The first in a three-part series on strategies to minimize costs of upcoming CMR audits required under the SEC final conflict minerals regulation. Each installment focuses on one strategy.
For companies subject to SEC’s conflict minerals rule, independent third party audits of their Conflict Minerals Report (CMR) are required depending on the outcome of their due diligence process1. While the final regulation specifies the audit objective and auditing standards, many questions exist as to what the audit will involve and how much it will cost. Both the AICPA and The Auditing Roundtable are developing guidance for CMR auditors in applying the GAO “Yellow Book” standards.
Recall that SEC’s stated audit objective has two components – the auditor is to express an opinion or conclusion as to whether
- the design of the issuer’s due diligence framework as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is in conformity with, in all material respects, the criteria set forth in the nationally or internationally recognized due diligence framework used by the issuer, and
- whether the issuer’s description of the due diligence measures it performed as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is consistent with the due diligence process that the issuer undertook.
Restated for simplicity,
- does the company’s due diligence program conform to an accepted standard, and
- did the company actually implement the due diligence program as it was designed.
The audit will not offer an opinion on the actual effectiveness of the company’s programs or due diligence efforts. In the preamble to the final regulation, SEC stated that they
… recognize that an audit objective requiring an auditor to express an opinion or conclusion as to the design and description of an issuer’s due diligence measures is not as comprehensive as an audit objective requiring an auditor to express an opinion or conclusion as to the effectiveness of due diligence measures or the accuracy of conclusions in the Conflict Minerals Report.
77 Fed. Reg. 56329 (Sept, 12, 2012)
So let’s face questions most (especially consultants and auditors) don’t want to ask out loud – what is the value of the CMR audit, and is it worth the expense? Are there ways to reduce the cost of the audit?
We won’t address the first question, as each company will answer that in their own context.
On the cost question – regardless of whether there is perceived value in the expenditure – we believe opportunities exist to manage costs while still producing an audit of the necessary quality and scope of the regulations and the GAO audit standard.
We see three main considerations in reducing CMR audit costs. The first two are fairly traditional audit concepts; the third delves into details of what constitutes conflict minerals “due diligence”. This article will look at audit planning; the others topics will be covered in later installments.
As with any audit, planning is crucial to success and cost management. Representative sampling parameters can have a significant cost impact. For CMR audits, this may be most important in the context of the second objective – implementation assessment.
One example of this is selecting sites at which the auditor will evaluate program implementation. Highly centralized companies are more likely to have an easier time of reducing the number of verification site visits. In such cases, representative operations that function within a centralized business model (such as procurement processes/systems) can be identified and audit results/assumptions extrapolated in a reasonable manner. The more sites visited, the higher the audit cost; conversely, fewer site visits generally equates to lower audit cost.
In contrast, companies with decentralized management processes, or that produce a wide range of products out of different locations, present a greater challenge in identifying “representative” sites to select for implementation verification. Site selection criteria should be carefully evaluated in order to manage costs but cost reduction opportunities for these companies may be limited without compromising the quality of the audit.
Another scope and cost matter is how a CMR auditor deals with supplier or contract manufacturer location visits as part of the implementation verification. Planning certainly impacts how/how many such visits are addressed within the audit; but we believe there is a threshold matter of whether visits to supplier or contract manufacturer locations should be conducted as part of the CMR audit at all2.
Generally speaking, the use of contract manufacturers can reduce the CMR audit cost, as implementation verification does not mandate visits to those locations. SEC’s regulation allows reliance on representations made by suppliers and doesn’t specify particular forms of verification as part of the due diligence (or RCOI for that matter).
This article looked at only one example of planning. Other matters can impact the cost of the CMR audit as well which we did not explore, such as sampling parameters for reviewing products and the materials/components/suppliers associated with products.
1 We realize that many companies will fall within the two-year deferral tied to a “DRC conflict undeterminable” classification.
2 Part 3 of this series will discuss the due diligence process scope in relation to the CMR audit, and why supplier/contract manufacturer CSR visits may be outside the conflict minerals due diligence framework and also a CMR audit.
This article represents views, observations and opinions of The Elm Consulting Group International LLC/Elm Sustainability Partners LLC and is not to be construed as legal advice, nor should it be relied on without appropriate business and legal reviews.