CORPORATE GOVERNANCE - Audit Committee Charter

 

Purpose

 

The purpose of the Audit Committee (the "Committee") of Petrohawk Energy Corporation (the "Company") is to assist the Board of Directors (the "Board") of the Company to oversee the accounting and financial reporting process and audits of the financial statements of the Company and to assist in fulFiling its responsibilities as to the quality and integrity of the Company’s financial reports. In so doing, the Committee will be the Board’s principal agent in overseeing:

 

The integrity of the Company’s financial statements and appropriateness of the Company’s accounting policies and procedures;

The Company’s compliance with legal and regulatory requirements;

The adequacy of the Company’s internal controls;

The review and approval of all Company transactions involving a related party;

The independence and capability of the Company’s independent auditors; and

The performance and sufficiency of the Company’s internal and independent auditors.

While the Committee has the responsibilities and powers set forth in this charter, it is not the duty of the 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. These are the responsibility of management and the independent auditors.

 

Composition

 

The Committee shall be composed of at least three (3) members of the Board who are "independent," as defined and required pursuant to the criteria for independence set forth under Rule 10A-3 of the Securities Exchange Act of 1934, as may be amended from time to time (the "Exchange Act"), and as defined and required under the Nasdaq rules, as may be amended from time to time, or as otherwise required by securities laws, rules and regulations and the Nasdaq rules from time to time. Committee members (i) may not accept any consulting, advisory or other compensatory fee from the Company or any of its subsidiaries, other than in his or her capacity as a member of the Board or any committee of the Board, and (ii) may not be an "Affiliate" of the Company or any subsidiary of the Company, as such term is defined in Rule 10A-3 under the Exchange Act.

 

Each Committee member must be able to read and understand fundamental financial statements, including a company’s balance sheet, income statement and cash flow statement, at the time of the Committee member’s appointment. No Committee member shall have participated in the preparation of the financial statements of the Company or any current subsidiary of the Company at any time during the past three (3) years. At least one Committee member shall qualify as an audit committee financial expert, if and as required by the SEC rules and the Nasdaq rules.

 

The members of the Committee shall be appointed by the full Board after an affirmative judgment and declaration by the Board that each member is "independent" and shall serve until their successors shall be duly elected and qualified. Unless a Chairperson is appointed by the full Board, the members of the Committee shall designate a Chairperson by majority vote of all Committee members.

 

At its discretion, the Committee shall have direct access to the independent auditors, outside counsel and the Controller of the Company and any other employee of the Company. All employees will be directed to cooperate with respect thereto as requested by members of the Committee. The members of the Committee shall also have the ability to engage, at the Company’s expense, independent outside counsel and any other consultants or experts the members deem appropriate in order to carry out their responsibilities.

 

Meetings

 

The Committee shall meet at least four times annually but in any case as often as necessary to carry out its responsibilities.

 

The Chief Financial Officer and representatives of the independent auditors may be requested to attend a portion of the Committee meetings. The Chairperson may also ask other officers and employees of the Company to attend.

 

The Committee shall establish such procedures, which are not inconsistent with this charter, any applicable rule, or regulation, as its members deem necessary.

 

Minutes of each meeting shall be kept, and the Committee will report the results of its meetings to the Board.

 

Authority and Specific Duties

 

The Committee is granted the authority to perform each of the specific duties enumerated below:

 

Independent Audit

1. Be responsible for the appointment, compensation, retention, oversight and termination of the work of a registered public accounting firm to be engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company. The independent auditor shall report directly to the Audit Committee. If the appointment of the independent auditors is submitted to any ratification by stockholders, the Audit Committee shall be responsible for making the recommendation of the independent auditors.

 

2. Obtain annually from the independent auditors a written list of all of their relationships with, and professional services provided to, the Company and its related entities, as required by Independence Standards Board Standard No. 1, Independence Discussions With Committees and applicable standards and rules. The Committee shall also review no less frequently than annually a report from the independent auditors regarding (a) the independent auditors’ internal quality-control procedures, (b) any material issues raised by the most recent internal quality-control review, or peer review, of the independent auditors, 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 auditors, (c) any steps taken to deal with any such issues and (d) all relationships between the independent auditors and the Company as well as all other reports from the independent auditors, including the annual comments from the independent auditors on accounting procedures and systems of control. This evaluation shall include the review and evaluation of the lead partner of the independent auditors and shall ensure the rotation of partners in accordance with the SEC rules and the securities laws. In addition, the Committee shall consider the advisability of regularly rotating the audit firm in order to maintain the independence between the independent auditors and the Company.

 

3. Evaluate the qualifications, performance and independence of the independent auditors and the senior members of the independent audit team, taking into account the opinions of management and recommend for approval by the Board the independent auditing firm to be engaged to conduct the annual audit of the financial statements of the Company and its subsidiaries for the ensuing year.

 

4. Review and approve the fee proposed by the independent auditors for their annual examination and review the contents of their engagement letter.

 

5. Review with the independent auditors, and pre-approve (prior to the beginning of their audit) the scope of their examination, the extent to which the planned audit scope can be relied upon to detect weaknesses in internal controls and to expose any activities that might be deemed illegal or otherwise improper, and the staffing of the audit including the responsibilities and staffing of the Company’s internal audit personnel who will assist in the audit.

 

6. Inquire as to the extent to which the Company uses external accountants, if any, other than the principal independent auditors, and understand the rationale for using them and the extent of the review of their work to be performed by the principal auditors.

 

7. Meet with the independent auditors without management present, review the audit opinion and inquire as to:

 

Whether there were any difficulties during their audit;

Whether there were any accounting or disclosure issues not resolved to their satisfaction;

Whether they have any concerns about the quality of the Company’s accounting personnel or the Company’s reporting policies and practices;

Whether there were any matters (including matters affecting their independence) that should be discussed with the Committee that have not been raised or covered elsewhere; and

Any other matters which the Committee deems relevant.

8. Review the independent auditors’ letter to management and ascertain that management has adequately responded to the letter.

 

9. Review and pre-approve management’s plans for engaging the Company’s independent auditing firm to perform permitted non-audit services during the coming year considering the possible effect, if any, of such engagements on the firm’s independence. Report such pre-approvals for disclosure in the Company’s periodic reports. The authority to pre-approve such plans may be delegated to one or more members of the Committee, who shall report any decision to pre-approve any services to the full Committee at its regularly scheduled meetings.

 

Financial Reporting

 

10. Review and discuss prior to public dissemination the annual audited and quarterly unaudited financial statements with management and the independent auditors, including major issues regarding accounting, disclosure, and auditing procedures and practices as well as the adequacy of internal controls that could materially affect the Company’s financial statements. The review shall include the Company’s disclosures under "Management’s Discussion and Analysis of Financial Condition and Results of Operations." Based on the annual review, recommend to the Board inclusion of the financial statements in the Annual Report on the Form 10-K.

 

11. Discuss with management and the independent auditors significant financial reporting issues, judgments and use of estimates (including proved reserve estimates) 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.

 

12. Review with management the existence and substance of any significant accounting accruals, reserves or estimates that had a material impact on the financial statements.

 

13. Review and discuss reports from the independent auditors on:

 

All critical accounting policies and practices to be used;

All alternative treatments of financial information within generally accepted accounting principles that have been discussed with management, ramification of the use of such alternative disclosures and treatments, and the treatment preferred by the independent auditors; and

Other material written communications between the independent auditors and management, such as any management letter.

14. Discuss with management the Company’s earnings press releases as well as financial information and earnings guidance provided to analysts and rating agencies.

 

15. Inquire of and discuss with management and the independent auditors

 

Whether there were any significant financial reporting issues discussed during the year and, if so, how they were resolved and whether a second opinion was sought;

Major issues regarding financial statement presentations;

The nature of any material correcting adjustments identified by the independent auditors; and

The methods used to account for significant unusual transactions.

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

 

17. Discuss with management the Company’s major financial risk exposures and the steps the management has taken to monitor and control such exposures, including the substance of any significant litigation, contingencies or claims that had, or may have, a significant impact on the financial statements.

 

18. Discuss with management the open years on federal income tax returns and whether there are any significant items that have been, or are expected to be, disputed by the Internal Revenue Service or applicable taxing authorities and inquire as to the adequacy of any related tax accruals.

 

19. Discuss at least annually with the independent auditors the matters required to be discussed by Statement of Auditing Standards No. 61 – Communication with Audit Committees.

 

20. Obtain quarterly assurances from the senior internal auditing executive and management that the system of internal controls is adequate and effective. Obtain annually a report from the independent auditors, with attestation, regarding management’s assessment of the effectiveness of the internal control structure and procedures for financial reporting.

 

Internal Controls

 

21. Review the appointment and replacement of the senior internal auditing executive.

 

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

 

23. Discuss with the independent auditors and management the internal audit personnel responsibilities, budget and staffing and any recommended changes in the planned scope of the internal audit.

 

Compliance Oversight Responsibilities

 

24. Obtain from the independent auditors assurance that Section 10A (b) of the Exchange Act has not been implicated.

 

25. Establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal controls or auditing matters, and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters, and investigate any other matters brought to the Committee’s attention within the scope of its duties and retain outside professional advice for this purpose if, in the Committee’s judgment, that is appropriate.

 

26. Discuss with management and the independent auditors any correspondence with regulators or governmental agencies and any published reports which raise material issues regarding the Company’s financial statements or accounting policies.

 

27. Discuss with the Company’s outside counsel legal matters that may have a material impact on the financial statements or the Company’s compliance policies.

 

Other

 

28. Obtain from the Company, appropriate funding, as determined by the Committee, in its capacity as a committee of the board of directors, for payment of:

 

Compensation to independent auditors engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company;

Compensation to any advisers employed by the Committee as described above;

Ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties.

29. Review and reassess the adequacy of this charter at least annually. If necessary, make recommendations to the Board for amendment of this charter. The Committee will annually prepare a report to be included in the Company’s annual proxy statement as required by the SEC.

 

30. Review and approve all related party transactions of the Company to the extent required by Nasdaq rules.

 

31. Report regularly to the Board with respect to any issues that arise with respect to the quality or integrity of the Company’s financial statements, the Company’s compliance with legal or regulatory requirements, the performance and independence of the Company’s independent auditors or the performance of the internal audit function.