Conflict minerals reporting may be a significant challenge for executives this spring as many companies are just in the early stages of compliance exercises as the May 31 SEC filing deadline approaches, according to a report released Wednesday.
The SEC’s new conflict minerals rule grew out of the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203. Legislators eager to choke off funding for warlords in certain countries in Africa required public companies to track the gold, tantalum, tin, and tungsten used in their products.
SEC registrants are required to research whether their products include those minerals and, if they do, report whether the minerals originated in mines run by armed groups that have been involved in human rights violations in the Democratic Republic of the Congo (DRC) and surrounding countries.
Just 4% of 700 companies responding to a PwC survey in February said they had drafted their SEC filings. And 31% said they had significantly completed their due-diligence process and were beginning to draft their SEC filings.
More than half of the responding companies said they had not begun the process of drafting SEC filings. They were still in the process of determining the origination of the raw materials used in their products. Other findings include:
- 32% said they had begun reviewing their supplier reasonable country of origin surveys and/or due diligence.
- 15% had launched and were actively conducting their supplier reasonable country of origin surveys.
- 11% were finalizing their scoping and planning to conduct their supplier reasonable country of origin surveys.
- Eight percent of respondents said they are not sure about their status, or the question is not applicable.
“As it relates to getting prepared for what the ultimate output of this is, which is the filing, companies are still in the early stages—and yet it’s less than two months away,” said Bobby Kipp, CPA, PwC’s conflict minerals leader.
Many private companies have been affected by the rule because they are in SEC registrants’ supply chains. Compliance has been difficult because the regulations require companies to track the materials used in all components of their products through multiple-tiered supply chains.
“It’s certainly complex, especially for companies with complex products and complex supply chains,” Kipp said.
The dotted line
More than one-fourth (26%) of companies in PwC’s survey said they did not know who will sign their conflict minerals report—or said the question did not apply to them. Kipp said it’s important for the signing executive to become comfortable with the process, people, and controls related to the compliance effort—and benchmarking with other companies could play a role in that comfort level.
CFOs were most commonly cited as the choice to sign conflict minerals reports, identified by 28% of respondents in the survey. General counsel or legal representatives were next at 19%.
Opportunities for audit firms with respect to conflict minerals may be limited, according to the PwC survey. SEC rules require companies that determine that their conflict minerals come from the DRC or neighboring countries to get an independent private-sector audit of the conflict minerals report they file.
But 67% of respondents said they expect not to be required to undergo an audit for 2013 or 2014, because they either source from outside the covered countries or expect to report that they cannot identify the source of their materials. An additional 21% said they are not sure if they will need an independent audit.
Kipp offered the following advice for CPAs as the conflict minerals deadline approaches:
- Get involved. CFOs and internal audit chiefs need to know the status of compliance efforts with respect to the plan and the quality of the efforts. “Get at least to that level of involvement, not necessarily to become an expert, but to make sure the company has the bases covered,” Kipp said.
- Remember the broader perspective. Efforts to regulate conflict minerals sourcing also are in progress in Australia, Canada, and the European Union. And in the United States, some organizations are indicating preference for suppliers that demonstrate responsible sourcing. “There’s a commercial benefit to this,” Kipp said.
- Use compliance to gain additional value. In the first year, companies’ focus may be mostly on compliance. But 13% of companies in PwC’s survey are using the process as an opportunity to leverage supply chain opportunities. “There are opportunities for streamlining the supply chain and opportunities for cutting costs by rationalizing numbers of suppliers,” Kipp said.
— Ken Tysiac ( firstname.lastname@example.org ) is a JofA senior editor.