Tag Archives: Conflict Free

Reputation Risk and Conflict Minerals

Respected governance and internal audit expert Norman Marks posted a fascinating article on reputation risk.  He quotes a line from a recent survey that summarizes the main point:  reputation risk is driven by other business risks.  In many ways, he seems to be speaking directly to conflict minerals.  A few of his salient points are below.  Actually, the whole article is so on-point we almost need to quote it in its entirety.

It should be noted that the likelihood of a significant impact on reputation arising from, say, a safety issue is not necessarily the same as the likelihood of other impacts such as fines, lost time, and so on.

In addition, the impact on reputation may be positive while the impact on, say cash flow, is negative!

For example, the decision to divorce the organization from a supplier who is found to have broken the law may adversely impact costs and disrupt delivery of product to the market – while enhancing the reputation of the organization…

… when there is violence in some part of the world, people look to the US, EU, and others for a reaction. It’s not only the action that can affect reputation, but the failure to act

Actions by third parties that are part of the extended enterprise (suppliers, channel parties, agents, and even customers) can affect reputation. This needs to be identified, assessed, and monitored closely as well…

Of course, reputation risk is the basis of the Dodd-Frank Section 1502 conflict minerals disclosure so perhaps there is little surprise that Norman’s comments are so relevant.  Yet in the heat of effort companies are expending for SEC compliance, some may lose sight of this risk.

Reputation risk is a subject we explore specifically and deeply, from many points of view and sources.  We also explicitly drill down into impacts on supplier relationships – both positive and negative*.

Norman refers to the concept of “risk sensing” as a means of identifying and monitoring reputation risk.  We agree – as a matter of fact, given that our experience includes traditional risk management (insurable and non-insurable), this comes naturally to us.

One client has a particular exposure to reputation risk.  We knew this before the engagement because of our pre-engagement research and “risk sensing”.  In reality, this was easy to identify because the company is very well known and recently the subject of significant negative publicity about their core operations.  Because we were aware of this existing situation, significant time was expended discussing potential reputation impacts of conflict minerals matters.  Facilitated discussions took place between many business, communications, PR and procurement leaders (among others), leading the client to a thoroughly-considered conclusion and plan of action.

Norman’s article should be carefully reviewed and considered.  Afterwards, it may be worthwhile to revisit your own assessment of conflict minerals reputation risk.


*  For instance, eliminating suppliers that are not conflict free can result in a consolidation of purchasing power (a positive), but also reduce supply chain resiliency in the event of a disruption, such as what occurred with capacitor manufacturing in 2011 (a negative).

Should You Have Your Conflict Minerals RCOI Validated?

Now that the inaugural conflict minerals disclosures have been filed with the SEC, and those filings also made public on company websites, expectations have been raised on the adequacy, accuracy and certainty of the information for 2014.   Our recent post on DRC Conflict Free determinations got us thinking – how comfortable will issuers be in making a DRC Conflict Free determination based only on their Reasonable Country of Origin Inquiry (RCOI)?  How can the executive who signs the Form SD ease their concerns or anxiety about putting their name on the form?

In our view, CY2014 claims of “DRC Conflict Free”, while voluntary, will be put under a microscope by customers, NGOs and certainly the media.  Filers making the claim based on their RCOI only (i.e., determining that none of their conflict minerals originated from the Covered Countries, or originates from 100% scrap/recycled materials) will be scrutinized even more due to a general perception that this is a loophole for companies to avoid effort, cost and information disclosure.

Companies anticipating claiming DRC Conflict Free status because none of their conflict minerals originates from the Covered Countries, or 100% originates from scrap/recycled materials should seriously consider having an independent program review/assessment to support such a claim.

This type of program review is not mandated, and is not contemplated by the SEC’s disclosure requirement, but can significantly strengthen company claims and determinations.  Different from the Independent Private Sector Audit (IPSA) that is required for a DRC Conflict Free determination after full  due diligence, an RCOI program assessment can be more flexible.   The IPSA focuses on conformity of the processes to criteria, whereas the RCOI assessment would evaluate and validate the results and validity of the RCOI efforts to directly support the determination.

For us, however, such an assessment is nothing new.  As part of our conflict minerals program assessments, we conduct detailed reviews and evaluations of the programs, processes and results – as well as the information on which the company relies.

If you want to substantiate your RCOI claims, contact us via our website or call 678-200-5220.

On Being DRC Conflict Free Without Due Diligence or an IPSA

One of the many things we learned from our analysis of the CY2013 SEC conflict minerals filings is that 23% of the 1300 filers filed a Form SD only, indicating those filers conducted the RCOI and found no reason to believe any materials originated from the Covered Countries, and filed no Conflict Minerals Report (CMR). Most of these filers did not make a statement about their conflict status or determination, although some specifically classified their products as DRC Conflict Free.

But can you really call yourself DRC Conflict Free without full due diligence, a CMR and the Independent Private Sector Audit of that report?

For this discussion, let’s put aside the question of whether the first-year information was good enough to be relied on for such a determination, and the legal wranglings surrounding the First Amendment matter. Let’s focus on whether a determination based solely on RCOI is sufficient to make a claim of DRC Conflict Free.

Pages 149 and 150 of the Final Release, SEC states

… if an issuer reasonably designs an inquiry and performs the inquiry in good faith, and in doing so receives representations indicating that its conflict minerals did not originate in the Covered Countries, the issuer may conclude that its conflict minerals did not originate in the Covered Countries, even though it does not hear from all of its suppliers, as long as it does not ignore warning signs or other circumstances indicating that the remaining amount of its conflict minerals originated or may have originated in the Covered Countries. For example, we would agree that “if reasonable inquiry has been made, and if no evidence of [Covered Country] origin has arisen, and if the origin of only a small amount of gold were still unknown, a manufacturer should be allowed to declare that its gold is not from the [Covered Countries] and is DRC Conflict Free.”

Yet in what seems to be a contradiction, Question 15 of the SEC Q&A states that “to be able to describe qualifying products in its Conflict Minerals Report as ‘DRC conflict free,’ an issuer must have obtained an IPSA.”

But the key here is that Question 15 specifically references situations where the determination is made within a CMR. No mention is made of a situation where a DRC Conflict Free determination is made outside of a CMR (i.e., RCOI/Form SD only).  Or, to be more direct – the difference is conflict minerals that simply do not originate from Covered Countries versus those that originate from non-conflict sources within the Covered Countries.  The term “DRC Conflict Free” applies to both circumstances, but different paths are required to get to the same final conclusion.

Further, Stephen Quinlivan of Stinson Leonard Street LLP pointed out in relation to an amicus brief filed December 8, 2014 in the current conflict minerals rehearing:

… nothing in the statute or the rule requires any speaker to use any variant of the term “DRC conflict free.”  You can comply with Form SD with a statement as simple as “the following products are required to be disclosed pursuant to 15 U.S.C. § 78m(p)(1)(A)(ii) and its implementing rule” followed by a description of the products—such as “Model XYZ handheld cameras manufactured between Dates A and B.”

This is essentially the direction we take with clients. Our view has been that an RCOI-only determination does not lead to any formal mandated status with no specific wording required. Moreover, given the questionable quality, reliability and credibility of the conflict minerals supply chain data developed for CY2013 and CY2014, we typically don’t suggest that clients rely too heavily on it, and undertake due diligence where there are uncertainties, gaps or ambiguities.

In the end, more issuers may choose to make an RCOI-only DRC Conflict Free determination in CY2014 and beyond, which is a continuing disincentive to participating in responsible sourcing from the region. Or as one highly respected expert put it – “more incentive to hurt the people this darn thing was supposed to help”.


A final thought – What of us auditors anticipating a flood of IPSA work?  Well, we should probably consider cutting back our expectations if issuers have an option in achieving the same end point that does not involve an IPSA.  Not everyone will go this route, but some will.