 

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Financial Statements and Disclosure Matters

 

Review and discuss with management and the independent auditor: (a) accounting policies and financial reporting issues and judgments that may be viewed as critical; and (b) analyses prepared by management and the independent auditor setting forth significant financial reporting issues and judgments made in connection with the preparation of financial statements, including analyses of the effects of alternative generally accepted accounting principles ("GAAP") methods on the financial statements;

Consider and approve, when appropriate, any significant changes in the Company's accounting and auditing policies, and review with the Company's independent auditor, the internal audit department and management the extent to which changes or improvements in financial or accounting practices and standards, as approved by the Audit Committee, have been implemented;

Review and discuss with management and the independent auditor the Company's annual audited and quarterly unaudited financial statements, including the Company's disclosures under "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the results of the independent auditor's reviews of the annual audited and quarterly unaudited financial statements;

Review and discuss: (a) the adequacy and effectiveness of the Company's internal controls, including any significant changes or deficiencies in internal controls reported to the Audit Committee by the independent auditor or management and any special audit steps adopted in light of control deficiencies; and (b) the adequacy and effectiveness of the Company's disclosure controls and procedures;

Review and discuss with management its policies and practices regarding: (a) earnings press releases; and (b) financial information and earnings guidance given to analysts and ratings agencies;

Discuss with management and the independent auditor the effect of regulatory and accounting initiatives, and any accounting and financial reporting proposals that may have a significant impact on the Company's financial reports;

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Oversight of the Company's Relationship with the Independent Auditor

 

Be directly responsible, in its capacity as a committee of the Board, for the appointment, compensation, retention, oversight and, where appropriate, replacement of the independent auditor, who is responsible to the Board and the Audit Committee. In this regard, the Audit Committee shall have the sole authority to appoint, and shall appoint and retain, (subject to ratification by the Company's shareholders) and terminate, when appropriate, the independent auditor;

Obtain and review a formal written report by the independent auditor, at least annually, describing: (a) the independent auditor's internal quality-control procedures; and (b) any material issues raised by the most recent internal quality control review, or peer review, or by any inquiry or investigation by governmental or professional authorities in the preceding five years in respect of one or more independent audits carried out by the independent auditor and any steps taken to deal with such issues;

Consider, at least annually, the independence of the independent auditor, including whether the independent auditor's performance of permissible non-audit services is compatible with independence, and obtain and review a report by the independent auditor describing all relationships between the independent auditor and the Company and any other relationships that may adversely affect the independence of the independent auditor;

Approve in advance or establish pre-approval policies for all auditing services and permitted non-audit services, other than "prohibited non-auditing services" (specified below), to be performed for the Company by its independent auditor. Any such pre-approval policies shall be detailed as to the particular service, shall require that the Committee be informed of each service so approved, and shall not include a delegation to management of the Company of the Committee's responsibilities pursuant to U.S. federal securities laws. The Committee may also delegate authority to grant pre-approvals of audit and permitted non-audit services to one or more of its members, provided that any such pre-approval shall be presented to the full Committee at its next scheduled meeting. The Committee shall promptly report the approval of any permitted non-audit services to management for disclosure in the Company's periodic reports.

 

The following shall be "prohibited non-auditing services": (i) bookkeeping or other services related to the accounting records or financial statements of the audit client; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, providing fairness opinions or preparing contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service that the Public Company Accounting Oversight Board prohibits through regulation.

Review and discuss with the independent auditor: (a) the audit planning and procedures, including the scope, fees, staffing and timing of the audit; (b) the results of the audit exam, including any problems or difficulties encountered in the course of the audit work and management's response, and any management letters; and (c) any reports of the independent auditor with respect to any interim period;

Review with the Company's internal auditors and the independent auditor the coordination of their audit efforts to provide for completeness of coverage, reduction of redundant efforts and effective use of audit resources;

Establish hiring policies for employees and former employees of the independent auditor;

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Oversight of the Company's Internal Audit Function

 

Establish an internal audit program for the Company and review and approve changes thereto;

Review and discuss with the senior internal audit executive the results of the internal audit program, including the internal audit department's responsibilities, budget and staffing;

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Compliance Oversight Responsibilities

 

Receive reports from management, the Company's senior internal auditing executive, the General Counsel, the independent auditor and such other persons as they may deem appropriate regarding compliance with the Company's investment policies and applicable REIT requirements, SEC requirements and other legal and regulatory requirements;

Review any material pending legal proceedings involving the Company and other contingent liabilities;

Establish procedures for: (a) the receipt, retention, and treatment of complaints received by the Company regarding accounting, internal accounting controls, or auditing matters; and (b) the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters; and

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Other Matters

 

Review and reassess the adequacy of this Charter annually and recommend any proposed changes to the Board for approval, and annually review the Audit Committee's performance.

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MEETINGS

The Audit Committee shall meet at least four times a year, which meetings shall include meeting separately, at least quarterly, with the Company's Chief Financial Officer, General Counsel and such other senior management as it deems necessary, internal auditor and independent auditor. The Chairman or a majority of the members of the Audit Committee may call meetings of the Audit Committee upon reasonable notice to all members of the Audit Committee. The Audit Committee shall report to the Board at least four times a year with respect to its activities.

 

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OUTSIDE ADVISORS

In the course of fulfilling its duties, the Audit Committee shall have, to the extent it deems necessary, the authority to retain outside legal, accounting or other advisors, who shall be appropriately compensated, as determined by the Audit Committee, with funding provided by the Company.

 

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SAFE HARBOR STATEMENT

While the Audit Committee has the responsibilities and powers set forth in this Charter, it is the responsibility of Management and the independent auditors, and not the duty of the Audit Committee, to plan and conduct audits, and to determine that the Company's financial statements are complete, accurate and in accordance with GAAP. Neither is it the duty of the Audit Committee to conduct investigations, to resolve disagreements, if any, between Management and the independent auditors, or to assure the Company's compliance with applicable laws and regulations.