Tag Archives: GAO

New GAO Report on Conflict Minerals Regulation – It Just Ain’t Right

GAO just released its latest annual report to Congress on the effectiveness of the conflict minerals regulation.  We’ll save you some effort and boil it down this way:

Essentially, the reporting year 2015 conflict minerals disclosures filed by May 31, 2016 were the same as those filed for reporting year 2014.  I doubt this is much of a surprise.

But what caught our attention is this little twist: GAO is critical of the fact that “an estimated 55 percent of the companies in 2016 reported that they could not definitively confirm the source of the conflict minerals in their products.”  Yet nowhere in the report is there mention that the SEC, under the May 2014 Statement from then-Director of Corporate Finance Keith Higgins, allows companies to file without including a product determination statement.  Due to the legal uncertainty surrounding the rule at the time of the filings reviewed in the report (which was not resolved until earlier this month), many filers chose to submit disclosures without the definitive language GAO is seeking.

But GAO does acknowledge that companies “had taken actions to improve their data collection processes, such as gathering missing information about their supply chains and implementing new technologies to facilitate the data collection process” and that “the process for collecting data on conflict mineral supply chains had become more routine and standardized.”

GAO’s report may be accurate insofar as the literal text of the CMRs, but statements about filers’ inability to determine necessary sourcing information are not so accurate.  While filers may have chosen not to provide specific product determination language in their CMRs, Conflict Minerals Reporting Templates (CMRTs) both from suppliers and provided to customers paint a more accurate picture of a company’s status.

It wasn’t in GAO’s scope to review CMRTs, although the statutory mandate for the annual study doesn’t appear to limit the GAO to SEC filings.  Perhaps next year – assuming there will be a next year for the SEC conflict minerals disclosures – GAO could expand their efforts for a more accurate picture.

Latest GAO Annual Report on Conflict Minerals Regulation Efficacy

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.

Conflict Minerals IPSA Rumor Mill Churns

At the OECD Forum earlier this week,  a couple people told us about a new rumor floating around concerning the Independent Private Sector Audits (IPSAs). According to speculation, interests for CPA auditors are pushing for the SEC to eliminate the option for issuers to engage non-CPA auditors to conduct IPSAs. We don’t know if this is true or not, but the claim is generating some buzz in industry.

Even if the rumor is true, we don’t think there is much likelihood of success. When we were asked to be a panelist to the Commission’s 2011 Conflict Minerals Roundtable, the basis of our participation was presenting the non-CPA perspective on the IPSAs – including costs and applicability of the Performance Audit standards.  The SEC staff  demonstrated a sensitivity to IPSA costs and opening doors to competition in the market to help.  We don’t think this will change.

Other important points to remember:

  • SEC’s economic impact analysis included the use of, and cost differentials between, CPAs and non-CPAs for IPSAs;
  • The GAO, who has responsibility for matters pertaining to the audit standards as mandated by the law itself, stated that no specific audit standard is needed for the IPSAs and that the GAGAS audit standards “will be applicable”;
  • The GAGAS audit standards include and allow for both Attestations and Performance Audits; and
  • The SEC stated in Question 13 of their FAQs that “an auditor other than a certified public accountant may perform the IPSA pursuant to the Yellow Book’s Performance Audit provisions.”


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


[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.


GAO Publishes Results of Accountability Audit of SEC Conflict Minerals Rulemaking Activities

The Government Accountability Office (GAO) has published its report to Congress (mandated as part of Section 1502 of The Dodd-Frank Act) that

  • assesses the effectiveness of Section 1502(b),
  • describes issues encountered by the SEC in carrying out the provisions of the Act,
  • reviews non-covered companies that have conflict minerals necessary to the functionality or production of a product manufactured by such companies; and
  • reviews the rate of sexual-and gender-based violence in war-tom areas of the Democratic Republic of the Congo and adjoining countries.

Because the final rule has not yet been promulgated, the GAO report – as stated by SEC in their June 22, 2012 written comments to the report – “examines the steps the SEC has taken toward issuing a conflict minerals disclosure rule; stakeholder-developed initiatives that may help covered companies comply with the anticipated rule; and any additional information available on the rate of sexual violence in the eastern Democratic Republic of Congo.”

Key Points from the Report

The following are excerpts from the report on what we think are key points.

Some stakeholders’ efforts to improve their initiatives through expansion and harmonization have been hindered by the uncertainty regarding potential due diligence and disclosure requirements stemming from SEC’s delay in issuing a final rule. For example, while 12 of the approximately 25 tantalum smelting companies world-wide have been certified as conflict-free through the Conflict-Free Smelter Program to date (see figure 6),[Footnote 38] company representatives said GeSI and the EICC are facing challenges engaging tin and tungsten smelters in the absence of a final rule…

GeSI and EICC representatives are finding it difficult to convince Asian–particularly Chinese–smelters to participate in the program because the electronics industry has limited leverage over Chinese smelters in the absence of a final SEC rule. In addition, according to one EICC member company representative, Chinese smelters and the Chinese government are not concerned with improving the transparency of supply chains in the absence of any business incentives. The limited participation by Chinese smelters may affect the scalability of the Conflict-Free Smelter Program as Chinese smelters processed an estimated 43 to 48 percent of the global tin supply between 2006 and 2009, and Chinese companies mined and processed an estimated 77 to 84 percent of the global tungsten supply between 2006 and 2009…

Some stakeholders have discussed efforts to harmonize their initiatives to further improve them, but some of these efforts have been hindered by the absence of SEC’s final rule.

In the report’s conclusion, GAO stated the following:

SEC has taken some important steps in its effort to issue a rule, including issuing a proposed rule that generated a large volume of public comments. However, SEC has not yet finalized and issued a rule as stipulated in the Act, largely due to the time and effort required for the Commission to understand the complexities of the four conflict minerals’ supply chains, review the large volume of comment letters, and hold the numerous meetings requested by stakeholders…

The continued delay in issuing a final rule, however, has contributed to a lingering uncertainty among industry and other stakeholders who expect their actions to be guided by a final rule…

Without a final rule, it is unclear to what extent the initiatives currently being developed or implemented by industry and other stakeholders will achieve results consistent with those anticipated under the conflict minerals legislation. Moreover, in part because of the delay in the rule’s issuance, many companies across the tin, tantalum, tungsten, and gold supply chains are reluctant to participate in or support the global and in-region initiatives currently being developed or implemented because they are uncertain whether or not the initiatives will align with the anticipated rule.

We think it is worth noting that although GAO laid out that there are six global inititives requiring audits and 3 in-region sourcing initiatives requiring audits, there was no mention of the divergent scopes of these audit, the absence of auditor qualification standards or applicability/relevance to the audits required by Section 1502.

The full report is available as a PDF here or text file here.