The purpose and goal of the Audit Committee (the "Committee") shall be to assist the Board of Directors (the "Board") of FreeSeas Inc. (the "Company") in monitoring (1) the integrity of the Company's financial statements, (2) the independent accountants' qualifications and independence, (3) the performance of the Company's internal audit function and independent accountants, and (4) the compliance by the Company with legal and regulatory requirements.
The Committee shall consist of no fewer than three members of the Board of Directors of the Company that satisfy the independence requirements of the Securities and Exchange Commission (the "SEC") and The NASDAQ Stock Market ("NASDAQ"). Additionally, at least one member of the Committee shall be a "financial expert" as defined by the SEC.
Committee Responsibilities and Authority:
The Committee shall have the sole authority to appoint or replace the independent accountants. The Committee shall be directly responsible for the compensation and oversight of the work of the independent accountants (including resolution of disagreements between management and the independent accountants regarding financial reporting) for the purpose of preparing or issuing an audit report or related work. The independent accountants shall report directly to the Committee.
The Committee shall pre-approve all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for the Company by its independent accountants, subject to the de minimus exceptions for non-audit services described in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that are approved by the Committee prior to the completion of the audit.
The Committee, to the extent it deems necessary or appropriate, shall:
Financial Statement and Disclosure Matters
* Review and discuss with management and the independent accountants the annual audited financial statements, including disclosures made in management's discussion and analysis, and recommend to the Board whether the audited financial statements should be included in the Company's Form 20-F.
* Review and discuss with management and the independent accountants the Company's quarterly financial statements, if any, prior to the filing of its Form 6-K, including the results of the independent accountants' review of the quarterly financial statements.
* Discuss with management and the independent accountants significant financial reporting issues and judgments made in connection with the preparation of the Company's financial statements, including any significant changes in the Company's selection or application of accounting principles, any major issues as to the adequacy of the Company's internal controls and any special steps adopted in light of material control deficiencies.
* Review and discuss quarterly reports from the independent accountants on:
(a) All critical accounting policies and practices to be used, including critical and significant accounting releases.
(b) 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 accountants.
(c) Other material written communications between the independent accountants and management, such as any management letter or schedule of unadjusted differences.
* Discuss with management the Company's earnings press releases, including the use of "pro forma" or "adjusted" non-GAAP information, as well as financial information and earnings guidance provided to analysts and rating agencies. Such discussion may be done generally (consisting of discussing the types of information to be disclosed and the types of presentations to be made).
* Discuss with management and the independent accountants the effect of regulatory and accounting initiatives as well as off-balance sheet items 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.
* Discuss with the independent accountants the matters relating to the conduct of the audit, including any difficulties encountered in the course of the audit work, any restrictions on the scope of activities or access to requested information, and any significant disagreements with management.
* Review disclosures made to the Committee by the Company's CEO and CFO during their certification process for the Form 20-F about any significant deficiencies in the design or operation of internal controls or material weaknesses therein and any fraud involving management or other employees who have a significant role in the Company's internal controls.
Oversight of the Company's Relationship with the Independent Accountants
* Review and evaluate the lead partner of the independent accountants' team.
* Obtain and review a report from the independent accountants at least annually regarding (a) the independent accountants' internal quality-control procedures, (b) any material issues raised by the most recent internal quality-control review, or peer review, of the firm, 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 firm, (c) any steps taken to deal with any such issues, and (d) all relationships between the independent accountants and the Company. Evaluate the qualifications, performance and independence of the independent accountants, including considering whether the accountants' quality controls are adequate and the provision of permitted non-audit services is compatible with maintaining the accountants' independence, and taking into account the opinions of management and internal auditors.
* Ensure the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law.
* Recommend to the Board policies for the Company's hiring of employees or former employees of the independent accountants who participated in any capacity in the audit of the Company.
* Meet with the independent accountants prior to the audit to discuss the planning and staffing of the audit.
Oversight of the Company's Internal Audit Function
* Review the appointment and replacement of the senior internal auditor.
* Review the significant reports to management prepared by the internal auditing department and management's responses.
* Discuss with the independent accountants and management the internal audit department responsibilities, budget and staffing and any recommended changes in the planned scope of the internal audit.
Compliance Oversight Responsibilities
* Obtain from the independent accountants written assurance that Section 10A(b) of the Exchange Act has not been implicated.
* Obtain reports from management, the Company's internal audit department and the independent accountants that the Company and its subsidiary/foreign affiliated entities are in conformity with applicable legal requirements and the Company's Code of Ethics. Review reports and disclosures of insider and affiliated party transactions. Advise the Board with respect to the Company's policies and procedures regarding compliance with applicable laws and regulations and with the Company's Code of Ethics.
* Establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.
* Discuss with management and the independent accountants any correspondence with regulators or governmental agencies and any published reports which raise material issues regarding the Company's financial statements or accounting policies.
* Discuss with the Company's counsel legal matters that may have a material impact on the financial statements or the Company's compliance policies.
The Committee shall designate one member of the Committee as its chairperson. The chairperson shall chair all meetings of the Committee and set the agendas for Committee meetings. In the event of a tie vote on any issue, the chairperson's vote shall decide the issue. The Committee shall meet in person or telephonically as often as necessary but in any event not less than quarterly, and more frequently as may be necessary, in conjunction with regularly scheduled meetings of the Board or at regularly scheduled times and places determined by the Committee chairperson. Committee actions may also be taken by unanimous written consent, when deemed necessary or desirable by the Committee or its chairperson.
The Committee may invite to its meetings any director, member of management or other person as it deems appropriate in order to carry out its responsibilities. The Committee may also exclude from its meetings any persons it deems appropriate in order to carry out its responsibilities.
The Committee shall have the authority to retain search firms and other consultants and independent counsel to assist in the performance of its responsibilities, and to authorize the payment of all fees charged by such firms, consultants or counsel.
The Committee will maintain written minutes of its meetings, which minutes will be filed with the minutes of the meetings of the Board. The Committee chair shall report the highlights of any Committee meeting to the full Board.
Members of the Committee may not receive any compensation from the Company except the fees that they receive for service as a member of the Board or any committee thereof.
Annual Review and Amendment of Charter:
The Committee shall review and reassess the adequacy of the Charter annually and recommend any proposed changes to the Board or approval. The Charter may be amended by a majority vote of the independent directors of the Board.