Smelling Your Conflict Minerals Auditor

Yes, you read that headline right. We’ll explain.

Interest in mock or simulated independent private sector audits (IPSAs) has spiked recently as companies prepare for the end of the IPSA deferral period this year (although the deferral period is currently extended).

At times, the same company has asked us to perform these consulting services and their IPSA. Each time we are asked to do both for the same client, we decline. It is our position that providing substantive consulting support concerning the same subject matter that is the subject of the audit is an impairment to auditor independence.

The SEC has stated that IPSAs are “non-audit services” under Regulation S-X and that a company’s financial auditor can conduct the IPSA for the same company, and of course non-CPAs can conduct IPSAs too. All of this appears to create confusion to many in deciding what is consulting versus auditing, and who can provide what services to the same client. But page 215 of the final release also states

… entities performing an independent private sector audit of the Conflict Minerals Report must comply with any independence standards established by GAO and any questions regarding applicability of GAGAS on this point should be directed to the GAO.

So we decided to contact GAO, but first we reviewed the independence requirements of the GAO Performance Audit standard (Chapter 3 and the Appendices[1]). Twenty-six pages of the current Government Audit Standard (aka, GAGAS) are dedicated to independence – more than any other topic in the document. This does not even include the Information to Accompany Chapter 3 in Appendix I and the GAGAS Conceptual Framework for Independence in Appendix II.

When we posed our question to GAO, there was little hesitation in their response: an impairment to independence exists if an audit firm conducts a simulated audit (or program assessment) AND the IPSA. Simulated audits and program assessments are intended to provide management with a primary basis for making decisions that are significant to the subject matter of the audit (Section 3.36h) or at the very least are services that directly affect the subject matter information of the IPSA (Appendix I, Section A3.04c). Other types of threats may also be applicable depending on the situation.

Auditor independence is a serious matter to Elm and from the beginning of our involvement in conflict minerals in 2010, we made it clear that we would  stay on one side of the fence or the other for any particular client. We know other firms are willing to justify why they can provide both services. But we simply don’t want to put any client in a position to defend why we worked on different sides of the same audit matter.

Simply put, we believe in the smell test – if it doesn’t smell right, it isn’t right.

So let me ask you – how does your selected IPSA audit firm smell?

If you have questions about GAGAS, feel free to contact

GAGAS Technical Assistance
(202) 512-9535

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[1]   In general we found sections 3.13 – .14, 3.34 – .44, 3.54, A3.03 – .05 and A3.08 most on-point in the context of conducting simulated audits and IPSAs.

 

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