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  • 1. Sarbanes Oxley & IT Compliance By KhaziSyed T. AhmedJeelani November 15 th 2005
  • 2. Sarbanes Oxley Act
    • Agenda:
    • What is SOX?
      • What does it require, why, and who cares?
    • State of the mind
      • Confusion, Complacency, Communications-challenges
    • Building a Defensible Compliance Strategy for ETIS
      • ETIS SOX Strategies: From KYC to ROI
  • 3. What Is SOX? Sarbanes-Oxley Overview
  • 4. Background Of The Problem
    • May 2, 2005 headline stated: “Audit flaws wipe $2.7bn from AIG.”
    • Discoveries of improper accounting at American International Group (AIG) are to knock $2.7 billion off the value of the world's biggest insurer.
    • AIG said it would restate its accounts for each of the last 5 years from 2000 onwards, lowering the company’s value by 3.3%.
    • It said it had found “material weaknesses” in its control systems and postponed filing its 2004 accounts.
        • Source: http://news.bbc.co.uk/1/hi/business/4504865.stm
  • 5. Sarbanes-Oxley Overview
    • The act was signed into law on July 30, 2002.
    • It includes regulations regarding:
      • Public Company Accounting Oversight Board (PCAOB).
      • Auditor independence.
      • Corporate responsibility.
      • Enhanced financial disclosures.
      • Corporate and criminal fraud accountability.
    • It applies primarily to publicly traded companies.
    • SOX is actually a combination of:
      • Sarbanes Oxley Act of 2002 (H.R. 3763).
      • Rules of the PCAOB.
      • Rules of the SEC.
  • 6. Sarbanes Oxley Act Background Why Do I Care About Sarbanes-Oxley in ETIS ?
  • 7. Background Of The Problem
    • SOX was a reaction to corporate scandals and lack of investor confidence:
      • Enron.
      • Arthur Andersen.
      • MCI.
    • Intense competition and pressure, conflicts of interest, and poor practices led to poor reporting and mismanagement.
    • Criminal activities also contributed to the problem.
    • Many other smaller examples of “dot com” booms that turned out to be investor busts all combined to prompt congressional action.
        • Source: Bauer College of Business
  • 8. Cost of Compliance
    • Compliance will cost public companies an average 62 percent more than previously anticipated. The average company expects to spend $3.14 million in its first year of compliance. (Financial Executives International).
    • $1.24 billion and 5,396,266 man-hours will be the aggregate annual costs of implementing Section 404(a) of the Sarbanes-Oxley Act, according to the SEC's PRA burden estimates.
    • PWC estimates that 76% of added cost for Sarbanes-Oxley compliance will come from additional internal resources
    • SOX compliance costs average $16 Million per company . (Business Wire, Nov 15, 2004)
    • 85% of public companies intend to change their IT systems as part of their efforts to comply with Sarbanes-Oxley legislation. (CIO Insight)
    • “ The Sarbanes-Oxley compliance impact is not just being felt by large public companies . Rather, its impact will be felt by most companies doing business in the US." (META Group)
    • Compliance Efforts Still Somewhat Haphazard . (Information Week, July 26, 2004)
  • 9. Cost of Compliance
    • AMR Research estimates that companies will spend $5.8 billion on meeting SOX requirements in 2005 .   Despite initial thoughts that SOX spending would be a one time expenditure, 36% of companies plan to increase spending, 52% will maintain current levels and 12% will decrease SOX spending. Spend allocation will be:
      • 42% on internal labor
      • 29% on services
      • 28% on technology
      • 1% on other
    • “ Technology will play an increasingly significant role in the integration of SOX compliance initiatives into business processes” (AMR Research)
  • 10. Which Departments Are Affected?
  • 11. People, Processes, and Systems will be Impacted
  • 12. Key findings:
    • Companies not focusing on technology fixes - instead auditing, procedures, and reporting. Most not buying new technology to solve, but may upgrade or partially replace to address.
    • Split on whether finance understands technology issues involved in SOX compliance, and whether IT understands the business issues
    • IT will be affected by SOX, more so than all other departments except finance.
    • Almost 1 in 10 think their job is at risk if the firm is non-compliant and 1 in 4 must certify results personally.
    • Companies are talking about SOX but not delivering much
    • Most viewed SOX compliance more resource intensive than other regulatory compliance projects
  • 13. Building a Defensible Compliance Strategy
    • Three Lines of Defense
      • "I made a mistake."
      • "No one else did it better."
      • "Nobody could do it better."
  • 14. “ I Made A Mistake” (so, sue me)
    • Build your own solutions.
    In the event that a firm is found to be out of compliance, this is the worst possible scenario, and maximum penalties may apply. It also has the greatest potential for reputational risk, in addition to punitive risks. Full control over the process, possibly the fastest and cheapest route for some regulations, if the appropriate infrastructure is in place. Risks Benefits
  • 15. “ I Bought A Mistake” (so, sue me and I’ll sue the vendor) This option entrusts, but cannot delegate, some aspects of compliance to a third party. Typical vendor due diligence concerns are magnified based on potential exposure, including reputational risk. When a packaged solution exists, maintenance of the process should be less expensive. If the solution achieves significant market share, the defensive position of the firm is enhanced in the event of non-compliance. Keeping up to date with regulations is a very challenging task. If this application were to be built in house, the organization would have to devote a minimum of one full-time employee to this. Regulations may change frequently Vendors may also provide some best practices for maintaining compliance. And, their solutions may offer improvements (automation) over current processes. Risks Benefits
  • 16. “ Nobody could do it better.” (so sue us all and shut down our industry) Collaborate & Share: If a group of leading firms collaborates to develop best practices for compliance and fails, it may serve as an informal proof of difficulty or regulatory ambiguity. It would be much more difficult to extract the maximum penalty from each of them than if any one individually came up with the same solution and failed alone. Minimized if sharing partners have similar reputations in one's market. Peers are in the best position to develop common best practices. In the event of non-compliance, a penalty to one participant results in a penalty to all. Risks Benefits
  • 17. User Strategy: Focus Where Customers Notice
    • Control Activities
    • Policies/procedures that ensure management directives are carried out.
    • Range of activities including approvals, authorizations, verifications, recommendations, performance reviews, asset security and segregation of duties.
    • Monitoring
    • Assessment of a control system’s performance over time.
    • Combination of ongoing and separate evaluation.
    • Management and supervisory activities.
    • Internal audit activities.
    • Control Environment
    • Sets tone of organization-influencing control consciousness of its people.
    • Factors include integrity, ethical values, competence, authority, responsibility.
    • Foundation for all other components of control.
    • Information and Communication
    • Pertinent information identified, captured and communicated in a timely manner.
    • Access to internal and externally generated information.
    • Flow of information that allows for successful control actions from instructions on responsibilities to summary of findings for management action.
    • Risk Assessment
    • Risk assessment is the identification and analysis of relevant risks to achieving the entity’s objectives-forming the basis for determining control activities.
    All five components must be in place for a control to be effective. Source: Pricewaterhouse Coopers
  • 18. Compliance Road Plan
    • Looking ahead, we will see focus on reducing compliance resource requirements through technology.
    Public Companies have generally adopted a methodology for SOX compliance… SOX Compliance Plan (GTS) NCG Controls Framework ETIS Control Documentation & Test Plans Internal Control Testing & Remediation Auditor Attestation of Controls … .in addition to refinement of controls. Continuous Improvement
  • 19. Cost of Compliance Strategy for Refinement of Controls….
  • 20. Revisit the Compliance Plan
    • Address organizational or infrastructure changes
      • Implement a compliance organizational framework (GTS) to sustain the on-going control revisions, quarterly control reviews, and documentation related to key controls.
    • Address resource requirements
      • NCG to Budget for compliance
      • ETIS to identify and leverage technology solutions to reduce resource requirements.
      • EAS to revise business process control procedures to reduce resource requirements.
    • Optimize control procedures
      • EAS to eliminate controls that are redundant.
      • EAS to replace or revise controls that are ineffective.
      • EAS to investigate automated controls to replace manual controls.
      • EAS to focus effort on those applications which impact financial controls (compliance related ex FileNet)
  • 21. Revisit the Compliance Plan
    • Utilize published, recognized frameworks as your IT control foundational framework
      • NCG to adopt or construct a Framework from acknowledged Risk Management Frameworks such a COBIT or COSO ERM (Enterprise Risk Management).
      • NCG to seek out generally accepted control frameworks from auditing or compliance consulting companies (you are not permitted to utilize your attesting auditor).
    • Document your specific IT Controls Framework
      • Simplify the foundational framework to fit ETIS & EAS requirements.
      • Seek internal buy-in to Bank of America specific Controls framework.
      • Review and seek consensus with the auditor, to perform controls audit.
      • Provide a testing plan
      • Adopt generally accepted sampling techniques of the auditor.
  • 22. ETIS Document IT Controls and Test plans
    • Document IT Key Controls
      • Adopt a standard procedure for documenting key IT Controls and approvals.
      • Internally test the IT controls and document results.
      • Remediate controls when deficiencies are identified from the test results.
    • Construct a testing plan
      • Adopt a standard procedure for documenting test plans and test results.
      • Construct a test plan to insure the effectiveness of each key control, not the control procedures. (Test results, not the process )
      • Utilize generally accepted sampling techniques of your auditor.
    Revisit the Compliance Plan
  • 23. Internal Testing & Controls Attestation
    • Agree on a testing strategy & timeline
      • Meet with your BOA Auditor and agree on the controls to be tested, testing procedure, sample sizes, items to be sampled, and schedule.
      • Suggest use of standard control reports, audit tools, logs, and software that are available and can be used by both the company and auditor to perform the controls attestation.
      • Focus on key controls and control activities that support financial systems.
      • Agree on outcome goals necessary to support effectiveness of the controls.
    • Start Early
      • Conduct internal testing early and provide it to the auditor.
      • Encourage as much of the attestation by the auditor to be done prior to year end as possible and follow up with a review of control changes at year end.
  • 24. Internal Testing & Controls Attestation
    • Investigate Technology Solutions to reduce Compliance Resource Requirements….
  • 25. What’s Ahead?
    • 2005 – A windfall year for Auditors
    • 2006 – A windfall year for ETIS
        • Application Security
        • Document Management, Imaging and Workflow
        • Backup, Recovery and Data Archival
        • Infrastructure Security
        • Change Management
        • “ Compliance Audit Solutions”
  • 26. Application Security Seek Solutions that…
    • Simplify security management and implement standard procedures.
    • Provide auditable logs or change control.
    • Proactively identify Segregation of Duties issues or other areas of security exposure.
    • Support robust security measures.
  • 27. Conclusion What Are the Key Points?
  • 28. Recommendations
    • Establish an overall cross-functional compliance team and a dedicated sub team managed by a director level person. The team should be supported by C-level executives and include executive from GTS, NCG, ETIS and Lob’s units.
    • Coordinate ETIS activities within the scope of an overall security and disaster recovery plan.
    • Have ETIS or NCG take final responsibility to ensure compliance with SOX. ETIS should take the lead on Lob’s data usage. ETIS is one input to the whole process.
  • 29. Recommendations
    • Document Management, Imaging, Workflow Seek Solutions that…
    • EAS to integrate with existing systems and establish control procedures.
    • EAS to provide easy document retention and archival system (FileNet).
    • EAS to effectively manage change control and change tracking.
    • EAS to start audit practices of sampling and reporting that would be part of SOX .
  • 30. What must one do to be compliant?
    • Nothing
    • Test and document only
    • Become process oriented + above
    • Build a wall between development and operations + above
    • Beef up security, change management, e-records retention, anti-fraud techniques, and patch management + above
    • Audit outsourcers (dev and ops) and business partners with access + above
  • 31. Q & A