The audit committee's primary function is to assist the board of directors
in fulfilling its oversight responsibilities by monitoring:
The integrity of financial information which will be provided
to the shareholders and others;
The systems of internal controls and disclosure controls which
management has established;
The performance of internal and external audit functions; and
The company's compliance with legal and regulatory
The committee shall consist of no fewer than three directors. All committee
members must meet applicable New York Stock Exchange (NYSE) and Securities
and Exchange Commission (SEC) independence and experience requirements. All
committee members shall be financially literate or must become financially
literate within a reasonable period of time after appointment to the
committee. At least one member of the committee shall be an audit committee
financial expert as determined by the board in accordance with NYSE listing
standards. At least one member of the committee shall serve concurrently on
the public policy and compliance committee.
The committee members shall be appointed for one-year terms at the annual
meeting of the board. The board shall designate the chairperson.
The committee shall meet not less than six times per year and shall report
at the next board meeting following each such committee meeting. The
committee shall meet at least annually with the public policy and
compliance committee. This meeting will allow the audit committee to review
non-financial legal and regulatory compliance as well as the risk
assessment and risk management processes, which are overseen by the public
policy and compliance committee. The committee shall meet periodically with
management, the internal auditors, and the independent auditor in separate
executive sessions. The committee may request an officer or employee of the
company, the company's outside counsel, or representatives of the company's
independent auditor to attend a meeting of the committee or to meet with
any members of, or advisors to, the committee. The committee may, at any
time, retain its own outside advisors at the company's expense.
Supporting Corporate Staff
Office of the Corporate Secretary
Chief Accounting Officer
Duties and Responsibilities
To fulfill its duties and responsibilities, the committee shall:
Annually review and reassess this charter.
Maintain a clear understanding with management and the
independent auditors that the committee is directly responsible for
compensation and oversight of the work of the independent auditor,
Having the sole authority (subject to shareholder
ratification) to appoint or replace the independent auditor;
Approving the compensation of the independent auditor;
Reviewing and evaluating the lead partner of the independent
Reviewing the audit scope and audit plan of the independent
Obtaining and reviewing, at least annually, a report from the
independent auditor which describes the firm's internal compliance
procedures, any issues raised from peer reviews, or other quality reviews
of the firm, any steps taken to deal with the issues, and all relationships
between the firm and Lilly;
Ensuring rotation of the lead audit partner as required by law
(or any stricter policies as may be established by the committee);
Setting clear hiring policies for employees or former
employees of the independent auditor; and
Resolving disagreements between management and the independent
auditor regarding financial reporting.
Pre-approve all audit services and approve permitted non-audit
services (including fees and terms) to be performed for Lilly by the
independent auditor, consistent with the requirements of the SEC and NYSE
or any stricter standards as may be adopted by the committee.
Oversee the internal audit function, including:
Reviewing the appointment and replacement of the general
Reviewing and approving the internal audit plan;
Reviewing significant reports to management prepared by
internal audit (and management's response); and
Discussing with the independent auditor and management the
responsibilities, budget, and staffing of the internal audit function.
The general auditor will report directly to the chair of the
audit committee, with a secondary reporting relationship to the chief
financial officer for administrative purposes.
Prepare a report for inclusion in the company's annual proxy
statement in accordance with SEC regulations.
Review, with management and the independent auditors, the
annual and quarterly financial results before they are filed in periodic
reports with the SEC or other regulators. These reviews shall include
discussions with management and the independent auditor regarding
significant financial reporting issues and judgments made in connection
with the preparation of Lilly's financial statements and any special steps
adopted in light of material control deficiencies. The committee shall also
receive regular reports from the independent auditor on the critical
accounting policies and practices of Lilly and significant alternative
treatments of financial information within GAAP that have been discussed with
management. The committee shall discuss with the independent auditor the
auditor's assessment of the quality, not just the acceptability, of the
company's accounting principles as required by SAS No. 61.
Review and discuss with management Lilly's earnings press
releases, including the use of "pro forma" non-GAAP information,
as well as financial information and earnings guidance provided to analysts
and rating agencies.
Provide an open avenue of communication between the
independent auditor, the general auditor, and the board, including
sufficient opportunity for the independent auditor and the general auditor
to meet with the committee without members of management present.
Consider and review with the independent auditor, the chief
accounting officer, and the general auditor:
The independent auditor's audit of financial statements and
their report thereof;
The adequacy of the company's internal controls and disclosure
Any related significant findings and recommendations of the
independent auditors or the internal auditors together with management's
Any difficulties encountered in the course of the audits,
including any restriction on the scope of work or access to required
Any material written communications between the independent
auditor and management, including management letters or schedules of
Oversee the company's dissemination of and compliance with the
company's code of conduct, including but not limited to those codes that
apply specifically to employees involved in matters that affect accounting,
auditing, and financial reporting.
Review procedures to promote and protect employee reporting of
suspected fraud or wrongdoing relating to accounting, auditing, or
financial reporting, including procedures for:
Receiving, retaining, and addressing complaints received by
Lilly relating to such matters;
Enabling employees to submit to the committee, on a
confidential and anonymous basis, any concerns regarding such matters; and
Protecting reporting employees from retaliation.
Together with the public policy and compliance committee,
assist the board in its oversight of legal and regulatory compliance. The
audit committee shall have sole oversight over matters of financial compliance
(accounting, auditing, financial reporting, and investor disclosures). As
to all other areas of compliance ("non-financial compliance"),
the public policy and compliance committee shall have oversight
responsibilities in the first instance; however, the two committees shall
meet jointly at least annually to review the major non-financial compliance
Overall state of compliance
Significant legal or regulatory compliance exposure
Material reports or inquiries from regulators.
Together with the public policy and compliance committee,
review at least annually a summary of the risk assessment and risk
management processes and policies.
Inquire of management, the general auditor, and the
independent auditors about significant financial risks or exposures and
evaluate the steps management has taken to assess and minimize such risks
to the company, including review of management's financial risk management
Review policies and procedures with respect to senior
management's expense accounts, including their use of corporate assets, and
consider the results of any review of these areas by the general auditor or
the independent auditor.
Conduct or authorize investigations into any matters within
the committee's scope of responsibilities. The committee may retain (at the
company's expense) independent counsel, accountants, or others to assist in
the conduct of any investigation.
The committee shall also undertake such additional activities
within the scope of its primary functions as the committee may from time to