A Practical IT Approach To Sarbanes-Oxley Compliance In 2002 the Sarbanes-Oxley Act was signed into law. It mandates more stringent controls on financial reporting for public companies. There’s been quite a bit written about Sarbanes over the past couple of years – particularly about its impact on IT. The purpose of this presentation is to educate you on what SOX means to IT and to introduce you to Ecora, our products, and show you how Ecora products can help you achieve SOX IT compliance.

Ecora and Sarbanes-Oxley Compliance Agenda Sarbanes-Oxley -- What is It? Some Definitions Where are companies in compliance effort? Why should I care? Why a Framework? COSO COSO IT Controls IT General Controls Example of compliance work with a customer Summary

Sarbanes-Oxley – What is it? Federal law that imposes strict new financial reporting requirements for publicly traded companies. Places burden on management to devise safeguards around the financial reporting process Specifically identifies IT as a key component of process and audit activity

Sarbanes-Oxley – Definitions Section 302 – Quarterly and annual reporting – set up internal controls. CEO and CFO own it. Section 404 – Management Assessment of Internal Controls Annual evaluation of internal controls Quarterly filing of material changes to internal controls Independent audit of internal controls Recognized control framework required for assessment

Sarbanes-Oxley – Definitions PCAOB – Public Company Accounting Oversight Board – established to oversee audits… Audit Standard No. 2 -- 200 page document defines SOX auditing standards COSO -- Committee of Sponsoring Organizations of the Treadway Commission – Internal Control – Integrated Framework, PCAOB referenced framework CobIT – Control Objectives for Information and Related Technology – another well known framework Internal Control – A process designed….to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles…. (SEC Definition)

Sarbanes-Oxley – Definitions Internal Control (cont.) – Internal control is not “one-size-fits-all,” and the nature and extent of controls that are necessary depend, to a great extent, on the size and complexity of the company. PCAOB Auditing Standard No. 2 Control Deficiency – exists when design or operation of a control does not allow management or employees …to prevent or detect misstatements on a timely basis. Significant Deficiency – control deficiency (or combination of CDs) that adversely affects company’s ability to initiate, authorize, record, process, or report external financial data reliably Material Weakness – significant deficiency (or combination of SDs) that results in more than remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected

Where are companies in the process? Plan Document Test Report Two Groups < $75M Market Cap – 11/15/04 64% Testing 34% Documentation 2% Reporting > $75M Market Cap – 7/15/05 60% Testing 3% Reporting 3% Planning Ernst&Young 2004

Sarbanes-Oxley – Why should I care? SOX is changing IT No more IT closed “black box” Auditors – with technical expertise -- are now looking closely at IT E&Y projects that next year IT portion of SOX audit will grow from 10% to 25%.

Sarbanes-Oxley – Why should I care? IT an integral part of the financial reporting and control process Management’s heavy dependency on IT High degree of automation in processing day to day transactions IT data elements are the primary source of data used in decision-making IT availability / integrity critical to the financial statement close and reporting processes

Why a Framework? 1. SOX Mandate -- Assessment of effectiveness requires “..suitable, recognized control framework...” Must be identified in annual report COSO is specifically referenced by PCAOB and forms foundation of its Auditing Standard No. 2. 2. It makes sense Provides structure Identifies functional areas of focus

Information and Communication COSO Framework A common sense approach to implementing internal controls Control Environment Risk Assessment Control Activities Lots has been written about COSO – however it’s actually a fairly intuitive and logical approach to project management. Control environment – sets the tone of an organization, influencing the way people understand and contribute to the control process. It is the foundation for all other components of internal control, providing discipline and structure. Risk Assessment – involves identification and analysis by management – not internal auditor – of relevant risks to achieving objectives. Brings business sensibility and responsibility to the process. Control Activities– policies, procedures and practices that ensure management objectives are achieved and risk mitigation strategies are carried out – this is where IT plays a central role Information and Communication – supports all other control components by communicating control responsibilities to employees and providing information in a form and timeframe that allows people to carry out their duties Monitoring – Just hat the name implies -- consists of processes that assess the quality of internal control performance over time. -- it covers external oversight of internal controls by managing/ mentoring other parties outside the process; or the application of independent methodologies, like customized procedures or standard checklists, by employees within a process. Information and Communication Monitoring

COSO IT Controls COSO identifies two broad groupings of information system control activities. Control Activities Application Controls Application controls – apply to business processes and designed within applications to prevent/detect unauthorized transactions. When you dig into control activities the COSO framework breaks information system control activities into two groups Application Controls – these are internal to an application such as passwords, and other internal security features that protect a specific application Then there are general controls – these controls are those that apply to all information systems. They provide continuous and ongoing protection of the infrastructure – they are the foundation for all other IT controls and that’s where Ecora plays a strong role. General Controls General Controls – apply to all information systems, support secure and continuous operation. They support all other controls

IT General Controls IT general controls are foundation for all IT controls Significant Accounts in Financial Statements Balance Sheet Income Statement SCFP Notes Other Business Processes/ Transaction Classes Process 1 Financial Applications Application X Application Y Application Z IT Infrastructure Services Database Operating System Network Application Controls *SCFP – statement of change in financial position As you can see by this diagram – General controls are a foundation for all other IT controls – this makes sense because if you neglect infrastructure security and access you undermine any other control scheme you put into play. General Controls Adapted from IT Control Objectives for Sarbanes-Oxley by the IT Governance Institute

IT General Controls IT General Controls are IT processes and related controls that are generally applied to support the computer application level. However, they may be performed on a single platform or application. IT general controls provide a focus for IT to identify, assess, and develop internal controls around defined areas of operation as they relate to financial controls Tests for controls are specific activities or processes that demonstrate and document proof that the controls are real and in place. Remember -- the whole point of SOX is financial reporting – the objective is to provide documented proof that IT systems associated with financial reporting are locked down. Let’s recap. Sarbanes-Oxley requires creation and assessment of internal control for financial reporting. Those internal controls must be defined by the company – which by the way has some latitude in their definition – and they must be audited. Auditors ask broad questions about access. Although this is changing – today 10% of internal controls are IT. That’s expected to rise to 25% in the next two years. Ecora Enterprise Auditor collects and reports on a wide range of IT infrastructure configuration data which can be used in SOX compliance. Let’s look at some concrete examples of IT internal controls and the auditor reports that support them.

System (OS) Access to System System (OS) Access to Data IT General Controls Your infrastructure figuratively surrounds you’re your financial reporting data. You need controls at each level. Network Access System (OS) Access to System System (OS) Access to Data Database Access Financial Reporting Data Another way to look at it is that we help validate the multiple layers surrounding your financial systems. Each ring or layer needs its own set of internal controls, tests, and documentation to show that you are complying with Sarbanes-Oxley.

How Ecora helps with IT General Controls Ecora Auditor maps to IT general controls. We provide documented proof that you are complying with internal controls for IT systems that impact financial reporting. IT Infrastructure Services Database Operating System Network General Controls Ecora Infrastructure Coverage Ecora Enterprise Auditor Database MS-SQL, Oracle I’m introducing Ecora here because I’m going to show you some concrete examples of internal controls from one of our clients. Ecora Enterprise auditor gives you an out of the box solution that reports on a significant portion of your infrastructure. We map pretty well to the COSO general control standard. We cover the major OSs, databases, and infrastructure applications. Our reporting and documentation capability can be used for a solid SOX foundation. The next series of slides show actual controls used by a recent SOX client. Operating System Windows, Solaris, HP- UX, AIX, Red Hat Linux, Novell Network Cisco

Client Example Database Internal Controls Internal Control Test of Internal Control Ecora Report for Test A process exists to review and confirm access rights. Ensure each DBA has own account and no generic accounts used to bypass audit trail of DBA activity DBA Accounts Ensure appropriate Authentication Mode is configured Authentication Mode Ensure all logins have passwords and not default password Login Password Review role memberships and permissions to ensure appropriate access and privileges to databases Role Permissions & Memberships Set file system privileges to prevent unauthorized access to database server data files, log files, and backup files System Privileges Ensure Verify Function exists and valid to ensure user passwords are validated and strong password criteria required Verify Function

Client Example Database Internal Controls Internal Control Test of Internal Control Ecora Report for Test Prove adequate password validation in place Password Lifetime, Password Grace Period, Password Reuse Time, Failed Login Attempts, Password Lock Time Appropriate controls exist to review and manage remote network access Audit and review list of linked and remote servers External Servers Identify all public database links. Review and replace with private links as appropriate to restrict access to confidential data Public Links

Client Example Database Internal Controls Internal Control Test of Internal Control Ecora Report for Test Controls exist to insure data is collected for tracking user activity Set Initialization Parameters to provide security and ensure database auditing is active Initialization Parameters Enable audit events to provide audit trail of user activity Auditing Enabled Audit and review DB owner for each database DB Owner Enable Archive Log Mode to allow point in time recovery to ensure data not lost when recovering Archive Log Mode

Client Example OS Internal Controls Internal Control Test for Internal Control Ecora Report for Test A control process exists to review and confirm access OS rights. Audit and review user privileges on each system User Privileges Audit and review system access permissions to sensitive files NTFS Permissions Ensure systems configured to restrict anonymous remote access to your systems. Remote Access Select sample of terminated employees and determine if their access has been removed User Access

Client Example OS Internal Controls Internal Control Test for Internal Control Ecora Report for Test Procedures for protection against malicious programs are in place through the use of anti-virus and other software and measures Ensure systems are updated with appropriate service packs and hotfixes Patch Levels Ensure anti-virus software installed on systems Computer without Ant-virus Installed

Client Example OS Internal Controls Internal Control Test for Internal Control Ecora Report for Test Procedures exist to maintain effectiveness of authentication and access mechanisms Ensure built-in local administrator account is renamed Built-in Admin Renamed Ensure strong password and account lockout policies are implemented. Password Policy Ensure all services are configured appropriately and that only required services are running to protect system from unauthorized access Services Summary Audit and review list of local administrators to ensure only appropriate accounts have full admin privileges Admins Group Report If using SNMP ensure appropriate Community String(s) defined to prevent unauthorized users from obtaining systems status information SNMP

Client Example OS Internal Controls Internal Control Test for Internal Control Ecora Report for Test IT administration insures appropriate audit mechanisms are in place to allow detail event tracking Ensure strong audit policy configured to ensure audit trail of events is recorded to provide audit trail of user activity (e.g. account login events, policy change, object access, process tracking, etc..) Audit Policy Ensure event log setting are configured to retain recorded events for appropriate time and prevent guest access to logs Event Log

Summary Sarbanes-Oxley is here to stay – annual and quarterly Internal controls defined by each company IT will bear an increasing burden of SOX compliance Framework can be guide IT general controls are foundation of all controls Sustainability is requirement Automation tools will make your job easier Let’s recap. Sarbanes-Oxley requires creation and assessment of internal control for financial reporting. Those internal controls must be defined by the company – which by the way has some latitude in their definition – and they must be audited. Auditors ask broad questions about access. Although this is changing – today 10% of internal controls are IT. That’s expected to rise to 25% in the next two years.

And now a word from our sponsor… Ecora Software, Inc. and Enterprise Auditor Enterprise Auditor automates the collection of configuration data from the major infrastructure applications, databases, OSs, and network components and delivers audit ready reports. Ecora’s Enterprise Auditor forms the foundation for Sarbanes-Oxley IT internal controls. It gives you a platform for, and proof of compliance with IT internal controls. Solution Express combines Enterprises Auditor and an Ecora Systems Engineer (no-charge) to get your IT Sarbanes-Oxley compliance effort on a fast track. Before we begin I’d like to make one thing clear – we are not a Sarbanes-Oxley silver bullet. None – to my knowledge exists. Ecora Enterprise Auditor however can play a substantial role in defining controls – and more importantly – giving you audit ready reports that prove you are complying with those internal controls. And as we’ll see Internal Controls are central to Sarbanes-Oxley