In case you haven’t already heard, the US GAO issued its latest annual report on the SEC conflict minerals regulation. GAO is required to provide these reports under Section 1502(d) of the Dodd-Frank Act.
Among GAO’s most important findings:
- An estimated 67 percent of SEC conflict minerals filers reported they were unable to confirm the source of the conflict minerals in their products, and about 97 percent of them reported that they could not determine whether the conflict minerals financed or benefited armed groups in the Democratic Republic of the Congo (DRC) and adjoining countries. Our view: These numbers are reflective of filer’s wide reliance on the CFSI smelter/refiner audits and related information.
- As of July 2016, the Department of Commerce (Commerce) had not submitted a report that was required in January 2013, assessing the accuracy of the Independent Private Sector Audits (IPSA) nor had it developed a plan to do so. Ten companies filed the audits between 2014 and 2015 as part of their Conflict Minerals Reports, none of which Commerce has assessed. Commerce officials said they established a team in March 2016, but they noted that they did not have the knowledge, skills, or expertise to conduct IPSA reviews or to establish best practices. Our view: Commerce is indeed exploring the topic in detail and assessing how to approach the reporting requirement. Our meeting with them this past summer was a part of their exploration.
- Facilities that process conflict minerals pose challenges to the disclosure efforts of companies filing a Form SD because (1) these facilities generally rely on documentary evidence about the origin of conflict minerals, which may be susceptible to fraud; and (2) multiple levels of processing operations introduce fraud risk and may increase the cost associated with disclosures. Our view: Fraud risk has been a common theme and concern from the beginning of the various conflict minerals schemes. While some physical mechanisms exist in an attempt to eliminate fraud, we don’t know what mechanisms or training are in place for identifying documentation fraud in the various audits/checkpoints in the supply chain.
Finally, Elm is known for our candor and being vociferously critical about excessive fees and misrepresentation of the requirements by some advisors and service providers. We were pleased that GAO included our comments on this point:
… because of the uncertainty about IPSA requirements and best practices, some consulting firms were misrepresenting the scope of IPSA services that are needed for compliance in order to justify excessive fees for SEC-filing companies.
As in the past, this latest report provides valuable commentary and we consider it to be a “must read” for all in the conflict minerals space.