Employees’ Retirement System of the State of Hawaii

BOARD OF TRUSTEES ADMINISTRATIVE & AUDIT COMMITTEE

The Administrative & Audit Committee of the Employees’ Retirement System (“ERS”) of the State of Hawaii is a committee of the Board of Trustees (“Board”). Its primary function is to assist the Board in fulfilling its oversight responsibilities relating to:

A. The integrity of the ERS’s financial statements and the accounting and financial reporting processes;

B. The ERS’s compliance with legal and regulatory requirements;

C. The qualifications, independence and performance of the ERS’s external auditors;

D. Monitoring the performance of the systems of internal controls established by management and the Board;

E. Monitoring the performance of the ERS’s internal audit activities;

F. The business practices and ethical standards of the ERS; and

G. The review and monitoring of the administration of the ERS.

It is the responsibility of the Administrative & Audit Committee to provide an avenue of open and free communication between the Board, the internal auditors, the external auditors and management of the ERS. The Administrative & Audit Committee shall also perform such other functions set forth in this charter.

A. The membership of the Administrative & Audit Committee shall consist of at least three members of the Board who shall be appointed by the Chair of the Board and may be removed at any time.

B. The members of the Administrative & Audit Committee and its Chair shall be approved by the Board annually and shall serve one (can this be 2?) year terms or Employees’ Retirement System of the State of Hawaii BOARD OF TRUSTEES ADMINISTRATIVE & AUDIT COMMITTEE Page 2 until their successors are elected or their earlier resignation or removal. The Board shall approve members for a period shorter than one year in the event of a vacancy.

C. Administrative & Audit Committee members shall possess or obtain a basic understanding of governmental financial reporting and auditing.

D. Members of the Administrative & Audit Committee shall be considered independent if they have no relationship to the ERS that may interfere with the exercise of their fiduciary responsibilities.

A. The Administrative & Audit Committee must meet at least two times per year or more frequently as circumstances require, with prior notice and publication of the agenda as provided by law. The Administrative & Audit Committee may ask members of management or others to attend the meeting and provide pertinent information as necessary.

B. The Administrative & Audit Committee Chair may call a special meeting of the Administrative & Audit Committee upon due notice to the Chair of the Board and each other member, and with prior notice and publication of the agenda as provided by law.

The Administrative & Audit Committee shall have the power to conduct or authorize investigations into any matters within the Administrative & Audit Committee’s scope of responsibilities and shall recommend to the Board, retention of independent counsel, accountants, or others to assist in the conduct of any investigation. The Administrative & Audit Committee shall have the authority to seek information it requires from employees, management, and external parties; and to engage advisors, or otherwise obtain independent legal, accounting, consulting, or other professional services it requires at the expense of the ERS.

In carrying out its oversight responsibilities, the Administrative & Audit Committee’s practices/procedures should remain flexible in order to best react to changing conditions and assure the Board that the risk assessment process, the accounting and financial reporting processes, internal controls, and internal and external auditing are in accordance with all related requirements and are of the highest quality. In addition to fulfilling its duties as a member of the Board, the Administrative & Audit Committee is expected to:

Regarding Administration

A. Review and approve annually the ERS’ goals and objectives applicable to the administration of the ERS.

B. Assign and provide direction to the Executive Director (“ED”) and Deputy Executive Director (“Deputy ED”) on priorities and actions to successfully execute the responsibilities of the Administrative Branch.

C. Review and establish administrative policies, procedures, guidelines and recommendations for the Board’s consideration.

Risk Assessment

A. Inquire of management, the internal auditors, and the external auditors about significant risks or exposures.

B. Meet with the necessary parties to discuss the results of periodic risk assessments and obtain a clear understanding of the risk assessment process.

C. Assess the steps management has taken to minimize significant risks or exposures to the ERS.

Accounting and Financial Reporting Processes and Internal Controls

D. Obtain a clear understanding of the ERS’s accounting and financial reporting processes and critical policies, and ensure that the financial leadership team is qualified and competent.

E. Review the adequacy and effectiveness of the ERS’s accounting and financial controls (including information technology and security controls) with financial, accounting, and information systems personnel, internal auditors, and external auditors, and elicit any recommendations for the improvement of the system of internal controls or particular areas where new or more detailed controls or procedures are desirable.

F. Assess the integrity of the annual financial statements and related disclosures, including significant accounting judgments and estimates.

G. Obtain an understanding of any corrective actions to be taken with regard to controls and procedures.

H. Coordinate with the Legislative Committee, Investment Committee, Governance Policy Committee, and Compensation Review Committee, as deemed necessary.

Internal Auditors

I. Where appropriate, oversee the procurement of internal auditing services and recommend to the Board: (1) the internal auditor to be nominated, (2) approval of the fees of the internal auditor, and (3) the discharge of the internal auditor.

J. Recommend to the Board any co-sourcing or outsourcing internal audit services.

K. Review the ERS Internal Audit Charter, including the independence and authority of the internal audit function, and its reporting obligations, qualifications, and staffing for the coming year.

L. Review and approve the annual internal audit plan and all major changes to the plan.

M. Review the reports and findings/recommendations of the internal auditors and the responses of the ERS management, and monitor completion of management’s action plans.

N. Review a summary of major findings from completed internal audits and a progress report on the execution of the internal audit plan and management’s implementation of action plans (on a periodic basis).

O. Review the effectiveness of the internal audit function, including compliance with the Institute of Internal Auditors Standards for the Professional Practice of Internal Auditing.

P. On a regular basis, meet separately with the Chief Audit Executive1 to discuss any matters that is deemed necessary by the Administrative & Audit Committee or the internal auditor.

Q. Periodically report the results of the Internal Audit Plan to the Board. If desired by the Board, invite the internal auditors to attend Board meetings to assist in reporting the results of the Internal Audit Plan or to answer questions.

External Auditors

R. Review and examine the independence (including any potential conflict of interest) of the external auditor, including a review of management consulting services and related fees provided by the external auditor.

S. Oversee the procurement of external auditing services and recommend to the Board: (1) the external auditor to be nominated, (2) approval of the audit fees of the external auditor, and (3) the discharge of the external auditor.

T. Review with the external auditor the coordination of audit effort to assure completeness of coverage, reduction of redundant efforts, and the effective use of audit resources.

U. Review, at least annually, with management and the external auditor:

• i. Scope of the proposed audit for the current year and the procedures to be utilized.

• ii. The ERS’s annual financial statements and related footnotes.

• iii. The external auditor’s audit of the financial statements and his or her audit report thereon.

• iv. The adequacy of the ERS’s internal controls.

• v. Any significant changes required in the external auditor’s scope and audit plan.

• vi. Other matters related to the conduct of the audit which are to be communicated to the Administrative & Audit Committee under Generally Accepted Government Auditing Standards, including audit adjustments made and passed.

• vii. Judgments about the quality, not just the acceptability of accounting principles and the clarity of the financial disclosures practices used or proposed to be used, and particularly the degree of aggressiveness or conservatism of accounting principles and underlying estimates.

• viii. Any difficulties encountered in the course of their external audits, including any disputes with management, restrictions on the scope of their work or access to required information.

V. Consider and review with management any significant findings during the year and recommendations of the external auditors and management’s responses thereto.

W. Review prior year comments from the Government Finance Officers Association (“GFOA”) in its determination of the ERS’s compliance with the requirements for the Certificate of Achievement in Financial Reporting, where applicable.

X. Review with management and the external auditor the draft financial statements to be filed with the GFOA.

Y. Meet with the external auditor and/or management in separate meetings to discuss any matters that the Administrative & Audit Committee or these groups believe should be discussed privately with the Administrative & Audit Committee.

Z. Report the results of the annual audit to the Board. If desired by the Board, invite the external auditors to attend a Board meeting to assist in reporting the results of the annual audit or to answer questions.

Other

AA. Report Administrative & Audit Committee actions to the Board with such recommendations as the Administrative & Audit Committee may deem appropriate.

BB. Monitor the implementation of procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls, auditing or other matters, including mechanisms for anonymous submission of related concerns by ERS employees or the appropriate bodies.

CC. Consult with the Attorney General on legal matters regarding financial transactions, fraud, or any other issue that could have significant impact on the annual reports.

DD. Obtain any information and training needed to enhance the Administrative & Audit Committee members’ understanding of the role of internal and external auditors, the risk management process, internal controls and a certain level of familiarity in government financial reporting standards and processes.

EE. Obtain the Board’s approval of this Charter and, on an annual basis, evaluate the adequacy of this Charter and recommend any proposed changes to the Board for approval.

FF. Confirm annually that all responsibilities outlined in this Charter have been carried out.

GG. Perform such other functions as assigned by the Board.

It is not the duty of the Administrative & Audit Committee to plan or conduct audits or to determine that the ERS’s financial statements are complete, accurate, and in accordance with Generally Accepted Accounting Principles. This is the responsibility of management and the external auditors. Furthermore, while the Administrative & Audit Committee is responsible for reviewing the ERS’s policies and practices with respect to risk assessment and management, it is the responsibility of the Executive Director and senior management to determine the appropriate level of the ERS’s exposure to risk. It is the duty of the Administrative & Audit Committee to report regularly to the Board with respect to any issues that arise concerning the quality or integrity of the ERS’s financial statements, the ERS’s compliance with legal or regulatory requirements, the performance and independence of the ERS’s external auditors, the performance of the internal audit function, or any other matter within the scope of the Administrative & Audit Committee’s function.

Last Revised & Adopted by the Board: May 2020

1 The Chief Audit Executive may be an individual employee or a firm contracted to outsource or co-source the internal audit function.