sanders morris harris GROUP INC.


Of the

Audit Committee

Of The

Board of Directors

May 4, 2004


The Audit Committee is a standing committee of the Board of Directors (the “Board”) of Sanders Morris Harris Group Inc., a Texas corporation (the “Company”).  Its primary function is to assist the Board in fulfilling its oversight responsibilities by:

Reviewing the financial reports and other financial information provided by the Company to any governmental body or the public;

Reviewing the Company’s system of internal controls regarding finance, accounting, legal compliance and ethics that management and the Board have established; and the Company’s auditing, accounting and financial reporting processes generally;

Reviewing the independence and performance of the Company’s independent auditors;

Providing an open avenue of communication among the independent auditors, financial and senior management, and the Board; and

Monitoring and evaluating risks related to the Company’s activities and the effectiveness and adequacy the Company’s risk management measures including insurance coverage.

The Audit Committee will primarily fulfill these responsibilities by carrying out the activities enumerated in Section IV of this Charter.  The Audit Committee has direct access to the Company’s independent auditors, other professional advisors and contractors engaged by the Company and anyone in the Company.  The independent auditor will report directly to the Audit Committee and the Audit Committee will be responsible for the resolution of any disagreements between management and the independent auditor regarding financial reporting and related policies and procedures.  The Audit Committee has authority to retain, at the Company’s expense, special legal, accounting, or other consultants or experts it deems necessary in the performance of its duties.

While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that the Company’s financial statements and disclosures are complete and accurate and are in accordance with generally accepted accounting principles and applicable rules and regulations.  These are the responsibilities of management and the independent auditor.


The Audit Committee shall be comprised of at least three directors.  All three of the Audit Committee members must be independent directors and free from any relationship that, in the opinion of the Board, would interfere with the exercise of the director’s independent judgment as a member of the Audit Committee.

Directors with any of the following relationships will not be considered independent:

a director who is, or at any time during the past three years was, employed by the Company or by any parent or subsidiary of the Company;

a director who accepted or who has a Family Member (which means a person’s spouse, parents, children and siblings, whether by blood, marriage or adoption, or anyone residing in such person’s home) who accepted any payments from the Company or any parent or subsidiary of the Company in excess of $60,000 during the current or any of the past three fiscal years, other than the following:

compensation for Board or Board committee service;

payments arising solely from investments in the Company’s securities;

compensation paid to a Family Member who is a non-executive employee of the Company or a parent or subsidiary of the Company;

benefits under a tax-qualified retirement plan, or non-discretionary compensation; or

loans permitted under Section 13(k) of the Securities Exchange Act of 1934.

a director who is a Family Member of an individual who is, or at any time during the past three years was, employed by the Company or by any parent or subsidiary of the Company as an executive officer;

a director who is, or has a Family Member who is, a partner in, or a controlling shareholder or an executive officer of, any organization to which the Company made, or from which the Company received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenues for that year, or $200,000, whichever is more, other than the following:

payments arising solely from investments in the Company’s securities; or

payments under non-discretionary charitable contribution matching programs.

a director of the Company who is, or has a Family Member who is, employed as an executive officer of another entity where at any time during the past three years any of the executive officers of the Company serve on the compensation committee of such other entity;

a director who is, or has a Family Member who is, a current partner of the Company’s outside auditor, or was a partner or employee of the Company’s outside auditor who worked on the Company’s audit at any time during any of the past three years; or

a director who, other than in his or her capacity as a member of the Audit Committee, the Board of Directors, or any other Board committee:

accepts directly or indirectly any consulting, advisory, or other compensatory fee from the Company or any of its subsidiaries.  Compensatory fees do not include the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the Company (provided that such compensation is not contingent in any way on continued service); or

is an affiliated person of the Company or any of its subsidiaries.  An affiliated person of the Company or any of its subsidiaries, means a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the Company or any of its subsidiaries.

Notwithstanding the foregoing, one director who (i) is not independent by reason of any of paragraphs 1 through 6 above, (ii) meets the requirements of paragraph 7 above, and (iii) is not a current officer or employee or a Family Member of such officer or employee, may be appointed to the Audit Committee if the Board, under exceptional and limited circumstances, determines that membership on the Audit Committee by the individual is required by the best interest of the Company and its shareholders, and the Company discloses, in the next annual proxy statement subsequent to such determination, the nature of the relationship and the reasons for that determination.  A member appointed under this exception may not serve longer than two years and may not chair the Audit Committee.

Additionally, no member of the Audit Committee may 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 and all members of the Audit Committee must be able to read and understand fundamental financial statements, including the Company’s balance sheet, income statement, and cash flow statement.  At least one member of the Audit Committee must have 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 being or having been a chief executive officer, 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 401(h) of Regulation S-K is presumed to qualify as a financially sophisticated Audit Committee member.  The role of the financial expert will be that of assisting the Audit Committee in overseeing the audit process, not auditing the Company.

The members of the Audit Committee shall be elected by the Board at the annual organizational meeting of the Board, or in the event of a vacancy on the Audit Committee, a replacement member shall be elected at a Board meeting held as soon as reasonably practical following the occurrence of such vacancy.  Members of the Audit Committee shall serve for a term coinciding with their Board term.  If a Chair of the Audit Committee is not appointed by the Board, the Audit Committee shall itself elect a Chair.


The Audit Committee shall meet at least four times annually, or more frequently as circumstances dictate.  As part of its job to foster open communication, the Audit Committee should meet at least annually with management and the independent auditors in separate executive sessions to discuss any matters that the Audit Committee and each of these groups believe should be discussed privately.

Responsibilities and Duties

To fulfill its responsibilities and duties the Audit Committee shall:

Documents/Reports and Review Procedures

Evaluate annually its performance and the adequacy of this Charter, including compliance with applicable law and The Nasdaq Stock Market, Inc. listing standards, and recommend to the full Board any changes to this Charter as the Audit Committee deems appropriate.  The Audit Committee shall submit the Charter to the full Board for approval and have the document published at least every three years in accordance with the Regulations of the U.S. Securities and Exchange Commission (“SEC”).

Review the Company’s annual financial results prior to release of the results and annual audited financial statements and any reports or other financial information prior to filing with, or distribution to, the SEC, any governmental body, or the public, including any certification, report, opinion, or review rendered by the independent auditors.  The review should include discussion with management and independent auditors of critical accounting policies and significant issues regarding accounting principles, practices, estimates and judgments.

In consultation with management and the independent auditors, consider the integrity of the Company’s financial reporting processes and controls. Discuss significant financial risk exposures and the steps management has taken to monitor, control and report such exposures.  The Audit Committee should also review significant findings prepared by the independent auditors, with management’s responses, the status of management’s responses to previous recommendations from the independent auditors and the status of any previous instructions to management from the Audit Committee.

Review the Company’s quarterly financial results prior to the release of results and the Company’s quarterly financial statements prior to filing with the SEC.  In connection with such review, discuss with financial management and the independent auditors, the results of the independent auditors review of the quarterly financial statements, any significant changes to the Company’s accounting principles and any items required to be communicated by the independent auditors in accordance with AICPA SAS 61 (see item 14).  The Chair of the Audit Committee may represent the entire Audit Committee for purposes of these reviews and discussions.

Review with management all significant deficiencies and material weaknesses, if any, in the design or operation of internal controls, and any fraud, without regard to materiality, that involves management or any other employee who has a significant role in the Company’s internal controls.

Review with independent auditors the recommendations included in their management letter, if any, and their informal observations regarding the competence and adequacy of financial and accounting procedures of the Company.  On the basis of this review, make recommendations to the Board for any changes that seem appropriate.

Periodically review with, and receive reports from, management and the independent auditors regarding (i) critical accounting policies and practices to be used in preparing Company financial statements, (ii) all alternative treatments of financial information within GAAP discussed with management, including the ramification of such treatment and the treatment preferred by the auditors, and (iii) all other material written communication between the auditor and management.

Review all written communication between the Company and its officers, directors and employees on the one hand and the independent auditors on the other hand relating to the Company’s audit engagement of the independent auditors.

Independent Auditors

Have the sole ultimate authority and responsibility to appoint, select, evaluate, and, where appropriate replace the independent auditors, thus making the independent auditors ultimately accountable to the Audit Committee.

Review the performance of, and approve the fees and other significant compensation to be paid to, the independent auditors’ firm.

On an annual basis, ensure its receipt from the independent auditors of a formal written statement delineating all relationships between the independent auditors and the Company consistent with Independence Standards Board Standard 1 and review and discuss with the independent auditors all significant relationships they have with the Company or services they provide that could impair the auditors’ objectivity and independence.

Take appropriate action to oversee the independence of the independent auditors.

Review the independent auditors audit plan — discuss scope, staffing, locations, reliance upon management, and internal audit and general audit approach.

Prior to releasing the year-end results, discuss the results of the audit with the independent auditors.  Discuss certain matters required to be communicated to audit committees in accordance with AICPA SAS 61.

Consider the independent auditors’ judgments about the quality and appropriateness of the Company’s accounting principles as applied in its financial reporting.

Legal Compliance

On at least an annual basis, review with the Company’s counsel any legal matters that could have a significant impact on the Company’s financial statements, the Company’s compliance with applicable laws and regulations, and inquiries received from regulators or governmental agencies.

Other Matters

Establish procedures, and be responsible, for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal controls, or auditing matters, and the confidential, anonymous submissions by employees of concerns regarding questionable accounting or auditing matters.  Annually review these procedures and revise them as the Audit Committee deems appropriate.

Annually prepare a report to shareholders as required by the SEC.  The report should be included in the Company’s annual proxy statement.

Perform any other activities consistent with this Charter, the Company’s bylaws, and governing law, as the Audit Committee or the Board deems necessary or appropriate.

Review financial and accounting personnel succession planning with the Company.

Pre-approve the retention of the independent auditor for any permitted non-audit service and the fee for such service.  The Audit Committee may delegate the authority to pre-approve the retention of the independent auditor for permitted non-audit services to one or more members of the committee.  Those members, if any, who have authority to pre-approve permitted non-audit services shall present the pre-approval of any permitted non-audit service to the Audit Committee at the next meeting following any such pre-approval.

The Audit Committee will establish policies and procedures for the engagement of the independent auditor to provide non-audit services.  The Audit Committee will disclose in the annual proxy statement whether it has considered whether the provision of non-audit services is compatible with the auditor’s independence.

Permitted non-audit services shall include all non-audit services other than the following:

·                      bookkeeping and other services related to accounting records or financial statements;

·                      financial information systems design and implementation;

·                      appraisal or valuation services, fairness opinions, or contributions-in-kind reports;

·                      actuarial services;

·                      internal audit outsourcing services;

·                      management functions or human resources;

·                      broker or dealer, investment adviser or investment banking services; and

·                      legal services and expert services unrelated to the audit.

Review and approve all related party transactions.

Annually review policies and procedures as well as audit results associated with directors’ and officers’ expense accounts and perquisites.  Annually review a summary of director and officers’ related party transactions and potential conflicts of interest.

Annually consult with the independent auditors out of the presence of management about internal controls and the fullness and accuracy of the organization’s financial statements.

Review and assess the adequacy of the Company’s ethics, code of conduct or similar policy and report to the Board any recommended changes to such policies.

Maintain minutes of meetings and periodically report to the Board on significant results of the foregoing activities.

I, Sandra J. Williams, do hereby certify that I am the duly elected Secretary of the Company and that the above is a true and correct copy of the Charter for the Audit Committee adopted at a meeting of the Board of Directors on May 4, 2004, and that this Charter is now in full force and effect.


                                                                                                                        Sandra J. Williams, Secretary