Semiconductor vendors, most major consumer electronic OEMs and other high-tech companies largely ignored the voluntary independent audit requirement for compliance with the Dodd-Franks Conflict Minerals legislation in 2013 and this will most likely remain unchanged for 2014, according to a report compiled by Schulte Roth & Zabel, a law firm that provides advisory services to some of the impacted companies, and the Conflict-Free Sourcing Initiative, an industry organization.
In fact, only 1,315 enterprises representing 22 percent of the approximately 6,000 enterprises identified by the US Securities and Exchange Commission as having potential “filing obligations under the Conflict Minerals Rule” submitted the required Form SDs related to the Dodd Frank legislation. Of the 1,315 filers, only four companies, including three from the electronics industry, submitted an independent private sector audit (IPSA) form with their filings. These include Intel Corp., Kemet Corp. and Koninklijke Philips NV. The fourth company was Signet Jewelers Ltd., a U.K.-based jewelry company.
“As expected, there were few audits for calendar year 2013,” noted attorneys at Schulte Roth & Zabel LLP in a white paper co-authored with the Conflict-Free Sourcing Initiative. “Under the Conflict Minerals Rule and as clarified in a subsequent SEC FAQ, an independent private sector audit (IPSA) is not required during a temporary transition period if, after exercising due diligence over the source and chain of custody of its conflict minerals, the issuer determined that at least one of its products may be described as ‘DRC conflict undeterminable.’ ”
The “Conflict Minerals” issue has long been a problem for the electronics industry and other manufacturers required to show they do not have raw materials illegally sourced from Congo in their supply chain. The procurement of certain raw materials widely used in the production of electronic devices is widely believed to be fueling the civil war in the Congo and resulting in major human rights violations. In response, the U.S. Congress included provisions in its wide-ranging 2010 Dodd-Franks Wall Street Reform and Consumer Protection Act requiring manufacturers to ensure their suppliers do not patronize mines and smelters owned or supported by the Congolese warlords.
Although companies do not as yet have to submit the independent audit forms, observers say providing the information can help boost the enterprise’s public image and could also demonstrate a clear willingness to comply with the spirit of the Dodd Frank law. The White Paper cited above pointed out that “larger issuers with well-known consumer brands, may receive pressure from non-governmental organizations to conduct an audit for ”.
So far, however, it doesn’t look like the top consumer electronics brands and others in the high-tech sector are moving towards supplying audited statements. While companies are submitting general reports most are not yet ready to affirm they have no knowledge of conflict minerals in their supply chain by asking their accounting firms to audit the submissions.
The Securities and Exchange Commission initially set a transition reporting date of 2014 for large companies and 2016 for smaller enterprises but pushed this out in a statement issued earlier this year following a ruling by the D.C. Circuit Court of Appeals on the conflict minerals rule. The SEC has since suspended the independent audit requirement until further notice “unless an issuer voluntarily elects to describe a product as “DRC conflict free” in its conflict minerals report.
This doesn’t mean high-tech companies are not working on excluding the so-called “Conflict Minerals” – tin, tungsten, tantalite and gold ore mined in the war-plagued region of Eastern Congo – from their supply chain. In fact, most major users of the minerals have over the last several years stepped up compliance activities and now require full disclosure of raw material sources from first and second-tier suppliers. The White Paper stressed, however, that impacted enterprises will wait until legally required before submitting audited reports.
“There is likely to continue to be only a small number of IPSAs [independent private sector audit] for calendar year 2014,” the authors said. “Although NGOs and SRIs have indicated that they would like to see more independent audits, thus far, most issuers do not appear to be inclined to undergo an audit until they are required to do so, which will not occur until the calendar year 2015 compliance period at the earliest.”
Additionally, it appears manufacturers are still struggling to secure sufficient information about the raw materials. Only about 15 percent of the enterprises polled by the authors of the Schulte Roth & Zabel and Conflict-Free Sourcing Initiative White Paper said, for example, that they were able to examine smelter and refiner “information received from suppliers against published third-party lists of smelters and refiners.” The main reason for this shortfall was because the companies were unable to secure the additional information from their suppliers, according to the report.
The companies polled identified the following areas for improvement:
- Continuing to implement various elements of the OECD Guidance;
- Enhancing supplier training;
- Engaging with suppliers that provided incomplete information for calendar year 2013 or that did not respond to information requests;
- Encouraging suppliers to provide product level information;
- Monitoring and encouraging the continued development and progress of traceability measures at suppliers;
- Communicating the conflict minerals policy and sourcing expectations to new suppliers;
- Incorporating conflict minerals compliance into supplier audits;
- Retaining a third-party IT vendor to assist with supplier outreach and/or data analysis;
- Reaching out to smelters and refiners to encourage them to undergo audits; and
- Joining the CFSI and participating in other industry initiatives.
Click here to download the White Paper.