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Controls Compliance – Rounding the Turn

The Institute of Internal AuditorsSeptember 14, 2004

Controls Compliance – Rounding the Turn

The Institute of Internal AuditorsSeptember 14, 2004

Ed Dudley, CIA, CPA

Retired Vice-President & General Auditor-ABB Americas

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• Introduction & Key Issues For Today Ed Dudley• SOX Lessons Learned

Dan Langer• Integration of SOX 302 and 404

Brian Appleton• SAS 70 Considerations for SOX 404

Nathan Prather• Break• Q & A• Summary of Main Points Ed Dudley

AgendaAgenda

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Key Controls Compliance Issues for Today

Key Controls Compliance Issues for Today

• Approach to Convergent regulatory challenges

• Process Improvements• Technology Infrastructure

Enhancements

• Improvements in Leadership

• Inventorying in 302/404

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Key Controls Compliance Issues for Today

Key Controls Compliance Issues for Today

• Role Clarifications in SOX 302/404

• Software Utilization in SOX 302/404

• Resource Issues in SOX 302/404

• Inventorying Service Organizations/Specialists in SAS 70

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Key Controls Compliance Issues for Today

Key Controls Compliance Issues for Today

• Understanding/Evaluating Significance in SAS 70

• Evaluating Evidence in SAS 70

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Controls Compliance – Rounding the Turn

SOX Lessons Learned

Controls Compliance – Rounding the Turn

SOX Lessons Learned

Daniel B. Langer, CPA, CIA, CCSASolutions Director, Internal Audit and Controls

Jefferson Wells International

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10-Step Program for Clarity and Sustainability

10-Step Program for Clarity and Sustainability

• Four Main Categories– Efficient and better organized approach to

convergent regulatory challenges– Process improvements– Technology infrastructure enhancements– Leadership improvements

• Helpful reference resources

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10-Step Program for Clarity and Sustainability

10-Step Program for Clarity and Sustainability

1) Established Post-404 Compliance Infrastructure– Improved/strengthened internal audit department– Full-time/dedicated ongoing compliance team,

Steering Committee, and external resources where appropriate

– Formally trained process owners– Instituted ongoing risk-assessment strategy– Established desk-top procedures and sub-process

“certifications”

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10-Step Program for Clarity and Sustainability

10-Step Program for Clarity and Sustainability

2) Beware of “too many” internal controls– Excessive detail when documenting internal

controls– Try to replace multiple ineffective controls with

one effective control

3) Excessive detail when documenting internal controls

– Use external auditor formulas as a guide– Evaluate as attestation process progresses

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10-Step Program for Clarity and Sustainability

10-Step Program for Clarity and Sustainability

4) Strive for the right “Tone at the Top”– Focus– Direction– Top management commitment to good governance-

related control compliance– Proactive education and awareness

5) Side-step confusion related to IT and internal controls – Assess system access controls as users are promoted,

transferred, or leave the company– Properly define and document SOX-related controls (not

all IT controls)

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10-Step Program for Clarity and Sustainability

10-Step Program for Clarity and Sustainability

6) Make the right compliance software investment– To date quality has been spotty, has not

met organization needs, and/or implementation resources have been inadequate

– Revisit as “sustaining organization needs” are defined

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10-Step Program for Clarity and Sustainability

10-Step Program for Clarity and Sustainability

7) Manage external auditor demands– Avoid time-consuming attestation reviews– Ensure they provide proper resources on

your reviews– Manage expectations/establish position

• Materiality levels• Key accounts• # of Controls

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10-Step Program for Clarity and Sustainability

10-Step Program for Clarity and Sustainability

8) Address external service provider key controls Focus– Strength of service provider– Adequacy of documentation– Pooled review with other “customers”

9) Consider compliance in the context of governance and risk management– Ongoing process of enterprise-level risk

assessment

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10-Step Program for Clarity and Sustainability

10-Step Program for Clarity and Sustainability

10) Properly staff the Internal Audit function

– Proper mix of industry, financial, operational, and technology practice experience and expertise

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So, how best can Internal Audit effectively participate in improving the reporting process

towards better governance and sustainable control compliance?

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Internal Auditors’ RoleInternal Auditors’ Role• Educate all levels about controls• Ongoing assessment of the “Tone at the Top”• Facilitate Board, key management, and external auditor

involvement in communication of strengthened control expectations

• Provide objective and independent participation in controls documentation, testing and assessment process

• Analyze and evaluate causes of company-wide non-compliance issues – both systemic or isolated

• Conduct regular KPI monitoring• Facilitate cost beneficial design modifications to achieve control• Evaluate effectiveness of corrective actions on an enterprise-

wide basis

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Internal Auditors’ RoleInternal Auditors’ Role• Ask yourself “good questions” *

– Would you have prepared the financials in the same manner?

– Was there full disclosure had you been an investor?

– Are internal audit procedures the same as if you were CEO?

– Are there any activities to move revenue or expenses from period-to-period?

* Warren Buffet, Berkshire Hathaway

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Governance OrganizationsGovernance Organizations• www.theiia.org - Institute of Internal Auditors• www.pcaobus.org - Public Company Accounting Oversight Board• www.coso.org - Committee of Sponsoring Organizations• www.nyse.com - New York Stock Exchange• www.nacdonline.org - National Association of Corporate Directors• www.issproxy.com - Institutional Shareholder Services • www.ecgi.org - European Corporate Governance Institute• www.icgn.org - International Corporate Governance Network• www.asx.com.au/ - Australian Stock Exchange• www.oecd.org – Organization for Economic Co-operation and Development• www.ifac.org - International Federation of Accountants• www.icaew.co.uk - Institute of Chartered Accountants in England and

Wales• www.oceg.org - Open Compliance and Ethics Group

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Integration of SOX 302 & 404Integration of SOX 302 & 404

Brian T. Appleton, CIA, MBA, CDP

Director of Internal Audit

National Penn Bancshares

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This is the TimeThis is the Time

– Take an inventory

– Budget considerations

– Role clarification

– Software utilization

– Human resources

– Integration

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Take an InventoryTake an Inventory

• Review SOX 302 & 404 methodology

• Overlay risk based work with SOX 302 & 404 work

• Full consideration to SOX 302 & 404 in annual risk analysis

• Minimum - tentative 2005 audit plan

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Budget ConsiderationsBudget Considerations

• Schedule resource needs

• Do not understate resource needs

• Educate Audit Committee, CEO, and Executives on needs

• Manage your resource network

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Role ClarificationRole Clarification

• Identify roles for ongoing compliance with Sarbanes-Oxley compliance. Include other company initiatives in the matrix. These may include CSA or ERM.

• Consider forming a transition team • Revisit your resource needs calculation

and encourage management to do the same.

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Software UtilizationSoftware Utilization

• Business need or purpose

• Tracking

• Maintenance

• Infrastructure compatibility

• Cost benefit

• Implementation plan

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Human ResourcesHuman Resources

• Leadership

• Continual improvement

• Staff development

• Customer satisfaction

• Audit results

• Key performance indicators

• Standards

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IntegrationIntegration

• Range of integration varies

• What are other companies doing?

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SummarySummary

– Inventory and integrate– Revisit software support– Develop HR, elevate standards

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Evaluating Third Parties SAS 70 Considerations for

SOX 404

Evaluating Third Parties SAS 70 Considerations for

SOX 404

Nathan PratherManager, Audit and Enterprise Risk Services

Deloitte & Touche LLP

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AgendaAgenda

Evaluating Third Parties:• Step 1: Prepare Inventory Of Service Organizations

and Specialists • Step 2: Gain Understanding/Evaluate Significance• Step 3: Obtain Evidence• Step 4: Concluding

SAS 70 Issues and Considerations

Q&A

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Step 1: Prepare Inventory Of Service Organizations and

Specialists

Step 1: Prepare Inventory Of Service Organizations and

Specialists

• Identify third party involvement in relevant processes which involve the use of service providers and specialists

• Definitions: – Service organization: An entity that provides

services to a user organization that is part of the user organization’s information system

– Specialist: A person (or Firm) possessing special skill or knowledge in a particular field…

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Step 1: Prepare Inventory Of Service Organizations and Specialists – Summary

Step 1: Prepare Inventory Of Service Organizations and Specialists – Summary

Evaluate User

Controls?

Evaluate Third Party

Controls?

Service organization

Yes Yes, if relevant

Specialist Yes* No

*Specialist Key Considerations:

• Evaluate the competence of the specialist

• Understand nature and scope of the work performed

• Key control considerations:

• Appropriateness of methods and assumptions

• Accuracy and completeness of data provided

• Reasonableness and recording of the results

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Step 2: Gain Understanding/Evaluate

Significance

Step 2: Gain Understanding/Evaluate

Significance• Gain an understanding of the service

organization process flows and controls– Review SAS 70 or perform walkthrough of service

organization

• Gain an understanding of the user organization process, controls and monitoring activities

• Conclude whether service organization activities and controls necessary to achieving a user control objective(s)

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Step 2: Gain Understanding/Evaluate

Significance

Step 2: Gain Understanding/Evaluate

Significance• When are user controls alone sufficient?

– If the control performed by the service organization were not outsourced, would the control be necessary to achieving a control objective(s)

– Detective/monitoring controls at the user organization should operate at an appropriately detailed level to conclude that a control objective is met

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Step 3: Obtain EvidenceStep 3: Obtain Evidence

Determine if the scope of the SAS 70 is appropriate

• Type 1 SAS 70 addresses design of controls• Type 2 SAS 70 addresses design and operating

effectiveness of controls• Map controls at service organization to risks

and controls objectives for the user organization– Business process controls– Information technology controls

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Step 3: Obtain EvidenceStep 3: Obtain EvidenceDetermine if the nature and extent of testing

appropriate • Treatment of user controls identified in the SAR

– Determine relevance– Test of relevant controls

• Determine if the period of coverage is appropriate– Cover a sufficient period to conclude the

controls are operating effectively• Depends on the frequency and nature of the controls• Evaluate the need to update or “roll forward”

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Step 4: ConcludingStep 4: Concluding

• Read the conclusions within the SAS70 for qualifying language– The service auditors’ opinion section

• If exceptions are noted in the SAS70– Evaluate the impact of the deficiency to the

user organization• Quantitative and qualitative aspects • Consider compensating controls

– Make inquiries of Service Organization

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SAS 70 Issues & ConsiderationsSAS 70 Issues & Considerations

• What if the service organization will not provide access to obtain evidence directly or a suitable SAS 70?– Current thinking:

• SEC precludes management from qualifying their report• If management can’t get a SAS 70 management will need

to perform procedures at the service organization• If management is unable to access to the service

organization, they need to be able to demonstrate that user controls alone are sufficient

• If user controls are then insufficient management will need to determine if they have a deficiency in their control environment

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SAS 70 Issues & ConsiderationsSAS 70 Issues & Considerations

• What if the Service Organization will not remediate exceptions?– Management will need to install mitigating

user controls

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Q & AQ & A

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• Establish a Post 404 Compliance Infrastructure

• Consider the possibility of “too many” internal controls

• Beware of excessive documentation detail

• Side-step confusion related to IT & internal controls

Summary of Main PointsSummary of Main Points

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Summary of Main PointsSummary of Main Points

• Make Right Compliance Software Decisions

• Manage External Auditor Demands

• Compliance should be Considered within the Needs of Governance & Risk

• Inventory & Integrate Work within SOX 302/404

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Summary of Main PointsSummary of Main Points

• Revisit Software Support for SOX 302/404

• Strive for Continual Improvement within SOX 302/404

• Identify Third Party Involvement & Processes for Possible SAS 70

• Understand Service Organization’s Process Flow & Controls

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Summary of Main PointsSummary of Main Points

• Understand User Organization’s Process Flows, Controls & Monitoring

• Determine Appropriate Scope of SAS 70(Type 2 for both design & operating effectiveness)

• Evaluate Impact of Deficiency in Any Exceptions from SAS 70 Performed

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October 12, 2004

““Quality AssuranceQuality Assurance””

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