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AUDIT COMMITTEE CHARTER
Adopted by the Board of Directors (the "Board") of XenoPort, Inc. (the "Company") as of January 21, 2005
Amended by the Board of the Company as of June 9, 2005
PURPOSE AND POLICY
The primary purpose of the Audit Committee (the "Committee") shall be to act on behalf of the Board of the Company in fulfilling the Board's oversight responsibilities with respect to the Company's corporate accounting and financial reporting practices, the systems of internal control over financial accounting, audits of financial statements, as well as the quality and integrity of the Company's financial statements and reports and the qualifications, independence and performance of the independent registered public accounting firm engaged as the Company's independent outside auditors for the purpose of preparing or issuing an audit report or performing audit services (the "Auditors"). The Committee will take appropriate actions to set the overall corporate "tone" for quality financial and other reporting, sound business risk practices and ethical behavior.
The policy of the Committee, in discharging these obligations, shall be to maintain and foster an open avenue of communication between the Committee, the Auditors and the Company's management.
The Committee shall consist of at least three members of the Board, provided that any vacancies will be filled as promptly as practicable. The members of the Committee shall satisfy the independence and financial literacy requirements of The Nasdaq Stock Market ("Nasdaq") applicable to Committee members as in effect from time to time, when and as required by Nasdaq and Rule 10A-3 of the Securities Exchange Act of 1934, as amended. At least one member shall satisfy the applicable Nasdaq financial sophistication requirements as in effect from time to time, and at least one member shall be an "audit committee financial expert" as defined by Securities and Exchange Commission ("SEC") rules and regulations as in effect from time to time, when and as required by the SEC. The members of the Committee shall be appointed by and serve at the discretion of the Board. Vacancies occurring on the Committee shall be filled by the Board. The Committee's chairperson shall be designated by the Board or, if it does not do so, the Committee members shall elect a chairperson by vote of a majority of the full Committee.
MEETINGS AND MINUTES
The Committee shall hold such regular or special meetings as its members shall deem necessary or appropriate. Meetings may be held in person or telephonically. Minutes of each meeting of the Committee shall be prepared and distributed to each director of the Company and the Secretary of the Company promptly after each meeting. The Committee, or the chairperson of the Committee acting on its behalf, shall report to the Board from time and time and whenever requested to do so by the Board.
The Committee shall have authority to appoint, determine compensation for, and at the expense of the Company, retain and oversee the Auditors as set forth in Section 10A(m)(2) of the Securities Exchange Act of 1934, as amended, and the rules thereunder and otherwise to fulfill its responsibilities under this charter. The Committee shall have authority to retain and determine compensation for, at the expense of the Company, special legal, accounting or other advisors or consultants as it deems necessary or appropriate in the performance of its duties. The Committee shall also have authority to pay, at the expense of the Company, ordinary administrative expenses that, as determined by the Committee, are necessary or appropriate in carrying out its duties. The Committee shall have full access to all books, records, facilities and personnel of the Company as deemed necessary or appropriate by any member of the Committee to discharge his or her responsibilities hereunder. The Committee shall have authority to require that any of the Company's personnel, counsel, accountants (including the Auditors) or investment bankers, or any other consultant or advisor to the Company attend all or any portion of any meeting of the Committee or meet with any member of the Committee or any of its special legal, accounting or other advisors and consultants. The Committee shall have authority to initiate investigations, to provide notices, including notices to the SEC, to retain experts, to recommend that the Company implement remedial or other appropriate actions and to carry out its responsibilities under this charter and the Company's Code of Business Conduct and Ethics. The approval of this charter by the Board shall be construed as a delegation of authority to the Committee with respect to the responsibilities set forth herein. The operation of the Committee shall be subject to the Bylaws of the Company, as in effect from time to time, and Section 141 of the Delaware General Corporation Law.
The Committee shall oversee the Company's financial and other reporting processes on behalf of the Board. The Committee shall also have direct responsibility for the appointment, compensation, retention and oversight of the work of the Auditors and any other registered public accounting firm engaged for the purpose of performing other review or attest services for the Company. The Auditors and each such other independent registered public accounting firm shall report directly to, and be accountable to, the Committee. The Committee's functions and procedures should remain flexible to address changing circumstances most effectively. To implement the Committee's purpose and policy, the Committee shall be charged with the following responsibilities with the understanding, however, that the Committee may supplement or (except as otherwise required by applicable laws or rules) deviate from these activities as appropriate under the circumstances:
Evaluation and Retention of Auditors. The Committee shall evaluate the performance of the Auditors, assess their qualifications and determine whether to retain or to terminate the existing Auditors or to appoint and engage new auditors for the ensuing year.
Approval of Audit Engagements. The Committee shall determine and approve engagements of the Auditors, prior to commencement of such engagement, to perform all proposed audit, review and attest services, including the scope of and plans for the audit, the adequacy of staffing, the compensation to be paid, at the Company's expense, to the Auditors and the negotiation, on behalf of the Company, of the Auditors' engagement letters. Such approval may be pursuant to preapproval policies and procedures established by the Committee consistent with applicable laws and rules, including the delegation of preapproval authority to one or more Committee members, so long as any such preapproval decisions are presented to the full Committee at the next scheduled meeting. The Committee shall not engage the Auditors to perform non-audit services proscribed by law or regulation.
Approval of Non-Audit Services. The Committee shall determine and approve engagements of the Auditors, prior to commencement of such engagements (unless in compliance with exceptions available under applicable laws and rules related to immaterial aggregate amounts of services), to perform any proposed permissible non-audit services, including the scope of the service and the compensation to be paid therefor. Such approval may be pursuant to preapproval policies and procedures established by the Committee consistent with applicable laws and rules, including the delegation of preapproval authority to one or more Committee members so long as any such preapproval decisions are presented to the full Committee at the next scheduled meeting.
Audit Partner Rotation. The Committee shall monitor the rotation of the partners of the Auditors on the Company's audit engagement team as required by applicable laws and rules.
Auditor Conflicts. At least annually, the Committee shall receive and review written statements from the Auditors delineating all relationships between the Auditors and the Company, consistent with Independence Standards Board Standard No. 1, consider and discuss with the Auditors any disclosed relationships and any compensation or services that could affect the Auditors' objectivity and independence, and to assess and otherwise take appropriate action to oversee the independence of the Auditors.
Former Employees of Auditor. The Committee shall preapprove employment by the Company of individuals formerly employed by the Company's Auditors.
Audited Financial Statement Review. The Committee shall review, upon completion of the audit, the financial statements proposed to be included in the Company's Annual Report on Form 10-K to be filed with the SEC and to recommend whether or not such financial statements should be so included.
Annual Audit Results. The Committee shall review and discuss with the Company's management and the Auditors the results of the annual audit, including the Auditors' assessment of the quality, not just acceptability, of accounting principles, the reasonableness of significant judgments and estimates (including material changes in estimates), any material audit adjustments proposed by the Auditors and any adjustments proposed by the Auditors that were not recorded, the adequacy of the disclosures in the financial statements, the effect of regulatory accounting initiatives, as well as off-balance sheet structures and any other matters required to be communicated to the Committee by the Auditors under the standards of the Public Company Accounting Oversight Board (United States), as appropriate.
Quarterly Results. The Committee shall review and discuss with the Company's management and the Auditors, as appropriate, the results of the Auditors' review of the Company's quarterly financial statements, prior to public disclosure of quarterly financial information, if practicable, or filing with the SEC of the Company's Quarterly Report on Form 10 Q, and any other matters required to be communicated to the Audit Committee by the Auditors under the standards of the Public Company Accounting Oversight Board (United States).
Management's Discussion and Analysis and Other Disclosure in Periodic Reports. The Committee shall review and discuss with the Company's management, a representative of the Company's Disclosure Committee and the Auditors, as appropriate, the Company's disclosures contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other disclosures in its annual and periodic reports to be filed with the SEC.
Media Disclosures. The Committee shall review and discuss with the Company's management and the Auditors all earnings press releases, as well as, as appropriate, the substance of financial information and earnings guidance provided to analysts and ratings agencies, which discussions may be general discussions of the type of information to be disclosed or the type of presentation to be made. The chairperson of the Committee may represent the entire Committee for purposes of this discussion.
Accounting Principles and Policies. The Committee shall review and discuss with the Company's management and the Auditors significant issues that arise regarding accounting principles and financial statement presentation, including critical accounting policies and practices, alternative accounting policies available under generally accepted accounting principles in the United States ("GAAP") related to material items discussed with management and any other significant reporting issues and judgments.
Risk Assessment and Management. The Committee shall review and discuss with the Company's management and the Auditors, as appropriate, the Company's major financial risk exposures and the steps taken by management to monitor and control these exposures.
Cooperation with Auditors. The Committee shall evaluate the cooperation received by the Auditors from the Company during their audit examination, including any significant difficulties with the audit or any restrictions on the scope of their activities or access to required records, data and information.
Management Letters. The Committee shall review and discuss with the Auditors and, if appropriate, the Company's management, any management or internal control letter issued or, to the extent practicable, proposed to be issued by the Auditors and management's response, if any, to such letter, as well as any additional material written communications between the Auditors and management.
National Office Communications. The Committee shall review and discuss with the Auditors, as appropriate, communications between the audit team and the firm's national office with respect to accounting or auditing issues presented by the engagement.
Disagreements Between Auditors and Management. The Committee shall review and discuss with the Company's management and the Auditors or any other registered public accounting firm engaged to perform review or attest services any material conflicts or disagreements between management and the Auditors or such other accounting firm regarding financial reporting, accounting practices or accounting policies and resolve any such conflicts or disagreements regarding financial reporting.
Internal Control Over Financial Reporting. The Committee shall confer with the Auditors and with the Company's management, as appropriate, regarding the scope, adequacy and effectiveness of internal control over financial reporting including any special audit steps taken in the event of material control deficiencies.
Separate Sessions. Periodically, the Committee shall meet in separate sessions with the Auditors and the Company's management, as appropriate, to discuss any matters that the Committee, the Auditors or management believe should be discussed privately with the Committee.
Correspondence with Regulators. The Committee shall consider and review with the Company's management, the Auditors, outside counsel, as appropriate, and, in the judgment of the Committee, such special counsel, separate accounting firm and other consultants and advisors as the Committee deems appropriate, any correspondence with regulators or governmental agencies and any published reports that raise material issues regarding the Company's financial statements or accounting policies.
Complaint Procedures. The Committee shall 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 and anonymous submission by employees of concerns regarding questionable accounting or auditing matters.
Regulatory and Accounting Initiatives. The Committee shall review and discuss with counsel, the Auditors and the Company's management, as appropriate, any significant regulatory or other legal or accounting initiatives or matters that may have a material impact on the Company's financial statements or compliance programs and policies if, in the judgment of the Committee, such review is necessary or appropriate.
Engagement of Registered Public Accounting Firms. The Committee shall determine and approve engagements of any registered public accounting firm (in addition to the Auditors) to perform any other review or attest service, including the compensation to be paid to such firm and the negotiation and execution, on behalf of the Company, of such firm's engagement letter. Such approval may be pursuant to preapproval policies and procedures, including the delegation of preapproval authority to one or more Committee members, so long as any such preapproval decisions are presented to the full Committee at the next scheduled meeting.
Investigations. The Committee shall investigate any matter brought to the attention of the Committee within the scope of its duties if, in the judgment of the Committee, such investigation is necessary or appropriate.
Proxy Report. The Committee shall prepare the report required by the rules of the SEC to be included in the Company's annual proxy statement and review the draft proxy statement before it is submitted to the full Board for review.
Approval of Related-Party Transactions. The Committee shall review and approve all related-party transactions as required by Nasdaq rules.
Committee Self-Assessment. The Committee shall review, discuss and assess its own performance at least annually and to review and assess the adequacy of this charter at least annually, including the Committee's role and responsibilities as outlined in this charter, and to recommend any proposed changes to the Nominating and Corporate Governance Committee for its consideration.
Report to the Board. The Committee shall report to the Board with respect to material issues that arise regarding the quality or integrity of the Company's financial statements or other disclosures, the performance or independence of the Auditors or such other matters as the Committee deems appropriate from time to time or whenever it shall be called upon to do so.
Additional Responsibilities. The Committee shall perform such other functions and have such powers as may be necessary or appropriate in the efficient and lawful discharge of the foregoing.
It shall be the responsibility of the Company's management to prepare the Company's financial statements and periodic reports and the responsibility of the Auditors to audit those financial statements. These functions shall not be the responsibility of the Committee, nor shall it be the Committee's responsibility to ensure that the financial statements or periodic reports are complete and accurate, conform to GAAP or otherwise comply with applicable laws or rules.
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