Conflict Minerals Disclosures: Reporting Requirements and Implications for Auditing

Abstract

SUMMARY: Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) created a reporting requirement for publicly traded companies that manufacture products using ''conflict minerals'' from the Democratic Republic of the Congo (DRC) or adjoining countries. Under certain circumstances, companies must file a Conflict Minerals Report (CMR) in addition to a Specialized Disclosure Report (Form SD). Companies that claim their products are free of conflict minerals from the DRC must have an audit of their CMR. We investigate the extent to which companies have complied with the new disclosure requirements as well as the current and future auditing implications.

Determinants of Conflict Minerals Disclosure Under the Dodd–Frank Act

“…Among the 387 rules that address regulatory failures to restrain excessive risk taking and questionable practices in the financial markets, Section 1502 specifically adds Section 13(p) to the Securities Exchange Act of 1934. The new rule mandates disclosure related to the use of conflict minerals sourced from the DRC or adjacent countries to all US publicly listed companies, with the SEC's final rule on disclosure taking effect in November 2012 (Sankara et al ., ). The main objective by the Congress for passing the disclosure regime was to reduce violence in the DRC by enhancing transparency and inducing (‘shaming’) companies to reduce conflict minerals trade (Ayogu and Lewis, ).…”

“…In accordance with Section 1502 of the Dodd–Frank Act, the SEC outlined a three‐step process for CMD (Sankara et al ., ). As a first step, companies must determine whether they are subject to conflict minerals legislation.…”

“…Instead, the militias are dependent on partners to transform these minerals into products, ultimately generating profit streams (Ochoa and Keenan, ). These trading partners include multinational companies that use 3TG minerals for the production of a variety of consumer products, such as mobile phones, computers and cans (tin and coltan), light bulbs and machine tools (tungsten), and jewelry (gold) (Amnesty International, ; Sankara et al ., ).…”

“…In summary, Section 1502 of the Dodd–Frank Act provides the first legislation for mandatory human rights reporting in the US. Prior research on conflict minerals has examined the conceptual or legal aspects that led to the developments of this innovative regime (Arikan et al ., ; Sankara et al ., ; Schwartz and Nelson, ). After the first two rounds of mandatory reports under the Dodd–Frank Act, there was in fact a prominent variation in the occurrence of CMDs and, for filing firms, regarding their compliance.…”

“…Since 2014, companies publicly listed in the United States for which 3TG minerals are ‘necessary for the functionality or production’ of their products must disclose to the US Securities and Exchange Commission (SEC) their practices related to conflict minerals. This mandatory reporting regime, ratified in Section 1502 of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd–Frank Act), is the first attempt to legislate human rights disclosures (Arikan et al ., ; Sankara et al ., ; Christensen et al ., ). The Dodd–Frank Act illustrates the emerging need to regulate social conflicts and human rights abuses by demanding an increase in the disclosure of management practices regarding conflict minerals issues as part of a firm's business strategy.…”