AMENDED AND RESTATED CHARTER OF THE
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
PACIFIC ETHANOL, INC.
As Amended and Restated June 15, 2005
PURPOSE AND SCOPE
The primary function of the Audit Committee (the "COMMITTEE") of the
Board of Directors (the "BOARD") of Pacific Ethanol, Inc. (the "COMPANY") is to
(a) assist the Board in fulfilling its responsibilities by reviewing: (i) the
financial reports provided by the Company to the Securities and Exchange
Commission ("SEC"), the Company's shareholders or to the general public, and
(ii) the Company's internal financial and accounting controls, (b) oversee the
appointment, compensation, retention and oversight of the work performed by any
independent public accountants engaged by the Company and (c) recommend,
establish and monitor procedures designed to improve the quality and reliability
of the disclosure of the Company's financial condition and results of
The Committee shall be comprised of a minimum of three or more
directors as appointed by the Board of Directors, who shall meet the
independence, audit committee composition requirements promulgated by the SEC,
the Nasdaq National Market, any exchange upon which securities of the Company
are traded, or any governmental or regulatory body exercising authority over the
Company (each a "REGULATORY BODY" and collectively, the "REGULATORY BODIES"), as
in effect from time to time, and each member of the Committee shall be free from
any relationship that, in the opinion of the Board of Directors, would interfere
with the exercise of his or her independent judgment as a member of the
At the time of his or her appointment to the Committee, each member of
the Committee shall be able to read and understand fundamental financial
statements, including a balance sheet, cash flow statement and income statement.
At least one member of the Committee shall have employment experience in finance
or accounting, requisite professional certification in accounting, or other
comparable experience or background which results in the individual's financial
sophistication, including being or having been a chief executive officer, chief
financial officer or other senior officer with financial oversight
responsibilities. Further, at least one member of the Committee shall qualify as
an "audit committee financial expert" as such term is defined by the Securities
and Exchange Commission pursuant to Section 407 of the Sarbanes-Oxley Act of
The members of the Committee shall be elected by the Board of Directors
at the meeting of the Board of Directors following each annual meeting of
stockholders and shall serve until their successors shall be duly elected and
qualified or until their earlier resignation or removal. Unless a Chair is
elected by the full Board of Directors, the members of the Committee may
designate a Chair by majority vote of the full Committee membership.
RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties, the Committee shall carry
out the following specific activities:
A. DOCUMENT REVIEW
1. Review and reassess the adequacy of this Charter
periodically as conditions dictate, but at least annually, and
recommend any proposed changes to the Board of Directors for approval.
2. Review with representatives of management and
representatives of the independent accounting firm the Company's
audited annual financial statements prior to their filing as part of
the Annual Report on Form 10-KSB. After such review and discussion, the
Committee shall recommend to the Board of Directors whether such
audited financial statements should be published in the Company's
annual report on Form 10-KSB. The Committee shall also review the
Company's quarterly financial statements prior to their inclusion in
the Company's quarterly SEC filings on Form 10-QSB.
3. Take steps designed to insure that the independent
accounting firm reviews the Company's interim financial statements
prior to their inclusion in the Company's quarterly reports on Form
4. Review and discuss with management and the independent
accountants any material financial or non-financial arrangements of the
Company that do not appear on the financial statements of the Company.
B. INDEPENDENT ACCOUNTING FIRM
1. The Committee shall be directly responsible for the
appointment, compensation, retention and oversight of the work of any
independent accounting firm engaged by the Company for the purpose of
preparing or issuing an audit report or related work. The Committee
shall have the ultimate authority and responsibility to appoint,
evaluate and, when warranted, replace such independent accounting firm
(or to recommend such replacement for shareholder ratification in any
2. Resolve any disagreements between management and the
independent accounting firm as to financial reporting matters.
3. Instruct the independent accounting firm that it should
report directly to the Committee on matters pertaining to the work
performed during its engagement and on matters required by applicable
Regulatory Body rules and regulations.
4. On an annual basis, receive from the independent accounting
firm a formal written statement identifying all relationships between
the independent accounting firm and the Company consistent with
Standards Board Standard 1. The Committee shall actively Independence
engage in a dialogue with the independent accounting firm as to any
disclosed relationships or services that may impact its independence.
The Committee shall take appropriate action to oversee the independence
of the independent accounting firm.
5. On an annual basis, discuss with representatives of the
independent accounting firm the matters required to be discussed by
Statement on Auditing Standards 61, as it may be modified or
6. Meet with the independent accounting firm prior to the
audit to review the planning and staffing of the audit and consider
whether or not to approve the auditing services proposed to be
7. Evaluate the performance of the independent accounting firm
and consider the discharge of the independent accounting firm when
circumstances warrant. The independent accounting firm shall be
ultimately accountable to the Board of Directors and the Committee.
8. Consider in advance whether or not to approve any non-audit
services to be performed by the independent accounting firm required to
be approved by the Committee pursuant to the rules and regulations of
any applicable Regulatory Body.
9. The Committee shall have the authority to oversee and
determine the compensation of any independent accounting firm engaged
by the Company.
10. Ensure the rotation of the audit partners as required by
Section 10A(j) of the Securities Exchange Act of 1934, as amended, and
consider whether, in order to assure continuing auditor independence,
it is appropriate to adopt a policy of rotating the independent
auditing firm on a regular basis.
11. Recommend to the Board of Directors policies for the
Company's hiring of employees or former employees of the independent
auditor consistent with Section 10A(l) of the Securities Exchange Act
12. At least annually, obtain written confirmation from the
independent accountants that, in the independent accountants'
professional judgment, the independent accountants are "independent" of
the Company within the meaning of the federal securities laws.
13. Periodically consult with the independent accountants out
of the presence of management about internal controls and the fullness
and accuracy of the Company's financial statements.
C. FINANCIAL REPORTING PROCESSES
1. In consultation with the independent accounting firm and
management, review annually the adequacy of the Company's internal
financial and accounting controls.
2. Review disclosures made to the Committee by the Company's
chief executive officer and chief financial officer in connection with
their certifications of the Company's reports on Form 10-KSB and Form
10-QSB, including disclosures concerning (a) evaluations of the design
and operation of the Company's internal financial and accounting
controls, (b) any significant deficiencies discovered in the design and
operation of the Company's internal controls which could adversely
affect the Company's ability to record, process, summarize, and report
financial data, and (c) any fraud, whether or not material, that
involves management or other employees who have a significant role in
the Company's internal controls. The Committee shall direct the actions
to be taken and/or make recommendations to the Board of Directors of
actions to be taken to the extent such disclosures indicate the finding
of any significant deficiencies in internal controls or fraud.
3. Regularly review the Company's critical accounting policies
and accounting estimates resulting from the application of these
policies and inquire at least annually of both the Company's internal
auditors and the independent accounting firm as to whether either has
any concerns relative to the quality or aggressiveness of management's
4. Consider the independent accountant's judgments about the
quality and appropriateness of the Company's accounting principles as
applied in its financial reporting.
5. Consider and approve, if appropriate, major changes to the
Company's auditing and accounting principles and practices as suggested
by the independent accountants or management.
6. Establish regular and separate reporting to the Audit
Committee by each of management and the independent accountants
regarding any significant judgments made in management's preparation of
the financial statements and the view of each as to appropriateness of
7. Following completion of the annual audit, review separately
with each of management and the independent accountants any significant
difficulties encountered during the course of the audit, including any
restrictions on the scope of work or access to required information.
8. Review and resolve any significant disagreement among
management and the independent accountants in connection with the
preparation of the financial statements.
9. Review with the independent accountants and management the
extent to which changes or improvements in financial or accounting
practices, as approved by the Audit Committee, have been implemented.
10. Establish procedures for the receipt, retention and
treatment of complaints received by the Company regarding accounting,
internal accounting controls, or auditing matters.
11. Establish procedures for the confidential, anonymous
submission by employees of the Company of concerns regarding
questionable accounting or auditing matters.
1. Obtain from the independent auditor assurance that Section
10A(b) of the Securities Exchange Act of 1934, as amended, has not been
2. Obtain reports from management and the independent auditor
that the Company and its subsidiaries and affiliated entities are in
conformity with applicable legal requirements and the Company's Code of
Business Conduct and Ethics.
3. To the extent deemed necessary by the Committee, it shall
have the authority to engage outside counsel, independent accounting
consultants and/or other experts at the Company's expense to review any
matter under its responsibility.
4. Establish written 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
5. Investigate any allegations that any officer or director of
the Company, or any other person acting under the direction of any such
person, took any action to fraudulently influence, coerce, manipulate,
or mislead any independent public or certified accountant engaged in
the performance of an audit of the financial statements of the Company
for the purpose of rendering such financial statements materially
misleading and, if such allegations prove to be correct, take or
recommend to the Board of Directors appropriate disciplinary action.
6. Discuss with the Company's legal counsel matters that may
have a material impact on the financial statements or the compliance
7. Review and approve in advance any proposed related party
8. Perform any other activities consistent with this Charter,
the Company's bylaws and governing law, as the Audit Committee or the
Board of Directors deems necessary or appropriate.
1. Prepare, in accordance with the rules of the SEC as
modified or supplemented from time to time, a written report of the
audit committee to be included in the Company's annual proxy statement
for each annual meeting of stockholders.
2. To the extent required by any Regulatory Body, instruct the
Company's management to disclose in its Form 10-KSB and Form 10-QSB's
the approval by the Committee of any nonaudit services performed by the
independent accounting firm, and review the substance of any such
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.