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The Importance of IT Controls to Sarbanes-Oxley Compliance.,Importance of IT Controls to Sarbanes-Oxley,2,Provide a high-level overview of Sarbanes-Oxley and the internal control certification requirements Discuss the importance of information technology in internal control over financial reporting Describe how the Sarbanes-Oxley section 404 rules impact information technology Provide an overview of the Cobit IT control framework Provide an example of a readiness program roadmap Summarize the importance and impact of IT controls to Sarbanes-Oxley compliance,Todays Objectives,Importance of IT Controls to Sarbanes-Oxley,3,Setting the Stage,Importance of IT Controls to Sarbanes-Oxley,4,Setting the Stage,What is internal control? Internal control is broadly defined as a process, effected by an entitys board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Effectiveness and efficiency of operations Reliability of financial reporting Compliance with applicable laws and regulations Internal control is now the Law The Sarbanes-Oxley Act of 2002 was created to restore investor confidence in the public markets Section 404 of the Act requires management to establish and maintain internal control and requires the independent auditors to evaluate Compliance deadline: Year-ends on or after November 15, 2004 Preparing for Sarbanes-Oxley compliance is a significant and challenging task There are many requirements, including the identification of significant financial statement accounts, processes and systems that support them and then documenting and testing them,Importance of IT Controls to Sarbanes-Oxley,5,Overview of Internal Control Certification Requirements,Section 302 Certification Overview CEO and CFO to make specific certifications as of the end of each quarterly and annual reporting period, including: Report contains no untrue statements Report is fairly presented in all material respects Responsibility for design and maintenance of disclosure controls and procedures as well as internal controls over financial reporting Became effective in 2002 (amended in June 2003),Section 404 Certification Overview CEO and CFO to certify as of the end of every annual reporting period: Their responsibility for establishing and maintaining effective internal controls over financial reporting Their assessment of internal controls, accompanied by the independent auditors attestation report Effective for annual periods ending after November 15, 2004 (small business and foreign filers July15, 2005).,Importance of IT Controls to Sarbanes-Oxley,6,Understanding the Rules Impact to IT,Importance of IT Controls to Sarbanes-Oxley,7,Understanding the Rules Impact to IT,Management is required to assess the design and effectiveness of its internal control over financial reporting and provide an assertion to that effect in the published financial statements. The companys external auditors are required to express an opinion on managements assessment as well their own opinion on the companys internal controls.,Auditor must perform a walkthrough of major classes of transactions for significant processes to understand process flows, and assess the design and effectiveness of controls including application and IT general controls. Evaluate the design effectiveness of IT controls to determine whether they are properly designed to achieve relevant assertions. Perform tests of the operating effectiveness of IT controls that are necessary to achieve relevant assertions.,Key Compliance Requirements,Impact to IT Controls,Importance of IT Controls to Sarbanes-Oxley,8,(paragraph 47) “The auditor should obtain an understanding of the design of specific controls by applying procedures that include tracing transactions through the information system relevant to financial reporting” (paragraph 73) “Most processes involve a series of tasks such as capturing input data, sorting and merging data, making calculations, updating transactions and master files, generating transactions, and summarizing and displaying or reporting data. The processing procedures relevant for the auditor to understand the flow of transactions generally are those activities required to initiate, authorize, record, process and report transactions.”,The PCAOB rules are clear - auditors must understand how transactions flow through the system not around it,Understanding the Rules Impact to IT contd,Importance of IT Controls to Sarbanes-Oxley,9,(paragraph 69) “The auditor should identify each significant process over each major class of transactions affecting significant accounts or groups of accounts and Understand the flow of transactions, including how transactions are initiated, authorized, recorded, processed, and reported. Identify the points within the process at which a misstatement including a misstatement due to fraud related to each relevant financial statement assertion could arise. Identify the controls that management has implemented to address these potential misstatements. Identify the controls that management has implemented over the prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets.,PCAOB statements applicable to Application Controls:,Understanding the Rules Impact to IT contd,Importance of IT Controls to Sarbanes-Oxley,10,(paragraph 40) “Determining which controls should be tested Generally, such controls include information technology general controls, on which other controls are dependent” (paragraph 50) “Some controls have a pervasive effect on the achievement of many objectives for example, information technology general controls over program development, program changes, computer operations, and access to programs and data”,PCAOB statements applicable to IT General Controls:,Understanding the Rules Impact to IT contd,Importance of IT Controls to Sarbanes-Oxley,11,The Importance of Information Technology in Internal Control over Financial Reporting,Importance of IT Controls to Sarbanes-Oxley,12,For most organizations, IT is pervasive and critical to the financial reporting process Financial and routine business applications are commonly used to initiate, authorize, record, process and report transactions Relevant IT controls include application controls - those that are embedded in financial and business applications general computer controls underlying infrastructure components that support the applications Statements made by the Public Company Accounting and Oversight Board (PCAOB) on the impact of IT (paragraph 75): “The nature and characteristics of a companys use of information technology in its information system affect the companys internal control over financial reporting”,The Importance of Information Technology (IT) in Internal Control over Financial Reporting,Importance of IT Controls to Sarbanes-Oxley,13,Application Controls,SoD,Data integrity,Completeness,Validation,General Computing Controls,Information Security,Operations,Database Impl. & Support,Network Support,Business Process,Classes of Transactions,Sales,Returns,Write offs,Significant Account Balance,Balance Sheet (AR),Income Statement,G/L,Inventory,Other,AR Mgt Process,FCRP,Sales Process,Process Stages,Initiate,Record,Process,Report,Application Impl. & Maint.,System Software Support,The Role of Information Technology in Internal Control over Financial Reporting contd,Importance of IT Controls to Sarbanes-Oxley,14,Account balance: Trade AR, Sales Classes of Transactions: Invoices, Sales orders Business Process: AR, Sales Order processes Process Stages: Initiate, record, process Application Controls: Access controls Built in limits for credit approval Restricted access to pricing table GCC Controls: Program change Operations Network & system security,Link Accounts and Assertions to IT: An Example,Customer order entry,SAP, Oracle, Other Applications,General computing controls cover security access, change management, operations, systems and network support, data retention, etc.,Order Processing,Order & supplier controls,Sales Sub-process,Customer controls,IT Infrastructure,Networks,System Software,Databases and Information,Security,Application controls cover authorized changes, segregation of duties, validity, completeness and timeliness of reporting of financial information.,Importance of IT Controls to Sarbanes-Oxley,15,Cobit IT Control Framework Overview,Importance of IT Controls to Sarbanes-Oxley,16,COBIT A Model for General Computer Controls,The IT Governance Institute (www.ITGI.org) has recently published “revised” guidance for IT professionals on how to address Sarbanes-Oxley from an IT perspective April 2004 “Sarbanes-Oxley; The importance of information technology in the design, implementation and sustainability of internal control” The publication is the result of a joint effort of industry and auditors, with leadership from Deloitte and others The ITGI is a recognized global leader in IT governance, control and assurance with members in more than 100 countries,Importance of IT Controls to Sarbanes-Oxley,17,PCAOB designates COSO as the prescribed standard control framework and has become the control framework of choice for SOX compliance All 5 layers must be considered when evaluating internal control However, COSO does not provide specific guidance around IT control. CobiT is a widely accepted IT control framework (ITGI) CobiT provides 4 domains of IT control CobiT controls address the 5 layers of COSO With the development of this approach, organizations can be confident that they are taking an approach that reflects COSO requirements,COBIT A Model for General Computer Controls contd,Importance of IT Controls to Sarbanes-Oxley,18,The ITGI publication provides guidance to IT professionals on how to meet the Sarbanes-Oxley challenge Detailed control objectives are provided for each CobiT domain and mapped to their respective COSO component Other control guidelines were reviewed and reconciled to this approach during the development process, including ISO17799, Common Criteria, ITIL, and SysTrust Organizations should assess their requirements on an individual basis and tailor their approach accordingly,COSO Components,CobiT Objectives,COBIT A Model for General Computer Controls contd,Importance of IT Controls to Sarbanes-Oxley,19,The CobiT SOA framework identified a sub-set of these areas for the purpose of focusing on SOA requirements Company level: Planning & Organizing / Monitoring,COBIT A Model for General Computer Controls contd,Planning & Organization IT Strategic Planning IT organization and relationships Management of human resources Educate and train users Information architecture Communication of mgmt aims and direction Assessment of risks Manage the IT investment Manage projects,Monitoring Compliance with external requirements Management of quality Ensure continuous service Performance and capacity Monitoring Adequacy of internal controls Independent assurance Internal audit,Activity level: Acquisition and Implementation / Delivery and Support Program Development (SDLC) Program Changes Computer Operations (scheduling, backup, problem management) Access to programs and data (applications, database, operating system, network),Importance of IT Controls to Sarbanes-Oxley,20,Top 5 List 404 IT Controls Requirements,Security Application and platform based Focused on applications that may impact financials and supporting infrastructure Requires secure operating systems, database, network, firewalls and infrastructure Auditors will look for excessive access; lack of segregation of duties; inadequate approval of access; they will be testing key processes to determine that they are effective Change Control Need to ensure that procedures are in place to control and ensure proper approval of changes to production Technical controls must tightly limit and control developer access to production Disaster Recovery Focus will be on basic backup and recoverability of financial data IT Governance Focus will be on determining of there are clear policies, procedures, and communications within IT Are there clear segregation of duties? Is there the appropriate “tone at the top” of the IT organization? Development And Implementation Activities Proper controls need to be built in before a new system or system changes go in the production environment Auditors may evaluate new financial systems; data conversion and testing are critical,Importance of IT Controls to Sarbanes-Oxley,21,Most Common IT Control Gaps To Remediate,Change control processes not fully in place (especially in distributed or web based environments) Security procedures, strategies, and profile structures not documented for critical applications. Organizational security policies, procedures, and roles and responsibility gaps. Security administration procedures lack appropriate controls or consistency Inadequate controls to delete or change access when individual leaves of changes job responsibilities (especially contractors) Inadequate approval of access changes Access levels not regularly reviewed and approved by management Excessive access to systems Privileged access to operating system, database, and application environment Inadequate segregation of duties Application developers and DBAs have access to production Infrastructure supporting applications is not secure (network, operating system, database) IT controls not integrated into key business processes (e.g. SDLC, change control, compliance, testing and data conversion procedures) Lack of a regular process to verify that controls continue to be adequate and effective (at least quarterly) No long term strategy to evaluate and address risks,The areas that will get hit hardest are security and change control,Importance of IT Controls to Sarbanes-Oxley,22,IT Control Readiness Roadmap,Importance of IT Controls to Sarbanes-Oxley,23,SOA Readiness Roadmap,Preparing for SOX 404 requires a structured and measured approach, otherwise you will find yourself doing “too much” or “too little” The current PCAOB rules require auditors to attest on “management assessment process” As such, the readiness roadmap that many organizations are following demonstrates the assessment process through a series of steps and activities that align to the PCAOB rules,Importance of IT Controls to Sarbanes-Oxley,24,SOA Readiness Roadmap,Business Value,Sarbanes-Oxley IT Compliance,1. Plan & Scope Financial reporting process Supporting systems,3. Identify Significant Controls Application controls - over initiating, recording, processing & reporting IT General Controls,5. Evaluate Control Design Mitigates control risk to an acceptable level Understood by users,8. Document Process & Results Coordination with Auditors Internal sign-off (302, 404) Independent sign-off (404),7. Identify & Remediate Deficiencies Significant deficiencies Material weakness Remediation,6. Evaluate Operational Effectiveness Internal audit Technical testing Self assessment Inquiry + All locations and controls (annual),4. Document Controls Policy manuals Procedures Narratives Flowcharts Configurations Assessment questionnaires,2. Perform Risk Assessment Probability & Impact to business Size / complexity,9. Build Sustainability Internal evaluation External evaluation,Importance of IT Controls to Sarbanes-Oxley,25,A Readiness Roadmap Plan & Scope,Key Considerations In-scope vs out-of-scope systems Opportunities for improvement Prevention, identification and detection of fraud,Key Components Financial reporting processes Initiating Recording Processing Reporting Classes of transactions Non-routine and systematic,Understand the financial reporting process and identify the information systems and related resources that are used.,Importance of IT Controls to Sarbanes-Oxley,26,A Roadmap for Compliance Perform Risk Assessment,Key Components IT Risks Quality and Integrity failure Security failure Availability failure Risk assessment Probability of failure Impact to the business,Key Considerations Specific risk areas Data validation Data conversion Interfaces Management reports Complex or critical calculations Spreadsheets,Identify risks associated the information systems and related IT resources (ie. what could go wrong?),Importance of IT Controls to Sarbanes-Oxley,27,A Roadmap for Compliance Identify Significant Controls,Key Components Application controls Embedded within business processes Directly support financial assertions General controls Program development Program changes Program operations Access control,Key Considerations Control framework - CobiTTM Revised April 2004* 12 primary control objectives at the process level Control environment questionnaire for entity level,Identify application and general controls,Importance of IT Controls to Sarbanes-Oxley,28,A Roadmap for Compliance Document Controls,Key Components Process description Risk assessment Control objective Control activity Test of the control Conclusions and remediation plans,Key Considerations Include compensating controls Impact on overall SOA testing program Report gaps in documentation Sufficient to support management assertion,Document control processes to support managements assessment,Importance of IT Controls to Sarbanes-Oxley,29,A Roadmap for Compliance Evaluate Control Design,Key Components Sufficient to demonstrate: Control designed to prevent or detect material errors Conclusion that tests were appropriately conducted Results of tests appropriately evaluated,Key Considerations Preventative vs. detective Automated vs. manual People, process and technology Control maturity level controls are defined, managed, measured and repeatable,Controls should be designed to reduce the risk of error to an acceptable level,Importance of IT Controls t