1. COSO changes coming in 2014 An overview of COSO’s 2013 update to the
Internal Control – Integrated Framework
January 7, 2014

2. Agenda
Overview of updated 2013 COSO Internal Controls – Integrated Framework
Principles & Points of Focus supporting the Five Components
Transitioning to the 2013 Framework
Other Considerations

3. Overview of COSO IC-IF Internal Control - Integrated Framework (ICIF)
Originally released in 1992
Updated in May 2013, including three companion documents
Authored by PwC under direction of COSO Board
Committee Of Sponsoring Organizations of the Treadway Commission

4. COSO 2013 update
Updated Internal Control – Integrated Framework issued on May 14, 2013
Companion documents include:
Internal Control – Integrated Framework Executive Summary
Illustrative Tools for Assessing Effectiveness of a System of Internal Controls
Internal Control over External Financial Reporting: A Compendium of Approaches and Examples
Transition Date: December 15, 2014

5. 2013 update: What’s new? Expands operations and reporting objectives
Codification of 17 principles supporting the five components
Points of Focus to help identify and evaluate 17 principles
Addresses increased relevance and dependence on IT
Increased guidance on fraud risk assessment and responses
Updated for changes in business and operating environments

6. 2013 update: What’s the same?
Core definition of internal controls
Objectives: Operations, Reporting & Compliance
Five components of internal controls:
Control Environment
Risk Assessment
Control Activities
Information & Communication
Monitoring
Role judgment plays in design, implementation, operation and assessment of internal controls

7. 17 Codified Principles

8. Internal Control Objectives
Operations: “relate to the achievement of an entity’s basic mission and vision operational financial performance, productivity and includes safeguarding of assets against loss” (‘92 framework “effectiveness and efficiency of the entity's operations, including performance and profitability goals and safeguarding resources against loss”)
Reporting: “pertains to the preparation of reports for use by organizations and stakeholders and may relate to financial and non-financial reporting External reporting objectives are driven primarily by regulations and/or standards established by regulators and standard-setting bodies . . .” (‘92 framework was know as Financial Reporting objective “preparation of reliable published financial statements, including prevention of fraudulent public financial reporting”)
Compliance: “conduct activities, and often take specific actions, in accordance with applicable laws and regulations understanding which laws, rules and regulations apply across the entity (‘92 framework “pertains to adherence to laws and regulations to which the entity is subject”)

9. Principles & Points of Focus: Control Environment
“The control environment is the set of standards, processes, and structures that provide the basis for carrying out internal control across the organization. The board of directors and senior management establish the tone at the top regarding the importance of internal control including expected standards of conduct. . . The control environment comprises the integrity and ethical values of the organization enabling the board of directors to carry out its oversight responsibilities structure and assignment of authority and responsibility attracting, developing, and retaining competent individuals rigor around performance measures, incentives, and rewards to drive accountability for performance. The resulting control environment has a pervasive impact on the overall system of internal control.”
1. Organization demonstrates a commitment to integrity and ethical values
Tone at the Top
Establishes Standards of Conduct
Evaluates adherence to Standards of Conduct
Addresses deviations in a timely manner.
2. The board of directors demonstrates independence from management and exercises
oversight of the development and performance of internal control
Establishes oversight responsibilities
Applies relevant expertise
Operates independently
Provides oversight for the system of internal control

10. Principles & Points of Focus: Control Environment Continued
3. Management establishes, with Board oversight, structures,
reporting lines, and appropriate authorities and
responsibilities in the pursuit of objectives
Considers all structures of the entity
Establishes reporting lines
Defines, assigns and limits authorities and responsibilities
4. The organization demonstrates a commitment to attract, develop, and
retain competent individuals in alignment with objectives
Establishes policies and practices
Evaluates competence and addresses shortcomings
Attracts, develops and retains individuals
Plans and prepares for succession
5. The organization holds individuals accountable for their internal
control responsibilities in the pursuit of objectives
Enforces accountability through structures, authorities, and responsibilities
Establishes performance measures, incentives and rewards
Evaluates performance measures

11. Principles & Points of Focus: Risk Assessment
“Risk assessment involves a dynamic and iterative process for identifying and analyzing risks to achieving the entity’s objectives, forming a basis for determining how risks should be managed. Management considers possible changes in the external environment and within its own business model that may impede its ability to achieve its objectives.”
6. The organization specifies objectives with sufficient clarity to enable the
identification and assessment of risks relating to objectives
Operations Objective:
Reflects Management’s Choices
Considers Tolerances for Risk
Includes Operations and Financial Performance Goals
Forms a Basis for Committing of Resources
Note: For Principal 6 related to Risk Assessment, there are different Points of Focus for each of five specific objectives:
Operations Objectives
External Financial Reporting Objectives
External Non-Financial Reporting Objectives
Internal Reporting Objectives
Compliance Objectives

12. Principles & Points of Focus: Risk Assessment
“Risk assessment involves a dynamic and iterative process for identifying and analyzing risks to achieving the entity’s objectives, forming a basis for determining how risks should be managed. Management considers possible changes in the external environment and within its own business model that may impede its ability to achieve its objectives.”
6. The organization specifies objectives with sufficient clarity to enable the
identification and assessment of risks relating to objectives
External Financial Reporting Objective:
Complies with applicable accounting standards
Considers Materiality
Reflects entity activities
Note: For Principal 6 related to Risk Assessment, there are different Points of Focus for each of five specific objectives:
Operations Objectives
External Financial Reporting Objectives
External Non-Financial Reporting Objectives
Internal Reporting Objectives
Compliance Objectives

13. Principles & Points of Focus: Risk Assessment Continued
7. The organization identifies risks to the achievement of its objectives across the
entity and analyzes risks as a basis for determining how the risks should be
managed
Includes Entity, Subsidiary, Division, Operating Unit, and Functional Levels
Analyzes Internal and External Factors
Involves Appropriate Levels of Management
Estimates Significance of Risks Identified
Determines How to Respond to Risks
8. The organization considers the potential for fraud in assessing risks to the
achievement of objectives
Considers Various Types of Fraud
Assesses Incentive and Pressures
Assesses Opportunities
Assesses Attitudes and Rationalizations
9. The organization identifies and assesses changes that could significantly impact
the system of internal control
Assesses Changes in the External Environment
Assesses Changes in the Business Model
Assesses Changes in Leadership

14. Principles & Points of Focus: Control Activities
“Control activities are the actions established through policies and procedures that help ensure that management’s directives to mitigate risks to the achievement of objectives are carried out. Control activities are performed at all levels of the entity, at various stages within business processes, and over the technology environment. They may encompass a range of activities Where segregation of duties is not practical, management selects and develops alternative control activities.”
10. The organization selects and develops control activities that contribute to the
mitigation of risks to the achievement of objectives to acceptable levels
Integrates with Risk Assessment
Considers Entity-Specific Factors
Determines Relevant Business Processes
Evaluates a Mix of Control Activity Types
Considers at What Level Activities Are Applied
Addresses Segregation of Duties

15. Principles & Points of Focus: Control Activities Continued
11. The organization selects and develops general control activities over technology
to support the achievement of objectives
Determines Dependency between the Use of Technology in Business Processes and Technology General Controls
Establishes Relevant Technology Infrastructure Control Activities
Establishes Relevant Security Management Process Control Activities
Establishes Relevant Technology Acquisition, Development, and Maintenance Process Control Activities
12. The organization deploys control activities through policies that establish what
is expected and procedures that put policies into action
Establishes Policies and Procedures to Support Deployment of Management’s Directives
Establishes Responsibility and Accountability for Executing Policies and Procedures
Performs in a Timely Manner
Takes Corrective Action
Performs Using Competent Personnel
Reassesses Policies and Procedures

16. Principles & Points of Focus: Information & Communication
“Information is necessary for the entity to carry out internal control responsibilities to support the achievement of its objectives. Management obtains or generates and uses relevant and quality information from both internal and external sources to support the functioning of internal control. Communication is the continual, iterative process of providing, sharing, and obtaining necessary information. Internal communication is the means by which information is disseminated throughout the organization, flowing up, down, and across the entity. It enables personnel to receive a clear message from senior management that control responsibilities must be taken seriously. External communication is twofold: it enables inbound communication of relevant external information and provides information to external parties in response to requirements and expectations.
13. The organization obtains or generates and uses relevant, quality information to
support the functioning of internal control
Identifies Information Requirements
Captures Internal and External Sources of Data
Processes Relevant Data into Information
Maintains Quality throughout Processing
Considers Costs and Benefits

17. Principles & Points of Focus: Information & Communication Continued
14. The organization internally communicates information, including objectives and
responsibilities for internal control, necessary to support the functioning of
internal control
Communicates Internal Control Information
Communicates with the Board of Directors
Provides Separate Communication Lines
Selects Relevant Method of Communication
15. The organization communicates with external parties regarding matters
affecting the functioning of internal control
Communicates to External Parties
Enables Inbound Communication

18. Principles & Points of Focus: Monitoring Activities
16. The organization selects, develops, and performs ongoing and/or separate
evaluations to ascertain whether the components of internal control are present
and functioning
Considers a Mix of Ongoing and Separate Evaluations
Considers Rate of Change
Establishes Baseline Understanding
Uses Knowledgeable Personnel
Integrates with Business Processes
Adjusts Scope and Frequency
Objectively Evaluates
17. The organization evaluates and communicates internal control deficiencies in a
timely manner to those parties responsible for taking corrective action,
including senior management and the board of directors, as appropriate
Assesses Results
Communicates Deficiencies
Monitors Corrective Actions

19. Transition to 2013 Framework
Transition to the 2013 Framework, 1992 Framework to be superseded on December 15, 2014
COSO issued transition document “The 2013 Framework & SOX Compliance – One Approach to An Effective Transition” by Steven McNally, CPA
SEC implications in transitioning to the 2013 Framework
Developing a transition plan, documentation & other considerations

20. COSO Guidance on Transition
The 2013 COSO Framework & SOX Compliance – One Approach to An Effective Transition
By Stephen McNally, CPA
Develop Awareness, Expertise and Alignment
Timeless concepts, Expanded reporting, Codified principles,
Conduct Preliminary Impact Assessment
Evaluate existing system, leverage existing documentation, identify gaps
Facilitate Broad Awareness
Engage broader organization, educate & build awareness, leverage key stakeholders
Develop & Execute Transition Plan for SOX Compliance
Documentation & evaluation, testing, gap remediation, external review & testing
Drive Continuous Improvement
Tone at the top, culture & processes, improve reporting & communication

21. SEC Reporting Implications
I understand that COSO intends to supersede their 1992 Framework . . .we expect there will be questions about whether the SEC will provide management with any transition or implementation. . . SEC staff plans to monitor the transition for issuers using the 1992 framework to evaluate whether and if any staff or Commission actions become necessary or appropriate at some point in the future. . . I’ll simply refer users of the COSO framework to the statements COSO has made about their new framework and their thoughts about transition.
Paul Beswick
Chief Accountant, SEC
SEC definition of internal control over financial reporting has NOT changed.
Material weakness (SEC/PCAOB) vs major deficiency (COSO)
Disclosures: framework used for assessment and plan for transition

22. SEC Reporting implications continued
Regulation 13a-15(f) defines internal controls over financial reporting as: “A process To provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP . . .”
Policies and procedures must:
Maintain records in reasonable detail that accurately and fairly reflect the transactions and dispositions of the assets of the issuer
Ensure receipts and expenditures of the issuer are made only in accordance with authorizations of management and directors, and
Provide reasonable assurance regarding prevention of timely detection of the unauthorized acquisition, use or disposition of the issuers assets that could have a material effect on the financial statements.

23. Transition plan
High level assessment and implications of adopting 2013 Framework ASAP
Determine the impact at the Entity, Division, Operating and Functional levels across the organization
Identify key stakeholders and decision makers associated with the organization Internal Controls (specifically over Financial Reporting)
Leverage existing processes, procedures and documentation
Develop a transition plan:
Responsibilities and expectations
Timeline
Reporting and communication
Opportunities and benefits

24. Documentation
Documentation of the organizations system of internal controls
Provides evidentiary support regarding design and operating effectiveness
Allows for ongoing monitoring and communication
Basis for managements assessment
Support for third parties (Shareholders, Regulators, External Auditors)
Responsibility and accountability
Training and consistency

25. Other Considerations
Organizational objectives related to risk, operations, controls, and reporting
Use of third-party service provides and SaaS
Size and scope of entity, subsidiaries, foreign operations
Judgment regarding internal controls, specifically over External Financial reporting
Costs and benefits of internal controls
Limitations of internal controls

26. Companion documents Executive Summary
Illustrative Tools for Assessing Effectiveness of a System of Internal Controls
Templates & scenarios
Do not modify existing framework
Internal Controls over External Financial Reporting: A Compendium of Approaches and Examples
Examples of how principles apply to External Financial Reporting
Illustrate design and implementation for any size entity
Demonstrate how Points of Focus support principles

27. References & Links COSO references & links SEC references & links
The 2013 COSO Framework & SOX Compliance: One Approach to an Effective Transition
Executive Summary, 2013 Internal Control – Integrated Framework
The complete updated 2013 IC-IF compendium is available through the AICPA, Ebook member price $216
SEC references & links
Remarks at the 32nd Annual SEC and Financial Reporting Institute Conference
Paul Beswick, Chief Accountant, U.S. Securities and Exchange Commission
Jeff Lliteras, CPA
Consulting Services Manager
Eide Bailly LLP
877 W. Main Street, Suite 800
Boise, ID