Under the AIM Act, HFC producers, reclaimers, and other regulated entities are required to have their annual HFC inventory reports audited by a certified public accountant (CPA) to verify compliance. These audits are an important part of ensuring accurate reporting and adherence to regulatory standards as the industry works toward the phasedown of HFCs.
The initial year of the annual HFC audit requirement in 2023 was a learning experience, marked by heightened stress due to expedited timelines and documentation uncertainty. Now that the regulated community and professional service firms have one year of experience in satisfying the Environmental Protection Agency’s (EPA’s) regulatory requirement, we all now look forward to a second year and the potential of a much more informed and smoother process.
Having said that, highlighted below are some important areas for the regulated community to be aware of when assessing regulatory needs for the 2024 compliance period.
Regulatory Requirement
The HFC annual audit regulatory requirement is included in the Code of Federal Regulations (CFR) Part 84.33 and states that, “Any person producing, importing, exporting, reclaiming, or recycling for fire suppression a regulated substance, as well as any person receiving application-specific allowances, must arrange for annual third-party auditing of reports submitted to EPA except for persons receiving application-specific allowances for mission-critical military end uses.” There are subsequent regulatory requirements detailed in 84.33 subsections for three different groups of regulated entities.
The first group consists of the producers, importers, and exporters of bulk HFCs. These companies would typically be described as the ones that are either producing or importing HFCs in bulk for further use in the air conditioning and/or refrigeration sector. The second group consists of companies that were issued application-specific allowances, which do not directly impact the air conditioning and refrigeration sector. The third group are the reclaimers and fire suppressant recyclers, which would include companies that reclaim, purify, and then sell HFCs used in the air conditioning and refrigeration sector.
Audit Scope
The requirements for each type of regulated entity are the codified portion of the regulations. EPA has also supplemented these regulations with very detailed guidance in the “Guidance for Certified Public Accountants” document that was released in March 2024.
The guidance document is very important in terms of defining the “records to be provided by regulated entity,” as well as listing the procedures performed by the CPA. In total, the scope of the review should be defined by both the CFR-codified requirements and the EPA guidance document. It is also worth noting that the codified requirements can only be modified by an additional rulemaking, which is a time-consuming process; however, the EPA guidance document can be modified and adjusted by the Agency on an annual basis, as the regulated community provides feedback each year.
The Independence Requirement
In order to protect the integrity of the audit requirement, the CFR states that the auditor “must be a certified public accountant, or firm of such accountants, that is independent of the regulated person.” With that said, the auditor can have performed other services for the regulated entity such as tax services and/or other unrelated auditing services, but could not have performed specific consulting services in regard to the HFC-regulated substances, their accounting systems, or their handling.
In addition, the CPA firm must not be an employee of the regulated entity and must be free of financial interests in the regulated entity. The professional services firm will also have to conduct internal independence checks on the potential audit team per the professional standards set forth in CFR 84.33, as well as by the American Institute for Certified Public Accountants (AICPA). Any CPA or firm of CPAs that passes the independence requirement can complete the independent review. However, due to the fact that professional service firms must register with EPA to submit reports in their online system, EPA can be a source for regulated entities to help identify a service firm that meets their needs.
Project Timelines
Each professional service firm will coordinate directly with regulated entities to set beginning and intermediate project timelines to complete the annual review before the deadline of May 31. However, as spring is also a time when CPAs are heavily engaged with the tax requirements for their respective clients, it is recommended to engage with a firm early in order to allow sufficient time for the required documentation reviews.
As a general timeline expectation, it is important to note that the regulated entity’s reports must be submitted to EPA 45 days after the end of the respective reporting period, i.e., quarterly or semi-annually, and therefore, the annual audit requirement could be started as early as February 14th of each year following the compliance period under review. Given that potential start date, it could be expected for regulated entities to select and engage a professional services firm in the fourth quarter of the compliance period or, at the latest, early in the new year following the compliance period under review.
Cost and Delivery
The professional services fee associated with completing the annual audit requirement will be proposed by the professional services firm conducting the review. Since EPA does not allow sampling as a part of the process in most, but not all, of the prescribed procedures and 100% of all documentation must be reviewed in many cases, the number of transactions and the number of corresponding documents that must be reviewed will most likely be the primary cost driver in determining the annual audit fee range. As such, regulated entities can expect fees to vary each year depending on levels and types of activity. Types of activity could be best described as producer, importer, exporter, reclaimer, etc., and level of activity could be commonly described as number of allowance transfers, number of imports, number of shipments reclaimed, etc.
Once the annual review is completed, EPA mandates that the independent auditor complete the annual audit requirement and submit the final attestation report directly to EPA through EPA’s Central Data Exchange (CDX) online portal by the due date of May 31 each year. The independent auditor therefore must have registered with CDX and have the ability to submit reports directly to EPA. The regulated entities can expect the auditor to submit the final report directly to EPA after the review is completed, as well as deliver a copy of the submitted report to the regulated entity for their recordkeeping.
