The document outlines a webinar discussing the key principles and changes in the 2013 control environment framework, emphasizing its importance in internal control systems. It highlights the framework's shift from seven factors to five underlying principles, aiming to improve organizational governance and risk management. The control environment is portrayed as foundational to ensuring effective internal controls, with significant implications for compliance, particularly regarding Sarbanes-Oxley applications.

1. 2013: What YOU Need to Know
2013:
What YOU
Need to Know
CONTROL ENVIRONMENT
October 17, 2013 | 12:00 p.m. ET | 1 hour | 1 CPE credit
Slide 1

2. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
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3. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
CPE Credit
•
Today’s webcast is worth one (1.0) CPE credit.
•
To qualify for CPE, one must have registered via FEI’s website, as well as,
meet both duration, poll requirements and complete an on-line survey
evaluation.
•
In accordance with the standards for the National Registry of CPE Sponsors,
CPE credit will be granted based on a 50-minute hour.
•
You must answer at least 3 polling questions (during the webcast) to qualify for
CPE credit.
•
Qualifying participants will have access to the NASBA required survey, in
FEI’s CPE Center, within 2-3 business days and the online certificate for CPE
credit is available immediately upon completion of this survey.
•
Additional information will be provided in a follow-up email after today’s webcast.
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4. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
About the Speaker
Jim DeLoach
Managing Director|
With over 35 years of experience and a member of the Protiviti’s Solutions Leadership Team, Jim DeLoach assists
organizations in responding to government mandates, shareholder demands and a changing business environment
in a cost-effective and sustainable manner. His focus is on managing risk and integrating risk with strategy setting,
business planning with performance management.
DeLoach was one of 25 recipients of the “Consultant of the Year” award from Consulting Magazine in 2011. In 2012
and again in 2013, he was named to the National Association of Corporate Directors’ Directorship 100 list,
recognizing him as one of the 100 most influential people in the boardroom community. DeLoach has authored
several books, including Enterprise-wide Risk Management: Strategies for linking risk and opportunity, which was
published by Financial Times in June 2000 and was the first book written on the subject of enterprise risk
management. Widely quoted in the press, he has published numerous articles and thought papers over the last 15
years covering various aspects of governance, managing business risk and effective internal controls. He has served
on the COSO Advisory Board for 10 years contributing to the development of several frameworks and projects.
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5. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Agenda
Why Focus on the Control Environment?
Key Changes in 2013 Framework –
Control Environment
Key Principles
Interdependencies with Other
Components
Implications to Sarbanes-Oxley
Applications
Conclusion
Slide 5

6. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Where It All Starts
“The set of standards,
processes, and structures
that provide the basis for
carrying out internal control
across the organization.”
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7. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Internal and External Factors Influence It…
• Company history and ethical values
• Industry considerations
• Management's philosophy and
operating style
• Competence of the entity's people at
all levels and the standards,
processes, and structures that guide
them
• Effectiveness of board oversight
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8. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Why Focus on the Control Environment?
• Is the foundation for all other
components of internal control
• Sets the tone of an organization
• May help an organization be more
resilient when facing pressures
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9. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Importance of the Control Environment
• It’s often where the problems start
• The core of any business is its people and the
environment in which they operate
• Without an effective control environment, it’s
game over
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10. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
The “Usual Suspects”: 10 Examples
(1) Pressure to meet unrealistic performance targets, particularly short-term
results
(2) Unbalanced compensation structures that encourage excessive risk
taking
(3) Passive boards that fail to exercise effective oversight
(4) Inadequate board communications
(5) Selective consideration of facts to fit management’s bias
(6) Lack of transparency into what matters
(7) Inability to manage conflicting objectives and metrics
(8) Board waiver of conflict of interests policy
(9) Poor escalation processes
(10) Management override of controls
Slide 10

11. The New
2013: What YOU Need to Know
Framework
Polling Question 1
The control environment:
a. Consists of a set of standards, processes, and structures
b. Is the foundation for carrying out internal control across the organization
c. Sets the tone for the organization’s internal control
d. May help an organization be more resilient when facing external and internal
pressures
e. All of the above
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12. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Key Changes in the 2013 Framework
• Combines the SEVEN factors into
FIVE underlying principles
• Provides in-depth account on
what is involved in an effective
control environment
• Explains interdependencies and
linkages between components
• Covers implications of extended
business models utilizing external
parties
Slide 12

13. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Key Changes in the 2013 Framework
• Expands on the concepts of
governance in an organization
• Clarifies the expectations of
integrity and ethical values to
reflect lessons learned and
new developments
Slide 13

14. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Key Principles Under Control Environment
1 Commitment to integrity and ethical values
Independence board of directors exercising
oversight of internal control
Structures, reporting lines, and appropriate
3
authorities and responsibilities
Commitment to attract, develop, and retain
4
competent individuals
2
5
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Individuals held accountable for their internal
control responsibilities

15. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Commitment to Integrity and Ethical Values
Sets the Tone at the Top
Points
of Focus
Establishes Standards of
Conduct
Evaluates Adherence to
Standards of Conduct
Addresses Deviations in a
Timely Manner
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16. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Using the Points of Focus as Guidance…
Sets the Tone at
the Top
Evaluates
Adherence to
Standards of
Conduct
Slide 16
Establishes Standards
of Conduct
Addresses Deviations
in a Timely Manner

17. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Principle 1: Suggested Approaches
• Set the tone from the top for day-to-day actions and
decision making across the organization
• Consider legal, ethical, and other expectations in the
conduct of business and financial reporting to establish
expected standards of conduct
• Train new and existing employees on the entity’s
standards of conduct
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18. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Principle 1: Suggested Approaches
• Analyze issues and trends from hotlines and help lines
made available within the organization that could
indicate potential fraud occurrences
• Make explicit the consequences for deviations from
standards of conduct at any level in the organization
• Establish, communicate and enforce standards of
conduct throughout the organization
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19. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Case in Point #1
The senior management of a publicly traded
company maintains and distributes the company’s
code of business conduct and ethical standards to
all employees and external parties acting on its’
behalf. It also provides for a supplier code of
conduct to its vendors as part of its agreements,
which provide for a basis of evaluation along with
product/service delivery evaluation.
Source: COSO; Internal Control over External Financial Reporting: A Compendium of Approaches and Examples
Slide 19

20. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Case in Point #2
A not-for-profit organization conducts scheduled
audits to determine whether employees are
receiving and understanding the board approved
standards of conduct when they are first hired and
as part of ongoing communications. This helps to
determine if there are any instances of noncompliance and to use those findings to assess
and correct any deficiencies in the organization’s
new-hire orientation, communications, training,
and employee review processes.
Source: COSO; Internal Control over External Financial Reporting: A Compendium of Approaches and Examples
Slide 20

21. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Independent Board Exercises Oversight
Establishes Oversight
Responsibilities
Points
of Focus
Applies Relevant Expertise
Operates Independently
Provides Oversight
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22. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Polling Question 2
Under the 2013 New Framework, the control environment
consists of 7 important principles.
a. True
b. False
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23. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Polling Question 3
Under the 2013 New Framework, the points of focus provided for each
principle are intended to provide helpful guidance but are not required to
be evaluated separately.
a. True
b. False
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24. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Case in Point
The audit committee of an electricity transmission
and distribution company meets, at least annually,
in executive session to discuss its assessment of the
risks of management override of internal control,
including motivations, opportunities, and
rationalizations for management override and how
those activities might be concealed. It also
collects information whenever any concerns are
expressed about ethics or possible management
override of internal controls. The process of
questioning continues until resolution is reached.
Source: COSO; Internal Control over External Financial Reporting: A Compendium of Approaches and Examples
Slide 24

25. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Appropriate Structures, Reporting Lines,
Authorities and Accountabilities
Points
of Focus
Considers All Structures of the
Entity
Establishes Reporting Lines
Defines, Assigns, and Limits
Authorities / Responsibilities
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26. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Third Point of Focus
Points
of Focus
Slide 26
Defines, Assigns, and Limits
Authorities / Responsibilities:
•Board of Directors
•Senior Management
•Management
•Personnel
•Outsourced Service Providers

27. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Principle 3: Suggested Approaches
• Management periodically considers the impact on the
control environment and the importance of effectively
segregating duties, as part of reviewing the assignment
of authorities and responsibilities
• Job descriptions outlining financial reporting
responsibilities are maintained and are updated when
necessary when circumstances change
• Management provides sufficient direction to ensure
that the appropriate employees recognize their
responsibility for internal control and the importance of
applying appropriate diligence / business judgment
when they carry out their assigned job responsibilities
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28. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Case in Point
The senior management at a games software
developer, has recognized that the company’s
recent significant growth is causing many of the
roles and responsibilities of its management
executives to be no longer relevant.
In response, the senior managers have initiated a
project to realign responsibilities among its
leadership team. The goals are to adequately
support financial reporting objectives, with clear
lines of reporting supported by new written job
descriptions.
Source: COSO; Internal Control over External Financial Reporting: A Compendium of Approaches and Examples
Slide 28

29. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Attract, Develop and Retain Competence
Establishes Policies and
Practices
Points
of Focus
Evaluates Competence and
Addresses Shortcomings
Attracts, Develops and
Retains Individuals
Plans and Prepares for
Succession
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30. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Principle 4: Suggested Approaches
• Management identifies the required skills and
experience necessary to support the entity’s objectives
• Training needs are identified / delivered to targeted
personnel
• Senior management evaluates the sufficiency and
competency of the personnel involved in recording
and reporting financial information and in designing
and developing financial reporting systems
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31. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Principle 4: Suggested Approaches
• The Board of Directors identifies essential roles for
functioning of the business and, for those roles,
management defines succession plans
• Management sets expectations that personnel raise
issues or questions relating to the application of defined
standards
• Performance evaluation processes and incentives are
established to promote expected standards of
behavior consistent with entity objectives
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32. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Case in Point
The bylaws of the board of a metal products
company specify the responsibility of the audit
committee of the board for reviewing the principal
roles and responsibilities of key financial reporting
senior management. To this end, the audit
committee chair meets annually with the
company’s human resources director, chief audit
executive, and legal counsel to review the roles,
responsibilities, and performance of the various
company managers. The review focuses on
aligning respective managerial responsibilities with
the company’s organization chart.
Source: COSO; Internal Control over External Financial Reporting: A Compendium of Approaches and Examples
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33. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Hold Individuals Accountable
Enforces Accountability Through Structures,
Authorities and Responsibilities
Points
of Focus
Establishes Performance Measures,
Incentives, and Rewards
Evaluates Performance Measures,
Incentives, Rewards for Ongoing
Relevance
Considers Excessive Pressures
Evaluates Performance and Rewards or
Disciplines Individuals
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34. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Principle 5: Suggested Approaches
• Senior management defines performance measures /
rewards aligned with ethical values and inclusive of
financial and non-financial measures
• The board of directors and management periodically
evaluate appropriateness of performance measures
• Management designs objective employee evaluation
and compensation systems that periodically provide
individual rewards or disciplinary action
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35. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Principle 5: Suggested Approaches
• Communicating and reinforcing the accountability for
responsible conduct of all personnel
• Policies that stress interactions with suppliers, customers,
and other external parties reflect fair and honest
dealings
• Anomalies in key performance indicators and internal
analytical reviews of operational and financial
information that could be a potential indicator of fraud
or other misconduct are considered
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36. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Case in Point #1
A forest products company, structures its bonus
plan to have 30% of the potential incentive award
directly related to the demonstration of the
company’s core values. Information items that the
company values are specific comments on how
management does or does not reflect values are
captured through employee feedback.
Source: COSO; Internal Control over External Financial Reporting: A Compendium of Approaches and Examples
Slide 36

37. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Case in Point #2
A private company that researches, develops,
produces, and markets medical scanning
equipment, encourages its employees to identify
and submit suggestions for improving internal
control, including internal control over financial
reporting. Employees are rewarded in the form of
company awards and/or cash bonuses for ideas
that are used.
Source: COSO; Internal Control over External Financial Reporting: A Compendium of Approaches and Examples
Slide 37

38. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Interdependencies with Other Components
• All components must operate together in an
integrated manner
• Components are interdependent with a multitude of
interrelationships and linkages among them
• Examples of components operating together:
− The organization establishes expected standards of conduct
and sets performance incentives within the Control
Environment that may impact the assessed level of fraud risk
evaluated within Risk Assessment
− The communication of internal control deficiencies as part of
Monitoring Activities requires a full understanding of the
entity’s structures, reporting lines, authorities and
responsibilities as set forth in the Control Environment
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39. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Implications to Sarbanes-Oxley Applications
• For established companies, existing documentation
must be converted to the principles-based approach
− For the Control Environment, the 7 factors under the original
1992 version can be organized easily under the 5 principles
• A separate ICEFR compendium may be useful to
companies complying with Sarbanes-Oxley
− For newly public companies or IPO companies, the ICFRE
Compendium provides useful guidance for getting started
− For established companies, use the ICEFR Compendium
selectively or in situations involving changes in conditions and
processes
Slide 39

40. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Polling Question 4
To support a conclusion that internal control is effective, all components
must be present and functioning and operate together.
a. True
b. False
Slide 40

41. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
In Conclusion
• The explicit listing of underlying principles increases the
framework’s utility
• The control environment has a pervasive impact on the
overall system of internal control
• A strong control environment positions organizations to
respond and adapt to internal and external pressures
• Organizational culture supports and is influenced by
the control environment
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42. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Slide 42
Framework

43. Principles and Points ofYOU Need to Know
2013: What Focus: The New
Framework
Thank you for your
participation!
In 2-3 business days, a follow-up email
will provide instructions on accessing
your CPE credits.
Our series continues…
COSO 2013 : What YOU Need to Know – Control Environment
Thursday, October 17 at 12:00 p.m. Eastern
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