The SEC Rule:
On August 22, 2012 the SEC approved a Final Rule (Rule) requiring public companies to report and make public disclosure of so-called “Conflict Minerals”. The Rule was issued under the Dodd-Frank Act. The Rule will require publicly-traded companies to adopt due diligence procedures for determining whether their products contain Conflict Minerals, and to make disclosure to the SEC and in its public reports if they do. While the Rule directly applies only to public companies, private company manufacturers will also be affected by the Rule. Private company manufacturers in a public company’s supply chain will most likely be required to certify to the public company that its products do not contain Conflict Minerals or their derivatives.
Conflict Minerals Defined:
Conflict Minerals are certain defined minerals (and metals derived from them) sourced in the Democratic Republic of the Congo (DRC) and the 9 countries surrounding DRC (DRC and these 9 countries are referred to in the Rule as “covered countries”). The primary metals derived from the Conflict Minerals are tungsten, tantalum, tin and gold (referred to as the ‘3Ts & G”). Funds derived from sale of these minerals finance the on-going “conflicts” in the covered countries. These conflicts violate the human rights of innocent citizens, largely women and children, in a very cruel way.
Products Covered by the Rule:
To be covered by the Rule, the 3Ts & G must be necessary to the functionality or production of the product. Numerous consumer and industrial products fit into this category — cell phones, computers, digital cameras, MP3players, video game consoles, aerospace products, automobiles, communications and electronic equipment and jewelry, to name a few. The Rule applies to manufacturers and to companies which have their products manufactured by third parties. Even if a company knows for certain that the 3Ts & G in its products come from a country other than the covered countries, the company is covered by the Rule and must have a due diligence process in place and make disclosures.
The Role of CPA’s
CPA firms will also play a role in the Conflicts Mineral reporting process. Generally speaking, the public company’s Conflict Minerals Report to the SEC must include an independent private sector audit report. The Rule limits the scope of the audit to (i) the overall design of the company’s due diligence process, and (ii) the due diligence process actually performed by the company. The auditing firm must determine if the design conforms to the criteria of a nationally or internationally recognized due diligence framework. The only framework presently available is the “Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas” of the Organization for Economic Co-operation and Development (OECD).
The audit report must be prepared in accordance with the standards of the U.S. Comptroller General –specifically, its Government Auditing Standards, referred to as the “Yellow Book.” According to the GAO auditing standards, auditors must be licensed CPAs, persons working for a licensed CPA firm or for a government auditing organization, or licensed accountants in States that have multi-class licensing systems that recognize licensed accountants other than CPAs.
It is too soon to know whether public companies will flow the audit requirement down through its supply chain. If they do, we suspect it will be only to its first tier suppliers. Moreover, if the SEC provides the same guidance other U.S. government agencies have provided in similar circumstances, we expect that public companies may rely on certificates from its first tier suppliers without having to conduct due diligence on the supplier’s processes, unless it has reason to doubt its veracity.