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A Primer on Audit for Responsible Gold


Pankaj Chadha, partner with an Indian member firm of Ernst & Young Global discussed about process of Audit for Responsible Gold, challenges on recycle gold, incremental cost on implementing system etc. while giving an interview to Bullion Bulletin. Excerpts….


Can you take us through the entire process of Audit for Responsible Gold?

LBMA has very extensive guidance for gold refiners that not only requires proper due diligence of supply chain but also requires refiners to design appropriate processes to address various associated risks and continuously monitor operating effectiveness of these processes. To maintain “good delivery” status with LBMA, refiners are required to pass an audit conducted by LBMA accredited auditor. Auditor accreditation is a well laid down process, controlled and monitored by LBMA. Auditors are required to follow global auditing standards to audit and report on compliance with LBMA guidance for Responsible Gold.


Auditors are required to audit and provide assurance under these global auditing standards on refiners gold supply chain management systems and practices. Typically, an audit would cover activities over a 12 month reporting period.


To ensure that all metals held for customers are of the highest quality and that the bars contain the weight of metal they are said to contain, the Chain of Integrity shall be maintained. This means that a bar from outside the chain can only be entered into the chain once it has been proven that the quality of the bar is according to LBMA Good Delivery standards.The Good Delivery standards provide the highest level of comfort to buyers of the quality.


Refinery space in India, particularly gold and other precious metals refining, is still at a very nascent stage.


Under the draft Gold Monetization Scheme of the Central Government,Bureau of India Standards (BIS) has been asked by the department to ascertain if it can conduct accreditation of products being produced by Indian refiners also. Bureau of Indian Standards may soon bring an accreditation programme for refiners.Also, similar accreditation initiatives may be pursued by various commodity exchanges for refiners interested in delivering metal into the exchanges.


Indian refiners who were to seek accreditation similar to one prescribed by LBMA would need not only to design business processes in manner so prescribed but also ensure that they have put in monitoring process of operating effectiveness of such processes.


Can you elaborate on the auditing process a bit?

A third party audit establishes existence and operating effectiveness of processes refiner has put in place to manage risks that impact the supply chain for gold and related quality matters. The guidance provided under auditing standards to undertake such audits is detailed but requires expertise to ensure that auditor employs adequate professional judgment in its understanding of risks associated with supply chain management for precious metals and has knowledge, tools and enablers to conduct a thorough audit. Professional judgment is required to assess appropriateness of samples to be tested, timing of audit procedures, nature of audit tests and extent of audit work, to just name a few.


Challenges related to dealing with recycle gold, basically scrap supplies.Your comments

Yes same challenges as in case of other channels of supply, exist in case of scrap supplies as well. However, as the refining scales up in India, the relative size and corresponding risks of scrap supplies might be less impacting.


I agree, maybe for an LBMA accredited refinery with mined gold as the primary raw material, recycle gold is relatively a small portion.However, if GMS comes into operation in India, bulk of the gold is going to be recycled gold. The money laundering could be a major problem. Is there any mechanism in-built in current regulation to deal with such situation?


Absolutely correct! There are risks associated to every class of transactions. Recycle gold has one set of risks, multi-layering of sourcing or sourcing from conflicted areas are other sets of risks. From an audit perspective, the approach would always be to assess the risks and determine the representative sample and then test that sample to be able to provide assurance.


In my view, if India were to move in that direction, there are three stages in which they have to go. Firstly, there has to be a regulator of the stature of LBMA in India. It could be BIS. That means, they are not only to put forth direction and monitoring kind of processes but also do accreditation of auditors in India, do ‘train the trainers’ kind of programme for auditors, so that they are geared up to provide that level of assurance.


Second layer is the refiners, who would have to gear up and set the processes which are aligned with the global standards.


Third is determination of timeliness of testing. Initially it should be more frequent kind of audits. As it matures, may be, it would become an annual process.


At a strategic level if India were to align itself with the global standards, we need to look at all three levels- at regulatory level, at company level and at the implementation level.


So, I understand the role of BIS is going to be key.

Yes, assuming BIS is going to lead. Whoever is going to lead, it could be BIS or a commodity exchange, their role is going to be key. The agency that is going to take the lead would also have to invest in developing these processes and competencies and sustaining them.They need to establish the entire IT infrastructure back-bone. It is going to be a live organisation and not merely a one-time activity.


Give us some perspective on what could be the incremental cost of implementing a system?

Costs would be significant’. However, you should not look at cost in isolation of the benefits that would accrue. Typically this is a one-time cost, mainly comprise of the process design and implementation of the processes.


Please note that the governance framework in India has expanded rapidly, with the introduction of the Companies Act 2013.Therefore, already there is an increased emphasis on internal financial control systems and controls over how the business is run including regulatory compliance related controls.


The cost of implementing proper systems should be seen more at a strategic level. If you have the ability to become a Good Delivery refiner, then does it mean that your revenue will go up, do you get better value from a realisation perspective. There is substantive evidence not only in India but also elsewhere that LBMA accredited refiners are preferred suppliers to major buyers etc.


Through the accreditation process, refiners would have improved ability to enter the global markets. Any refiner who has to come up to that level and wishes to supply to the market, particularly the large buyers like bankers, should be at Good Delivery status.


Would implementation challenges be different for India?

Well yes and no. No to the extent that more likely than not you will see similar processes being introduced in India. So, to that extent, it’s more a question of investment. There would definitely be learning curve. Success of such initiative would be function of implementation intensity with which regulators and refiners pursue this change. Also, how the monitoring is being carried out, who does the monitoring, and how do you get the auditor quality enhanced, how do you ensure that the assurance being provided for is genuinely comparable to the global standards are other matters which would determine success of implementation. All these are important. However, I don't think India will take too much time to catch up.


Currently, there are four very significant changes around processes impacting corporate world. We had a landmark change in Companies Act last year which impacted the whole corporate world. Second significant change is in the financial reporting landscape. India has moved from the Indian accounting standards to the new set of IFRS based Indian accounting standards.Interestingly, on those accounting standards, companies in India would end up reporting on few of those standards which are yet to be announced or implemented in rest of the world. This means, India would be ahead of the curve in that sense.


The third big change is tax accounting standards.


The fourth big change waiting to happen is the Goods and Services Tax (GST).


So, corporates are already geared up to adapting to these changes. Given this background, progressive companies should not have any difficulties in adopting Responsible Gold Guidance.


Any comments on the recurring costs?

First time audit cost is not likely to be more than 20% higher than the recurring audit cost. However, one time process design and monitoring costs could be significant when such processes are being set up by the refiner. On a recurring basis, you will have to maintain certain size of sample based on risk profile of supply chain. First time, one might do some incremental procedures to gain better understanding and risk assessment. On a year on year basis, you do not see too much movement in risk profile, unless there is a change in supplier base or more suppliers get added. That component may not be more than 20%. You can have a fair assessment of the audit cost.


You have been talking to various people on the subject. How is the response?

I have had discussion with a few commodity exchanges and few of the regulators.There appears to be eagerness and one would expect some significant steps in this direction soon.


Disclaimer: Views are personal and not the views of the publisher.