FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

Charter of the Audit Committee of the Board of Directors

 

A.      Audit Committee Purpose

 

The Audit Committee of First Federal of Northern Michigan Bancorp, Inc. (the “Company”) is appointed by the Board of Directors to assist the Board in fulfilling its oversight responsibilities.  The Audit Committee's primary duties and responsibilities are to:

 

1.        Monitor the integrity of the Company's financial reporting process and systems of internal controls regarding finance, accounting, and legal compliance.

2.        Monitor the qualifications, independence and performance of the Company's independent auditors and internal auditor.

3.        Provide an avenue of communication among the independent auditors, management, the internal auditor and the Board of Directors.

 

The Audit Committee has the authority to conduct any investigation appropriate to fulfilling its responsibilities, and it has direct access to the independent auditors as well as anyone in the organization.  The Audit Committee has the ability to retain, at the Company's expense, special legal, accounting, or other consultants or experts it deems necessary in the performance of its duties.

 

B.      Audit Committee Composition and Meetings

 

Audit Committee members shall meet the requirements of the National Association of Securities Dealers (NASD).  The Audit Committee shall be comprised of three or more directors as determined by the Board, each of whom shall be independent non-executive directors, free from any relationship that, in the opinion of the Board, would interfere with the exercise of his or her independent judgment.  All members of the Committee shall have a basic understanding of finance and accounting and be able to read and understand fundamental financial statements, and at least one member of the Committee shall have accounting or related financial management expertise. The Board shall determine whether at least one member of the Committee qualifies as an “audit committee financial expert” in compliance with criteria established by the SEC and other relevant regulations. The existence of such member, including his or her name and whether he or she is independent, shall be disclosed in periodic filings as required by the SEC.

 

Audit Committee members shall be appointed by the Board and the Audit Committee shall regularly report to the Board.  If an Audit Committee Chair is not designated or present, the members of the Committee may designate a Chair by majority vote of the Committee membership.

 

The Committee shall meet at least four times annually, or more frequently as circumstances dictate.  The Audit Committee Chair shall prepare and/or approve an agenda in advance of each meeting. The Committee should meet privately in executive session at least annually with management and the independent auditors, and as a committee to discuss any matters that the Committee or each of these groups believe should be discussed.  In addition, the Committee, or at least its Chair, should communicate with management and the independent auditors quarterly to review the Company's financial statements and significant findings based upon the auditors limited review procedures.

 

C.      Audit Committee Responsibilities and Duties

 

1.                    Review Procedures

 

a.              Review and reassess the adequacy of this Charter at least annually.  Submit the charter to the Board of Directors for approval and have the document published at least every three years in accordance with SEC regulations.

 

b.             Review the Company's annual audited financial statements, including disclosures made in management’s discussion and analysis, prior to filing or distribution, and recommend to the Board whether the audited financial statements should be included in the Company’s Form 10-KSB.  Review should include discussion with management and independent auditors of significant issues regarding accounting principles, practices, and judgments.

 

c.              In consultation with management and the independent auditors, the Committee will consider the integrity of the Company's financial reporting processes and controls and the “quality of earnings” from a subjective as well as an objective standpoint.

 

d.             Review with financial management and the independent auditors the Company's quarterly financial results prior to the release of earnings and/or the Company's quarterly financial statements prior to filing or distribution.  Discuss any significant changes to the Company's accounting principles and any items required to be communicated by the independent auditors in accordance with SAS 61.  The Chair of the Committee may represent the entire Audit Committee for purposes of this review.

 

e.              Review and discuss with management and the independent auditor the certifications of the Company’s chief executive officer and chief financial officer 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, as required by the Sarbanes-Oxley Act of 2002 (Sections 302 and 906), and the relevant reports rendered by the independent auditor.

 

f.               Review and discuss all reports from the independent auditor on:

 

                                                                                i.        all critical accounting policies and practices used or to be used

                                                                              ii.        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

                                                                             iii.        other material written communications between the independent auditor and management, such as any management letter or schedule of unadjusted differences

 

g.             Discuss with management, the independent auditors and internal auditor 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.

 

h.             Review with management, corporate counsel and the independent auditor the status of legal matters, including the significance of such matters on the Company’s financial statements, and the adequacy of disclosures regarding such matters in the Company’s financial statements and SEC filings.

 

i.               Review with management and the independent auditor all related party transactions and determine that all required disclosures are included in the Company’s annual report and annual proxy statement.

 

j.               Review any related significant findings and recommendations of the independent auditors and internal auditor together with management’s responses.

 

2.                    Independent Auditors

 

a.              The independent auditors are ultimately accountable to the Audit Committee and the Board of Directors.  The Audit Committee shall review the independence and performance of the auditors and annually recommend to the Board of Directors the appointment of the independent auditors or approve any discharge of auditors when circumstances warrant.

 

b.             Review and pre-approve the fees and other significant compensation for both audit and non-audit services to be provided by the independent auditor (other than with respect to non-significant exceptions permitted by the Sarbanes-Oxley Act of 2002) in accordance with the Company’s pre-approval policy.

 

c.              Ascertain that the lead or concurring audit partner serves in the capacity for no more than five (5) fiscal years and that any other partner other than the lead or concurring partner, serves no more than seven (7) years at the partner level on the Bank’s audit.

 

d.             On an annual basis, the Committee should review and discuss with the independent auditors, all significant relationships they have with the Company that could impair the auditors' independence.  The committee will also ensure that it receives from the independent auditors a formal written statement delineating these relationships consistent with the Independence Standards Board Standard 1

 

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

 

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

 

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

 

h.             Review with the independent auditor the matters required to be discussed by SAS 61 relating to the conduct of the audit, any difficulties encountered in the course of the audit, any restrictions on the scope of activities or access to requested information, and any significant disagreements with management.

 

3.  Internal Audit

 

a.              Review and concur the appointment, replacement, reassignment or dismissal of the internal auditor.

 

b.             Annually review the internal audit department charter, staffing, budget and audit plan.

 

c.              Review with the internal auditor any difficulties encountered in the course of the audit, any restrictions on the scope of activities or access to requested information, any significant disagreements with management, and any change required to the scope of the internal audit plan.

 

4.  Other Audit Committee Responsibilities

 

a.              Annually review the report to shareholders as required by the Securities and Exchange Commission. The report should be included in the Company's annual proxy statement.

 

b.             Review the procedures for receipt, retention and confidential treatment of complaints received by the company regarding accounting, internal controls, or auditing matters.

 

c.              Review the company’s policies with respect to officer’s expense accounts and perquisites and code of conduct to ensure they are adequate and up-to-date.  Review submitted expenses of the CEO, President, COO, and CFO at least quarterly.

 

d.             Perform any other activities consistent with this Charter, the Company's by-laws, and governing law, as the Committee or the Board deems necessary or appropriate.

 

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

 

IV.           Limitation of Audit Committee’s Role

 

While the Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the 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.