BREITLING ENERGY CORPORATION
AUDIT COMMITTEE CHARTER
Effective January 27, 2014
This Charter of the Audit Committee (this “Charter”) will be effective upon approval by the board of directors (the “Board”) of Breitling Energy Corporation (the “Company”).
The Audit Committee shall review and reassess the adequacy of this Charter on an annual basis and recommend any proposed changes to the Board for approval. The Company shall provide appropriate funding, as determined by the Audit Committee, for the independent registered public accounting firm engaged by the Company to perform audit services (the “Independent Auditor”), for any other advisors engaged by the Audit Committee and for the ordinary administrative expenses of the Audit Committee that are necessary or appropriate in carrying out its duties.
The Audit Committee is appointed by the Board to oversee the accounting and financial reporting processes of the Company and the audits of the Company’s financial statements. The Audit Committee assists the Board in monitoring the
- integrity of the financial statements of the Company,
- Independent Auditor’s qualifications, independence and performance,
- Company’s internal audit function and systems of internal controls over financial reporting and disclosure controls and procedures, and
- compliance by the Company with legal and regulatory requirements.
The Audit Committee shall be comprised of at least three members. Each member of the Audit Committee shall meet the independence and experience requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations of the NYSE MKT LLC (the “NYSE MKT”). All members of the Audit Committee shall be able to read and understand fundamental financial statements, including a company’s balance sheet, income statement and cash flow statement. Each member must not have participated in the preparation of the financial statements of the Company or any current subsidiary of the Company at any time during the past three years. The Audit Committee shall have at least one member who is financially sophisticated, in that he or she has past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including but not limited to being or having been a chief executive officer, a chief financial officer or other senior officer with financial oversight responsibilities. A member of the Audit Committee who qualifies as an “audit committee financial expert” under Item 407(d)(5)(ii) and (iii) of Regulation S-K is presumed to qualify as financially sophisticated. No member of the Audit Committee may serve simultaneously on the audit committee of more than two other public companies. The members of the Audit Committee and the Chairman of the Audit Committee shall be appointed and may be replaced by the Board at any time with or without cause.
The Audit Committee shall meet as frequently as necessary, but not less frequently than quarterly. The Audit Committee shall conduct special meetings as determined by the Chairman of the Audit Committee or at the request of the Chief Executive Officer, President or Chief Financial Officer of the Company or the Independent Auditor. Meetings may be in person, by telephone or videoconference as needed to conduct the business of the Audit Committee. For the transaction of any business at any meeting of the Audit Committee, a majority of the members shall constitute a quorum. The Audit Committee shall take action by the affirmative vote of a majority of the members present at a duly held meeting. The Audit Committee may also take action by unanimous written consent to the fullest extent permitted by the Nevada Revised Statutes. The Audit Committee shall maintain minutes of all of its meetings.
The Audit Committee shall meet periodically in separate executive sessions with each of management, the director-internal audit and the Independent Auditor and have such other direct and independent interaction with such persons from time to time as the Audit Committee deems appropriate. The Audit Committee may request any officer or employee of the Company, outside counsel or the Independent Auditor to attend a meeting of the Audit Committee or to meet with any members of, or consultants to, the Audit Committee.
The Audit Committee’s responsibility is oversight, and it recognizes that the Company’s management is responsible for preparing the Company’s financial statements and complying with applicable laws and regulations. In addition, the Audit Committee recognizes that financial management (including the internal audit staff), the Independent Auditor and the Company’s compliance officer have more knowledge and more detailed information about the Company than do the members of the Audit Committee. Consequently, in carrying out its oversight responsibilities, it is not the duty of the Audit Committee to plan or conduct audits or determine that the Company’s financial statements are complete and accurate or are in accordance with generally accepted accounting principles (“GAAP”). This is the responsibility of management and the Independent Auditor.
It is not the intent of this Charter to subject individual members of the Audit Committee to any increased exposure to liabilities in excess of those generally imposed on members of the Board under applicable laws.
The following functions shall be the common recurring activities of the Audit Committee in carrying out its oversight responsibility. The Audit Committee shall have and may exercise all powers and authority of the Board in connection with carrying out its functions and responsibilities. These functions are set forth as a guide with the understanding that the Audit Committee may diverge from this guide as appropriate. The Audit Committee shall carry out the following responsibilities:
The Independent Auditor shall report directly to the Audit Committee. The Audit Committee shall:
- Have sole authority to select and retain the Independent Auditor for the purpose of auditing the Company’s annual financial statements, books, records, accounts and internal controls over financial reporting. The Audit Committee shall be directly responsible for the compensation and oversight of the work of the Independent Auditor for the purpose of preparing or issuing an audit report or related work.
- At least annually, evaluate the qualifications, performance and independence of the Independent Auditor, including the performance of the lead audit partner of the Independent Auditor, assure the regular rotation of the lead audit partner of the Independent Auditor and consider regular rotation of the accounting firm serving as the Independent Auditor.
- At least annually, (a) obtain and review a report from the Independent Auditor regarding (i) the internal quality control procedures of the Independent Auditor, (ii) that any material issues that are 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 and (iii) all relationships between the Independent Auditor and the Company or any of its subsidiaries; and (b) discuss with the Independent Auditor such report and any relationships or services that may impact the objectivity and independence of the Independent Auditor.
- Review and approve in advance all audit and lawfully permitted non-audit services to be provided by the Independent Auditor and the fees for such services. The Audit Committee may delegate to a subcommittee, composed of one or more of its members, the authority to pre-approve auditing and non-auditing services that are otherwise permitted by law, provided that such pre-approval shall be presented to the full Audit Committee at its next scheduled meeting. Pre-approval of non-audit services (other than review and attestation services) shall not be required if such services fall within exceptions established by the Securities and Exchange Commission (“SEC”).
- Receive annually from the Independent Auditor a formal written statement delineating all relationships between the Independent Auditor and the Company or any of its subsidiaries, consistent with the applicable requirements of the Public Company Accounting Oversight Board (the “PCAOB”) regarding the Independent Auditor’s communications with the Audit Committee concerning independence. The Audit Committee is responsible for actively engaging in a dialogue with the Independent Auditor with respect to any disclosed relationships or services that may impact the objectivity and independence of the Independent Auditor and for taking, or recommending that the full Board take, appropriate action to oversee the independence of the Independent Auditor.
- Review and discuss the following items with management and the Independent Auditor at the completion of the annual audit of the Company’s financial statements included in the Company’s Annual Report on Form 10-K (the “Form 10-K”) prior to its filing:
- the Company’s annual financial statements, including disclosures made in management’s discussion and analysis, and related footnotes;
- the results of the Independent Auditor’s audit of the financial statements and its report with respect thereto;
- any audit problems or difficulties, including difficulties encountered by the Independent Auditor during its audit work (such as restrictions on the scope of its activities or its access to information); any serious difficulties or disputes with management encountered during the course of the audit; and management’s response to these problems, difficulties or disagreements; and
- other matters related to the conduct of the audit which are to be communicated to the Audit Committee under standards established by the PCAOB, including discussions relating to the Independent Auditor’s judgments about such matters as the quality, not just the acceptability, of the Company’s accounting practices and other items set forth in Statements on Auditing Standards (“SAS”) 61 (Communication with Audit Committees) or other such auditing standards that may in time modify, supplement or replace SAS 61.
- Review with management and the Independent Auditor: (a) any major issues regarding accounting principles and financial statement presentation, including any significant changes in the Company’s selection or application of accounting principles; (b) any significant financial reporting issues and judgments made in connection with the preparation of the Company’s financial statements, including the effects of alternative GAAP methods; and (c) the effect of regulatory and accounting initiatives and off-balance sheet structures on the Company’s financial statements.
- Review and discuss with management and the Independent Auditor: (a) the Company’s internal controls over financial reporting; (b) management’s report assessing the effectiveness of internal controls; (c) the Company’s disclosure controls and procedures; (d) any significant deficiencies or material weaknesses, if any, in the design or operation of, and any material changes in, the Company’s internal controls; (e) any special audit steps adopted in light of any material control deficiencies; (f) any fraud involving management or other employees with a significant role in such internal controls; and (g) the Independent Auditor’s attestation of management’s report assessing the effectiveness of internal controls prior to filing of the Annual Report on Form 10-K.
- Review with management and the Independent Auditor the financial information contained in each of the Company’s Quarterly Reports on Form 10-Q prior to its filing and the results of the Independent Auditor’s review of the interim financial information.
- Review and discuss quarterly with the Independent Auditor:
- all critical accounting policies and practices;
- all alternative 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 Auditor; and
- other material written communications between the Independent Auditor and management, such as any management letter or schedule of unadjusted differences.
- Review and discuss, at least annually, the Company’s proved reserves, and changes in proved reserves, as well as any report of the independent reserve engineering consultants regarding such reserves submitted to any governmental body or the public.
- Discuss with the Independent Auditor material issues on which the national office of the Independent Auditor was consulted by the Company’s audit team.
- Terminate the Independent Auditor, if necessary.
- Select, retain, compensate, oversee and terminate, if necessary, any other registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company.
The Audit Committee shall:
- Review procedures, at least annually, for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, including the confidential, anonymous submission by employees of the Company regarding questionable accounting or auditing matters.
- Obtain reports from management regarding any complaints that have been received by the Company regarding accounting, internal accounting controls or auditing matters.
- Review the Company’s compliance policies and procedures and advise the Board as to whether any changes to any policy or procedure is recommended.
- Review and approve all related-party transactions, defined by, or those transactions required to be disclosed under, Item 404 of Regulation S-K.
- Discuss with the Company’s legal counsel any legal matters that are required to be disclosed in any reports filed pursuant to the Exchange Act and any material inquiries received from regulators or governmental agencies.
Other Authority and Responsibilities
The Audit Committee shall:
- Have the authority, to the extent it deems necessary or appropriate, to engage and determine funding for independent legal, accounting or other advisers.
- Review any letters sent by the Independent Auditor to management, and reports by the director-internal audit to management that are material to the Company as a whole and management’s response to any such letters and/or reports.
- Maintain a channel of communication between the Board and each of the Company’s (i) Independent Auditor, (ii) principal financial and accounting officers, (iii) director-internal audit and (iv) compliance officer and provide sufficient opportunity for each to meet with the members of the Committee to discuss any matter within the scope of each of their respective responsibilities.
- Recommend to the Board whether the Company’s annual audited financial statements and accompanying notes should be included in the Form 10-K.
- Prepare and review the Audit Committee Report for inclusion in the proxy statement for the Company’s annual meeting of stockholders. In addition to all of the other items required to be included in such report by the rules promulgated by the SEC or other applicable law, the Audit Committee Report must state whether the Audit Committee has:
- reviewed and discussed the audited financial statements with management;
- discussed with the Independent Auditor the matters required to be discussed by SAS 61, as may be modified or supplemented;
- received the written disclosures from the Independent Auditor required by the applicable requirements of the Public Company Accounting Oversight Board regarding the Independent Auditor’s communications with the Audit Committee concerning independence and has discussed with the Independent Auditor their independence; and
- recommended to the Board of Directors, based on the review and discussions referred to in items (a) through (c) above, that the Company’s audited financial statements be included in the Annual Report on Form 10-K for the last fiscal year for filing with the SEC.
- Review the appointment and replacement of the Company’s chief financial officer, chief accounting officer, compliance officer and director-internal audit.
- Discuss with the Independent Auditor and management the internal audit department’s responsibilities, budget and staffing and any recommended changes in the planned scope of the internal audit.
- Consider major changes and other major questions respecting the appropriate auditing and accounting practices to be used in the preparation of the financial statements when presented by the Independent Auditor or management.
- Review and discuss with management and the Independent Auditor the Company’s earnings announcements, including the type of information to be included and its presentation and the use of “pro forma” or “adjusted” non-GAAP information, as well as any financial information and earnings guidance provided to analysts and rating agencies, including the type of information to be disclosed and type of presentation to be made.
- Review with management and the Independent Auditor the effect of regulatory and accounting initiatives as well as off-balance sheet structures, if any, on the Company’s financial statements.
- Discuss with management the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures, including the Company’s risk assessment and risk management policies.
- Review the policy for the hiring of employees or former employees of the Independent Auditor and recommend changes to the Board for approval.
- Review and reassess the adequacy of the Audit Committee charter on an annual basis and recommend any proposed changes to the Board for approval.
- Conduct and review an annual performance evaluation of the Committee.
- Report the Committee’s activities to the Board on a regular basis and otherwise when it deems necessary or desirable.
- Review and discuss with the Independent Auditor any other matters required to be discussed by PCAOB Auditing Standards No. 16, Communications with Audit Committees, including, without limitation, the Independent Auditor’s valuation of the quality of the Company’s financial reporting, information relating to significant unusual transactions and the business rationale for such transactions and the Independent Auditor’s evaluation of the Company’s ability to continue as a going concern.
- Perform any other activities consistent with this charter, the Company’s by-laws and governing law, as the Board deems necessary or appropriate.