GLADSTONE Investment CORPORATION

AUDIT COMMITTEE CHARTER

Article I
PURPOSE

The purpose of the Audit Committee is to assist the Board of Directors of Gladstone Investment Corporation (the “Company”) in undertaking and fulfilling its oversight responsibilities in connection with:

(a)    reviewing the financial reports and other financial information prepared by the Company for submission to any governmental or regulatory body or the public and monitoring the integrity of such financial reports;

(b)   reviewing the Company’s systems of internal controls established for finance, accounting, legal compliance and ethics;

(c)    reviewing the Company’s accounting and financial reporting processes generally and the audits of the financial statements of the Company;

(d)   monitoring compliance with legal regulatory requirements;

(e)    monitoring the independence and performance of the Company’s independent public accountants; and

(f)     providing effective communication between the Board, senior and financial management and the Company’s independent public accountants.

In discharging its oversight role, the Committee is empowered to investigate any matter brought to its attention with full power and all necessary resources to retain special legal, accounting or other consultants to advise the Committee.

Article II
MEMBERSHIP AND TERM

2.1.  Membership.

  The Audit Committee shall consist of at least three members of the Company’s Board of Directors.  Committee members shall meet the independence requirements of the Nasdaq Stock Market, Section 10A(m)(3) of the Securities Exchange Act of 1934 (the “Exchange Act”) and the rules and regulations of the Securities and Exchange Commission (“Commission”).  Accordingly,

(a)    The Committee shall be composed entirely of Directors who are not “interested persons” (as defined in the Investment Company Act of 1940);

(b)   Each member of the Committee must be an independent, non-executive director free from any relationship that, in the judgment of the Board, may interfere with the exercise of the member’s independence;

(c)    Each member of the Committee must not receive any payments from the Company other than in such member’s capacity as a director;

(d)   Each member of the Committee must be financially literate1 at the time of appointment to the Committee; and

(e)    At least one member of the Committee must have past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in such individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities.

2.2.  Term. 

The members of the Committee shall be appointed for a one year term by the Board at its annual meeting.  Any vacancy occurring in the Committee shall be filled by the Board.  Any such Committee member so elected shall hold office for a term expiring at the Board’s next annual meeting.  Unless a Chairman of the Committee is designated by the Board, the members of the Committee will elect a Chairman by formal vote of the Committee’s full membership.

Article III
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
 

The Company’s independent public accountants shall be accountable to the Committee.  The Committee will ascertain that the independent public accountants will be available to the full Board at least annually (and more frequently if deemed appropriate by the Committee) to provide the Board with a timely analysis of significant financial reporting issues.  The Committee will not engage the independent public accountants to perform any services set forth on Section 10(A)(g) of the Exchange Act.

Article IV
MEETINGS

The Committee shall meet on a regular basis and is empowered to hold special meetings, as circumstances require, all in accordance with the Company’s charter and bylaws.

            a.   The Committee shall meet at least annually with management of the Company and with the Company’s independent public accountants to discuss any issues arising from the Committee’s oversight obligations.

            b.   The Committee shall meet at least annually with the independent public accountants (outside the presence of management) to discuss any issues arising from the Committee’s oversight obligations.

            c.   The Committee shall meet at least annually with management (outside the presence of the independent public accountants) to discuss management’s evaluation of the work performed by the independent public accountants and the appropriateness of their fees.

            d.   The Committee shall keep minutes of each meeting and those minutes shall be reported to the Board of Directors.                                                           

Article V
RESPONSIBILITIES

The following functions are the common recurring activities of the Committee in carrying out its oversight role.  These functions are set forth as a guide with the understanding that the Committee may diverge from this guide as appropriate given the circumstances.

(a)    Review and reassess the adequacy of this Committee and its Charter not less than annually and recommend any proposed changes to the Board for consideration and approval.

(b)   Review with management and the independent public accountants the audited financial statements and related footnotes, and the clarity of the disclosures in the financial statements, to be included in the Company’s Annual Report on Form 10-K (or the Annual Report to Stockholders if distributed prior to the filing of Form 10-K) prior to the filing of the Form 10-K, including a review of major issues regarding accounting and auditing principles and practices and any related party transactions as well as the adequacy of internal controls that could significantly affect the Company’s financial statements, and review and consider with the independent public accountants the matters required to be discussed by Statement on Auditing Standards (“SAS”) 61.

(c)    Review with management and the independent public accountants their judgments about the quality, not just the acceptability, of accounting principles, the reasonableness of significant judgments, and the clarity and transparency of the disclosures in the financial statements.

(d)   Prepare the report required by the rules of the Securities and Exchange Commission regarding the Committee, to be included in the Company’s annual proxy statement.  The Committee will include a statement within such report on whether the Committee has recommended that the financial statements be included in the Form 10-K.  The Committee should also ensure that a copy of the Committee’s Charter is included within the Company’s proxy statement at least once every three years. 

(e)    Discuss with the independent public accountants and management whether the Company’s quarterly financial statement as well as significant events, transactions and changes in accounting estimates were considered by the independent public accountants (after performing their required quarterly review) to have affected the quality of the Company’s financial reporting.  Such review will occur prior to the Company’s filing of the Form 10-Q and, to the extent practicable, prior to the quarterly earnings release.

(f)     Review the Company’s disclosures contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the Company’s Annual Report on Form 10-K, Quarterly Report on Form 10-Q or other pertinent form, as applicable.

(g)    Meet periodically with management and the independent public accountants to review the Company’s major financial risk exposures and the steps taken to monitor and control such exposures.

(h)    Discuss with management and the independent public accountants the effect of regulatory and accounting initiatives, including pronouncements by the Financial Accounting Standards Board, the Securities and Exchange Commission and other agencies or bodies, on the Company’s financial statements.

(i)      Review disclosures made to the Committee by the Company’s Chief Executive Officer and Chief Financial Officer, or the Company’s disclosure committee or any member thereof, during their certification process for the Form 10-K or Form 10-Q, as appropriate, 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.

(j)     Review any relevant financial reports or other financial information submitted to any governmental body, or the public, including any certification, report, opinion, or review rendered by the independent public accountants.

(k)   Review and discuss quarterly reports from the independent public accountants regarding:

(i)                  all critical accounting policies and practices to be used;

(ii)                all alternative disclosures and 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 public accountant; and

(iii)               other material written communications between the independent public accountant and management, such as any management letter or schedule of unadjusted differences.

(l)      Obtain from the independent public accountants their recommendation regarding internal controls and other matters relating to the accounting procedures and the books and records of the Company and the correction of controls deemed to be deficient.  After the completion of the audit, the Committee shall review with the independent public accountants any problems or difficulties the independent public accountants may have encountered.

(m)  Receive periodic reports from the independent public accountants regarding relationships between the independent public accountants and the Company consistent with Independence Standards Board Standard Number 1.  The Committee shall also discuss with the independent public accountants any such disclosed relationships and their impact on the independent public accountants’ independence.  The Committee shall take appropriate action to ensure the continuing objectivity and independence of the independent public accountants.

(n)    The Committee shall have the sole authority to appoint or replace the independent public accountants (subject, if applicable, to stockholder ratification). 

(o)   The Committee shall be directly responsible for the compensation and oversight of the work of the independent public accountants (including resolution of disagreements between management and the independent public accountant regarding financial reporting) for the purpose of preparing or issuing an audit report or related work.  The independent public accountants shall report directly to the Committee.

(p)   The Committee shall pre-approve all auditing services and permitted non-audit services (including the fees for such services and terms thereof) to be performed for the Company by its independent public accountants in one of two methods.  Under the first method, the engagement to render the services would be entered into pursuant to pre-approval policies and procedures established by the Committee, provided (i) the policies and procedures are detailed as to the services to be performed, (ii) the Committee is informed of each service, and (iii) such policies and procedures do not include delegation of the Committee’s responsibilities under the Exchange Act to the Company’s management.  Under the second method, the engagement to render the services would be presented to and pre-approved by the Committee (subject to the de minimus exceptions for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act that are approved by the Committee prior to the completion of the audit).   The Chairman of the Committee will have the authority to grant pre-approvals of audit and permissible non-audit services by the independent public accountants, provided that all pre-approvals by the Chairman must be presented to the full Committee at its next scheduled meeting.  The Company will provide for appropriate compensation as determined by the Committee, for payment of compensation to the independent public accountants, to any consultants, experts or advisors engaged by the Committee, and for ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties.

(q)   Adopt procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submission by employees, as well as employees of any investment adviser, administrator, principal underwriter or any other provider of accounting related services of or to the Company, of concerns regarding questionable accounting or auditing matters.

(r)     Ensure the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law.  Consider whether, in order to assure the continuing independence of the Company’s independent public accountants, it is appropriate to adopt a policy of rotating the independent public accountants itself on a regular basis.

(s)    Recommend to the Board policies for the Company’s hiring of employees or former employees of the independent public accountants who participated in any capacity in the audit of the Company.

(t)     Review with the Company’s counsel legal matters that may have a material impact on the financial statements, the Company’s compliance policies and any material reports or inquiries received from regulators or governmental agencies.

(u)    Review and approve any transactions between the Company and related parties.

(v)    Conduct or authorize investigation into any matters within the Committee’s scope of responsibilities with full access to all books, records, facilities and personnel of the Company and direct access to the independent public accountants.  The Committee has the ability to retain, at the Committee’s request, special legal, accounting or other consultants, experts or advisors it deems necessary in the performance of its duties. 

(w)  Consider such other matters in relation to the financial affairs of the Company and its accounts, and in relation to the audit of the Company, as the Committee may, in its discretion, determine to be advisable.

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 the generally accepted accounting principles.  This is the responsibility of management and the independent public accountants.

The Committee recognizes that the Company’s management is responsible for preparing the Company’s financial statements, and the independent public accountants are responsible for auditing or reviewing those financial statements in compliance with applicable law.  The Committee also recognizes that management of the Company and the independent public accountants have more time, knowledge and more detailed information on the Company than do Committee members.  Consequently, in carrying out its oversight responsibility, the Committee will not provide any special assurances as to the Company’s financial statements or any professional certification as to the independent public accountants’ work. 

The date of the adoption of this charter by the Audit Committee was June 22, 2005.

The date of the adoption of this charter by the Board of Directors of the Company was June 22, 2005


 


 


 


 


 


 



1 The term “financial literacy” means that a member of the Committee must have the ability to read and understand Companyamental financial statements, including a balance sheet, income statement and cash flow statement.  The term “financial literacy” does not mean that a member must have a chief financial officer’s or accounting practitioner’s understanding of generally accepted accounting principles, consistently applied, as adopted in the United States of America by the Financial Accounting Standards Board (“GAAP”).