The second in a three-part series on strategies to minimize the costs of upcoming Conflict Minerals Report (CMR) audits required under the SEC final regulation. Each installment focuses on one strategy.
The first article of this series reviewed SEC’s stated audit objective for the Conflict Minerals Report (CMR) audit, asked the ugly questions about the value of the CMR audit, and explored the first of three audit cost reduction strategies – audit planning. This article looks at the second – auditor selection.
As required by the law itself, an independent private sector auditor must be engaged for the CMR audit (where such an audit is triggered). Companies have the option of choosing their preferred audit standard (Attestation or Performance Audit under GAO’s Government Auditing Standard, also known as GAGAS or the “Yellow Book”), and who they want to be their CMR auditor. By definition, Attestations must be conducted by CPAs or others directly supervised by CPAs, although Performance Audits may be conducted by non-CPA auditors.
Since SEC specified that CMR audits are considered non-audit services under SEC Regulation S-X, existing financial auditors are allowed to conduct the CMR audit (assuming the proper pre-approvals are obtained). So it is easy to see how companies may simply ask their financial auditor to perform the CMR audit as well.
But not everyone is willing to pay financial auditor/CPA billing rates for an audit many view as having little to no value given the SEC-mandated objective. In these cases, cost savings opportunities may be possible by selecting a qualified non-CPA auditor.
SEC’s reason for allowing CMR audits to be conducted by non-CPA auditors under the Performance Audit standards was to offer a lower cost alternative to financial auditors/CPAs. Both audit types offer the same level of assurance, so differences in audit types are not a trade off in quality or scope.
Potentially appropriate non-CPA CMR auditors may have backgrounds in fields such as quality, supply chain, environmental, health and safety (EHS) or sustainability/corporate social responsibility (CSR). These auditors may also hold third-party certifications, such as BEAC certifications held by many EHS auditors1. In many cases, their billing rates are significantly lower than CPA/Big 4 firms.
At the moment, there seem to be few non-CPA audit firms who know the subject matter in detail. Some will be able to demonstrate significant competence in Yellow Book audits, but they may lack experience in applying that to non-governmental settings, or may be unaware of conflict minerals-specific matters altogether.
Of course, this is not meant to imply that every CPA – including the Big 4 – has appropriate knowledge or expertise either. Indeed, questions have been posed about how relevant financial auditing knowledge is in relation to CMR audits.
In either case, we think it is imperative that companies carefully screen potential CMR auditors to ensure they thoroughly understand the specific objective, regulatory requirements and the associated technical programs (such as OECD and EICC-GeSI) in order to work within appropriate boundaries and be able to interpret/apply technical information that is unique to this topic.
Our next article will illustrate even further the criticality of an appropriately-qualified CMR auditor.
1 True certifications through third party organizations like BEAC, involve continuing professional education, training, commitment to ethics/standards and competency testing. Others are simply certificates issued to attendees at conferences, meetings or one-time training events. We strongly encourage buyers of audit services to investigate auditor claims of certification, and the issuing bodies. More information on BEAC is available on their website. http://www.beac.org/index.html
These articles represent views, observations and opinions of The Elm Consulting Group International LLC/Elm Sustainability Partners LLC and are not to be construed as legal advice, nor should they be relied on without appropriate business and legal reviews.