UPDATE: For additional insight on how to separate RCOI and due diligence for purposes of the IPSA, read this.
Readers of our blog, or anyone who has stood still long enough for us to grab them to talk about the Independent Private Sector Audits (IPSAs) of Conflict Minerals Reports (CMRs) – whether they wanted to or not – have heard us discuss strategies to reduce the effort and costs of the IPSAs. Two of our articles on the matter can be read here and here. In recent weeks, we had some interesting experiences in this regard.
To begin with, we completed our first IPSA for a major company in the electronics supply chain. In conducting the IPSA, essentially all of our expectations about the process and effort were confirmed. We also saw first hand the value of good pre-audit preparations and a thoughtfully written CMR.
Second, clients and outside law firms have told us that a number of audit firms are pulling out of the IPSA market. In the early days of the final SEC rule, many audit firms expected IPSAs to require significant time and effort, generating large revenue opportunities. Once the SEC staff clarified their expectations of the IPSA, it became evident that the effort, scope and cost of the audit were lower than originally thought (or perhaps “hoped” by the audit profession). The actual IPSA costs are simply too small for some firms to bother with, and we hear a number of them are quietly withdrawing from the market.
Some may recall that the SEC had hoped pricing of the IPSAs would be impacted by competition resulting from allowing non-CPAs to conduct Performance Audit IPSAs. We believe this is happening, and continue to think that the SEC’s estimated IPSA cost of $25,000 is fairly accurate under certain easily-attainable circumstances.
Which leads us to our last experience. Our consulting clients are beginning to explore IPSA providers, and we are seeing higher prices and bigger scopes for IPSAs than we would expect. This has been surprising, but also makes clear that issuers needing an IPSA should strive to be more educated on the IPSA than the auditors themselves. We tend to think our clients are.
The major takeaways from all this are:
- As we have said before, the wording and content of the CMR are absolutely critical to the effort and cost of the IPSA. For a cost effective IPSA, the wording must be auditable and concise. The audit firm will likely review the CMR for auditability prior to the IPSA, but the more you do this yourself, the less time the auditor will need for that task.
- Perhaps most importantly, RCOI activities should not be included in the description of due diligence measures undertaken. The SEC Q&A (#18) clarifies that “[t]he IPSA does not need to include the reasonable country of origin inquiry because, under the rule, that inquiry is a distinct step separate from the due diligence process.”
- Similarly, it is not necessary to define “due diligence” as all five steps of the OECD Due Diligence Guidance. This has been a point of confusion since the document is called “Due Diligence Guidance”, but the SEC’s definition of due diligence differs from all five steps (as demonstrated by the point above).
- Assertively manage your IPSA auditor. Don’t be swayed by scare tactics used to pad the effort and price. Make sure you understand what the IPSA is not to cover. Some matters that are not within the IPSA scope are set forth in Question .06 in AICPA’s Conflict Minerals Resources Q&A. It is probably well worth having an auditor conduct preparation activities before selecting the IPSA auditor. You can use Internal Audit staff to do this (once they are adequately informed or trained on this unique audit), or hire a qualified third party auditor. The better informed you are, the better you can control the IPSA cost.