The highly respected duo of Mike Loch and Dr. Chris Bayer published a pointed article exposing several flaws in company conflict minerals reporting and the Independent Private Sector Audits (IPSAs) for CY15. Based on their analysis of the findings, companies:
… failed basic plausibility tests concerning the Tin, Tantalum, Tungsten and Gold (3TG) Country of Origin (COO) and the 3TG Smelter or Refiner (SOR) countries.
Examples include references to DRC as the location of smelters/refiners (“As far as we know, no smelter or refiners processing tin, tungsten, tantalum and gold ore are located in the DRC”). Further, they found “a considerable number of companies, over 250, cite countries as the source of their 3TG that are highly unlikely to be the actual source.”
In our view, these are legitimate concerns, indicating a widespread over reliance on a single source of smelter/refiner data with no substantive review or consideration given to the data by the issuers themselves.
With regard to the IPSA,
… among the companies submitting implausible COO, four (4) companies made a “DRC conflict free” product determination and underwent an IPSA. These four IPSA’s were performed by three different audit firms.
These findings illustrate the fact that the two IPSA objectives in the SEC Rule do not take into account the accuracy of the content and conclusions …
At first glance, this may be taken as a critique of the three audit firms – but in reality it is not. Rather, Mike and Chris point out – as we ourselves have stated many times – the specific IPSA objectives offer very little assurance with respect how thoroughly or how well companies conduct their due diligence. Other critiques of IPSAs and auditors have incorrectly placed blame on audit firms for following the legally-mandated objectives. Even though Elm was not one of the three audit firms indicated, we – as do Mike and Chris – do not believe the auditors are at fault in any way.