Tag Archives: compliance management

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.

EHS Journal Article on Sustainability, Financial Valuation

Recently, Elm posted a piece discussing comments from Kevin Parker, the CEO of Deutsche Asset Management, an investment firm with three-fourths of US$1 trillion under management.

We expanded that original post for EHS Journal, who just published it.  The expanded version dives deeper into trends in the past decade supporting Parker’s assessment of why capital markets are bullish on carbon-intensive investment opportunities even in light of this era of sustainability.

View the article in its entirety here.

Elm to Present in Conflict Minerals Webinar

Elm will be a featured presenter in a free webinar on Wednesday, October 12, 2011 10:00 AM – 11:00 AM CDT sponsored by MetalMiner and Aravo.

Lisa Reisman, Editor of MetalMiner, will provide opening remarks and then pass the program to Lawrence M. Heim, who leads the conflict minerals practice and is director with The Elm Consulting Group International LLC. Lawrence will provide background around the legislation and the current status of regulations and related initiatives, as well as key definitions and concepts. He will then move into discussing current challenges that leading organizations face and considerations they can take to successfully integrate the legislation into their sourcing practices.

Robert Shecterle of Aravo will make closing remarks before a 15-minute Q&A concludes the session.

Register for this free and informative session here.

Is Demand for “Absolute Certainty” Fueling Failure of US Conflict Minerals Law, DRC?

Recent reports in the New York Times and Christian Science Monitor (CSM) about the impact of Section 1502 of the Dodd-Frank Act on the Democratic Republic of Congo (DRC) sparked both controversy and debate in the media and in on-line conversations.  The CSM article contains an interview with Eric Kajemba who, according to the CSM, is founder/director of Observatoire Gouvernance et Paix (OGP), an NGO based in Bukavu, and has worked in the minerals trade.  Mr. Kajemba provided insight into DRC’s mining sector in the twelve months since the law’s passage.  Among his more interesting quotes:

… It is true that there is no official embargo on the Congo today, and that the Dodd-Frank law did not call for such an embargo. But the truth is that as soon as the Congolese export ban was lifted, the Electronic Industry Citizenship Coalition (EICC) [an electronics industry body] in the United States imposed a de facto embargo. Traders here only had time to sell their stock and then everything stopped again! Now most of the minerals seem to leak out through smuggling.

… There are a lot of initiatives that have been proposed, but this has added to the confusion. We need one approach. The centres de négoce and tagging are not enough. Tagging is good – but you can end up tagging dirty minerals, as well! There is a whole bunch of work to do. Let’s not confine ourselves to tagging.

 ENOUGH [the US based activist organization most visible/vocal on conflict minerals issues] has hardened its tone. They only show the negative side of artisanal mining here. This one-sidedness of their advocacy has had negative side-effects. No, we know we can’t stop Dodd-Frank, but we need to be aware of these negative consequences – we are not very happy with Global Witness or ENOUGH, but we feel they are very influential, and we are ready to work with them.

Based on our experiences in conflict minerals auditing, we recognize these points, but from a different perspective:  Approaching compliance with the US conflict minerals law as a “cause” (demanding immediate resolution with absolute certainty) is perhaps the most direct reason for the de facto US embargo on DRC sourced minerals, and the breakdown of an economy supporting legitimate sources. 

Why?  The issue’s disturbing basis (systemic human rights atrocities), combined with media coverage and well managed NGO campaigns, drive emotionally-charged demands for zero tolerance and absolute certainty in traceability information and processes.  No such solution exists, and attempts to force-fit a handful of inadequately planned ideas are proving unsuccessful and problematic.  The easiest (and theoretically most certain) solution is for companies to simply stop buying any materials sourced from Central Africa, collapsing the sole legitimate economic support for those most needing it.  This result is a case study in perverse consequences.

Our long-standing position is that the implementation of Dodd-Frank’s conflict minerals mandate should be based on “reasonable assurance” rather than “absolute certainty” in expectations, management processes and auditing.   It is worth pointing out that the language of the law itself mirrors this, as it requires “efforts to determine the mine or location of origin with the greatest possible specificity.” 

Removing expectations of – and pressures related to – achieving perfection will allow pragmatic and compliant solutions to develop quickly, and reduce risks for companies seeking to support legitimate DRC sourced materials helping those in need.