Oct 17, 2013
From the Audit Committee Institute
More than three-quarters of the way through the SEC's first "conflict minerals" reporting period -- and just less than six months away from its May deadline for disclosures -- many companies have been slow in implementing compliance processes and procedures.
Indeed, despite the broad reach of the rules -- some 6,000 companies may be affected, across most major industries -- as well as the legal/regulatory and reputational implications, conflict minerals has yet to make it onto many audit committee or board agendas.
In short, the rule requires companies to make a reasonable determination whether tin, tantalum, tungsten or gold (3TG) are in their products -- and if so, whether they are either "conflict-free" or "non-conflict-free" in both sourcing and chain of custody (both of which declarations would require an independent private sector audit).
The first specialized disclosure (SD) for SEC registrants is due May 31, 2014, covering the 2013 calendar year regardless of the company's fiscal year end. (While the D.C. Court of Appeals has agreed to expedite an appeal of a lower court ruling upholding the SEC's Conflict Minerals rules, it is unclear whether the Court of Appeals will issue a decision by the SEC's May 14, 2014, compliance deadline.)
"The due diligence required may be far more complex and involved than most companies have been expecting," says Jim Low, an Audit partner at KPMG LLP. Noting that many companies have vast supply chains, Low said the potentially daunting task of collecting accurate data from a complex web of suppliers will put organizations and IT systems to the test. "Essentially, it's a huge research effort that will hinge on different departments and often different companies working in sync, and data collection software to bring it all together."
A recent survey presented at the Global Conflict Minerals Symposium indicated that many companies affected by the rules are less than half way through the four main compliance tasks -- determining whether the company manufactures or contracts to manufacture its products exposed to conflict minerals, conducting a country-of-origin analysis, supply chain due diligence and developing a conflict minerals report.
From an oversight perspective, audit committees can help ensure that the company's response to the conflict minerals rules is on track by having robust discussions with management on key elements of the effort, including:
- The big picture: What is the potential scope of the effort, and what are the company's goals -- i.e., to simply comply with the rules, or ultimately to be "conflict-free"?
- The company's processes and timeline for compliance: Is there an overarching framework and clear responsibility and accountability for the compliance effort? What are the key milestones in the timeline?
- Adequacy of resources and coordination: Are all the key departments involved -- e.g., legal, procurement, internal audit -- and working in sync? Are the company's IT systems capable of synthesizing the necessary data? What is the level and competency of cooperation of the companies' suppliers in the information-gathering process?
- Implications of audit and certification requirements: Has management planned for an independent audit of its supply chain due diligence process -- scope, cost and timing -- as well as for management's attestation statements in the company's conflict minerals report -- i.e., the internal representation process needed to enable the designated member of senior management to sign-off on Form- SD?
- Broader business implications of the conflict minerals rules: How might the conflict minerals issue impact the company's brand and shape its future business decisions -- e.g., new product development, supplier/sourcing decisions, M&A and joint ventures?
Audit committees should be particularly alert to several key challenges that many companies are encountering, including collecting accurate survey data from suppliers, processing and analyzing the data, evaluating and validating supplier responses, and training staff on effective communication with suppliers.
"For many companies this will be more than a compliance exercise," said Low. "It will trigger some major business decisions."
Beyond the SEC requirements, other jurisdictions have also adopted -- or are considering -- conflict minerals rules, including Australia, Canada, the EU, Japan and the UK, as well as California and several U.S. cities. The OECD has published guidance to help companies conduct "upstream due diligence" of suppliers.
Read on for more on conflict minerals from KPMG.