The long wait for direction on the conflict minetals provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act is finally over. It's time for companies to develop a strategy for compliance...
Conflict Minerals: Time to Develop a Compliance Strategy
r1_F_25057_FinancialReporting_eh_013_25056_FinReporting 9/26/12 8:54 AM Page 13 BY JIM LOW FINANCIAL REPORTING Conflict Minerals: Time to Develop a Compliance Strategy T he long wait for direction on the conflict minerals provi- sion of the Dodd-Frank Wall Street Reform and Con- sumer Protection Act is finally over. It’s time for companies disclosure Form SD. 3. If the 3TG minerals do come from the DRC region — or if the source is unknown — companies must trace the to develop a strategy for compliance. On Aug. 22, the U.S. supply chain for the source and furnish an independently Securities and Exchange Commission completed its deliber- audited report on those due-diligence efforts. ations over Dodd-Frank Section 1502 and voted to adopt the provision and issued a 357-page set of rules for compliance. The compliance deadlines are already within sight. Un- These rules mean companies will need to disclose der the rules, companies will need to compile data for cal- whether their manufacturing process or products utilize so- endar year 2013 (irrespective of their fiscal year) and make called “conflict minerals” from the Democratic Republic of their first filing by May 31, 2014. The SEC’s requirement to Congo (DRC) and adjoining countries. Congress included “file” this report potentially creates for companies a higher this provision in Dodd-Frank be- standard for compliance. The cause of concerns that the exploita- practical impact is that a compa- tion of these minerals by armed ny could be held liable for “false groups is helping to finance con- Though the timing is right and or misleading statements” under flict in the DRC region and is con- the upfront costs could be Section 18 of the Exchange Act. tributing to a humanitarian crisis. Congress believes that these significant, this could prove to ance will be question, compli- Without costly. The SEC es- reporting requirements will pro- be an investment that yields timates it will cost affected vide transparency for investors even greater savings companies a total of $3-$4 bil- and, through that transparency, lion in the first year and at least help curb the violence. over the long term. $200 million each year after- Minerals covered under the ward. All that said, this new provision are commonly referred compliance requirement — to as “3TG,” for tin, tantalum, tungsten and gold. These done correctly — could offer beneficial insights for com- minerals are used in a wide range of industries including panies as they gain more visibility into their supply electronics and communications, aerospace and automo- chain. Some are already using this information to ration- tive, jewelry, health care devices and diversified industrial alize their supply chain operations and exert better risk manufacturing. controls over suppliers. The DRC holds a substantial supply of tantalum and Though the timing is tight and the upfront compliance large deposits of gold and tin, which means a large number costs could be significant, this could prove to be an invest- of companies will undoubtedly be affected by this provi- ment that yields even greater savings over the long term. sion. The SEC estimates it may affect about 6,000 compa- nies in the United States and abroad. Private companies Building a Framework for Compliance may also be affected if they are part of the supply chains of For companies that are already developing a conflict miner- the companies affected by the reporting requirements. als compliance framework, the process is being led by C-level executives, with the board of directors and CEO driv- Three Steps to Follow ing strategy. But though each company’s compliance frame- Under Section 1502, Dodd-Frank mandates three steps: work may be organized differently, the ultimate responsibil- 1. SEC-registered companies must determine if they ity for reporting information to the SEC sits primarily with the have any exposure to 3TG. chief financial officer, as conflict minerals reports (subject to 2. Companies must determine, on a reasonable basis, if audit) would be furnished as an exhibit to a company’s pub- the 3TG minerals they use originated in the DRC or an ad- lic filings with the SEC. joining country. If the metals did not originate in the DRC Building a Section 1502 reporting structure below the nations or are considered scrap or recycled, companies CFO and chief operation officer is likely to be demanding, must report how they determined this in a new specialized involving work from at least four corporate departments: www.financialexecutives.org FinancialExecutive • OCTOBER 2012 13
r2_F_25057_FinancialReporting_eh_013_25056_FinReporting 9/27/12 10:26 AM Page 14 Once a company has its internal compliance framework built, it needs to determine the sources of the minerals in its supply chain. This can be a daunting task. FEI Member Larry Salva Appointed to supply chain and procurement, legal counsel, finance and internal audit. Meanwhile, the audit committee will want to FASB’s EITF; FEI Member George be involved in the same way as with any financial statement Beckwith Appointed to FAF’s PCC to the SEC, given there is an external audit requirement for the conflict minerals filing. And given the intent of the law, some companies are O n Sept. 10, the Financial Accounting Standards Board (FASB) announced the appointment of three new mem- bers to the Emerging Issues Task Force (EITF). EITF assists also including their office for sustainability or corporate so- FASB in improving financial reporting through the timely cial responsibility (CSR). identification, discussion and resolution of financial account- ing issues. Mapping the Supply Chain Among the new members is FEI Once a company has its internal compliance framework member Larry J. Salva, senior vice presi- built, it needs to determine the sources of the minerals in dent, chief accounting officer and con- its supply chain. This can be a daunting task, as exemplified troller of Comcast Corp. He will begin by an aerospace company that is already engaged in the his term on the EITF on Nov. 1, 2012. process. As one executive put it, a typical commercial air- Salva serves on FEI’s Committee on Cor- plane has more than five million parts, and airplane compa- porate Reporting (CCR) and has served nies are usually just the final assemblers of the aircrafts. as the committee’s chair. Yet, the company has commercial relationships with its The other members appointed to the Larry Salva, tier-one suppliers, and those suppliers may have a dozen or EITF are Terri Z. Campbell, CFA, a man- Comcast Corp. more tiers of suppliers, each tier made up of a web of usu- aging director with Liberty Mutual ally confidential commercial agreements. Group Asset Management Inc., and Jack- Like the organization in this example, a number of com- son Day, the Americas director of ac- panies have already gotten a jump on the Dodd-Frank re- counting standards setting for Ernst & quirement and have at least started to set up a compliance Young LLP. framework. By KPMG’s count, 77 companies have pub- Then, on Sept. 19, the Board of lished a conflict minerals statement online and 63 organiza- Trustees of the Financial Accounting tions included conflict minerals information in their SEC fil- Foundation (FAF) appointed the chair and ings for 2011. Others have set goals. members of the Private Company Council For instance, semiconductor maker Intel Corp. says it (PCC). The PCC is a new body that will wants to make the first microprocessor validated as “con- work with FASB to determine whether flict free” by the end of 2013. and when to modify U.S. generally ac- George Beckwith, In some cases, companies have been spurred to comply cepted accounting principles (U.S. National Gypsum Co. by state rules. California and Maryland have already adopt- GAAP) for private companies. ed conflict minerals provisions, and Massachusetts and George Beckwith, vice president and chief financial of- Rhode Island are considering legislation. Internationally, ficer of National Gypsum Co. and chairman of FEI’s Com- Australia has released due diligence guidelines, and there mittee on Private Company Standards, was named as a are three proposed laws under consideration in the Euro- member of the council, along with chair Billy M. Atkinson, pean Union. who served as chairman of the National Association of State For companies that have not yet considered this issue, Boards of Accountancy (NASBA) until 2010. it’s time to get started. When starting the process, keep in Others comprising the committee are Steven Brown, mind that this does not have to be simply a compliance ex- vice president of US Bank; Jeffery Bryan, partner, Profes- ercise. It could result in a supply chain operation that’s sional Standards Group of Dixon Hughes Goodman LLP; more transparent for the company’s investors and better for Mark Ellis, CFO, PetCareRx Inc.; Thomas Groskopf, director its bottom line. and owner, Barnes, Denning & Co. Ltd; Neville Grusd, president, Merchant Financial Corp.; Carleton Olmason, Jim Low is a partner at KPMG LLP, the U.S. audit, tax and managing principal, GMB Mezzanine Capital; Diane Ru- advisory ﬁrm, and leader of KPMG’s Financial Services bin, partner, Novogradac & Co. LLC; and Lawrence Wein- Regulatory Center of Excellence (www.kpmg.com/us). stock, vice president – Finance, Mana Products Inc. 14 OCTOBER 2012 • FinancialExecutive www.financialexecutives.org