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January 2010 Update
Purpose and Applicability of Policy
Under the Sarbanes-Oxley Act of 2002, the Audit Committee of the Board of Directors is responsible for the appointment, compensation and oversight of the work performed by the independent auditor engaged by McDonald¶s Corporation (the Company). As part of this responsibility, the Audit Committee is required to pre-approve all audit and non-audit services performed by the independent auditor to assure that they do not impair the auditor¶s independence from the Company. Examples of these services are set out in Exhibit A. Accordingly, the Audit Committee has adopted the following policy that sets forth the procedures and conditions for pre-approving audit and permitted non-audit services to be performed by the independent auditor responsible for auditing the Company¶s consolidated financial statements or any separate financial statements that will be filed with the SEC. The Audit Committee shall review this policy annually for purposes of assuring its continued appropriateness and compliance with applicable law and listing standards, including regulations of the SEC and the Public Company Accounting Oversight Board (PCAOB). The SEC¶s rules establish two different approaches to pre-approving services, both of which the SEC considers to be equally valid. Proposed services may either be pre-approved by the Audit Committee on a categorical basis, without consideration of specific services (³general preapproval´), or may be subject to case-by-case pre-approval by the Audit Committee (³specific pre-approval´). The Audit Committee believes that the combination of these two approaches will result in an effective and efficient procedure for purposes of addressing the Company¶s auditing and non-auditing services and when evaluating the potential impact of non-audit services on the independence of the external auditor. Regardless of whether a class of or individual service is proposed for general or specific preapproval, the Audit Committee shall consider whether such service is consistent with applicable SEC and PCAOB rules and guidance with respect to auditor independence. The Audit Committee shall also consider whether the independent auditor is best positioned to provide the most effective and efficient service, for reasons such as familiarity with the Company¶s business, people, culture, accounting systems, risk profile and other factors, and whether the service may enhance the Company¶s ability to manage or control risk or improve audit quality. All such factors will be considered as a whole, and no one factor should necessarily be determinative. The Audit Committee shall also be mindful of the relationship between fees for audit and nonaudit services in determining whether to pre-approve any class of or individual service and may determine, for each fiscal year, the appropriate ratio between the total amount of fees for ³Audit´, ³Audit-related´ and ³Tax´ services and the total amount of fees for permissible nonaudit services classified as ³All Other´ services.
Pre-Approval Requirement and Disclosure
All audit and permitted non-audit services to be provided by the independent auditor shall be pre-approved by the Audit Committee. Pre-approval fee levels for all services to be provided by the independent auditor shall generally be established annually by the Audit Committee, subject to the following limitations:
y When considering whether to grant an approval, the Audit Committee should consider the nature, scope and fees of the service to be provided to the Company as well as the principles and guidance established by the SEC and PCAOB with respect to auditor independence, including the fact that an auditor cannot (i) function in the role of management; (ii) audit his or her own work; or (iii) serve in an advocacy role for the Company. In general, classes of predictable and recurring audit and permitted non-audit services shall be considered for general pre-approval by the full Audit Committee on an annual basis at the beginning of each fiscal year.
Unless a class of or individual audit or non-audit service shall have received a general preapproval, it will require specific pre-approval by the Audit Committee or its delegate. Also, any proposed service for which the estimated fees would cause the total fees for that class of service to exceed the applicable estimated fee threshold shall require specific approval by the Audit Committee or its delegate. In addition, specific pre-approval by the Audit Committee or its delegate is required before engaging Ernst & Young to perform any due diligence services or internal control review, regardless of the size of the fee. Schedule 1 lists services that are expected to be the subject of general pre-approval on an annual basis and an indication of the historical amount of fees paid for each class of service, the time frame and process for approval, and the estimated pre-approval fee threshold. Services as to which a general pre-approval shall have been granted on an annual basis shall be effective for the applicable fiscal year. Any specific pre-approval of an audit or permitted nonaudit service may be provided up to one year prior to commencement of the service. In any case in which a service is to be provided over a period of years, the approval shall be reviewed for renewal on an annual basis.
Delegation of Pre-Approval
The Audit Committee elects to delegate pre-approval authority to the Chairman of the Audit Committee to approve any one or more individual audit or permitted non-audit services for which estimated fees do not exceed $250,000 as well as adjustments to any estimated preapproval fee thresholds up to $100,000 for any individual service. Any services that would exceed such limits should be pre-approved by the full Audit Committee. The Chairman shall report any pre-approval granted at the next scheduled meeting of the Audit Committee.
The Company may not under any circumstances engage the independent auditor to provide any service that is prohibited by applicable law. The Audit Committee should consult with General Counsel if any question arises as to whether a proposed audit or non-audit service is permissible under applicable law. The Audit Committee may determine to prohibit other services that in its view may compromise, or appear to compromise, the independence and objectivity of the independent auditor.
The Audit Committee has designated the Corporate Controller to monitor the performance of all services provided by the independent auditor and to determine whether such services are in compliance with this policy. The Corporate Controller shall report to the Audit Committee on a periodic basis with respect to compliance with the policy. The Corporate Controller shall promptly report to the Chairman of the Audit Committee any non-compliance (or attempted noncompliance) with this policy of which he or she becomes aware. On a periodic basis, the nature of actual services provided by the independent auditor as well as the associated fees shall be reported to the Audit Committee.
The Audit Committee shall take additional measures on an annual basis as may be appropriate to meet its responsibility to oversee the work of the independent auditor and to assure the auditor¶s independence. Such measures shall include the review of a written statement from the independent auditor describing all relationships between the independent auditor and the Company, consistent with PCAOB Rule 3526; a discussion with the independent auditor with respect to its methods and procedures for ensuring independence; and an annual review of the Company¶s hiring policy for employees of the external audit firm.
De Minimis Exception
Applicable law provides for an exception to the pre-approval requirements for permissible nonaudit services provided that (1) all such services do not, in the aggregate, amount to more than 5 percent of the total fees paid by the Company to the independent auditor, (2) such services were not recognized as non-audit services at the time of the relevant engagement, and (3) such services were promptly brought to the attention of and approved by the Audit Committee (or its delegate) prior to the completion of the annual audit.
Disclosure of Pre-Approval Policies and Procedures
The Company shall publicly disclose the Audit Committee¶s pre-approval policies and procedures in its Proxy Statement.
AUDIT COMMITTEE REPORT
I. Statement of Purpose
The Audit Committee is a standing committee of the Board of Directors. The purpose of the Committee is to assist the Board of Directors in fulfilling its oversight responsibility relating to (i) the integrity of the Company¶s financial statements and financial reporting process and the Company¶s systems of internal accounting and financial controls; (ii) the performance of the internal auditors; (iii) the annual independent audit of the Company¶s financial statements, the engagement of the independent auditors and the evaluation of the independent auditors¶ qualifications, independence and performance; (iv) the compliance by the Company with legal and regulatory requirements, including the Company¶s disclosure controls and procedures; (v) the evaluation of management's process to assess and manage the Company's enterprise risk issues; and (vi) the fulfillment of the other responsibilities set out herein. The Committee shall also prepare the report of the Committee required to be included in the Company¶s annual proxy statement. In discharging its responsibilities, the Committee is not itself responsible for the planning or conduct of audits or for any determination that the Company¶s financial statements are complete and accurate or in accordance with generally accepted accounting principles. This is the responsibility of management and the independent auditors. II. Organization
1. Charter. At least annually, this charter shall be reviewed and reassessed by the Committee and any proposed changes shall be submitted to the Board of Directors for approval. 2. Members. The members of the Committee shall be appointed by the Board of Directors and shall meet the independence and experience requirements of applicable law, the listing standards of the New York Stock Exchange and applicable policies of the Board of Directors. The Committee shall be comprised of at least three members, at least one of whom shall meet the expertise requirements of the listing standards of the New York Stock Exchange. Committee members may be removed by the Board of Directors. The Board of Directors shall also designate a Committee Chairperson. 3. Meetings. In order to discharge its responsibilities, the Committee shall each year establish a schedule of meetings; additional meetings may be scheduled as required. In planning the annual schedule of meetings, the Committee shall ensure that sufficient opportunities exist for its members to meet separately with the independent auditors, the head of internal audit and management, and to meet in private with only the Committee members present. 4. Agenda, Minutes and Reports. An agenda, together with materials relating to the subject matter of each meeting, shall be sent to members of the Committee prior to each meeting. Minutes for all meetings of the Committee shall be prepared to document the Committee s discharge of its
responsibilities. The minutes shall be circulated in draft form to all Committee members to ensure an accurate final record, shall be approved at a subsequent meeting of the Committee and shall be distributed periodically to the full Board of Directors. The Committee shall make regular reports to the Board of Directors. 5. Performance Evaluation. The Committee shall evaluate its performance on an annual basis and establish criteria for such evaluation.
1. Engagement of Independent Auditors. The Committee shall directly appoint, retain, compensate, evaluate and terminate the Company¶s independent auditors. The Committee shall have the sole authority to approve all engagement fees to be paid to the independent auditors. The independent auditor shall report directly to the Committee.
2. Determination as to Independence and Performance of Independent Auditors. The Committee shall receive periodic reports from the independent auditors as required under generally accepted auditing standards, applicable law or listing standards regarding the auditors¶ independence, which shall be not less frequently than annually. The Committee shall discuss such reports with the auditors, and if so determined by the Committee, take appropriate action to satisfy itself of the independence of the auditors. The Committee shall review the performance of the Company¶s independent auditors annually. In doing so, the Committee shall consult with management and the Company¶s internal auditors and shall obtain and review a report by the independent auditors describing their internal control procedures, material issues raised by their most recent internal quality control review, or by any inquiry or investigation by governmental or professional authorities within the preceding five years and the response of the independent auditors. The Committee shall consider whether or not there should be a regular rotation of the independent audit firm. Any selection of the auditors by the Committee may be subject to shareholders¶ approval, as determined by the Board of Directors.
3. Audits by Independent Auditors. The Committee shall discuss with the independent auditors the overall scope, plans and budget for the audit, including the adequacy of staffing and other factors that may affect the effectiveness of the audit. In this connection, the Committee shall discuss with financial management, the internal auditors and the independent auditors the Company¶s major risk exposures (whether financial, operating or otherwise), the adequacy and effectiveness of the accounting and financial controls, and the steps management has taken to monitor and control such exposures and manage legal compliance programs, among other considerations that may be relevant to the audit.
The Committee shall review with financial management and the independent auditors management¶s annual internal control report.
4. Review of the Internal Audit Plan and Performance and Communications with Internal Auditors. The Committee shall annually review the structure, resources and performance of the Company¶s internal audit department. In that regard, the Committee shall discuss with the internal auditors the overall scope, plans and budget for the annual internal audit plan, including the adequacy of staffing and other factors that may affect the effectiveness and timeliness of the internal audits. In addition, the internal auditors shall report periodically to the Committee regarding any significant deficiencies in the design or operation of the Company¶s internal controls, material weaknesses in internal controls and any fraud (regardless of materiality) involving persons having a significant role in the internal controls, as well as any significant changes in internal controls implemented by management during the most recent reporting period of the Company.
5. Pre-Approval of Audit and Non-Audit Services. The Committee shall establish and maintain guidelines for the retention of the independent auditors for any non-audit service and the fee for such service and shall determine procedures for the approval of audit and non-audit services in advance. The Committee shall, in accordance with such procedures, approve in advance any audit or non-audit service provided to the Company by the independent auditors, all as required by applicable law or listing standards.
6. Review of Annual SEC Filings. The Committee shall review with management and the independent auditors the Company¶s Annual Report on Form 10-K, including the disclosures under ³Management¶s Discussion and Analysis of Financial Condition and Results of Operations,´ their judgment about the quality, not just acceptability, of accounting principles, the reasonableness of significant judgments, the clarity of the disclosures in the financial statements and the adequacy of internal controls. The Committee shall also discuss the results of the annual audit and any other matters required to be communicated to the Committee by the independent auditors under generally accepted auditing standards, applicable law or listing standards, including matters required to be discussed by Statement on Auditing Standards No. 61, as amended by Statement on Auditing Standards No. 90. The Committee may discuss with the national office of the independent auditors issues on which it was consulted by the Company¶s audit team and matters of audit quality and consistency. Based on such review and discussion, the Committee shall make a determination whether to recommend to the Board of Directors that the audited financial statements be included in the Company¶s Form 10-K.
7. Review of Quarterly SEC Filings and Other Communications. The Committee shall meet to review and discuss with management and the independent auditors the quarterly financial information to be included in the Company¶s Quarterly Reports on Form 10-Q, including the disclosures under ³Management¶s Discussion and Analysis of Financial Condition and Results of Operations,´ and shall discuss any other matters required to be communicated to the Committee by the independent auditors under generally accepted auditing standards, applicable law or listing standards. Management shall review and discuss the Company's quarterly earnings press releases with the Committee Chairman prior to their issuance. The Committee shall also periodically review and discuss the Company's earnings press releases as well as the types of financial information provided to analysts and rating agencies. The Committee shall also discuss the results of the independent auditors¶ review of the Company¶s quarterly financial information conducted in accordance with Statement on Auditing Standards No. 71.
8. Review of Disclosure Controls and Procedures. The Committee shall review with the Chief Executive Officer, the Chief Financial Officer and the General Counsel the Company¶s disclosure controls and procedures and shall review periodically, but in no event less frequently than quarterly, management¶s conclusions about the effectiveness of such disclosure controls and procedures, including any significant deficiencies in, or material non-compliance with, such controls and procedures.
9. Review of Certain Matters with Internal and Independent Auditors. The Committee shall review periodically with financial management, the internal auditors and independent auditors the effect of new or proposed regulatory and accounting initiatives on the Company¶s financial statements and other public disclosures.
10. Consultation with Independent Auditors. The Committee shall review with the independent auditors any problems or difficulties the auditors may have encountered in connection with the annual audit or otherwise, any management letters provided to the Committee and the Company¶s responses. Such review shall address any difficulties encountered in the course of the audit work, including any restrictions on the scope of activities or access to required information, any disagreements with management regarding generally accepted accounting principles and other matters, material adjustments to the financial statements recommended by the independent auditors and adjustments that were proposed but ³passed´, regardless of materiality.
11. Preparation of Report for Proxy Statement. The Committee shall prepare the report required to be included in the Company¶s annual proxy statement, all in accordance with applicable rules and regulations.
12. Employment of Former Audit Staff. The Committee shall establish and maintain guidelines for the Company¶s hiring of former employees of the independent auditors, which shall meet the requirements of applicable law and listing standards.
13. ³Whistleblowing´ Procedures. The Committee shall establish and maintain procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters and for the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters.
14. Review of Legal and Regulatory Compliance. The Committee shall periodically review with management, including the General Counsel, and the independent auditors any correspondence with, or other action by, regulators or governmental agencies and any employee complaints or published reports that raise concerns regarding the Company¶s financial statements, accounting or auditing matters or compliance with the Company¶s Standards of Business Conduct. The Committee shall also meet periodically, and may request to meet separately, with the General Counsel and other appropriate legal staff of the Company, and if appropriate, the Company¶s outside counsel, to review material legal affairs of the Company and the Company¶s compliance with applicable law and listing standards.
15. Review of Related Person Transactions. The Committee shall review periodically the Company's policy with respect to related person transactions and shall review, but no less frequently than annually, a summary of the Company¶s transactions with Directors and executive officers of the Company and with firms that employ Directors, as well as any other material related party transactions, for the purpose of recommending to the disinterested members of the Board of Directors that the transactions are fair, reasonable and within Company policy, and should be ratified and approved.
16. Grant of Franchises. The Committee shall approve the appropriateness of an initial grant of franchise(s) to a Company officer or a former Company officer in accordance with the Company¶s policy with regard to such grants of franchises. The Committee shall also approve the purchase of restaurants from a franchisee who immediately thereafter becomes a Company officer.
17. Review of Compliance Programs. The Committee shall review annually with the General Counsel the adequacy and appropriateness of the Company¶s compliance programs. The review shall include a summary of employees¶ compliance with the Company¶s Standards of Business Conduct. The Committee shall be responsible for determining whether and on what terms to grant to any executive officer a waiver from the Company¶s Standards of Business Conduct.
18. Access to Records, Consultants and Others. The Committee shall have the full resources and authority (i) to investigate any matter brought to its attention with full access to all books, records, facilities and personnel of the Company; (ii) to retain outside legal, accounting or other consultants to advise the Committee; and (iii) to request any officer or employee of the Company, the Company¶s outside counsel, internal auditor, internal audit service providers or independent auditors to attend a meeting of the Committee or to meet with any members of, or consultants to, the Committee.
19. Delegation. The Committee may delegate any of its responsibilities to a subcommittee comprised of one or more members of the Committee. The Committee shall also carry out such other duties that may be delegated to it by the Board of Directors from time to time.
Approved by the Audit Committee Date: March 18, 2008 Approved by the Board of Directors Date: March 19, 200
Getting to Know Us...
McDonald's Corporation (NYSE: MCD) is one of the world's largest chain of hamburger fast food restaurants, serving nearly 47 million customers daily. In addition to its signature restaurant chain, McDonald¶s Corporation held a minority interest in Pret A Manger until 2008, was a major investor in the Chipotle Mexican Grill until 2006, and owned the restaurant chain Boston Market until 2007. A McDonald's restaurant is operated by either a franchisee, an affiliate, or the corporation itself. The corporation's revenues come from the rent, royalties and fees paid by the franchisees, as well as sales in company-operated restaurants. McDonald's revenues grew 27% over the three years ending in 2007 to $22.8 billion, and 9% growth in operating income to $3.9 billion. McDonald's primarily sells hamburgers, cheeseburgers, chicken products, french fries, breakfast items, soft drinks, shakes, and desserts. In response to obesity trends in Western nations and in the face of criticism over the healthiness of its products, the company has modified its menu to include healthier alternatives such as salads, wraps and fruits y McDonald's is the leading global foodservice retailer with more than 32,000 local restaurants serving more than 60 million people in 117 countries each day. More than 75% of McDonald's restaurants worldwide are owned and operated by independent local men and women. We serve the world some of its favorite foods - World Famous Fries, Big Mac, Quarter Pounder, Chicken McNuggets and Egg McMuffin. Our rich history began with our founder, Ray Kroc.
The strong foundation that he built continues today with McDonald's vision and the commitment of our talented executives to keep the shine on McDonald'sArches for years to come.
Audit Committee Report Dear Fellow Shareholders: The Audit Committee is composed of four Directors, each of whom meets the independence and other requirements of the New York Stock Exchange. As stated previously, Enrique Hernandez, Jr., Cary D. McMillan and Roger W. Stone qualify as the ³audit committee financial experts.´ The Committee has the responsibilities set out in its charter, which has been adopted by the Board of Directors and is reviewed annually. Management is primarily responsible for the Company¶s financial statements, including the Company¶s internal control over financial reporting. Ernst & Young LLP, the Company¶s independent auditors, is responsible for performing an audit of the Company¶s annual consolidated financial statements in accordance with generally accepted accounting principles (GAAP) and the Company¶s internal controls over financial reporting and for issuing reports on the statements and internal controls. Ernst & Young also reviews the Company¶s interim financial statements in accordance with Statement on Auditing Standards No.100 (interim financial information). The Committee oversees the Company¶s financial reporting process and internal control structure on behalf of the Board of Directors. The Committee met nine times during 2004, including meeting regularly with Ernst & Young and the internal auditors, both privately and with management present. In fulfilling its oversight responsibilities, the Committee reviewed and discussed with management and Ernst & Young the audited and interim financial statements, including Management¶s Discussion and Analysis, included in the Company¶s Reports on Form 10-K and Form 10-Q. These reviews included a discussion of: critical accounting policies of the Company;
the reasonableness of significant financial reporting judgments made in connection with the financial statements, including the quality (and not just the acceptability) of the Company s accounting principles; the clarity and completeness of financial disclosures;
the effectiveness of the Company s internal control over financial reporting, including management s and Ernst & Young s reports thereon, the basis for the conclusions expressed in those reports and changes made to the Company s internal control over financial reporting during 2004; items that could be accounted for using alternative treatments within GAAP, the ramifications thereof and the treatment preferred by Ernst & Young; the annual management letter issued by Ernst & Young, management s response thereto and other material written communications between management and Ernst & Young;
unadjusted audit differences noted by Ernst & Young during its audit of the Company s annual financial statements; and the potential effects of regulatory and accounting initiatives on the Company s financial statements. In connection with its review of the Company¶s annual consolidated financial statements, the Committee also discussed with Ernst & Young other matters required to be discussed with the auditors under Statement on Auditing Standards No. 61, as modified or supplemented (communication with audit committees) and those addressed by Ernst & Young¶s written disclosures and its letter provided under Independence Standards Board Standard No. 1, as modified or supplemented (independence discussions with audit committees). The Committee is responsible for the engagement of the independent auditors and appointed Ernst & Young to serve in that capacity during 2004 and 2005. In that connection, the Committee: reviewed Ernst & Young s independence from the Company and management, including Ernst & Young s written disclosures described above; reviewed periodically the level of fees approved for payment to Ernst & Young and the pre-approved nonaudit services it has provided to the Company to ensure their compatibility with Ernst & Young s independence; and reviewed Ernst & Young s performance, qualifications and quality control procedures. Among other matters, the Committee also: reviewed the scope of and overall plans for the annual audit and the internal audit program;
consulted with management and Ernst & Young with respect to the Company s processes for risk assessment and risk management; reviewed the adequacy of certain of the Company s financial policies;
reviewed and approved the Company s policies for the pre-approval of audit and permitted non-audit services by the independent auditors and the hiring of former employees of the independent auditors; in 2003, established a policy for the submission and confidential treatment of communications received from employees and third parties about accounting, internal controls and auditing matters, and reviewed reports of such communications in accordance with the policy; 24 McDonald¶s Corporation
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reviewed with management the scope and effectiveness of the Company s disclosure controls and procedures, including for purposes of evaluating the accuracy and fair presentation of the Company s financial statements in connection with certifications made by the Chief Executive Officer and Chief Financial Officer; and reviewed significant legal developments and the Company s processes for monitoring compliance with law and Company policies. Based on the reviews and discussions referred to above, the Committee recommended to the Board of Directors the audited financial statements be included in the Company¶s Annual Report on Form 10-K for the year ended December 31, 2004 for filing with the SEC.