Conflict minerals and the push for transparency
To prepare for the new reporting requirements, companies need to think about their supply chains.October 4, 2012
by Colleen Cunningham, CPA
While the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was widely viewed as an instrument of financial reform, it also spells out significant changes for the reporting of supply chains of SEC filers. Section 1502, the Conflict Minerals Provision, requires significantly increased transparency for affected companies.
Conflict minerals reporting may be just the tip of the iceberg and may prove to be the blueprint for future reporting of human rights issues. Congress proposed another bill requiring similar reporting for companies that source from countries known for human trafficking and child labor. Companies need to be thinking about the linkages between their sourcing policies and the potential for standardized reporting.
Congress enacted Section 1502 because of concerns that the exploitation and trade of certain minerals by armed groups is helping to finance conflict in the Democratic Republic of the Congo (DRC) region. Dodd-Frank left the task of developing and implementing rules associated with the provision to the SEC. Essentially, Congress is requiring companies to report on their use of “conflict minerals” through their reporting requirements to the SEC, meaning that human rights political policy is being implemented through the SEC’s reporting mechanisms.
On Aug. 22, the SEC, by a 3-2 vote, passed the rule implementing Section 1502. The dissenting commissioners felt that the rules were not in the scope of the SEC’s mission—investor protection. It’s hard to argue that point, but the fact remains that Congress mandated the SEC to set these new rules. The final rule requires SEC-registered companies to trace the origin of the identified conflict minerals and provide a conflict minerals report on a new Form SD.
The SEC estimates that about half of all registrants will be directly affected by this rule. Additionally, perhaps hundreds of thousands of companies that are suppliers to SEC registrants will be indirectly impacted. The directly impacted companies are expected to push the burden down their supply chains, requiring assurance that they are supplying “conflict-free” minerals. In its proposal, the SEC estimated that it would cost about $71 million to implement the rule. But that estimate rose to $4 billion in the final rule based on constituents’ input.
Under the rule, conflict minerals are defined as columbite-tantalite, cassiterite, gold, wolframite, or derivatives including the so-called “3TG”: tin, tantalum, tungsten, and gold. Some of these minerals may not be household names, but they are ubiquitous in this global electronic age. With their wide application in the manufacturing process, they are pervasive in tin alloys and plating, pipe solder, industrial tooling, and aerospace equipment.
Tantalum, which is extracted from columbite-tantalite, is used in components for mobile phones, computers, video game consoles, digital cameras, and jet engines. Cassiterite, a metal ore used to produce tin, goes into solders for joining pipes and electronic circuits. Gold, of course, is used for jewelry but also in aerospace equipment. And wolframite is used to produce tungsten, which is used for metal wires and other electrical or welding applications.
While the continued use of conflict minerals is not prohibited, nor is there any imposed “penalty” per se, the intent is to drive markets toward creating substitutes or a market for “conflict free” minerals.
The rule also says that the definition of conflict minerals may be broadened if the secretary of state determines that other minerals are financing conflict in covered countries.
The SEC outlined a three-step process:
An issuer will be required to file conflict minerals disclosures in the body of a new specialized disclosure report Form SD.
The report is based on the calendar year, regardless of the company’s fiscal year end, and is due on May 31 the following year. The first report for 2013 calendar year will be due on May 31, 2014. The report is required to be independently certified, or audited. It can be audited using the government Yellow Book audit standards for either an attestation (which requires the audit to be performed by a CPA firm) or the performance audit standards (audit can be performed by a firm with the appropriate skills and infrastructure but does not have to be a CPA firm). There is a two-year (four years for smaller companies) deferral permitted for the audit requirement if a company cannot determine whether or not they source from the DRC.
Many constituents noted that their supply chains run deep, and it may be difficult to trace the minerals all the way back to the mine.
To prepare for the new reporting, companies need to think about their supply chains. How deep do they run? Can their suppliers provide the appropriate certifications? Do contracts with suppliers provide for the ability to obtain certifications? What are the company’s sourcing policies? Do they need to be revised? Keep in mind the conflict minerals report will require transparency around these policies as well.
To read the SEC’s final rule on conflict minerals, click here.
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Colleen Cunningham, CPA, is vice president-controller at Zoetis, a Pfizer subsidiary that develops and manufactures animal medicines and vaccines. Cunningham, the former chief executive of Financial Executives International, also has served as a member of the standards advisory committees of both FASB and the International Accounting Standards Board.