Wilshire Financial Services Group Inc.
AUDIT COMMITTEE CHARTER

Amended and Restated as of October 1, 2003

The board of directors of Wilshire Financial Services Group Inc. hereby constitutes and establishes an audit committee.

Purpose

The audit committee is established to monitor and confirm that the Company has an effective control environment and clear financial reporting by evaluating and monitoring:

 

The honesty, completeness, and correctness of the financial statements of the Company.

 

 

The independent auditor’s qualifications, independence, and performance.

 

 

 

 

The performance of the Company’s internal audit function.

 

 

 

 

The compliance by the Company with legal and regulatory requirements.

 

 

 

 

The Company’s systems of internal accounting and financial control.

 

 

Composition and Organization

The audit committee shall be comprised of three or more directors who are independent of management and the Company within the meaning of Section 10A of the Securities Exchange Act of 1934, as amended, and the rules of the SEC and Nasdaq. Committee members shall be independent directors, free from any relationship that would interfere with the exercise of his or her independent judgment. The determination of a director’s independence shall be made by the board.

All members of the committee shall have a basic understanding of finance and accounting and be able to read and understand fundamental financial statements, including the Company’s balance sheet, income statement and cash flow statement, at the time of their appointment. At least one member of the audit committee shall be a financial expert as defined by the SEC. The Company will disclose in its periodic reports pursuant to Sections 13(a) or 15(d) of the Exchange Act whether or not a financial expert has been designated. Audit committee members shall meet the listing requirements of the Nasdaq Stock Market, and shall fully comply with the requirements of the Sarbanes-Oxley Act of 2002 and the SEC’s regulations.

The board of directors shall designate one of the committee members as chairperson. Audit committee members shall not simultaneously serve on the audit committees of more than two other public companies. No member of the audit committee will receive compensation from the Company except director’s fees for serving on the board and committees of the board. Membership and terms of appointment shall be at the discretion of the board of directors.

Meetings

The committee shall meet at least four times (4) times annually, or more frequently as circumstances dictate. The audit committee chairman shall prepare and/or approve an agenda in advance of each meeting. As necessary or desirable, the chairman of the committee may request that members of management, internal audit and representatives of the independent accountants be present at meetings of the committee. The committee will meet privately in executive session with management, the independent auditors, the internal auditor, and as a committee, as frequently as deemed necessary, to discuss any matters that the committee or each of these groups believe should be discussed. Management will be asked to report whether significant findings and recommendations made by the internal auditors and the independent accountant have been addressed in a timely manner.

Authority

The audit committee is empowered by the board to retain qualified persons as necessary to assist in the effective discharge of their responsibilities. The audit committee shall have the sole authority to appoint or replace the independent auditor. The audit committee shall be directly responsible for the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work. The independent auditor shall report directly to the audit committee.

The audit committee shall pre-approve all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for the Company by its independent auditor, subject to the de minimus exceptions for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act which are approved by the audit committee prior to the completion of the audit. The audit committee may form and delegate authority to subcommittees consisting of one or more members or to the committee’s chairman, when appropriate, including the authority to grant preapprovals of audit and permitted non-audit services, provided that decisions of such subcommittee, or chairman, as the case may be, to grant preapprovals shall be presented to the full audit committee at its next scheduled meeting.

The audit committee shall make regular reports to the board. The audit committee shall review and reassess the adequacy of this charter periodically (ordinarily annually) and recommend any proposed changes to the board for approval. The audit committee shall periodically (ordinarily annually) review the audit committee’s own performance.

Responsibility

The audit committee’s primary duties and responsibilities are to: (i) monitor the integrity of the Company’s financial reporting process and systems of internal controls regarding finance, accounting, and legal compliance; (ii) monitor the independence and performance of the Company’s independent auditors; and (iii) provide an avenue of communication among the independent auditors, management, and the board of directors. The Committee is to be the board’s principal agent in ensuring the independence of the Company’s independent accountants and the adequacy of disclosures to stockholders. The Audit Committee itself does not prepare financial statements or perform audits, and its members are not auditors or certifiers of the Company’s financial statements.

Process

The chairman of the board shall appoint a chairman of the committee from among the members of the committee. If the chairman of the committee is not present at any meeting of the committee, the members of the committee shall appoint an acting chairman for such meeting. The Secretary of the Company, or a designee, shall attend each meeting of the committee and shall act as secretary of such meeting (but shall not be present when requested by the committee). Meeting minutes will be sent to Audit committee members and to board members who are not on the committee. The company’s independent auditors shall also be recipients of minutes for all meetings that they attend and for other meetings as deemed necessary by the committee. Meeting minutes will be approved at the next schedule meeting.

The time and place of meetings of the committee and the procedures to be followed at such meetings shall be determined from time to time by the members of the committee, provided that:

 

(a)

 

a quorum for meetings shall be a majority of the members, present in person or by telephone or other telecommunications device permitting all persons participating in the meeting to speak to and hear each other;

 

 

(b)

 

the affirmative vote of a majority of the members of the committee present at a meeting at which a quorum is present shall be the act of the committee;

 

 

 

(c)

 

the committee may act by unanimous written consent signed by each member of the committee;

 

 

 

(d)

 

the committee and the corporate audit manager shall keep minutes of the committee proceedings and shall deliver the same (and reports and recommendations to the board) to the Secretary of the Company;

 

 

 

(e)

 

all minutes of the meeting of the committee, and all unanimous written consents of the committee, shall be filed with the records of the meetings of the committee;

 

 

 

(f)

 

the chairman, or any member of the Committee, or the Secretary of the Company at the direction of the chairman of the committee, the chairman of the board or the chief executive officer of the Company, shall have the authority to call meetings of the committee; and

 

 

(g)

 

notice of the time and place of every meeting of the committee shall be given in writing, facsimile transmission or electronic mail to each member of the committee at least one business day before any such meeting, unless notice is waived by the members.

Specific Duties of the Audit Committee

Internal Control

Encourage management to communicate the importance of internal control of the Company’s finances and to ensure that all employees are aware of the Company’s internal controls and procedures. Review the internal controls and procedures of the Company. Ensure that the independent auditors attest to and report on the effectiveness of the Company’s internal controls and procedures, and that such report is included in the annual report.

Financial Reporting

Review and discuss with management and the independent auditor the annual audited financial statements, including disclosures made in the management’s discussion and analysis, and recommend to the board whether the audited financial statements should be included in the Company’s Form 10-K.

Review and discuss with management and the independent auditor the Company’s quarterly financial statements prior to the filing of its Form 10-Q, including the results of the independent auditor’s review of the quarterly financial statements.

Discuss with management and the independent auditor significant financial reporting issues and judgments made in connection with the preparation of the Company’s financial statements, including any significant changes in the Company’s selection or application of accounting principles, any major issues as to the adequacy of the Company’s internal controls and any special steps adopted in light of material control deficiencies.

Review and discuss quarterly reports from the independent auditors on:

 

(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, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the independent auditor.

 

 

 

(c)

 

Other material written communications between the independent auditor and management such as any management letter or schedule of unadjusted differences.

 

Financial Reporting Continued

Discuss with management the Company’s earnings press releases, including the use of “pro forma” or “adjusted” non-GAAP information, as well as financial information and earnings guidance provided to analysts and rating agencies. Such discussion may be done generally (consisting of discussing the types of information to be disclosed and the types of presentations to be made).

Discuss with management and the independent auditor the effect of regulatory and accounting initiatives as well as off-balance sheet structures on the Company’s financial statements.

Discuss with management the Company’s major financial risk exposure and the steps management has taken to monitor and control such exposures, including the Company’s risk assessment and risk management policies.

Discuss with the independent auditor the matters required to be discussed by Statement on Auditing Standards No. 61 related to the conduct of the audit, including any difficulties encountered in the course of the audit work, any restrictions on the scope of activities or access to requested information, and any significant disagreements with management.

Review disclosures made to the audit committee by the Company’s CEO and CFO during their certification process for the Form 10-K and Form 0-Q about any significant deficiencies in the design or operation of internal controls or material weaknesses therein and any fraud involving management or other employees who have a significant role in the Company’s internal controls.

Compliance Oversight

Review and advise the board with respect to the effectiveness of the Company’s system for monitoring compliance with the laws and regulations, and with the Company’s Ethics Policy and periodically obtain any required reports and assurances from the independent accountant, management, internal auditor, and compliance officer.

Discuss with management and the independent auditor any correspondence with regulators or governmental agencies, including Federal, State and local tax matters, and any published reports which raise material issues regarding the Company’s financial statements or accounting policies.

On at least an annual basis, review with the Company’s legal counsel, any legal compliance matters, including corporate securities trading policies, and NASDAQ stock market requirements that could have a significant impact on the organization’s financial statements, the Company’s compliance with applicable laws and regulations, and inquiries received from regulators or governmental agencies.

Compliance Oversight Continued

Establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and the confidential, submission by employees of concerns regarding questionable accounting or auditing matters.

Ensure that an ethics policy is formalized in writing and that management takes the necessary actions to disseminate the information and educate employees. The program for monitoring compliance and updates from Human Resources shall be reviewed periodically.

Internal Audit

Approve the internal auditors’ proposed audit schedule and plans annually, and review audit activities and the organizational structure of the internal audit function regularly.

Review the significant reports to management prepared by the internal auditing department and management’s responses.

Review the internal audit charter annually. Review the appointment and/or replacement of the head of internal auditing function as necessary.

Independent Accountant

Preapprove all auditing services and permitted non-audit services to be performed for the Company by the independent accountant in accordance with Section 10A(i) of the Exchange Act. Approvals of all fees paid to the independent accountant shall be disclosed in the Company’s annual proxy statements and annual reports as required by Section 13(a) of the Exchange Act. In carrying out its duty to approve fees and terms of the independent accountant, if the audit committee approves an audit service within the scope of engagement of the independent accountant, such audit service shall be deemed to have been preapproved. The audit committee may delegate its duties to preapprove auditing services and permitted non-audit services to its chairman or one or more other Audit committee members.

At least annually, obtain and review a report by the independent accountant describing (a) the independent account’s internal quality-control procedures, (b) any material issues raised by the most recent internal quality-control review, or peer review, of the independent accountant’s, 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 independent accountant, (c) any steps taken to deal with any such issues and (d) all relationships between the independent accountant and the Company.

Evaluate the qualifications, performance, and independence of the independent accountant, including considering whether the independent account’s quality controls are adequate and whether the provision of permitted non-audit services is compatible with maintaining the independent accountant’s independence. In making its evaluation, the audit committee shall take into account the opinion of management and the internal auditor. The audit committee’s evaluation will include a review of the experience, qualifications and performance of the senior members of the independent accountant team, including the lead partner of the independent accountant. The audit committee will oversee the rotation of the lead (or coordinating) audit partner as required by law and will consider whether, in order to assure continuing independent accountant’s independence, there should be regular rotation of the audit firm itself. The audit committee will present its conclusions regarding the independent accountant to the board of directors, and if so determined by the audit committee, recommend that the board take additional action to satisfy itself of the qualifications, performance and independence of the independent accountant.

Set policies for the Company’s hiring or employees or former employees of the independent accountant, particularly in light of the prohibition on employment outlined in Section 10A (I) of the Exchange Act.

Require the independent accountant to communicate whether it is aware of any reportable illegal acts.

Discuss with the independent accountant matters related to the conduct of the audit as required in Statement on Auditing Standards No. 61. In particular, the audit committee will discuss quarterly reports from the independent accountants on:

 

(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, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the independent auditors; and

 

 

 

(c)

 

other material written communications between the independent auditors and management, such as any management letter or schedule of unadjusted differences.

 

     Discuss the following with independent accountants:

 

(a)

 

the adoption of, or changes to, the Company’s significant auditing and accounting principles and practices suggested by the independent accountant, internal auditors or management;

 

 

(b)

 

the management letter provided by the independent accountant and the Company’s response to that letter; and

 

 

 

(c)

 

any difficulties encountered in the course of the audit work, including any restrictions on the scope of activities or access to requested information, and any significant disagreements with management.

 

Other Responsibilities

The Company officers who are required by law to certify the Company’s annual or quarterly reports will disclose to the audit committee and to the independent accountants that information which is required to be disclosed to them by Section 302 of the Sarbanes-Oxley Act.

Other Responsibilities Continued

Review financial and accounting personnel succession planning within the Company.

Review and reassess the audit committee charter annually.

Perform any other activities consistent with this charter, the Company’s by-laws, and governing law, as the committee or the board deems necessary or appropriate.