Proposed Guidance: COSO Internal Controls for Integrated Reporting

IMA's Annual Conference & Expo in Las Vegas - 2016
Presented By:
Liv Watson, Sr. Director of Customers Strategic Initiatives, Workiva Inc.
Brad Monterio, Managing Director, COLCOMGROUP, INC.
Proposed Guidance: COSO
Internal Controls for Integrated
Reporting
June 22, 2016
10:00 AM - 11:15 AM
Liv Watson, Sr. Director of Customer Strategic Initiatives, Workiva, Inc.
Brad Monterio, Managing Director, Colcomgroup, Inc.

Learning Objectives
Œ
Describe how the proposed guidance
applies to integrated reporting (<IR>),
especially non-financial information.

Explain proposed guidance on how to
apply COSO to <IR> and integrated
thinking.
Ž
Recognize how to apply basic templates
for mapping COSO to the <IR>
framework.

Context
It is commonly said that companies
undergo a 'journey' to <IR>. The same is
true about internal controls and
assurance on <IR> - the pathway is
being built today.
"The business community is entering
a new era in corporate reporting,
assurance, and internal controls - the
management accounting profession
is in a unique position to help guide
that journey."
--- Liv Watson and Brad Monterio

The <IR> Report must be...
▪ Understandable and usable
▪ Talking about value creation
▪ Focused on strategy and the future
▪ Connected
▪ Accurate, reliable and complete
▪ Concise
▪ Focused on material information
▪ Consistent and comparable
▪ Targeted at a variety of stakeholders

▪ 193 Countries
▪ 17 Goals
▪ 169 targets
Market Drivers - The 2030 Agenda

Learning Objective 1
Œ
Describe how the proposed guidance
applies to integrated reporting (<IR>),
especially non-financial information.

Common Reporting Frameworks

Common Reporting Frameworks
Framework About
IIRC <IR> (global) Helps organizations explain to providers of financial capital how they create value over time
CDP / CDSB (global)
CDP: Uses the power of information disclosure to drive organizations to measure, manage &
reduce their impact on the environment & build resilience, while providing high quality
information to the market. CDSB: Helps organizations prepare/present environmental
FASB US GAAP (U.S.)
Establishes & improves standards of financial accounting/reporting by nongovernmental
entities to provide decision-useful information to investors & other users of financial reports
GRI G4 (global)
Enables all organizations – regardless of size, sector or location – to report the sustainability
information that matters
IASB (global)
Provides high quality, transparent & comparable information for investors, provides capital
markets with a common language for financial reporting, promotes capital market stability
through transparent financial reporting & promotes consistent application of standards
ISO 26000 (global) Provide guidance on how businesses & organizations can operate in a socially responsible way
SASB (U.S.)
Helps public corporations disclose material sustainability information in mandatory SEC filings,
such as the Form 10-K and 20-F

▪ Defining the Non-GAAP Financial
Measure
▪ Unbiased Purpose
▪ Prominence of Presentation of
GAAP measures versus Non-
GAAP Financial measures
▪ Reconciliation to Comparable
GAAP Measures
▪ Presentation of Non-GAAP
Financial Measures Consistently
Over Time
▪ Recurring Items
▪ Access to Associated Information
Non-GAAP Measures

Common Assurance Frameworks

Common Assurance Frameworks
Framework About
IFAC / ISAE 3000 (global)
The standard consists of guidelines for the ethical behavior, quality management and
performance of an ISAE3000 engagement.
An ISAE3000 report generally consists of a description of the scope, the norm against which
the report is tested, a description of the control framework and a detailed description of the
risk management system and a control matrix consisting of the risks, the related control
objectives and the related controls.
AccountAbility / AA1000AS
(global)
(AA1000AS) provides a methodology for assurance practitioners to evaluate the nature and
extent to which an organization adheres to the AccountAbility Principles.

Assurance Challenges
▪ Materiality
▪ Reporting Boundary
▪ Connectivity
▪ Completeness
▪ Narrative Reporting and Future Oriented
Information
▪ Quantitative and Qualitative Information

Controls and <IR>
Œ

Ž

1st Line of Defense:
Business and Management
Controls
2nd Line of Defense:
Capitals Controls
3rd Line of Defense:
Internal Audit
4th Line of Defense:
External Assurance
1st Line of Defense:
Business/Mgt. Controls
5th Line of Defense:
Regulators
‘6th Line of Defense:
Stakeholders

Controls and <IR>
Stakeholders
á á á
4thLineofDefense
5thLineofDefense
6thLineofDefense

Materiality: Common Principles"Statement of Common Principles of Materiality"
Published by Members of the Corporate Reporting Dialogue (CRD)

Materiality: Common Principles
▪ Concept that is widely used in financial and non-financial
reporting
▪ Frequently a legal concept - some countries, by either statute,
case law or regulation, have established a definition of
materiality to be applied in a specific jurisdiction
▪ Not possible to establish a ‘one size fits all’ quantified
definition of materiality globally
▪ The application of materiality among Corporate Reporting
Dialogue (CRD) participants compounded due to the different
context in which their reporting standards are applied
▪ Each CRD organization will need to tailor any definition
of materiality to its respective mission
▪ CRD recommends modifications adhere to a foundational
principle: 'material information is any information which is
reasonably capable of making a difference to the
conclusions reasonable stakeholders may draw when
reviewing the related information.'

Materiality: Common Principles
Organization Definition / Principle Scope / Boundary
IIRC A matter is material if it could substantively affect the organization’s ability to create value in the short,
medium or long term.
Scope of reporting is towards providers of financial capital with focus on what is
material to an assessment of how an organization creates value over time.
CDP/
CDSB
Environmental information is material if: (1) The environmental impacts or results it describes are, due to
their size and nature, expected to have a significant positive or negative effect on the organization’s
current, past or future financial condition and operational results and its ability to execute its strategy; or
(2) Omitting, misstating or misinterpreting it could influence decisions that users of mainstream reports
make about the organization.’
Audience/scope is the same as those of the IASB. Subject focus narrower as CDSB
remit addresses natural capital - i.e. environment, climate change, etc.
GRI ‘Material Aspects’ are those that reflect the organization’s significant economic, environmental and social
impacts; or that substantively influence the assessments and decisions of stakeholders.
Stakeholders broadly defined as entities or individuals that can reasonably be
expected to be significantly affected by the organization’s activities or products
and services; and whose actions can reasonably be expected to affect the ability of
the organization to successfully implement its strategies and achieve its objectives.
‘Aspects’ refers to the list of subjects covered by GRI guidelines and cover a range
of a reporting entity’s economic, environmental and societal activities and impacts.
SASB
SASB standards are developed using the definition of “materiality” applied under the U.S. federal
securities laws. That definition, set forth by the U.S. Supreme Court in TSC Industries v. Northway, 426
U.S. 438 (1976), is that a fact is material if “there is a substantial likelihood” that a “reasonable investor”
would view its omission or misstatement as “having significantly altered the total mix of information.”
SASB identifies sustainability topics that are reasonably likely to be material for a specific industry and
then develops corresponding metrics. A company’s management must determine whether the relevant
SASB standard should be used to comply with the disclosure requirements of the federal securities laws.
SASB standards are developed for 79 industries in 10 sectors and can be used by all
public companies. The standards apply to U.S. and non‑U.S. companies that access
capital in the U.S. markets and are subject to SEC reporting requirements. The
SASB recommends that issuers follow the same boundaries and timing as they use
for financial reporting to the S.E.C, thus ensuring that financial fundamentals and
material sustainability fundamentals can be analyzed in a similar context and
compared year on year.
FASB
Current: ‘Information is material if omitting it or misstating it could influence decisions that users make on
the basis of financial information of a specific reporting entity. ...’Status as of February 2016: There is an
active FASB project reconsidering the definition of materiality which has the potential for changes in the
scope and general application for entities which report in accordance with US GAAP. No final decisions
have been made and overall project direction remains to be determined.
In process of being evaluated with potential for revision.
IASB
Current: ‘Information is material if omitting or misstating it could influence decisions that users make on
the basis of financial information about a specific reporting entity. …’ Proposed: Information is material if
omitting it or misstating it could influence decisions that the primary users of general purpose financial
reports make on the basis of financial information about a specific reporting entity.’
Scope is narrowly defined as any assessment of materiality would be limited to the
reporting entity and more specifically its financial statements prepared in
accordance with IFRS. Intended audience is primary users of financial statements
(current/ potential capital providers, lenders) in order to assist in making hold, buy,
sell, lend and similar investment and credit decisions. Further, primary users are
defined to be those users with a general knowledge of business and economics
and the willingness to diligently study the financial information presented.
ISO
An organization should review all the core subjects to identify which issues are relevant. The
identification of relevant issues should be followed by an assessment of the organization’s impacts. The
significance of an impact should be considered with reference both to the stakeholders concerned and to
the way in which the impact affects sustainable development.
Broad, inclusive definition of stakeholder as ‘an individual or group that has an
interest in any decision or activity of an organization. ‘Scope’ of reporting extends
to both those activities an organization has control over but may situationally
extend to other organizations and activities that the reporting entity has the ability
to influence (its ‘sphere of influence’).
Copyright © March 2016 by the participants of the Corporate Reporting Dialogue.

Materiality: A Closer Look
Material information is defined by the U.S.
Supreme Court as presenting a substantial
likelihood that the disclosure of the omitted fact
would have been viewed by the reasonable
investor as having significantly altered the “total
mix" of information made available.
-TSC Industries, Inc. v. Northway, Inc., 426 U.S.
438 (1976)
<IR> "Relevant Matters"
Not all relevant matters will be considered
material. To be included in an integrated
report, a matter also needs to be sufficiently
important in terms of its known or potential
effect on value creation.

Materiality: SASB
The SASB Materiality
Map™ analyzes the
potential for material
impacts of 30
sustainability issues across
all industries.
Sustainability issues are
divided into five
dimensions:

▪Environment
▪Social Capital
▪Human Capital
▪Business Model &
Innovation
▪Leadership & Governance

Materiality: SASB

Global Regulation Update
▪ GRI, the United Nations Environment
Programme (UNEP), KPMG International,
and the Centre for Corporate Governance in
Africa recently released the 4th edition of
"Carrots & Sticks: Global Trends in
Sustainability Reporting Regulation and
Policy"
▪ Reviews the reporting landscapes of 64
countries and territories
▪ Identifies approximately 400 regulations,
guidelines, codes-of-conduct, frameworks,
and other reporting instruments—both
mandatory and voluntary
▪ This report paints one of the most
comprehensive pictures of the global non-
financial reporting requirements
▪ www.carrotsandsticks.net

Global Regulation Update: U.S.
▪ U.S. Congress recently mandated new disclosure
requirements to be enforced by the SEC:
◦ Dodd Frank Act Section 1502 X - SEC adopts
rules regarding registrants’ use of conflict
minerals
◦ Section 1504 directs SEC to adopt rules
regarding disclosure of payments made by
resource extraction issuers to foreign
governments or the federal government for the
purpose of the commercial development of oil,
natural gas, or minerals
◦ Section 1503 requires certain registrants to
disclose information about health and safety
violations at mining-related facilities
▪ SEC recognized that investors want greater
disclosure of some public policy and sustainability
matters
▪ SEC voted in April to publish concept
release seeking public comment on modernizing
Regulation S-K

Global Regulation Update: E.U.
Non-financial regulatory disclosure trends
in the EU
▪ EU Directive 2014/95/EU (Dec 2016) on
disclosure of non-financial and diversity
information went into action
▪ Aims at improving transparency of
certain large EU companies regarding
non-financial information
▪ New disclosure requirements apply to
large public-interest entities with more
than 500 employees

Learning Objective 2

Explain proposed guidance on how to
apply COSO to <IR> and integrated
thinking.

What does it
mean to be an
integrated
reporting
company?

High-Level Overview
▪ 3 Objectives
▪ 5 Integrated
Components
▪ 17 Principles
▪ 100+ specific
"Points of
Focus"
▪ 8 Content
Elements
▪ 7 Guiding
Principles
▪ 6 Capitals/
Resources

The <IR> Framework The COSO Framework
<IR> reports to communicate a clear, concise, integrated story that explains
how all of their resources are creating value

▪ Internal controls considerations
▪ Materiality
▪ Reporting boundary
▪ Connectivity matters
▪ Assessing completeness
▪ Assessing narrative reporting
(incl. future-oriented
statements)
▪ Using work of others
▪ Form of the assurance report
Challenges

Gather Review Final ReviewOrganize
Accounting Operations
Accounting Policy
Actuarial
Corporate Benefits
GAAP Reporting Team
Investments
Legal
Lines of Business
Reinsurance
Risk Management
STAT Reporting Team
Tax
<IR>y Team
Other
• Track deliverables
• Combine data
• Perform rounding
Version 4
Version 4
Version Final
Senior Management
& External Auditors
Version 1
Version 2
Version 3
Master Excel®
File
Copy, paste, manually update, and format
text and tables in multiple documents;
track deliverables; follow up on and
resolve questions, and track sign-off.
Reporting Team
Audited Financial
Statement
MD&A
Footnotes
Departmental
Management
Times 35+ Notes
Times # of Pages
Times 25+ Notes
GL & STAT
Package
Unstructured Data - 90%
Structured Data - 10%
<IR> Report
The <IR> Report Manual Close

Learning Objective 3:
Ž
Recognize how to apply basic templates
for mapping COSO to the <IR>
framework.

Does the <IR> Report include all 8 Content Element of the <IR> Framework?
Yes or No
Does the <IR> Report reflect all 7 Guiding Principles of the <IR> Framework?
Does the <IR> Report include all 6 Capitals of the <IR> Framework ?

Sample
Disclosure
Exercises

Sanford, the Home of Sustainable Seafood
Content Elements
▪ Org Overview/Ext
Environment
▪ Governance
▪ Business Model
▪ Risks/Opportunities
▪ Strategy/Resources
▪ Performance
▪ Outlook
▪ Basis of Preparation
Guiding Principles
▪ Strategic Focus/Future
Orientation
▪ Connectivity
▪ Stakeholder Relationships
▪ Materiality
▪ Conciseness
▪ Reliability/Completeness
▪ Consistency/Comparability
Capitals
▪ Financial
▪ Natural
▪ Human
▪ Intellectual
▪ Manufactured
▪ Social & Relationship

Bringing <IR> and
COSO into the
Cloud
A Demonstration

SASB - Commercial Banks Example

Proposed Guidance: COSO Internal Controls for Integrated Reporting

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