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Financial Reporting and the Law

The American Institute of CPAs (AICPA) recently issued additional guidance for CPAs who perform the independent private sector audit required by the SEC when a company issues a conflict minerals report. This guidance will likely affect companies’ disclosure and conduct if they retain a CPA to audit the report. The AICPA has issued guidance because staff of the Government Accountability Office advised the SEC staff that it would not establish new standards for the conflict minerals audit but would instead “look to its existing Government Auditing Standards . . ., which is commonly referred to as ‘the Yellow Book.’”

Since CPAs who audit the conflict minerals report required in the SEC’s Form SD will take into account the AICPA’s guidance, companies will be affected by the guidance as well. The new guidance states that a company’s description of its performed due diligence measures must be objective, measurable, complete, and relevant. Section .05 of the guidance explains that, to be objective, the description should not include “subjective language such as best practice or industry standard” since that language would not “provide suitable criteria for an attestation engagement.” To be measurable—i.e., to “permit reasonably consistent measurements of the subject matter”—the description must be precise and specific and not use “adjectives such as some, reasonable, substantive, or exhaustive, or phrases such as to the best of our efforts.” To be complete, the description must describe all due diligence measures performed. Finally, to meet the relevant requirement, the description must only discuss the due diligence measures actually performed.

Various audit procedures suggested in the AICPA’s guidance will also affect companies, including:

  • Asking management to identify how the design of its due diligence framework is set forth in the conflict minerals report and to provide documentation of the design of the due diligence framework as set forth in the report. (This appears to go beyond the information required by Form SD.)
  • Obtaining management’s representations that the design of the due diligence framework “conforms in all material respects to the [Organisation for Economic Co-operation and Development] framework” and that the description of the due diligence measures performed “is consistent, in all material respects, with the due diligence process that the issuer undertook.
  • Obtaining “documentation supporting the description of the reported due diligence measures disclosed or planned to be disclosed” in the conflict minerals report.