Audit Committee Charter
Pacific Financial Corporation
AUDIT COMMITTEE CHARTER
The Audit Committee is appointed by the Pacific Financial Corporation (“Company”) Board of Directors (“Board”) to assist the Board in overseeing the Company’s and it’s subsidiary Bank of the Pacific (“bank”) operations and reporting relating to:
- The integrity of the financial statements of the Company, and the company’s accounting and financial reporting processes and financial statement audits [NASDAQ Corporate Governance Rule 4350(d)(1)],
- Compliance by the Company with applicable legal and regulatory requirements,
- The qualifications, independence and performance of the Company’s registered public accounting firm [NASDAQ Corporate Governance Rule 4350(d)(1)(c)], and
- The performance of the Internal Auditor.
The Audit Committee will comprise of three or more Directors as determined by the Board. The members of the Audit Committee will meet the independence and financial experience requirements of the NASDAQ Stock Market, Inc. and the Sarbanes-Oxley Act. The determination of independence will be made by the Board [Sarbanes-Oxley Act Section 301, and NASDAQ Corporate Governance Rule 4350(d)(2)].
All members of the Audit Committee must comply with all financial-literacy requirements of the NASDAQ Stock Market. At least one member will qualify as an “Audit Committee Financial Expert” as defined by the SEC and determined by the Board [Sarbanes-Oxley Act Section 407].
The Audit Committee has the authority to retain special legal, accounting or other consultants to advise and assist the Audit Committee as necessary to perform its duties and responsibilities [Sarbanes-Oxley Act Section 301, and NASDAQ Corporate Governance Rule 4350(d)(3)]. The Audit Committee may request any officer or employee of the Company or the Company’s outside counsel or independent auditor to attend a meeting of the Audit Committee, or to meet with any of the Committee members or Audit Committee consultants.
The Company will provide appropriate funding, as determined by the Audit Committee, for compensation to an independent auditor and/or any consultants that the Audit Committee chooses to engage, as well as for payment of ordinary administrative expenses of the Audit Committee that are necessary or appropriate in carrying out its duties. [Sarbanes-Oxley Act Section 301 and NASDAQ Corporate Governance Rule 4350(d)(3)].
A quorum of at least two attending Committee members shall be required for purposes of Audit Committee action(s) or decisions made on all matters related to the Audit Committee’s operations and responsibilities under this Charter, as well as any other situation where approval is required of the Audit Committee. A decision made by a quorum of Audit Committee members is effective for all purposes and intents under this Charter.
The Audit Committee shall convene at regularly scheduled meetings held at least once each calendar quarter, as prescribed by the Audit Committee Chair or Management. Each Audit Committee meeting may include exclusive Executive Sessions with the (a) Internal Auditor, (b) independent auditors, (c) Senior Management and/or (d) Committee members only as determined by the Committee during said Audit Committee meeting.
The Audit Committee shall make timely reports to the Board, detailing Committee actions.
III. DUTIES, RESPONSIBILITIES AND POWERS
The Audit Committee has the responsibility and powers as set forth in this Charter, however:
- 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, which is the responsibility of management and the independent auditor.
- Further, it is not the duty of the Audit Committee to conduct investigations or to assure compliance with applicable laws and regulations.
Document/ Reports/Accounting Information Review
- Review and reassess the adequacy of this Charter annually and recommend any proposed changes to the Board for approval. [NASDAQ Corporate Governance Rule 4350(d) (1)].
- Review and discuss the annual audited financial statements with the Company’s management and the independent auditor, including major issues regarding accounting and auditing principles and practices as well as the adequacy of internal controls that could significantly affect the Company’s financial statements.
- Review analyses prepared by management and the independent auditor of significant financial reporting issues and judgments made in connection with the preparation of the Company’s financial statements.
- Review other relevant reports or financial information submitted by the Company to any governmental body or the public, including management certifications as required by the Sarbanes-Oxley Act [Sarbanes-Oxley Act Section 302 and 906] and relevant reports rendered by the independent auditor.
- Recommend to the Board whether the financial statements should be included in the annual report on Form 10-K.
- Review with management and the independent auditor the Company’s quarterly financial statements prior to the filing of its Form 10-Q.
- Advise the Board with respect to the Company’s policies and procedures regarding compliance with applicable laws and regulations.
- Recommend to the Board the appointment of the independent auditor.
- Review and pre-approve any and all fees to be paid to the independent auditor prior to any engagement for services [Sarbanes-Oxley Act Section 202].
- The independent auditor will report directly to the Audit Committee and the Audit Committee will oversee the resolution of disagreements between management and the independent auditor if they arise. [Sarbanes-Oxley Act Section 301 and NASDAQ Corporate Governance Rule 4350(d) (3)].
- Receive annual reports from the independent auditor regarding the auditor’s independence consistent with Independence Standards Board Standard 1 and discuss such reports with the auditor, and if so determined by the Audit Committee, take or recommend that the full Board take appropriate action to oversee the independence of the auditor [NASDAQ Corporate Governance Rule 4350(d)(1)].
- Evaluate together with the Board the performance of the independent auditor and, if so determined by the Audit Committee, recommend that the Board replace the independent auditor.
- 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, as amended by SAS No. 84 and SAS No. 90 including:
· Particular focus on the evaluation of the critical accounting policies used in the financial statements.
· Ensuring that disclosures in Management’s Discussion and Analysis are balanced and fully responsive.
· Prior to finalizing and filing the annual report, the Audit Committee should review the selection, application and disclosure of critical accounting policies.
· Information relating to the auditor’s judgments about the quality, not just the acceptability, of the bank’s accounting principles.
- Review with the independent auditor any problems or difficulties the auditor may have encountered and, any management letter provided by the auditor and the Company’s response to that letter. Such review should include: 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 changes required in the planned scope of the audit.
- Review the independent auditor’s attestation of internal control over financial reporting [Sarbanes-Oxley Act Section 404].
- Hold timely discussions with the independent auditor regarding the following:
● All critical accounting policies and practices [Sarbanes-Oxley Act Section 204],
● All alternative treatments of financial information within Generally Accepted Accounting Principles related to material items that have been discussed with management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the independent auditor [Sarbanes-Oxley Act Section 204], and
● Other material written communications between the independent auditor and management, including, but not limited to, the management letter and schedule of unadjusted differences [Sarbanes-Oxley Act Section 204].
Actively engage in dialogue with the independent auditor with respect to any disclosed relationships or services that may affect the independence and objectivity of the auditor
- and take appropriate actions to oversee the independence of the outside auditor [NASDAQ Corporate Governance Rule 4350(d)(1)].
Financial Reporting Processes, Accounting Policies, and Internal control Structure
- Receive and review any disclosure from the Company’s CEO or CFO made in connection with the certification of the Company’s quarterly and annual reports filed with the SEC of: a) significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize, and report financial data; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal controls [Sarbanes-Oxley Act Section 302].
- Review and approve all related-party transactions, defined as those transactions required to be disclosed under Item 404 of Regulation S-K [NASDAQ Corporate Governance Rule 4350(h)].
· Business relationships between directors or nominees and the bank’s significant creditors, customers, and suppliers must be disclosed.
· Disclosures must be made when the director or nominee has been an executive officer or owns 10% or more of the equity interest in the bank.
· Indebtedness of directors, nominees, executive officers, and certain defined immediate family members to the registrant must be disclosed when such amounts exceed $60,000.
- Establish and oversee procedures for the receipt, retention, and treatment of complaints regarding accounting, internal accounting controls, or auditing matters, including procedures for confidential, anonymous submissions by company employees regarding questionable accounting or auditing matters [Sarbanes-Oxley Act Section 301 and NASDAQ Corporate Governance Rule 4350(d)(3)]. Upon receipt of a complaint, the Audit Committee will take appropriate action for investigating, tracking and confidentiality.
- Review the appointment and replacement of the Company’s Internal Auditor.
- Annually, review and recommend changes (if any) to the Internal Audit Policy.
- Review the regular internal reports to management prepared by the Internal Audit Department and management’s responses.
Ethical Compliance, Legal Compliance, and Risk Management
- Review with the Company’s general 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.
- Oversee, review, and periodically update the Company’s code of business conduct and ethics and the Company’s system to monitor compliance with and enforce this code.1
- Meet periodically with management to discuss policies with respect to risk assessment and risk management, including appropriate guidelines and policies to govern the process, as well as review the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures.
- Review how major changes to the Company’s financial or accounting principles and practices have been implemented as suggested by the independent auditor, Internal Auditor or management.
- Obtain from the independent auditor assurance that Section 10A of the Securities Exchange Act of 1934 has not been implicated.
- Prepare the Audit Committee report required by the rules of the Securities and Exchange Commission to be included in the Company’s annual proxy statement.
- Meet at least annually with the Chief Financial Officer, the Internal Auditor and the independent auditor in separate executive sessions.
1Included as long as the Audit Committee oversees ethical compliance.
Approved: August 15, 2011