Tag Archives: auditing

Elm Summary, Analysis of OECD Conflict Minerals Pilot Study Report for Downstream Companies

Ahead of this week’s meeting in Paris, the Organisation for Economic Development and Cooperation (OECD) published its Baseline Reports on the pilot project for the implementation of the Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, Supplement on Tin, Tantalum, and Tungsten.

Two separate reports were published, one for upstream companies (from the mine to the smelter) and another for downstream companies (from the smelter to the final product).

Click here to download our summary and analysis of the baseline report for downstream companies.


Leading EHS Audit Organizations Comment to SEC on Conflict Minerals Regulations

Prior to the November 1 closing of the reopened public comment period on SEC’s proposed conflict minerals regulations, several companies and individuals filed new or updated comments.  Among the commenters are two organizations serving environmental, health and safety auditing practitioners.

The comments support (a) the use of Performance Audits as an appropriate audit standard for the Conflict Minerals Reports under SEC, and (b) appropriate auditor expertise and certification beyond ISO19011 for various audits within a conflict minerals management system.

The Auditing Roundtable is a professional organization dedicated to the development and professional practice of environmental, health, and safety (EHS) auditing.  Founded in 1982, the Roundtable represents the voice of the profession with more than 800 members.  The Roundtable’s comments can be read here.

The Board of Environmental Auditor Certification (BEAC) is an independent, nonprofit corporation established in 1997 to issue professional certifications relating to environmental, health, and safety auditing and other scientific fields. BEAC was originally created as a joint venture between the Institute of Internal Auditors (IIA) and The Auditing Roundtable.  BEAC is a member of the Council of Engineering and Scientific Specialty Boards (CESB), a third-party accreditation board, and is recognized by the American Chemistry Council (ACC); the American Industrial Hygiene Association (AIHA); the American Society of Safety Engineers (ASSE); the Auditing Association of Canada (AAC) ; the Global Reporting Initiative (GRI); and the National Organization for Competency Assurance (NOCA).  BEAC’s comments can be read here.


Transcript of Elm Comments at SEC Conflict Minerals Roundtable

The following is a transcript of Elm’s opening comments and answers to questions posed by SEC staff at this week’s Conflict Minerals Roundtable in Washington DC.  These comments were presented by Lawrence M. Heim, CPEA of Elm’s Atlanta office.

Opening Statement

I would like to thank the Commission for allowing me to appear and make a few comments.  I am here present the technical environmental health and safety auditing perspective and reflect experiences and thoughts from practitioners in these types of audit programs.

As a bit of disclosure Elm was one of the original audit firms for the EICC CFS.  We withdrew from that relationship at the end of December 2010.  So we do have experience with and understanding of the CFS program.

Through the past 18 months, we have had numerous conversations with customers, clients and other companies who contacted us with questions on conflict minerals management programs and audits.  We have a number of projects that are on-going and the comments I bring forward reflect those discussions and projects.

The most important point I want to emphasize relates to the idea of audits being a key aspect of credibility in the conflict minerals management program.  There are a number of known audit schemes such as OECD Due Diligence Guide which references audits and auditor competence standards.

If there is nothing else that I impress upon the Commissioners and the staff here today – recognize one element:  the auditor standards currently referenced in OECD and ancillary audit initiatives are the lowest common denominator globally for auditor qualifications in the environmental, health and safety audit profession.  And yet the global supply chain of 3TG is resting on the shoulders of that lowest level of auditor competence.  If there is nothing more that you take away from my comments, I ask that you consider that.

There is no question that the emotional nature of the issue is driving zero tolerance in the market.  Nobody wants to be associated with the atrocities in the DRC and rightly so.  But this zero tolerance is pushing company processes toward unreasonable standards.  One particular situation I dealt with involved having to determine and convince parties after an audit that the individual atoms in a particular product were conflict free.  That is not reasonable.

These audits – critical linchpins for credibility in conflict minerals processes – push towards absolute certainty and drive companies to attempt to develop management systems to manage to the atomic level.  That is not reasonable or achievable.  It is important to understand reasonable assurance in contrast to absolute certainty, a company’s desire to pass an audit, and what that audit means in the overall business context relative to customer demands and contractual requirements.  A level of audit specificity of absolute assurance is therefore driving management system development costs and expectations to a very unreasonable level.

With that I will conclude my opening comments.

Response to SEC question on Independent Private Sector Audit

It is important to start off with a clarification of what we are talking about here.  In a number of conversations I have had, there is a great deal of confusion as to what it is we are auditing and where does the audit fall in the process.  We have CFS audits which is part of this process, we are talking about some audits within ITRI and the chain from the mouth of the mine to the smelter, other audits are now being discussed in the recently announced private-public partnership and then there is the audit within the conflict minerals report.  It is important to recognize that and clarify that the discussion today is of the audit of the conflict minerals report – a singular element of the process.

It is our view that the conflict minerals report audit is a management systems audit; it is not an audit more related to the outcome or the results.  It is about assessing the existence of the processes, how well they are implemented and communicated throughout the organization, whether or not the data for making decisions exists – and is used – throughout the organizations and then made available not only within the organization but also through the supply chain.  We view it – coming from the traditional EHS management system approach – as what we call a management systems audit.  Therefore for us, the content of the report is that element.

Response to SEC question on Performance Audit Standards for the Independent Private Sector Audit

We are not CPAs but we have been doing environmental management systems audits for 25 years and are quite familiar with audit standards.  We began taking a detailed look at Yellow Book as soon as we were aware of the passage of the law.  Relative to traditional EHS auditors/standards – what are the gaps and differences and whether or not as practitioners we would be able to support these efforts.  And there is a difference.  Where we came down to is performance audits: in our discussions with clients we landed on performance audits as what we think seems to make sense.

You are correct  – we do believe that the competitive market would be opened up quite widely if this was not limited to CPAs having to perform that particular element of implementation.

Response to SEC question on Need for a Specific Audit Standard

We struggled at times in developing proposals for companies who requested this of us.  We have our audit process that we believe is correct, would meet 1502 and would be aligned with the current proposed regulations as well, but whether that is what the final standards would be, certainly we don’t know yet.  If there are substantive changes in that, that will obviously impact scope and cost.

The other thing is obviously we develop our costs and scope based on our costing structure which is quite a bit different from what the Big 4 cost structure is, so that is another element of pricing that goes into it.

There does need to be some acceptable “stake in the sand” for a standard.  Otherwise – and we have already run into this in proposal situations – we have been up against firms who don’t understand what the scope is, so the costs for what they bring forth is massive because it is so broad.   We bring a narrow focus based on our experience and a significantly lower cost.  The question is then “why is there this large gap in scope and cost differential between the two?” and the answer is we don’t really know what the audit standard is just yet.

Response to SEC question Applicability of Reporting to Scrap/Recycled Materials

It is important to recognize there may be some misunderstanding about what it gets you if you claim a material as scrap or recycled.  There is a sense out there by some companies that it is a complete exclusion from the applicability of the regulation and law and that is not the case.  As the proposed rule is written, it gets you a somewhat more streamlined report and due diligence process that must be implemented but it isn’t an exclusion.

As a comparison or perhaps contrast, EPA has spent decades trying to define “scrap” in various applications and they do it in the context of whether or not it is a solid or hazardous waste.  They have spent two decades trying to define this and they are still continually refining that so I think it is a complex question.

Whether or not it should be subject to the full due diligence and conflict minerals report, I believe that is too onerous.  It seems once you have defined a material as scrap, once you can verify through a reasonable inquiry or perhaps some level of – I don’t want to use the word audit – but some kind of evaluation and can reasonable rely on that evaluation to say “yes this does meet the definition of scrap under 1502 regulations”, it seems to me that it is appropriate for that process to end right there.  I don’t see any value and have not had clients express that there is any value in continuing to move the process forward.  It is an unnecessary expenditure and effort.

Response to SEC question on Type/Location/Timing of Report Within Corporate Disclosure

I can’t comment on the type of report or the location of the report – that is not what my expertise is.  I do think it is relevant to the overall timing of implementation to spend a minute and explain a little about the reality of what is happening today.  We have heard a lot about various types of reports and requests being pushed through the supply chain in order to gather the information.  Well the reality is what is happening today is that these first tier suppliers that get these – and they come in all forms.  Some are coming in through the EICC standard reporting template, which is an excellent effort at trying to reduce the impact and the burden on suppliers for trying to figure out how to report this information – what is it they need to look at.  That is an excellent effort, but not everybody has adopted that.  I have clients who are getting email requests, letters, phone calls – a variety of formats, forms and contents.  I am even seeing some clients who are getting conflict minerals requests for minerals that are not conflict minerals – they are outside the scope of 3TG.

What is happening now is first off, these requests are coming and sometimes the first tier suppliers are able to look at this and say yes we can answer some of these questions and they will answer them and send them back.  More frequently than I think is perhaps recognized, these suppliers look at it say “we don’t have any idea how to answer these questions – we don’t even really know what these questions mean but we’ll pass it on to our supplier because this impacts their material that we buy from them”.  So this is getting pushed down through the supply chain several levels.  What that means is delays – delays in issuers getting the information flowing up through the supply chain to them.  That is what is happening right now.

That is exacerbated by the point that Irma from Kraft made earlier which is that there are still a lot of companies who don’t know about this requirement, the law or the regulations.  Keep in mind, this regulation is geared toward – and specifically applicable to – publicly traded companies – issuers and registrants.  If I am a privately-held company, then why would I pay a whole lot of attention to what SEC is doing because I don’t have to answer to SEC.  I do answer to my customers but I may not be paying attention to rulemaking under SEC because I am a privately held company and have a couple million dollars a year in sales.  But my customers are going to drive this down to me, but I don’t know that yet.  There is a lot of that lack of awareness in lower levels of the supply chain that exist.  That is creating delays in responsiveness to the information requests as well.

And finally, another element that is creating delays in being able to move forward with this, in getting this information, comes to this whole point about absolute certainty.  There is a great deal of fear in the lower levels of the supply chain.  With the audits that are driving toward in some cases atomic level of expectations of certainty, companies are trying to manage and figure how to build management systems to deal with that level of certainty and that is causing delays because companies don’t know how to implement unreasonable parameters such as that.

New Economic Analysis of Conflict Minerals Rule Implementation from Tulane University Law School’s Payson Center for International Development

A new study on the economic impact of SEC proposed conflict minerals rule was released earlier this week by Tulane University.  The study evaluated cost estimates from SEC , National Association of Manufacturers (NAM) and IPC and provides what they refer to as a “Third Economic Impact Model”.

The study is available free of charge here.

Elm to be Panelist at SEC Public Roundtable on Conflict Minerals Rule

We are pleased to announce that the U.S. Securities and Exchange Commission (SEC) has selected Lawrence Heim of Elm’s Atlanta office to sit on the expert panel for Panel 2 of their previously announced public roundtable on the proposed conflict minerals regulation on October 18.

Panel 2 will focus on matters the implementation of the rule and conducting related audits, while Panel 1 will review the scope and definitions of the law/rule, along with tracking the supply chain.

The agenda and panelists for the roundtable have been publicly released.

NEWS ALERT – SEC Announces Public Roundtable on Conflict Minerals Regulations

See the press release here about SEC’s roundtable to be held in Washington DC on October 18, 2011.  More information will be provided as it becomes available.

Guest Viewpoint: EICC-GeSI Conflict Minerals Workshop in Brussels

Elm welcomes Michele Bruelhart as a guest blogger.  Michele is the Global Traceability Manager with UL-STR in Burundi and attended the EICC-GeSI Workshop held in Brussels recently.  She provided Elm with her perspective on the meeting, and regional progress on conflict minerals programs/infrastructure.


The challenges surrounding supply chain traceability of so called “conflict minerals” continue to be discussed in numerous fora in Europe and the US. Starting with roundtable consultations organized by the World Gold Council, the EICC-GeSI Group and the London Bullion Market Association (LBMA) held their conferences last week in Brussels which will be followed by the launch of a Public-Private Alliance for Responsible Minerals Trade in October and lastly a meeting of the OECD hosted working group on the implementation of the Due Diligence Guidance in November.

Broadly speaking, participants of these meetings appear divided into two groups: those contributing to discussions on the 3Ts (tin, tantalum and tungsten) and those trying to address the issues around gold. For the former, the EICC-GeSI Workshop provided an overview on the latest progress (or lack thereof) since their previous workshop in June of this year. Some of the main points from Brussels are summarized below:

  • The EICC-GeSI reporting template for the downstream supply chain is publicly available and has been piloted by a number of companies. While the tool itself was found to be helpful, it does not address the main challenge faced by end-user companies, which are (1) how to reduce the complexity and number of suppliers standing between the end product and the smelter in their supply chains and (2) how to get responses from supplier, investing a reasonable amount of time and resources.
  • The hours required to obtain a completed reporting template from all suppliers seem disproportionate to the information sought. Furthermore, the data provided by suppliers is not validated or verified externally. Lastly, the tool merely allows companies to gather information “backwards” for a finished product, rather than “forwards” (i.e., trying to prevent conflict minerals from entering the supply chain).  By the time all the information is collected and compiled, the product will most likely have been sold already, whether smelters used for its production were “conflict-free” or not. Given these limitations, it is not clear if the template truly responds to the needs of companies that are required to report under Section 1502 of the Dodd Frank Act. [Ed. note – this process/timing gap may also create liabilities in the context of representations and warranties made about the nature or status of the material, which could be proven incorrect once all relevant information is available].
  • Investing time and resources to gather information from suppliers regarding the smelters used in a company’s supply chain makes sense only if there is a sizeable list of conflict-free smelters that have been approved in the framework of the Conflict Free Smelter Program. So far, this list comprises six tantalum smelters. Assessment protocols for the other metals have been published this summer, though to date no smelters for tin and tungsten or refineries for gold have been approved as “conflict-free”. Despite the progress made in this program and the EICC-GeSI’s repeated assurances that it remains possible for smelters to source from the African Great Lakes region, the requirements defined for smelters to continue purchasing minerals from the Democratic Republic of Congo (DRC) or its neighbors provide a significant disincentive to do so. The assessment protocols list a number of conditions that must be fulfilled for minerals from the Great Lakes region. Among those figure full traceability for the shipment – something that has not been achieved yet for three of the DRC’s four affected provinces – and the implementation of the OECD Due Diligence Guidance. On the latter, it remains to be seen how this criteria should be implemented as the OECD is stressing that its Guidance should be understood as a process over time, whereas a mineral purchase is a punctual transaction. [Ed. note:  As Elm previously reported, OECD has softened its stance on its Guidance.  In addition, EICC CFS audits may not be completed in time for many companies to use them for purposes of fiscal year 2012 SEC compliance].
  • In the region itself, progress has been quite significant. The DRC Government is about to make the implementation of the OECD Guidance a requirement for companies bearing administrative sanction, mine site inspections have taken place at over 30 mine sites in North Kivu and the Government expects to be ready to issue regional certificates for its minerals within the ICGLR framework by the end of 2011. ITRI’s tag-and-bag scheme is targeting 75% of the 3Ts from Katanga province to be tagged by the end of this year and the German federal institute BGR has validated 35 mines against its Certified Trading Chains Standard.

Nevertheless, some important issues were not addressed during the Brussels workshop:

  • First and foremost, it remains unclear if the Congolese Government has the financial and human capacity to enforce the various rules and regulations that were passed over the last couple of months. In particular as the country is preparing for Presidential elections in November, no concrete plans for the enforcement of recently taken measures were presented, nor does the Government appear to take a clear leadership role in coordinating the various efforts on the ground.
  • For the in-region tracing or certification schemes, the monitoring and evaluation process of participating companies is not fully transparent. In the case of the mine visits of the DRC Government, no information is provided on the standards applied to flag a specific mine green, orange or black or the qualifications of the mine inspectors. For BGR’s and ITRI’s certification and traceability schemes, the boundaries between baseline assessments, preparation of participating companies, third party verification and remediation are not clearly defined. The absence of clearly defined tasks may lead to potential conflicts of interest where verifiers could be consulting and auditing the same companies.
  • The presentation of Gregory Mthembu-Salter of the United Nations Group of Experts (UN GoE) on the Democratic Republic of Congo painted a rather grim picture of the likelihood to see any of the above schemes being implemented in the Kivu provinces. The security situation in the Kivus renders the implementation of any traceability scheme difficult and the level of due diligence required from buyers in ensuring their purchases do not benefit armed groups appears to be prohibitively high.
  • The highly unique aspects of the gold supply chain and its traceability remain unresolved.  There are growing doubts that a viable framework applicable to gold will be available in the near future.

Despite these activities along the entire mineral supply chain there remains much to be done to establish credible systems of assurance in the African Great Lakes region that satisfy the needs of end user companies obliged to report on the origin of their raw materials.