Conflict Minerals Reporting: Be Ready for Independent Private Sector Audits

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conflict minerals filings 2013-14 chart

What will the number of IPSAs look like for 2015? Source: Deloitte

Recently, Deloitte put out a story in their Heads Up newsletter on what companies should be thinking about for their next Section 1502 (“Conflict Minerals Rule”) compliance reports, including how to best prepare for independent private sector audits (IPSA). Below are some nuggets for US manufacturing organizations to keep in mind. For an excellent rundown of the latest legal challenge to SEC’s Conflict Minerals Rule from the US Court of Appeals, read my colleague Jeff’s recent article.

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Currently, there is uncertainty as to whether SEC will require IPSAs for all companies filing conflict minerals reports (CMR) for calendar-year 2015. More on that below, but first, a quick refresher:

What Are IPSA’s Objectives?

Basically, there are two main objectives of the independent private sector audit, according to Deloitte’s report:

  1. As stated in the final rule, the IPSA’s first objective is for the IPSA practitioner “to express an opinion or conclusion as to whether the design of the [registrant’s] due diligence measures as set forth in the [CMR], 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 [registrant].”
  2. The final rule indicates that the IPSA’s second objective is for the IPSA practitioner to express an opinion or conclusion about “whether the [registrant’s] description of the due diligence measures it performed as set forth in the [CMR], with respect to the period covered by the report, is consistent with the due diligence process that the [registrant] undertook.”

Million-Dollar Question: When Will IPSA Be Required?

Our friend Lawrence Heim of Elm Consulting Group International posted a few days ago on LinkedIn, asking, “Are conflict minerals IPSAs the new Walking Dead?” In short order, Lawrence answers that question by way of his take on when IPSA’s will be required and how likely that will be:

“The reports of IPSA’s death are highly exaggerated; it may be more accurate to say IPSAs are undead.

Media coverage concerning last week’s District Court decision vacating the use of the SEC’s specific product determination wording claim that no IPSA will be required for CY2015 filings. From our perspective, cueing the funeral dirge may be premature (the line from Monty Python and The Holy Grail comes to mind – “I’m not dead yet”)…You certainly won’t be alone should your company choose to begin auditor selection.

We have heard that it is possible the SEC will require IPSAs for all CMR filers. There could be truth in this as the SEC economic analysis for the IPSAs in their final release was based on their estimate that 4500 issuers would require an IPSA – far higher than the actual number of CMR filers IN TOTAL for CY2014. If SEC chooses to require IPSAs for all CY2015 CMR filers (likely 1200 – 1300), that cost has already been taken into consideration in the final rule’s economic analysis, eliminating that argument.”

(Lawrence closes out by linking to what is surely a helpful webinar on IPSAs.)

Next Steps/Recommendations

According to Deloitte, here are some next steps for companies to think about:

  • Seek SEC counsel
  • Seek assurance readiness
  • Engage with your IPSA practitioner early
  • Stay tuned! — We recommend that registrants remain intently focused on the following marketplace developments related to the final rule and other conflict minerals reporting requirements: The Appellate Court’s recent decision to uphold its previous ruling may (1) extend the legal action beyond the May 31, 2016, filing deadline or (2) result in additional guidance from the SEC staff depending on the SEC’s next steps.

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Read Deloitte’s full newsletter for complete details behind the recommendations.

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