Ask an FEI researcher about... audit committee charters for private companies. (Resources).

Do you have any examples of a post-Sarbanes-Oxley audit committee charter for a privately held company?" asked a private company's CFO.

Frankly, we did not, so we asked members of FEI's Committee on Private Companies (CPC).

The CFO of North Pacific Group Inc., Christopher Cassard, forwarded a copy of his company's audit committee charter, which had just been reviewed and revised for compliance with the Sarbanes-Oxley Act ("the Act"). The Act does not require private companies to have audit committee charters and, boards of directors of private companies are not even required to have audit committees. North Pacific Group has decided to take a leadership role by approving an audit committee charter.

Cassard advises us that this charter is a work in progress, intended to respond to what is known today about the implications of the Act. "We expect it to need further improvement as public company interpretations and actions develop over the next year or so," he said.

We are reprinting here the opening paragraphs and the first five (of 18) responsibilities of the audit committee from North Pacific Group's recently revised audit committee charter, illustrating how it complies with the Act. The full text is available as a free download at the Financial Executives Research Foundation bookstore: www.fei.org/rfbookstore/

"The Audit Committee is a committee of the Board of Directors. Its primary function is to assist the Board in fulfilling its oversight responsibilities by reviewing the financial information that will be provided to the shareholders and others, the systems of internal controls that management and the Board of Directors have established, and the internal and external audit processes.

Subject to approval of the Board of Directors, an Audit Committee comprised of no less than three (3) independent members from the Board of Directors shall be appointed by the Nominating Committee. Independent is defined as not receiving, other than for service on the board, any consulting, advisory, or other compensatory fee from the Company, and as not being an affiliated person of the Company, or any subsidiary.

The Chair of this Committee will also be appointed by the Nominating Committee.

At least one member of the Audit Committee will be a "financial expert." In determining whether a member is a financial expert, the Audit Committee shall consider whether a person has (1) an understanding of generally accepted accounting principles and financial statements; (2) experience in the preparation or auditing of financial statements of generally comparable companies, and the application of such principles in connection with the accounting for estimates, accruals and reserves; (3) experience with internal accounting controls; and (4) an understanding of audit committee functions.

The Committee shall meet at least two times per year, or more frequently as circumstances require. The Committee may ask members of management or others to attend the meeting and provide pertinent information.

In meeting its responsibilities, the Audit Committee is expected to:

1. Provide an open avenue of communication between the internal auditors, the outside auditor, management and the Board of Directors.

2. Determine that management has implemented policies and procedures ensuring that the Company's risks are identified and that controls are adequate, in place and functioning properly.

3. Review and update the Committee's charter periodically, as needed, [and] at least annually.

4. Recommend to the Board of Directors the outside auditor to be appointed by the Board and the fee to be paid to the outside auditor. The outside auditor is ultimately accountable to the Board of Directors and the Audit Committee, and the Board of Directors and the Audit Committee have ultimate authority and responsibility to select, evaluate and replace outside auditors.

5. Ensure that the outside auditor will not provide any non-audit services including: bookkeeping or other services related to the accounting records or financial statements of the audit client; financial information systems design and implementation; appraisal or valuation services, fairness opinions, or contribution-in-kind reports; actuarial services; internal audit outsourcing services; management functions or human resources; broker or dealer, investment adviser or investment banking services; legal services and expert services unrelated to the audit; any other service that the Committee determines is impermissible.

The outside auditor may engage in any non-audit service, including tax services, which are not listed above, only if the activity is pre-approved by the Audit Committee."

William M. Sinnett is Manager of Research for the Financial Executives Research Foundation.