The purpose of the Audit Committee is to assist the Board of Directors in fulfilling the Board's oversight responsibilities for: (1) the integrity of the Bank's financial statements and financial reporting; (2) the maintenance of effective administrative, risk management, operating, and accounting internal control systems; (3) compliance with legal and regulatory requirements; (4) the qualifications, independence and performance of the independent auditors; (5) the performance of the Bank's internal audit function; and (6) the Bank's compliance with internal policies and procedures.
In addition to the powers and responsibilities expressly delegated or assigned to the Committee in this charter, the Committee may exercise any other powers and carry out other responsibilities delegated or assigned to it by the Board from time to time consistent with the Bank's bylaws. The Committee will exercise and carry out its powers and responsibilities as it deems appropriate without the requirement of Board approval, and any decision made by the Committee will be at the Committee's sole discretion.
The Committee's responsibilities are limited to oversight. Management of the Bank is responsible for the preparation, presentation and integrity of the Bank's financial statements as well as the Bank's financial reporting process, accounting policies, internal accounting controls and disclosure controls and procedures. The independent auditor is responsible for performing an audit of the Bank's annual financial statements, expressing an opinion as to the conformity of those annual financial statements with generally accepted accounting principles and reviewing the Bank's quarterly financial statements. It is not the responsibility of the Committee to plan or conduct audits or to determine that the Bank's financial statements and disclosure are complete and accurate and in accordance with generally accepted accounting principles and applicable laws, rules and regulations.
The members of the Committee are entitled to rely on (i) the integrity of the persons within the Bank and the professionals and experts (including the Bank's internal auditor and the Bank's independent auditor) from whom the Committee receives information; and (ii) absent actual knowledge to the contrary, the accuracy of the financial and other information provided to the Committee by those persons, professionals and experts.
The members of the Committee are not independent auditors, and the term "review" as used in this charter is not intended to suggest that the Committee members can or should follow the procedures required of auditors performing reviews of financial statements.
The Committee will be composed of at least five members of the Board, who must all meet the independence requirement in the regulations of the Federal Housing Finance Agency, the independence rules issued by the Securities and Exchange Commission under Section 10A(m) of the Securities Exchange Act of 1934, and other applicable requirements. Committee members and the Committee chair and vice chair will be designated by the Board, as follows:
- The Committee will include, to the extent practicable, a balance of (i) representatives of community financial institutions and other Bank members; and (ii) "member directors" and non-member "independent directors" (as such terms are defined by Section 7(a)(4) of the Federal Home Loan Bank Act, as amended).
- The terms of the Committee members will be appropriately staggered to provide for continuity of service.
- Each Committee member, at the time of appointment or election to the Board (or within a reasonable time thereafter) will have a working familiarity with basic finance and accounting practices, including the ability to read and understand the Bank's balance sheet, statement of cash flows and income statement and to ask substantive questions of management and the internal and independent auditors. Members of the Committee are not required to be engaged in the accounting and auditing profession and, consequently, some members may not be expert in financial matters, or in matters involving auditing or accounting. However, at least one member of the Committee will have extensive accounting or related financial management experience, which, for example, may include (i) a professional certification in accounting; (ii) experience as a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities; or (iii) other comparable experience or background resulting in the individual's financial sophistication. In addition, either (i) at least one member of the Committee will be designated as an "audit committee financial expert" as defined by the Securities and Exchange Commission, or (ii) the Bank will disclose in its periodic reports, to the extent required pursuant to the Securities and Exchange Act of 1934, the reasons why at least one member of the Committee is not designated as an "audit committee financial expert."
III. Powers and Responsibilities
The Committee will:
- In conjunction with the Board:
- Review and assess the adequacy of the Committee charter on an annual basis or more often, as appropriate and recommend to the Board any amendments, as needed.
- Review and recommend to the Board for reapproval the Committee charter at least every three years.
- Evaluate the performance of the Committee on an annual basis.
- Review periodically the requirements of laws, rules, regulations and guidelines applicable to the Committee's activities and duties.
- Meet periodically with senior management of the Bank and direct senior management to maintain the reliability and integrity of the accounting policies and financial reporting and disclosure practices of the Bank.
- Review the basis for and discuss with management and the independent auditor the Bank's annual audited financial statements and the independent auditor's opinion rendered with respect to the financial statements (including the nature and extent of any significant changes in accounting principles or their application) and quarterly financial statements, including the Bank's disclosures under "Management's Discussion and Analysis of Financial Condition and Results of Operations," and ensure that policies are in place that are reasonably designed to achieve disclosure and transparency regarding the Bank's true financial performance and governance practices.
- Review significant accounting and financial reporting policies and issues and understand their impact on the financial statements; assess at least every two years the need for an independent consultant or accounting firm to conduct an evaluation of one or more accounting policy areas and report its findings to the Board and management.
- Review with management the Bank's policies with respect to risk assessment and risk management as such policies relate to financial statements and financial reporting and discuss with management the Bank's significant financial risk exposure and the action management has taken to limit, monitor or control that exposure.
- Oversee the internal audit function by:
- Selecting, evaluating and, where appropriate, replacing the Chief Audit Executive, who may be removed only with the approval of the Committee.
- Reviewing and confirming the independence of the Chief Audit Executive, prior to appointment and annually thereafter.
- Monitoring and annually assessing the performance of the Chief Audit Executive and the effectiveness of the Internal Audit Function.
- Determining the compensation of the Chief Audit Executive.
- Requiring that the Chief Audit Executive report directly to the Committee on substantive matters and be ultimately accountable to the Committee and the Board.
- Reviewing and approving the internal audit department charter.
- Reviewing budget and staffing needs for the Bank's internal audit department and making appropriate budget and staff recommendations to the Board for approval.
- Reviewing and approving the internal audit work plan.
- Reviewing the scope of internal audit services required, significant accounting policies, significant risks and exposures, internal audit activities and internal audit findings.
- Reviewing internal audit department compliance with the Institute of Internal Auditors' International Standards for the Professional Practice of Internal Auditing.
- Reviewing, at least annually, the results of the internal audit department quality assurance program (comprising internal and periodic external quality assurance assessments).
- Meeting in executive session with the Chief Audit Executive on a regular basis to discuss any matters that the Committee or Chief Audit Executive believes should be discussed in confidence.
- Reviewing and confirming the qualifications and independence of the Audit Department staff annually.
- Be directly responsible for the appointment, compensation, retention and oversight of the work of the independent auditor (including resolution of disagreements between the Bank's management and the independent 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 Bank, with the independent auditor to report directly to the Committee.
- Oversee the independent audit function by:
- Approving the independent auditor's annual engagement letter and terms of engagement.
- Reviewing the independent auditor's proposed annual audit scope, plan, and approach.
- Reviewing the performance of the independent auditor.
- Making recommendations to the Board regarding the appointment, renewal or termination of the independent auditor, taking into account any applicable firm rotation requirements.
- Reviewing and confirming the qualifications and independence of the independent auditor at least annually.
- Obtaining and reviewing annually a report prepared by the independent auditor describing (a) the independent auditor's internal quality-control procedures, and (b) any material issues raised by the most recent internal quality-control review or peer review of the independent auditor 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 independent auditor and any steps taken to deal with any such issues.
- Discussing with the independent auditor its independence from the Bank and obtaining and reviewing a written statement prepared by the independent auditor describing all relationships between the independent auditor and the Bank, consistent with the applicable requirements of the Public Company Accounting Oversight Board and considering the impact that any relationships or services may have on the objectivity and independence of the independent auditor.
- Preapproving audit and non-audit services performed by the independent auditor, consistent with the independence rules applicable to the independent auditor. Committee pre-approval of audit and non-audit services will not be required if the engagement for the services is entered into pursuant to pre-approval policies and procedures established by the Committee, provided the policies and procedures are detailed as to the particular service and consistent with the independence rules applicable to the independent auditor, the policies and procedures do not include delegation of the Committee's responsibilities to the Bank's management, and the Committee is informed of each audit and non-audit service provided. The Committee may delegate to one or more designated members of the Committee the authority to grant pre-approvals, provided the approvals are presented to the Committee at a subsequent meeting. Committee pre-approval of audit and non-audit services (other than review and attest services) also will not be required if the services fall within exceptions permitted by the Securities and Exchange Commission.
- Confirming with the independent auditor that the independent auditor is in compliance with the partner rotation requirements established by the Securities and Exchange Commission.
- Meeting in executive session with the independent auditor on a regular basis to discuss any matters that the Committee or independent auditor believes should be discussed in confidence.
- Establishing hiring policies for employees or former employees of the independent auditor.
- Provide an independent, direct channel of communication between the Board and the internal and independent auditors, and provide the internal and independent auditors with unrestricted access to the Committee without the need for any prior management knowledge or approval.
- Conduct or authorize investigations into any matters within the Committee's scope of responsibilities.
- Ensure that senior management has established and is maintaining an adequate internal control system within the Bank by:
- Reviewing the Bank's internal control system and the resolution of identified material weaknesses and significant deficiencies in the internal control system, including the prevention or detection of management override or compromise of the internal control system.
- Reviewing the programs and policies of the Bank designed to ensure compliance with applicable laws, regulations, guidance and policies and monitoring the results of these compliance efforts.
- Reviewing the policies established by senior management to assess and monitor implementation of the Bank's strategic business plan and the operating goals and objectives contained in the plan.
- Review with senior management and the independent auditor:
- The Bank's quarterly and annual financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations.
- The independent auditor's integrated audit of the financial statements and internal control over financial reporting and audit report.
- Major issues regarding accounting principles and financial statement presentations, including any significant changes in the Bank's selection or application of accounting principles, and major issues as to the adequacy of the Bank's internal controls and any special audit steps adopted in light of material control deficiencies.
- Any analyses prepared by management or the independent auditor setting forth significant financial reporting issues and judgments made in connection with the preparation of the Bank's financial statements, including any analyses of the effects of alternative generally accepted accounting principles ("GAAP") methods on the Bank's financial statements.
- The effect of regulatory and accounting initiatives on the Bank's financial statements.
- Correspondence from or with regulators or governmental agencies and any employee complaints or published reports that raise material issues regarding the Bank's financial statements, financial reporting process, accounting policies or internal audit function.
- Review with the independent auditor (in executive session, as determined by the Committee):
- Any problems or difficulties the independent auditor may have encountered during the course of the audit, including any restrictions on the scope of activities or access to required information or any significant disagreements with management and management's responses.
- If considered by the Committee to be appropriate: (a) any accounting adjustments that were noted or proposed by the auditor but that were passed (as immaterial or otherwise); (b) any communications between the independent auditor and the independent auditor's national office respecting auditing or accounting issues presented by the engagement; and (c) any "management" or "internal control" letter or summary of control deficiencies issued, or proposed to be issued, by the independent auditor to the Bank.
- The report that the independent auditor is required to make to the Committee regarding: (a) all accounting policies and practices to be used that the independent auditor identifies as critical; (b) all alternative treatments within GAAP for policies and practices related to material items that have been discussed among management and the independent auditor, including the ramifications of the use of the alternative disclosures and treatments, and the treatment preferred by the independent auditor; and (c) all other material written communications between the independent auditor and management of the Bank, such as any management letter, management representation letter, reports on observations and recommendations on internal controls, independent auditor's engagement letter, independent auditor's independence letter, schedule of unadjusted audit differences and a listing of adjustments and reclassifications not recorded, if any.
- The matters required to be discussed in accordance with the standards of the Public Company Accounting Oversight Board, including Auditing Standard No. 1301, Communications with Audit Committees, as modified, reorganized or supplemented.
- Review with management and the Chief Audit Executive:
- Significant audit findings and recommendations and management's responses.
- Management's implementation of significant audit recommendations.
- Difficulties encountered in the course of any internal audit, including restrictions on the scope of the auditors' work or access to required information.
- Legal and regulatory matters that may have a material effect on the financial statements of the Bank, compliance with the Bank's policies and programs, and reports received from regulators.
- Provide an Audit Committee Report to be included with each Bank annual report that states whether:
- The Committee has reviewed and discussed the audited financial statements with management.
- The Committee has discussed with the independent auditor the matters required to be discussed in accordance with the standards of the Public Company Accounting Oversight Board, including Auditing Standard No. 1301, Communications with Audit Commitees, as modified, reorganized or supplemented.
- The Committee has received the written disclosures and the letter from the independent auditor required by the applicable requirements of the Public Company Accounting Oversight Board, and has discussed with the independent auditor its independence.
- Based on the review and discussions described above, the Committee has recommended to the Board that the audited financial statements be included in the Bank's annual report on Form 10-K.
- Review and discuss with the Chief Executive Officer and any other officer responsible for the evaluation of internal control over financial reporting any significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the Bank's ability to record, process, summarize and report financial information; and any fraud, whether or not material, that involves management or other employees who have a significant role in the Bank's internal control over financial reporting.
- Establish procedures for:
- Receiving, retaining and addressing complaints received by the Bank relating to accounting, internal accounting controls or audit matters; and
- The anonymous, confidential submission by employees of the Bank of concerns regarding questionable accounting or auditing matters.
In carrying out its responsibilities, each member of the Committee may rely on the assistance, advice and recommendations of Bank management and the Bank's internal auditors, independent auditors, and other advisors, as needed, and may refer specific matters to other committees of the Board other than matters expressly within the authority or responsibility of the Committee. The Committee may, at its sole discretion and without consultation with management or the Board, obtain separate legal counsel, experts, advisors or other outside professional services to enable it to fulfill the responsibilities and perform the functions set forth in this charter. The Board will approve appropriate funding, as determined by the Committee, for the compensation of independent advisors to the Committee and the compensation of the independent auditor for issuing audit reports or performing other services.
The Committee will report its activities, recommendations and findings periodically to the Board through the Committee chair, including any issues that arise with respect to the quality or integrity of the Bank's financial statements, the Bank's compliance with legal or regulatory requirements, the performance and independence of the Bank's independent auditor, the performance of the Bank's internal audit function or any other matter the Committee determines should be reported to the Board.
The Committee will meet just prior to each regular meeting of the Board, and more often as needed, as determined by the Board, the Committee chair or its members, or the Bank President.