Eli Lilly 2006 Annual Report Download - page 77

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the committee’s subsequent evaluation continues to be favorable, the candidate is contacted by the chairman of the
board and one or more of the independent directors for direct discussions to determine the mutual levels of inter-
est in pursuing the candidacy. If these discussions are favorable, the committee makes a fi nal recommendation to
the board to nominate the candidate for election by the shareholders (or to select the candidate to fi ll a vacancy, as
applicable).
Process for Submitting Recommendations and Nominations
A shareholder who wishes to recommend a director candidate for evaluation by the committee pursuant to this
process should forward the candidate’s name and information about the candidate’s qualifi cations to the chairman
of the directors and corporate governance committee, in care of the corporate secretary, at Lilly Corporate Center,
Indianapolis, Indiana 46285. The candidate must meet the selection criteria described above and must be willing
and expressly interested in serving on the board.
Under Section 1.9 of the company’s bylaws, a shareholder who wishes to directly nominate a director candidate
at the 2008 annual meeting (i.e., to propose a candidate for election who is not otherwise nominated by the board
through the recommendation process described above) must give the company written notice by November 6, 2007.
The notice should be addressed to the corporate secretary at Lilly Corporate Center, Indianapolis, Indiana 46285. The
notice must contain prescribed information about the candidate and about the shareholder proposing the candidate
as described in more detail in Section 1.9 of the bylaws. A copy of the bylaws is available online at http://investor.lilly.
com/bylaws.cfm. The bylaws will also be provided by mail without charge upon request to the corporate secretary.
Audit Committee Matters
Audit Committee Membership
All members of the audit committee are independent as defi ned in the New York Stock Exchange listing standards
applicable to audit committee members. The board of directors has determined that Mr. J. Michael Cook is an audit
committee fi nancial expert as defi ned in the rules of the Securities and Exchange Commission.
Audit Committee Report
The audit committee (“we” or “the committee”) reviews the company’s fi nancial reporting process on behalf of the
board. Management has the primary responsibility for the fi nancial statements and the reporting process, includ-
ing the systems of internal controls and disclosure controls. In this context, we have met and held discussions with
management and the independent auditors. Management represented to us that the company’s consolidated fi nancial
statements were prepared in accordance with generally accepted accounting principles, and we have reviewed and
discussed the audited fi nancial statements and related disclosures with management and the independent auditors,
including a review of the signifi cant management judgments underlying the fi nancial statements and disclosures.
The independent auditors report to us. We have sole authority to appoint (subject to shareholder ratifi cation)
and to terminate the engagement of the independent auditors.
We have discussed with the independent auditors matters required to be discussed by Statement on Auditing
Standards No. 61 (Communication with Audit Committees), including the quality, not just the acceptability, of the ac-
counting principles, the reasonableness of signifi cant judgments, and the clarity of the disclosures in the fi nancial
statements. In addition, we have received the written disclosures and the letter from the independent auditors re-
quired by the Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and
have discussed with the independent auditors the auditors’ independence from the company and its management. In
concluding that the auditors are independent, we determined, among other things, that the nonaudit services provid-
ed by Ernst & Young LLP (as described below) were compatible with their independence. Consistent with the require-
ments of the Sarbanes-Oxley Act of 2002, we have adopted policies to avoid compromising the independence of the
independent auditors, such as prior committee approval of nonaudit services and required audit partner rotation.
We discussed with the company’s internal and independent auditors the overall scope and plans for their
respective audits including internal control testing under Section 404 of the Sarbanes-Oxley Act. We periodically
meet with the internal and independent auditors, with and without management present, and in private sessions
with members of senior management (such as the chief fi nancial offi cer, the chief accounting offi cer, and the gen-
eral auditor) to discuss the results of their examinations, their evaluations of the company’s internal controls, and
the overall quality of the company’s fi nancial reporting. We also periodically meet in executive session.
In reliance on the reviews and discussions referred to above, we recommended to the board (and the board
subsequently approved the recommendation) that the audited fi nancial statements be included in the company’s