Auditing and reporting requirements Conflict resource
1 auditing , reporting requirements
1.1 applicability in general
1.2 supply chain traceability auditing
1.3 reporting , disclosure
auditing , reporting requirements
us conflict minerals law contains 2 requirements closely connected:
independent third party supply chain traceability audits
reporting of audit information public , sec.
even companies not directly regulated sec impacted audit requirements because pushed down through entire supply chains, including privately held , foreign-owned companies.
sec estimated 1,199 issuers (i.e., companies subject filing other sec reports) required submit full conflict mineral reports. estimate developed finding amount of tantalum produced drc in comparison global production (15% – 20%). commission selected higher figure of 20% , multiplied 6,000 (the total number of issuers sec required initial product/process evaluations). estimate not account companies supply materials issuers (but not sec-regulated) required conduct conflict minerals audits meet demands of customers. other estimates indicate total number of companies impacted may exceed 12,000.
a study of potential impact of regulation in 2011 ipc – association connecting electronic industries trade association. submitted association s comments sec. study states ipc survey respondents had median of 163 direct suppliers. applying number sec s estimated number of impacted issuers results in possibility of on 195,000 businesses subject level of supply chain traceability effort.
applicability in general
under law, companies have submit annual conflict minerals report sec if:
(a) required file reports sec under exchange act of 1934
(b) conflict minerals necessary functionality or production of product manufacture or contract manufactured. statement contains 2 separate – critical concepts: purpose of conflict mineral in product/process, , control company exerts on manufacturing process/specifications.
a company deemed contract item manufactured if it:
exerts influence on manufacturing process; or,
offers generic product under own brand name or separate brand name (regardless of whether company has influence on manufacturing process) , company contracted have product manufactured itself.
this language implied retailers not manufacturers might subject audit , disclosure requirements.
contracting manufacture product requires actual influence on manufacturing of process product, determination based on facts , circumstances. company not deemed have influence on manufacturing process if merely:
affixes brand, marks, logo, or label generic product manufactured third party.
services, maintains, or repairs product manufactured third party.
specifies or negotiates contractual terms manufacturer not directly relate manufacturing of product.
the proposed regulations attempted clarify tools used in assembly , manufacturing not trigger law. intent cover minerals/metals in final product only. nothing addresses intermediate chemical processes use chemicals contain conflict minerals. additionally, neither law nor proposed regulation established de minimis quantity or other form of materiality threshold preclude applicability of auditing/reporting requirements.
supply chain traceability auditing
the law mandates use of independent private sector auditor conduct audits. sec has proposed 2 different standards audits: reasonable inquiry , due diligence . should final rule include structure, reasonable inquiry first step determine if company can on own, using reasonable efforts , trustworthy information, make reliable determination source/origin of tin, tantalum, tungsten and/or gold. companies unable make such determination reason, required take next step of due diligence , independent private sector audit.
the statute specified audits conducted in accordance standards established comptroller general of united states, in accordance rules promulgated commission. means same auditing standards apply other sec auditing requirements apply conflict minerals audits because of language, sec have little discretion allow companies issue self-generated statements or certifications satisfy law.
third party audits conflict minerals supply chain traceability began in summer 2010 under electronic industry citizenship coalition (eicc), us-based electronics manufacturing trade association. under program, eicc selected 3 audit firms conduct actual audits, 2 of 3 participating in pilot audits in 2010. after concluding pilot, 1 of 2 firms involved in 2010 withdrew program in response sec s proposal , reduce potential legal risks audited entities.
neither law nor proposed regulations provide guidance on considered acceptable audit scope or process, preferring allow companies flexibility meeting requirement in manner responsive own individual business , supply chain. @ same time, law contains provision preserves government s rights deem report, audit or other due diligence processes being unreliable, , in such cases, report shall not satisfy requirements of regulations, further emphasizing need such audits conform established sec auditing standards. comments on proposed regulation pointed out that, should sec not specify applicable audit standard, cannot silent or ambiguous on auditor standards well, or commission violate plain language of law mandating standards established comptroller general of united states . expected sec provide specificity on both audit standard , auditor standard. sec s proposal attempted clarify position on auditor requirements.
the organization economic cooperation , development (oecd) published guidance on conflict minerals supply chain traceability. guidance gaining momentum standard within policy. however, recent critical analysis of standard in comparison existing auditing standards under sec highlighted number of significant inconsistencies , conflict relevant standards. companies subject law implement oecd guidance without regard sec auditing standards may face legal compliance risks.
reporting , disclosure
companies subject sec reporting requirement required disclose whether minerals used in products originated in drc or adjoining countries (as defined above). law mandates reporting submitted/made available annually. many comments proposed regulation asked sec clarify whether report must furnished —meaning made available sec not directly incorporated within company s formal financial report—or submitted —meaning report directly incorporated financial report. @ first glance, may appear minor point; however, difference important in determining audit/auditor standards , related liabilities.
if determined none of minerals originated in drc or adjoining countries, report must include statement effect , provide explanation of country of origin analysis used arrive @ ultimate conclusion. on other hand, if conflict minerals originating in drc or adjoining countries used (or if not possible determine country of origin of conflict minerals used), companies required state such in annual report. in either case, companies required make information public posting annual conflict minerals report on websites, , providing sec internet addresses reports may found. further, proposed regulations require companies maintain records relating country of origin of conflict minerals used in products.
media outlets have reported many companies required file specialized disclosure reports u.s. securities , exchange commission (sec) , necessary conflict minerals reports 2013 under sec’s conflict minerals rule struggling meet june 2, 2014 report filing deadline. many impacted companies hoping clarification regarding filing requirements, united states court of appeals district of columbia circuit lawsuit filed national association of manufacturers. appellate court’s ruling left necessary conflict minerals reporting requirements largely intact , has been suggested impacted companies should review sec’s division of corporation finance’s response court’s ruling provides guidance regarding effect of appellate court’s ruling.
on august 18, 2015 divided d.c. circuit court again held sec s conflict materials rule violates first amendment. senior circuit judge a. raymond randolph, joined senior circuit judge david b. sentelle, weighed if required disclosures effective , uncontroversial. citing news reports , congressional hearing, court decided policy ineffective. court next found required label controversial because metaphor conveys moral responsibility congo war. such, court struck down conflict materials rule’s disclosure requirements violation of corporations’ freedom of speech. circuit judge sri srinivasan dissented, writing required disclosures not controversial because truthful.
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