COSO II Event Identification will be a significant challenge for companies

COSO’s improvement to COSO II, sometimes referred to as COSO ERM, added requirements for objective setting, risk identification, management & reporting, as well as risk treatment and event identification. These would be regarded as the basic elements of a good ERM (Enterprise Risk Management) program, and tying these into COSO integrates the already established control framework around those ERM practices.

Sounds good! It is good, or at least a good starting point, I believe. A far more granular assessment to derive a risk level is needed if this is to become truly scientific, but that’s for another blog topic!

The issue now is that whilst most companies will probably be able to implement just about all the elements of COSO II, there is one that I believe will be a significant challenge, the ‘Event Identification’ element.

Under COSO II, Event Identification encompasses incidents (internal or external) that can have a negative (or positive – so perhaps opportunities?) effect. Much like under Basel II Operational Risk analysis, the benefit of hindsight determines or assists the prediction of future risk. So, effectively, to adhere to COSO II a company must identify and quantify incidents within the ERM framework, such that predictions of risk can be assisted by knowledge of actual loss in the past.

This is a whole new set of business processes and responsibilities that certain individuals must accept as part of their regular employment descriptions. But it is more complicated than that, because internal systems and processes will need to be developed to help those individuals to obtain the correct data to support event identification.

Take a simple example in IT. Let’s assume we are a pharmaceutical company, and a system falls victim to a security breach. On that system is 20 years of clinical trial information for a product and we know that an outside organization has potentially accessed that IP. Who’s responsibility is it to recognize that the incident has occurred? Who decides what the cost to the organization is? Who’s responsibility is it to capture that information? Who’s responsibility is it to identify the business and technical risks associated with the incident? Who’s responsibility is it to decide what actions should be taken as a result of the incident to prevent it happening again?

Even for this fairly tangible event, there are a whole set of new processes, policies, documentation and responsibilities that need to be in place to properly implement Event Identification.

So much so, that I contend most companies should not declare COSO II compliance, just yet.

Response to Visa’s Chief Enterprise Risk Officer comments on PCI DSS

Visa’s Chief Enterprise Risk Officer, Ellen Richey, recently presented at the Visa Security Summit on March 19th. One of the valuable points made in her presentation was defending the value of implementing PCI DSS to protect against data theft. In addition, Ellen Richey spoke about the challenge organizations face, not only becoming compliant, but proactively maintaining compliance, defending against attacks and protecting sensitive information.

Recent compromises of payment processors and merchants that were stated to be PCI compliant have brought criticism to the PCI program. Our views are strongly aligned with the views presented by Ellen Richey. While the current PCI program requires an annual audit, this audit is simply an annual health-check. If you were to view the PCI audit like a state vehicle inspection. Even though at the time of the inspection everything on your car checks out, this does not prevent the situation of days later your brake lights go out. You would still have a valid inspection sticker, but are no longer in compliance with safety requirements. It is the owner’s responsibility to ensure the car is maintained appropriately. Similarly in PCI, it is the company’s responsibility to ensure the effectiveness and maintenance of controls to protect their data in an ongoing manner.

Ellen Richey also mentioned increased collaboration with the payment card industry, merchants and consumers. Collaboration is a key step to implementing the technology and processes necessary to continue reducing fraud and data theft. From a merchant, service provider and payment processor perspective, new technologies and programs will continue to reduce transaction risk, but, today, there are areas where these organizations need to proactively improve. The PCI DSS standard provides guidance around the implementation of controls to protect data. Though in addition to protecting data, merchants, service providers and processors need to proactively address their ability to detect attack and be prepared to respond effectively in the event of a compromise. These are two areas that are not currently adequately addressed by the PCI DSS and are areas where we continue to see organizations lacking.

See the following link to the Remarks by Ellen Richey, Chief Enterprise Risk Officer, Visa Inc. at the Visa Security Summit, March 19, 2009:

Weak Application Security = Non-Compliance

I had to post about this one – our general counsel and compliance specialist Dave Stampley wrote an article recently at Information Week about the importance of ensuring application security as part of your regulatory compliance efforts. From the article:

Web-application security vulnerabilities pose a unique compliance risk for companies. Unlike compliance failures that take place in the background–for example, an unencrypted business-to-business transmission of sensitive consumer data–application weaknesses are open to discovery by any skilled Web surfer and even consumers themselves.

“The FTC appears to be taking a strict liability approach to E-commerce security flaws,” says Mary Ellen Callahan, an attorney at Hogan & Hartson in Washington, D.C., who has represented clients facing government privacy compliance investigations. “White-hat hackers and tipsters have prompted a number of enforcement actions by reporting Web-site flaws they discovered.”

Read the full article here