We are nearing the halfway mark in our review of SEC conflict minerals filings and some trends have emerged. One we are following is how filers defined and described “due diligence”. Our interest in this particular subject stems from the point that the CMR descriptions of the due diligence framework and activities undertaken form the basis of the independent private sector audit (IPSA) scheduled to be filed with the CY2015 filing.
Of course the recent (and possibly upcoming) court decisions, along with SEC’s public statement on April 29, 2014, put the IPSA requirement in limbo. At the same time, we anticipate the matter will be resolved by the expiration of original IPSA deferral period.
So in that light, we continue to recommend that issuers carefully assess how the wording of their CMRs impacts the effort and cost of an IPSA when required.
We have stated our views many times on the position that Steps 1 and 2 of the OECD Due Diligence Guidance are essentially the RCOI and therefore precede what SEC considers “due diligence”. SEC themselves made this clear in Question 18 of their Frequently Asked Questions. But in instances where issuers provide a detailed description of all five OECD steps as due diligence, auditors will include supplier screening and engagement (and possibly product screening) activities in the audit scope.
Based on what we have seen so far in the 2013 filings, around one-half of those companies reviewed (or about 25% of the total number of filings) included RCOI steps within the definition of due diligence.
While this may not be surprising or have IPSA implications for this first year, it almost certainly will once IPSAs are more broadly required.
We are not the only ones who have found the lack of RCOI/DD separation and recommend that issuers pay more attention to the implications of the IPSA when writing CMRs. Deloitte recently published an article that confirms our views. Interestingly, they also found 25% of all 1300+ filers included RCOI within due diligence, so our preliminary finding apparently hold true.
We are still hearing about six-figure IPSA cost estimates which may indeed be accurate given what we see in the 2013 CMRs.
So if you want to pay an IPSA fee equivalent to an Italian exotic automobile, we would be happy to oblige. However, if you prefer to buy your auditor a sensible used vehicle with miles on the odometer, give us a call. We can advise you on CMR structure and content that helps manage the IPSA fee, or when the time comes, we can conduct the IPSA at an appropriate cost.