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: COSOInternal Controls for Integrated

ReportingJune 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

� Describe how the proposed guidanceapplies to integrated reporting (<IR>),especially non-financial information.

� Explain proposed guidance on how toapply COSO to <IR> and integratedthinking.

�Recognize how to apply basic templatesfor mapping COSO to the <IR>

framework.


Context It is commonly said that companies

undergo a 'journey' to <IR>. The same istrue about internal controls and

assurance on <IR> - the pathway isbeing built today.

"The business community is enteringa new era in corporate reporting,

assurance, and internal controls - themanagement accounting professionis 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

� Describe how the proposed guidanceapplies to integrated reporting (<IR>),especially non-financial information.


Common Reporting Frameworks


Common Reporting FrameworksFramework 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 qualityinformation to the market. CDSB: Helps organizations prepare/present environmental

FASB US GAAP (U.S.) Establishes & improves standards of financial accounting/reporting by nongovernmentalentities 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 sustainabilityinformation that matters

IASB (global)Provides high quality, transparent & comparable information for investors, provides capitalmarkets with a common language for financial reporting, promotes capital market stabilitythrough 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 FinancialMeasure

▪ Unbiased Purpose ▪ Prominence of Presentation of

GAAP measures versus Non-GAAP Financial measures

▪ Reconciliation to ComparableGAAP Measures

▪ Presentation of Non-GAAPFinancial Measures ConsistentlyOver Time

▪ Recurring Items▪ Access to Associated Information

Non-GAAP Measures


Common Assurance Frameworks


Common Assurance FrameworksFramework About

IFAC / ISAE 3000 (global)

The standard consists of guidelines for the ethical behavior, quality management andperformance of an ISAE3000 engagement. An ISAE3000 report generally consists of a description of the scope, the norm against whichthe report is tested, a description of the control framework and a detailed description of therisk management system and a control matrix consisting of the risks, the related controlobjectives and the related controls.

AccountAbility / AA1000AS(global)

(AA1000AS) provides a methodology for assurance practitioners to evaluate the nature andextent 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>

��

1st Line of Defense:Business and ManagementControls2nd 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

4th Line of Defense

5th Line of Defense

6th Line of Defense


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-financialreporting

▪ Frequently a legal concept - some countries, by either statute,case law or regulation, have established a definition ofmateriality to be applied in a specific jurisdiction

▪ Not possible to establish a ‘one size fits all’ quantifieddefinition of materiality globally

▪ The application of materiality among Corporate ReportingDialogue (CRD) participants compounded due to the differentcontext in which their reporting standards are applied

▪ Each CRD organization will need to tailor any definitionof materiality to its respective mission

▪ CRD recommends modifications adhere to a foundationalprinciple: 'material information is any information which isreasonably capable of making a difference to theconclusions reasonable stakeholders may draw whenreviewing 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 ismaterial 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 totheir size and nature, expected to have a significant positive or negative effect on the organization’scurrent, 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 reportsmake about the organization.’

Audience/scope is the same as those of the IASB. Subject focus narrower as CDSBremit addresses natural capital - i.e. environment, climate change, etc.

GRI ‘Material Aspects’ are those that reflect the organization’s significant economic, environmental and socialimpacts; or that substantively influence the assessments and decisions of stakeholders.

Stakeholders broadly defined as entities or individuals that can reasonably beexpected to be significantly affected by the organization’s activities or productsand services; and whose actions can reasonably be expected to affect the ability ofthe organization to successfully implement its strategies and achieve its objectives.‘Aspects’ refers to the list of subjects covered by GRI guidelines and cover a rangeof 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. federalsecurities laws. That definition, set forth by the U.S. Supreme Court in TSC Industries v. Northway, 426U.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 andthen develops corresponding metrics. A company’s management must determine whether the relevantSASB 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 allpublic companies. The standards apply to U.S. and non‑U.S. companies that accesscapital in the U.S. markets and are subject to SEC reporting requirements. TheSASB recommends that issuers follow the same boundaries and timing as they usefor financial reporting to the S.E.C, thus ensuring that financial fundamentals andmaterial sustainability fundamentals can be analyzed in a similar context andcompared year on year.

FASBCurrent: ‘Information is material if omitting it or misstating it could influence decisions that users make onthe basis of financial information of a specific reporting entity. ...’ Status as of February 2016: There is anactive FASB project reconsidering the definition of materiality which has the potential for changes in thescope and general application for entities which report in accordance with US GAAP. No final decisionshave been made and overall project direction remains to be determined.

In process of being evaluated with potential for revision.

IASBCurrent: ‘Information is material if omitting or misstating it could influence decisions that users make onthe basis of financial information about a specific reporting entity. …’ Proposed: Information is material ifomitting it or misstating it could influence decisions that the primary users of general purpose financialreports 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 thereporting entity and more specifically its financial statements prepared inaccordance 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 aredefined to be those users with a general knowledge of business and economicsand the willingness to diligently study the financial information presented.

ISOAn organization should review all the core subjects to identify which issues are relevant. Theidentification of relevant issues should be followed by an assessment of the organization’s impacts. Thesignificance of an impact should be considered with reference both to the stakeholders concerned and tothe way in which the impact affects sustainable development.

Broad, inclusive definition of stakeholder as ‘an individual or group that has aninterest in any decision or activity of an organization. ‘Scope’ of reporting extendsto both those activities an organization has control over but may situationallyextend to other organizations and activities that the reporting entity has the abilityto 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 substantiallikelihood that the disclosure of the omitted factwould have been viewed by the reasonableinvestor as having significantly altered the “totalmix" of information made available.

-TSC Industries, Inc. v. Northway, Inc., 426 U.S.438 (1976)

<IR> "Relevant Matters"Not all relevant matters will be consideredmaterial. To be included in an integratedreport, a matter also needs to be sufficientlyimportant in terms of its known or potentialeffect on value creation.


Materiality: SASBThe SASB MaterialityMap™ analyzes thepotential for materialimpacts of 30sustainability issues acrossall industries.

Sustainability issues aredivided into fivedimensions: ▪ 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 inAfrica recently released the 4th edition of"Carrots & Sticks: Global Trends inSustainability Reporting Regulation andPolicy"

▪ Reviews the reporting landscapes of 64countries and territories

▪ Identifies approximately 400 regulations,guidelines, codes-of-conduct, frameworks,and other reporting instruments—bothmandatory and voluntary

▪ This report paints one of the mostcomprehensive 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 conflictminerals

◦ Section 1504 directs SEC to adopt rulesregarding disclosure of payments made byresource extraction issuers to foreigngovernments or the federal government for thepurpose of the commercial development of oil,natural gas, or minerals

◦ Section 1503 requires certain registrants todisclose information about health and safetyviolations at mining-related facilities

▪ SEC recognized that investors want greaterdisclosure of some public policy and sustainabilitymatters

▪ SEC voted in April to publish conceptrelease seeking public comment on modernizingRegulation S-K


Global Regulation Update: E.U.Non-financial regulatory disclosure trendsin the EU

▪ EU Directive 2014/95/EU (Dec 2016) ondisclosure of non-financial and diversityinformation went into action

▪ Aims at improving transparency ofcertain large EU companies regardingnon-financial information

▪ New disclosure requirements apply tolarge public-interest entities with morethan 500 employees


Learning Objective 2

� Explain proposed guidance on how toapply COSO to <IR> and integratedthinking.


What does itmean to be anintegratedreportingcompany?


High-Level Overview

▪ 3 Objectives▪ 5 Integrated

Components▪ 17 Principles▪ 100+ specific

"Points ofFocus"

▪ 8 ContentElements

▪ 7 GuidingPrinciples

▪ 6 Capitals/Resources


The <IR> Framework The COSO Framework

<IR> reports to communicate a clear, concise, integrated story that explainshow all of their resources are creating value


▪ Internal controls considerations▪ Materiality▪ Reporting boundary▪ Connectivity matters▪ Assessing completeness▪ Assessing narrative reporting

(incl. future-orientedstatements)

▪ 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 formattext and tables in multiple documents;track deliverables; follow up on andresolve questions, and track sign-off.

Reporting Team

Audited FinancialStatement

MD&A

Footnotes

DepartmentalManagement

Times 35+ Notes

Times # of Pages

Times 25+ Notes

GL & STATPackage

Unstructured Data - 90%

Structured Data - 10%

<IR> Report

The <IR> Report Manual Close


Learning Objective 3:

�Recognize how to apply basic templatesfor 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 ?


SampleDisclosureExercises


Sanford, the Home of Sustainable SeafoodContent Elements▪ Org Overview/Ext

Environment▪ Governance▪ Business Model▪ Risks/Opportunities▪ Strategy/Resources▪ Performance▪ Outlook▪ Basis of PreparationGuiding Principles▪ Strategic Focus/Future

Orientation▪ Connectivity▪ Stakeholder Relationships▪ Materiality▪ Conciseness▪ Reliability/Completeness▪ Consistency/ComparabilityCapitals▪ Financial▪ Natural▪ Human▪ Intellectual▪ Manufactured▪ Social & Relationship




Orientation▪ Connectivity▪ Stakeholder Relationships▪ Materiality▪ Conciseness▪ Reliability/Completeness▪ Consistency/ComparabilityCapitals▪ Financial▪ Natural ▪ Human▪ Intellectual▪ Manufactured▪ Social & Relationship




Orientation▪ Connectivity▪ Stakeholder Relationships▪ Materiality▪ Conciseness▪ Reliability/Completeness▪ Consistency/ComparabilityCapitals▪ Financial▪ Natural▪ Human▪ Intellectual ▪ Manufactured▪ Social & Relationship


Bringing <IR> andCOSO into theCloud

A Demonstration


SASB - Commercial Banks Example