PRENTISS PROPERTIES TRUST

 

 

 

AUDIT COMMITTEE CHARTER

 

 

 

Purpose

 

The Audit Committee is appointed by the Board of Trustees (the “Board”) of Prentiss Properties Trust (the “Company”) to: (a) assist the Board in monitoring (1) the quality and integrity of the financial statements of the Company; (2) the audit process; (3) the independent auditor’s qualifications and independence and their performance; (4) the performance of the Company’s internal audit function; (5) the operation of the system of internal controls and disclosure controls and procedures which management has established; and (6) the compliance by the Company with legal and regulatory requirements; (b) prepare the report required by the United States Securities and Exchange Commission (the “SEC”) for inclusion in the Company’s annual proxy statement; (c) retain and terminate the Company’s independent accountant; (d) approve/pre-approve audit and non-audit services to be performed by the independent accountant as required under the rules and regulations of the SEC and (e) perform such other functions as the Board may from time to time assign to the Committee.  The Audit Committee is expected to maintain free and open communication with the independent auditors, internal and external counsel and the management of the Company.

 

Committee Membership

 

The Audit Committee shall consist of no fewer than three, but not more than five, members. The members of the Audit Committee shall meet the independence requirements of the rules and regulations of the SEC and the New York Stock Exchange. No person may be made a member of the Audit Committee if his or her service on the Audit Committee would violate any restriction on service imposed by any rule or regulation of the SEC or the New York Stock Exchange.  The Audit Committee shall be composed of Trustees who are financially literate as required by the New York Stock Exchange which requires, in addition to the financial literacy required of all members, that at least one member of the Audit Committee shall have accounting or related financial management expertise, as the Board interprets such qualification in its business judgment.  In addition, any member of the Audit Committee need not be an “audit committee financial expert” as defined under the rules and regulations of the SEC.  Audit Committee members may enhance their familiarity with finance and accounting by participating in educational programs conducted by the Company or an outside consultant.

 

 

 

The members of the Audit Committee shall be appointed annually by the Board on the recommendation of the Nominating Committee.  Audit Committee members may be removed or replaced, with or without cause, by the Board.  One of the members shall be elected annually Chairman of the Audit Committee by the Board.  The Chairman will be responsible for leadership of the Audit Committee, including preparing the agenda, presiding over the meetings, making Audit Committee assignments and reporting to the Board.  The Chairman will also maintain regular liaison with the CEO, CFO, and CAO of the Company and lead partner of the independent auditor and the head of the internal audit function.

 

 

 

Committee Authority and Responsibilities

 

The Audit Committee shall have the sole authority to appoint or replace the independent auditor, and shall approve all audit engagement fees and terms , including compensation, and all significant non-audit engagements with the independent auditors.  The Audit Committee shall be directly responsible for the oversight of the work of the independent auditor engaged (including resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work or performing other audit, review or attest services for the Company. The independent auditor shall report directly to the Audit Committee. The Audit Committee may not engage the Company’s independent auditors to perform non-audit services which are restricted by applicable law including the rules and regulations of the SEC and the New York Stock Exchange.  The Audit Committee shall pre-approve audit and non-audit services to be performed by the independent accountant as required under the rules and regulations of the SEC. The Audit Committee shall consult with management but shall not delegate these responsibilities.  Except as otherwise provided for in this paragraph, the Audit Committee may form and delegate authority to subcommittees when appropriate . The Audit Committee shall also have the authority to engage outside advisors, including counsel, as it determines necessary to carry out its duties.

 

The Audit Committee shall receive funding from the Company, as determined by the Audit Committee, for payment of compensation to any advisors employed by the Audit Committee, and to any registered public accounting firm engaged for the purpose of rendering or issuing an audit report or related work or performing other audit, review or attest services for the Company. The Audit Committee shall make regular reports to the Board.  The Audit Committee shall review and reassess the adequacy of this Charter annually and recommend any proposed changes to the Board for approval.

 

In carrying out its responsibilities, the Audit Committee believes its policies and procedures should remain flexible, in order to best react to changing conditions and to ensure to the Trustees and shareholders that the accounting and reporting practices of the Company are in accordance with all requirements and are of the highest quality.

 

In carrying out these responsibilities, the Audit Committee will:

 

Financial Reporting Processes

 

 

 

š       In consultation with the independent auditors and management, review the integrity of the Company’s financial reporting processes, both internal and external.

 

š       Review with the independent auditors and the Company’s financial and accounting personnel, the adequacy and effectiveness of the accounting and financial controls of the Company, and elicit any recommendations for the improvement of such internal control procedures or particular areas where new or more detailed controls or procedures are desirable. Particular emphasis should be given to the adequacy of such internal controls to expose any payments, transactions, or procedures that might be deemed illegal or otherwise improper. Further, the Audit Committee periodically should review Company policy statements to determine their adherence to the Company’s Code of Conduct.

 

š       Consider the independent auditors’ judgments about the quality and appropriateness of the Company’s accounting principles as applied in its financial reporting.  Consider alternative accounting principles and estimates.

 

š       Consider and approve, if appropriate, major changes to the Company’s auditing and accounting principles and practices, including internal controls, as suggested by the independent auditors or management.

 

š       Discuss with management and legal counsel the status of pending litigation, taxation matters, compliance policies and other areas of oversight to the legal and compliance area as may be appropriate.

 

 

 

Financial Statement and Disclosure Matters

 

Review the following items with management and the independent auditors upon the completion of the annual audit and before issuance of the financial statements and the filing of the Form 10-K:

 

(a)    The Company’s annual financial statements and related notes and the disclosures under Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

(b)   The results of the independent auditors’ audit of the financial statements and the report thereon.

 

(c)    The audit adjustments proposed by the independent auditors, whether or not recorded.

 

(d)   The qualitative judgments about the appropriateness and acceptability of accounting principles, financial disclosures and underlying estimates, the clarity of the financial disclosure practices used or proposed to be used, and other significant decisions made in preparing the financial statements.

 

(e)    Any other matters about the audit procedures or findings that SAS No. 61, as amended, requires the independent auditors to discuss with the Audit Committee.

 

(f)    The contents of the certificates of the Chief Executive Officer and Chief Financial Officer required pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.

 

Based on the review and other procedures performed as set forth in this Charter, the Audit Committee shall make its recommendation to the Board as to the inclusion of the Company’s audited financial statements in the Company’s Annual Report on Form 10‑K.

 

Review the following items with management and the independent auditors before the filing of Form 10-Q:

 

(a)    The Company’s quarterly financial statements and related notes and the disclosures under Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

(b)   The results of the independent auditors’ review of the financial statements.

 

(c)    The audit adjustments proposed by the independent auditors, whether or not recorded.

 

(d)   The qualitative judgments about the appropriateness and acceptability of accounting principles, financial disclosures and underlying estimates, the clarity of the financial disclosure practices used or proposed to be used, and other significant decisions made in preparing the financial statements.

 

(e)    Any other matters about the review procedures or findings that SAS No. 71, as amended, requires the independent auditors to discuss with the Committee.

 

(f)    The contents of the certificates of the Chief Executive Officer and Chief Financial Officer required pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.

 

š       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, the development, selection and disclosure of critical accounting estimates, and analyses of the effect of alternative assumptions, estimates or GAAP methods on the Company’s financial statements, and a description of any transactions as to which management obtained Statement on Auditing Standards No. 50 letters.

 

š       Review any restatements of financial statements that have occurred or were recommended.

 

š       Discuss annually with management and the independent auditors the Company’s current property market values and how such values compare to the current property book carrying values. Discuss any accounting and reporting issues resulting from such review.

 

š       Discuss with management the Company’s quarterly and annual earnings press releases, prior to their release, 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.

 

š       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.

 

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

 

š       Provide sufficient opportunity for the independent auditors to meet with the members of the Audit Committee without members of management present. Among the items to be discussed in these meetings are the independent auditor’s evaluation of the Company’s financial and accounting personnel, and the cooperation that the independent auditors received during the course of the audit.

 

š       Discuss with the independent auditor the matters required to be discussed by Statement on Auditing Standards No. 61 relating to the conduct of the audit.  In particular, discuss:

 

(a)    The adoption of, or changes to, the Company’s significant auditing and accounting principles and practices as suggested by the independent auditor, internal auditors or management.

 

(b)   The management letter provided by the independent auditor and the Company’s response to that letter.

 

(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.

 

š       Prepare the report required by the rules of the SEC to be included in the Company’s annual proxy statement.

 

š       Review any report or other disclosure prepared by management regarding its assessment of the internal controls of the Company.

 

š       Review with management and the independent auditors any correspondence with regulators or government agencies and any employee complaints or published reports that raise material issues regarding the Company’s financial statements or accounting policies.

 

Oversight of the Company’s Relationship with the Independent Auditor

 

š       The independent auditor is ultimately accountable to the Audit Committee, and the Audit Committee has ultimate authority and responsibility to select, evaluate and, where appropriate, replace the independent auditor.

 

š       Review the experience and qualifications of the senior members of the independent auditor team.

 

š       Select annually the independent auditors to audit the financial statements of the Company.  In so doing, the Audit Committee will obtain and review a report from the independent auditor at least annually regarding

 

(a)    the independent auditor’s internal quality-control procedures,

 

(b)   any material issues raised by the most recent quality-control review, or peer review, of the firm, 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 firm,

 

(c)    any steps taken to deal with any such issues, and

 

(d)   all relationships between the independent auditor and the Company.

 

Evaluate the qualifications, performance and independence of the independent auditor, including considering whether the auditor’s quality controls are adequate and the provision of non-audit services is compatible with maintaining the auditor’s independence, and taking into account the opinions of management. 

 

š       The Audit Committee is responsible for ensuring that the independent auditor submits on a periodic basis to the Audit Committee a formal written statement delineating all relationships between the independent auditor and the Company, and the Audit Committee is responsible for actively engaging in a dialogue with the independent auditor with respect to any disclosed relationships or services that may impact the objectivity and independence of the independent auditor.  In making this determination, the Audit Committee shall consider not only auditing and other traditional accounting functions performed by the independent accountants, but also consulting, legal, information technology services and other professional services rendered by the independent auditors and their affiliates.  The Audit Committee should also consider whether the provision of any of these non-audit services is compatible with the independence standards under the guidelines of the SEC and of the Independence Standards Board.  The Audit Committee shall have sole authority to approve (1) all audit and non-audit services (other than those non-audit services prohibited by law) to be provided by the independent auditors and (2) all fees and other terms of engagement of the independent auditors in providing such services.  Before the independent auditors are engaged to perform any such audit or non-audit services, the Audit Committee must review and approve such services in accordance with the rules and regulations of the SEC.

 

š       In order to assure continuing auditor independence, the Audit Committee shall rotate the lead audit partner ,review partner and any other audit partners or staff, as required by the rules and regulations of the SEC, every five years and shall consider whether it is appropriate to adopt a policy of rotating the independent auditing firm on a regular basis.

 

š       Recommend to the Board policies for the Company’s hiring of employees or former employees of the independent auditor who were engaged on the Company’s account.

 

š       Meet with the independent auditor and financial management of the Company prior to the audit to review the scope of the proposed audit for the current year, the audit procedures to be utilized and the staffing of the audit, and at the conclusion thereof review such audit, including any comments or recommendations of the independent auditor.

 

š       Provide opportunity for management to discuss directly with the members of the Audit Committee the independent auditors’ performance.

 

š       Request management to advise the Audit Committee when it seeks a second opinion on a significant accounting issue and when independent auditors other than the primary independent auditor are to be used and the rationale for using them.

 

Oversight of the Company’s Internal Audit Function

 

š       Review the significant reports prepared by the internal audit function.

 

š       Discuss annually with the independent auditor and management, the internal audit function responsibilities and planned work to be done.

 

š       Consider and review with the independent auditor and management:

 

(a)    Significant findings during the year from the performed work.

 

(b)   Any changes required in the planned scope of the internal audit work performed.

 

Process Improvement

 

š       Establish regular and separate systems of reporting to the Audit Committee by management and the independent auditors regarding any significant judgments made in management’s preparation of the financial statements and the view of each as to appropriateness of such judgments.

 

š       Following completion of the annual audit, review separately with management and the independent auditors any significant difficulties encountered during the course of the audit, including any restrictions on the scope of work or access to required information.

 

š       Review with the independent auditor any problems or difficulties they encountered and any management letter provided by the auditor and the Company’s response to that letter.  Such review should include:

 

(a)    Any difficulties encountered in the course of the audit work, including any restrictions on the scope of activities or access to required information, and any disagreements with management.

 

(b)   Any changes required in the planned scope of the external audit.

 

š       Review with the independent auditors and management the extent to which changes or improvements in financial or accounting practices, as approved by the Audit Committee, have been implemented.  This review should be conducted at an appropriate time subsequent to implementation of changes or improvements, as decided by the Audit Committee.

 

 

 

Compliance Oversight Responsibilities

 

š       Obtain from the independent auditor assurance that Section 10A of the Securities Exchange Act of 1934 has not been implicated.

 

š      Obtain reports from management that the Company and its subsidiaries and other affiliated entities are in conformity with applicable legal requirements and the Company’s Code of Conduct.

 

š       Review reports and disclosures of insider and affiliated party transactions.  Establish and maintain appropriate procedures for (1) the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters and (2) the confidential, anonymous submission by employees of concerns regarding accounting or auditing matters.  Advise the Board with respect to the Company’s policies and procedures, including its disclosure controls and procedures and internal controls, regarding compliance with applicable laws and regulations and with the Company’s Code of Conduct.  Review and approve all waivers for executive officers and Trustees of the Company’s Code of Conduct.

 

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

 

š      Periodically discuss with the Company’s General Counsel and the Company’s Corporate Secretary (who also functions as the chief administrative officer) the legal matters that may have a material impact on the financial statements or the Company’s compliance policies.

 

š       Review the Company’s Policy Guide on Standards of Conduct and management’s procedures for monitoring and ensuring compliance.

 

Meetings

 

The Audit Committee shall meet at least quarterly, and as many additional times as the Audit Committee deems necessary.  Meetings of the Audit Committee for the consideration of pertinent matters may be requested by the Chairman of the Board, the President of the Company, the Chairman of the Audit Committee or any member of the Audit Committee by request of the Chairman of the Audit Committee.  The Audit Committee may meet by telephone conference call or by any other means permitted by law or the Company’s Bylaws.  A majority of the members of the Audit Committee shall constitute a quorum.  The Audit Committee shall act on the affirmative vote of a majority of members present at a meeting at which a quorum is present.  Without a meeting, the Audit Committee may act by unanimous written consent of all members.  The Chairman of the Audit Committee shall develop the agenda for each meeting and in doing so may consult with management or the Board.

 

As part of its policy to foster open communication, the Audit Committee should meet at least quarterly with management and the independent auditors in separate executive sessions to discuss any matters that the Audit Committee or any of these groups believe should be discussed privately.  In addition, the Audit Committee or at least its Chairman should meet with the independent auditors and management quarterly to review the Company’s financial statements prior to their public release.  The Audit Committee may ask members of management, employees, outside counsel, the independent auditor or others whose advice and counsel are relevant to the issues then being considered by the Audit Committee, to attend any meetings and to provide such pertinent information as the Audit Committee may request.

 

The Corporate Secretary need not be a member of the Audit Committee, but shall attend Audit Committee meetings and prepare minutes.  The Audit Committee shall keep written minutes of its meetings, which shall be recorded or filed with the books and records of the Company.  Any member of the Board shall be provided with copies of such Audit Committee minutes if requested and distributed to each member of the Audit Committee and the members of the Board who are not members of the Audit Committee.

 

Limitation of Audit Committee’s Role

 

While the Audit Committee has the responsibilities and powers set forth in this Charter, the Audit Committee’s role is one of oversight, where as the Company’s management is responsible for preparing the Company’s financial statements and the independent auditors are responsible for auditing those financial statements.  It is not the duty of the Audit Committee to plan or conduct audits or to determine or provide professional or special assurance or certification that the Company’s financial statements and disclosures are complete and accurate and are in accordance with generally accepted accounting principles and applicable rules and regulations.

 

Miscellaneous

Nothing contained in this Charter is intended to expand applicable standards of liability under statutory or regulatory requirements for the Trustees of the Company or members of the Audit Committee.  The purposes and responsibilities outlined in this Charter are meant to serve as guidelines rather than as inflexible rules and the Audit Committee is encouraged to adopt such additional procedures and standards as it deems necessary from time to time to fulfill its responsibilities.  This Charter, and any amendments thereto, shall be displayed on the Company’s web site and a printed copy of such shall be made available to any shareholder of the Company who requests it.