Global audit firms have a number of concerns around proposed SEC regulations implementing Dodd-Frank’s requirement of an independent outside audit of a company’s Conflict Minerals Report included in the annual report. In letters to the SEC, the audit firms ask the SEC to clarify and provide guidance on issues affecting the nature and form of the independent private sector audit, suitable criteria, and the sufficiency of evidence to support the assertion. Broadly, the independent auditors want the final SEC regulations implementing Section 1502 to provide guidance that would form a framework to aid both the company in preparing the Conflicts Minerals Report and the audit firm in conducting an independent audit of the report.
The proposed regulations would require a company, including a foreign private issuer, to undergo a reasonable due diligence process to ascertain whether conflict minerals are used in the manufacture or production of its products and, if they are, disclose in the body of its annual report on Form 10-K, or Form 20-F for foreign private issuers, whether its conflict minerals originated in the Democratic Republic of the Congo or an adjoining country. In addition to disclosure in its annual report, a company must also furnish a separate conflict minerals report as an exhibit to its annual report when it concludes that conflict minerals are used in, or are necessary for the manufacture or functionality of, its products or the company is unable to conclude whether any of the named minerals originate from the DRC or adjoining countries.
The Conflict Minerals Report should include a description of the measures taken to exercise due diligence on identifying the source and chain of custody of the conflict minerals, including an independent private sector audit of the issuer’s Conflict Minerals Report conducted in accordance with standards established by the Comptroller General. Further, any company furnishing a Conflict Minerals Report as an exhibit to its annual report would be required to certify that it obtained an independent audit of the report, furnish the auditor’s report as an exhibit to its annual report, and make the report and the auditor’s report publically available on the company’s internet Web site.
In its comment letter, Grant Thornton recommend that the Commission establish a working group to support the Comptroller General in the development of the appropriate form of engagement, including the criteria to be used to evaluate the subject matter and the opinion to be expressed thereon. Although recognizing the time constraints imposed by the effective dates mandated by the Dodd-Frank Act, GT believes that the expedited formation of a working group would assist the Commission in making appropriate decisions as it relates to the final rule and, along with the Comptroller General, in developing appropriate criteria and a practicable reporting framework.
In its letter, Deloitte asked for SEC guidance on the nature, objectives, criteria, and evidence of the company’s Conflict Minerals Reports so that the independent auditor would have better clarity on the type of audit procedures and reporting for its report. Similarly, Deloitte asked that the final regulations clarify the nature and objective of the independent audit because the nature and objectives would directly impact the complexity, practicability, and level of effort involved for the outside auditor. For example, it is unclear whether the objective is for the independent auditor to opine on the accuracy and completeness of information within an the Conflict Minerals Report or on the design and effectiveness of a company’s process used to identify the origin of conflict minerals.
Deloitte supports the SEC proposal to allow the audits to be performed either as examination attestation engagements or performance audits. However with regard to both of these audit types, there is insufficient guidance regarding suitable objectives and benchmarks and consequently there is not a consistent framework for companies to prepare their Conflict Minerals Reports and against which independent auditors need to perform the audit. Deloitte also asked that the final rule provide additional guidance on defining what would constitute sufficient audit evidence.
Deloitte also supports the proposal to furnish to the SEC, rather than file, the Conflict Minerals Report and the audit report and that such reports would not be automatically incorporated by reference into filings under the Securities Act.
It is unclear if the independent auditor would be required to issue an opinion on the content of the Conflict Minerals Report or the procedures that the company had in place to support assertions in the report. Thus, Deloitte urged the SEC to clarify whether the independent auditor should opine on the information contained in the Conflict Minerals Report or on the design and effectiveness of the corporate process to identify the origin of conflict minerals
In its comment letter, Ernst & Young noted that the SEC proposal states that a certified audit would constitute a critical component of the company’s due diligence in establishing the source and chain of custody of the conflict minerals. This language in the proposing release could cause confusion as to the nature of the engagement and the role of the independent auditor if it is perceived to be a component of management’s procedures, said E&Y.
The proposed rule does not dictate the standard for, or otherwise provide guidance concerning, the due diligence that a company must use related to the evaluation of its supply chain. Instead, the proposal would require the company to disclose the due diligence it used in making its determinations, including for example, whether it used any nationally or internationally recognized standards or guidance of supply chain due diligence.
For calendar-year issuers, these new processes and procedures would need to be in effect for the year ending 31 December 2012, noted E&Y, which provides limited time to develop and implement appropriate due diligence procedures to comply with this new reporting obligation. Many companies would be conducting supply chain due diligence procedures for the first time and would not have the benefit of the experiences of others in applying the new standards or guidance.
Thus, the SEC was urged to consider identifying a comprehensive framework to satisfy the criteria necessary to perform either an attestation engagement or performance audit. The proposing release cites the Organization for Economic Cooperation and Development’s (OECD) effort to develop due diligence guidance for conflict mineral supply chains. The SEC should consider whether the due diligence guidance issued by the OECD would provide a sufficient framework and, if so, reference to that guidance could be provided in the final rule.
Deloitte urged the SEC to clarify the independence standards applicable to the audit of the report and specifically clarify that the independence of the external auditor of the company’s financial statements would not be impaired if the same auditor performed an audit of the Conflict Minerals Report
Grant Thornton noted that the proposal, consistent with the Dodd-Frank Act, indicates that the independent audit is a critical component of due diligence. Noting that this statement is contradictory to the concept of an independent opinion, GT urged the SEC to clarify the intent of this statement, including the effect on the independence of the auditor.