Information technology controls

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In business and accounting, information technology controls (or IT controls) are specific activities performed by persons or systems designed to ensure that business objectives are met. They are a subset of an enterprise's internal control. IT control objectives relate to the confidentiality, integrity, and availability of data and the overall management of the IT function of the business enterprise. IT controls are often described in two categories: IT general controls (ITGC) and IT application controls. ITGC include controls over the Information Technology (IT) environment, computer operations, access to programs and data, program development and program changes. IT application controls refer to transaction processing controls, sometimes called "input-processing-output" controls. Information technology controls have been given increased prominence in corporations listed in the United States by the Sarbanes-Oxley Act. The COBIT Framework (Control Objectives for Information Technology) is a widely used framework promulgated by the IT Governance Institute, which defines a variety of ITGC and application control objectives and recommended evaluation approaches. IT departments in organizations are often led by a Chief Information Officer (CIO), who is responsible for ensuring effective information technology controls are utilized.

IT General Controls (ITGC)[edit]

ITGC represent the foundation of the IT control structure. They help ensure the reliability of data generated by IT systems and support the assertion that systems operate as intended and that output is reliable. ITGC usually include the following types of controls:

  • Control environment, or those controls designed to shape the corporate culture or "tone at the top."
  • Change management procedures - controls designed to ensure changes meet business requirements and are authorized.
  • Source code/document version control procedures - controls designed to protect the integrity of program code
  • Software development life cycle standards - controls designed to ensure IT projects are effectively managed.
  • Logical access policies, standards and processes - controls designed to manage access based on business need.
  • Incident management policies and procedures - controls designed to address operational processing errors.
  • Problem management policies and procedures - controls designed to identify and address the root cause of incidents.
  • Technical support policies and procedures - policies to help users perform more efficiently and report problems.
  • Hardware/software configuration, installation, testing, management standards, policies and procedures.
  • Disaster recovery/backup and recovery procedures, to enable continued processing despite adverse conditions.
  • Physical security - controls to ensure the physical security of information technology from individuals and from environmental risks.

IT application controls[edit]

IT application or program controls are fully automated (i.e., performed automatically by the systems) designed to ensure the complete and accurate processing of data, from input through output. These controls vary based on the business purpose of the specific application. These controls may also help ensure the privacy and security of data transmitted between applications. Categories of IT application controls may include:

  • Completeness checks - controls that ensure all records were processed from initiation to completion.
  • Validity checks - controls that ensure only valid data is input or processed.
  • Identification - controls that ensure all users are uniquely and irrefutably identified.
  • Authentication - controls that provide an authentication mechanism in the application system.
  • Authorization - controls that ensure only approved business users have access to the application system.
  • Input controls - controls that ensure data integrity fed from upstream sources into the application system.
  • Forensic controls - control that ensure data is scientifically correct and mathematically correct based on inputs and outputs

IT controls and the CIO/CISO[edit]

The organization's Chief Information Officer (CIO) or Chief Information Security Officer (CISO) is typically responsible for the security, accuracy and the reliability of the systems that manage and report the company's data, including financial data. Financial accounting and enterprise resource planning systems are integrated in the initiating, authorizing, processing, and reporting of financial data and may be involved in Sarbanes-Oxley compliance, to the extent they mitigate specific financial risks.

Internal control frameworks[edit]

COBIT (Control Objectives for Information Technology)[edit]

COBIT is a widely utilized framework containing best practices for both ITGC and application controls. It consists of domains and processes. The basic structure indicates that IT processes satisfy business requirements, which is enabled by specific IT control activities. It also recommends best practices and methods of evaluation of an enterprise's IT controls.

COSO[edit]

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) identifies five components of internal control: control environment, risk assessment, control activities, information and communication and monitoring, that need to be in place to achieve financial reporting and disclosure objectives; COBIT provide a similar detailed guidance for IT, while the interrelated Val IT concentrates on higher-level IT governance and value-for-money issues. The five components of COSO can be visualized as the horizontal layers of a three-dimensional cube, with the COBIT objective domains-applying to each individually and in aggregate. The four COBIT major domains are: plan and organize, acquire and implement, deliver and support, and monitor and evaluate.

IT controls and the Sarbanes-Oxley Act (SOX)[edit]

SOX requires the chief executive and chief financial officers of public companies to attest to the accuracy of financial reports (Section 302) and require public companies to establish adequate internal controls over financial reporting (Section 404). Passage of SOX resulted in an increased focus on IT controls, as these support financial processing and therefore fall into the scope of management's assessment of internal control under Section 404 of SOX.

The COBIT framework may be used to assist with SOX compliance, although COBIT is considerably wider in scope. The 2007 SOX guidance from the PCAOB[1] and SEC[2] state that IT controls should only be part of the SOX 404 assessment to the extent that specific financial risks are addressed, which significantly reduces the scope of IT controls required in the assessment. This scoping decision is part of the entity's SOX 404 top-down risk assessment. In addition, Statements on Auditing Standards No. 109 (SAS109)[3] discusses the IT risks and control objectives pertinent to a financial audit and is referenced by the SOX guidance.

IT controls that typically fall under the scope of a SOX 404 assessment may include:

  • Specific application (transaction processing) control procedures that directly mitigate identified financial reporting risks. There are typically a few such controls within major applications in each financial process, such as accounts payable, payroll, general ledger, etc. The focus is on "key" controls (those that specifically address risks), not on the entire application.
  • IT general controls that support the assertions that programs function as intended and that key financial reports are reliable, primarily change control and security controls;
  • IT operations controls, which ensure that problems with processing are identified and corrected.

Specific activities that may occur to support the assessment of the key controls above include:

  • Understanding the organization’s internal control program and its financial reporting processes.
  • Identifying the IT systems involved in the initiation, authorization, processing, summarization and reporting of financial data;
  • Identifying the key controls that address specific financial risks;
  • Designing and implementing controls designed to mitigate the identified risks and monitoring them for continued effectiveness;
  • Documenting and testing IT controls;
  • Ensuring that IT controls are updated and changed, as necessary, to correspond with changes in internal control or financial reporting processes; and
  • Monitoring IT controls for effective operation over time.

To comply with Sarbanes-Oxley, organizations must understand how the financial reporting process works and must be able to identify the areas where technology plays a critical part. In considering which controls to include in the program, organizations should recognize that IT controls can have a direct or indirect impact on the financial reporting process. For instance, IT application controls that ensure completeness of transactions can be directly related to financial assertions. Access controls, on the other hand, exist within these applications or within their supporting systems, such as databases, networks and operating systems, are equally important, but do not directly align to a financial assertion. Application controls are generally aligned with a business process that gives rise to financial reports. While there are many IT systems operating within an organization, Sarbanes-Oxley compliance only focuses on those that are associated with a significant account or related business process and mitigate specific material financial risks. This focus on risk enables management to significantly reduce the scope of IT general control testing in 2007 relative to prior years.

Section
Title
Description
302 Corporate Responsibility for Financial Reports Certifies that financial statement accuracy and operational activities have been documented and provided to the CEO and CFO for certification
404 Management Assessment of Internal Controls Operational processes are documented and practiced demonstrating the origins of data within the balance sheet. SOX Section 404 (Sarbanes-Oxley Act Section 404) mandates that all publicly traded companies must establish internal controls and procedures for financial reporting and must document, test and maintain those controls and procedures to ensure their effectiveness.
409 Real-time Issuer Disclosures Public companies must disclose changes in their financial condition or operations in real time to protect investors from delayed reporting of material events
802 Criminal Penalties for Altering Documents Requires public companies and their public accounting firms to retain records, including electronic records that impact the company’s assets or performance.

Fines and imprisonment for those who knowingly and willfully violate this section with respect to (1) destruction, alteration, or falsification of records in federal investigations and bankruptcy and (2) destruction of corporate audit records.

Real-time disclosure[edit]

Section 409 requires public companies to disclose information about material changes in their financial condition or operations on a rapid basis. Companies need to determine whether their existing financial systems, such as enterprise resource management applications are capable of providing data in real time, or if the organization will need to add such capabilities or use specialty software to access the data. Companies must also account for changes that occur externally, such as changes by customers or business partners that could materially impact its own financial positioning (e.g. key customer/supplier bankruptcy and default).

To comply with Section 409, organizations should assess their technological capabilities in the following categories:

  • Availability of internal and external portals - Portals help route and identify reporting issues and requirements to investors and other relevant parties. These capabilities address the need for rapid disclosure.
  • Breadth and adequacy of financial triggers and alert - The organization sets the trip wires that will kick off a Section 409 disclosure event.
  • Adequacy of document repositories – Repositories play a critical role for event monitoring to assess disclosure needs and provide mechanism to audit disclosure adequacy.
  • Capacity to be an early adopter of Extensible Business Reporting Language (XBRL) – XBRL will be a key tool to integrate and interface transactional systems, reporting and analytical tools, portals and repositories.

Section 802 & Records retention[edit]

Section 802 of Sarbanes-Oxley requires public companies and their public accounting firms to maintain all audit or review work papers for a period of five years from the end of the fiscal period in which the audit or review was concluded. This includes electronic records which are created, sent, or received in connection with an audit or review. As external auditors rely to a certain extent on the work of internal audit, it would imply that internal audit records must also comply with Section 802.

In conjunction with document retention, another issue is that of the security of storage media and how well electronic documents are protected for both current and future use. The five-year record retention requirement means that current technology must be able to support what was stored five years ago. Due to rapid changes in technology, some of today’s media might be outdated in the next three or five years. Audit data retained today may not be retrievable not because of data degradation, but because of obsolete equipment and storage media.

Section 802 expects organizations to respond to questions on the management of SOX content. IT-related issues include policy and standards on record retention, protection and destruction, online storage, audit trails, integration with an enterprise repository, market technology, SOX software and more. In addition, organizations should be prepared to defend the quality of their records management program (RM); comprehensiveness of RM (i.e. paper, electronic, transactional communications, which includes emails, instant messages, and spreadsheets that are used to analyze financial results), adequacy of retention life cycle, immutability of RM practices, audit trails and the accessibility and control of RM content.

End-user application / Spreadsheet controls[edit]

PC-based spreadsheets or databases are often used to provide critical data or calculations related to financial risk areas within the scope of a SOX 404 assessment. Financial spreadsheets are often categorized as end-user computing (EUC) tools that have historically been absent traditional IT controls. They can support complex calculations and provide significant flexibility. However, with flexibility and power comes the risk of errors, an increased potential for fraud, and misuse for critical spreadsheets not following the software development lifecycle (e.g. design, develop, test, validate, deploy). To remediate and control spreadsheets, public organizations may implement controls such as:

  • Inventory and risk-rank spreadsheets that are related to critical financial risks identified as in-scope for SOX 404 assessment. These typically relate to the key estimates and judgments of the enterprise, where sophisticated calculations and assumptions are involved. Spreadsheets used merely to download and upload are less of a concern.
  • Perform a risk based analysis to identify spreadsheet logic errors. Automated tools exist for this purpose.
  • Ensure the spreadsheet calculations are functioning as intended (i.e., "baseline" them).
  • Ensure changes to key calculations are properly approved.

Responsibility for control over spreadsheets is a shared responsibility with the business users and IT. The IT organization is typically concerned with providing a secure shared drive for storage of the spreadsheets and data backup. The business personnel are responsible for the remainder.

See also[edit]

References[edit]

  1. ^ PCAOB Auditing Standard No 5
  2. ^ SEC Interpretive Guidance
  3. ^ AICPA Statement on Auditing Standards No. 109
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