Sox Compliance

Where did the idea of compliance officers come from?

The industry that developed compliance officers first was the defense industry. Back in the mid-1980s, a whole bunch of defense contractors got into trouble. There was fraud, waste and abuse in the news, and President Reagan, in order to stem the tide, asked Deputy Secretary of Defense David Packard to form a commission. The Packard Commission recommended that clean up its own house.
I remember those overpriced toilet seats.

A funny aside, we had a vice president at United Technologies Corp., who was the first director of the office of federal procurement policy, but then went to work for us. He was asked to testify because of his prior position. They asked him what he thought about the $8,000 toilet seat, and his comment was, 'I don't want to take a position on that.' That's the only comment that made it into the news.

A whole bunch of CEOs got together after that and they developed what they called DII, the Defense Industry Initiatives, to write codes of ethics and develop programs. The outgrowth of that was having compliance officers to be responsible for developing those programs.
What's your view on the expense of compliance?

I would like to split out SOX [Sarbanes-Oxley Act] from general compliance. Prior to SOX, compliance programs consisted of things that were more than financial issues. Now along comes SOX, and what SOX says is your financials needs to be documented. How you handle your books and records needs to be documented. Some people might have said, 'Gee, weren't they documented before?' To a large extent they were, but over time some of those procedures changed, and the documentation wasn't changed. What became expensive was the interpretation of SOX, the testing, the requirement of having another set of auditors besides your independent auditors. So everybody is trying to do this thing completely right, and because this is a first-time effort, even companies that might have thought they were compliant prior to SOX, they are spending the money to make sure they are compliant.
There's a code of ethics that is kind of built into the military, where you worked previously, but there doesn't seem to be anything quite like that in the business world.

You're absolutely right.
The former CEO and other senior executives have been indicted on fraud charges. [CEO Sanjay Kumar and CA's former head of worldwide sales, Stephen Richards, have pleaded not guilty. Others have pleaded guilty to charges of securities fraud or obstruction of justice.] Do you think punishment is the only way to prevent misdeeds in business?

Wow. There are two answers. I don't know what else you can do with respect to misdeeds other than to punish. But I do know that if boards of directors and shareholders are not savvy to the fact that if there are individuals who have done the wrong thing, and the boards and shareholders haven't done the proper background checks in hiring those people later on, that is a huge mistake on the part of corporations -- to allow someone who has been punished for misdeeds, and then putting them back in the driver's seat should be a real negative in the business world.
Do you have to spend a lot of time reining in the tendency in people to win? Business is extremely competitive, and the desire to win at any cost, I think is pretty strong among very successful people.

No question about that. The desire to win is an important ingredient in business, and you really don't want to impede that desire to win. What you want to make sure is that everybody understands that the desire has to be measured with doing it the right way. I have to tell you that one of the things I talk to ethics officers about all the time is that you can sit there constantly and say no, no, no, you can't do this and you can't do that, and that may be one way to do your job. A better way to go about your job is to work with business and say, what is it that you're trying to accomplish and let's find the right way to do it.
Your job is not really to be a preacher, I guess.

If I end up being a preacher, I'm dead. People don't want to be lectured to. Most people feel they have good values to begin with. What they need is some guidance in solutions that are good, positive and workable and still help them meet their goals. I use an example with sales all the time. I say, if you come to me and say, 'I want to bribe, is that OK?' the answer is no, it's not OK. But that's really not the question you wanted to ask me. You want to tell me what your problem is and we want to find a solution.
Can you give me an example of a gray area where you have to come in and mediate?

Sure. You're out negotiating sales maybe in a foreign location. Someone comes to you -- a potential customer -- and says, 'I would really like to come visit your facility to see how your operation works.' This may not be a Computer Associates problem because we don't do a lot of manufacturing, but a lot of companies do. So, the answer is, of course, but the potential customer wants you to pay for it and the question is, 'Can we do that?' The answer in most instances is absolutely. But the gray area comes in when you ask how much entertaining you can do while you are there -- and are there any stop-offs, like to Orlando or to Las Vegas? Is there walking around money? Taking them out to dinner while they are there is certainly acceptable. Where you start to get uncomfortable is going beyond that and taking side trips, shopping trips.
We talked a little bit about SOX. Is SOX is a good thing?

Absolutely. I actually wrote a paper saying be happy for Sarbanes-Oxley. There are some unintended consequences of Sarbanes-Oxley that make my life and everybody else's difficult, and one of them is the huge cost associated with it. But how do you argue a provision in the law that says you must document your controls? How can you argue against a provision that says you need to have a mechanism where your employees can bring accounting irregularities up through the system and the board and the suit committee can act on it? I think most people will tell you that the law itself is a very proper one
Is there anything that CIOs should know about chief compliance officers?

The message I would want chief information officers to be aware of is that compliance officers and chief information officers should be working hand in glove. Some of the best controls that I am aware of are controls that are developed between the compliance organization and the chief information officer's organization. The more we can automate controls, the more we can take the human element out of it, the more reliance our employees and shareholders can have on the system. The chief compliance officer and the chief information officer should be married at the hip.
Patrick Gnazzo was appointed senior vice president of business practices and chief compliance officer (CCO) at Computer Associates International Inc. in January. A former chief trial lawyer for the U.S. Department of the Navy and a United Technologies Corp. CCO for 10 years, Gnazzo came to CA as part of a deal with the federal government in which the company agreed to pay $225 million in restitution to shareholders and improve its compliance and ethics practices. Gnazzo has until Dec. 31 to get a program up and running. A frequent lecturer on ethics and compliance, he spoke with SearchCIO.com about what compliance officers do and why.

What is the difference between record-keeping of VoIP messages versus traditional telephone messages?

There are going to be different types of records created by telephone calls when you do things digitally. When you do things digitally as opposed to the old-fashioned way, it creates new challenges in terms of retention. For example, if you look at old voicemails, analog form, there wasn't much expectation in the way of preserving them.

With digital voicemail systems and systems that turn voicemails into wave files that then get e-mailed, now you have this whole new possibility and treasure-trove evidence and information that would be potentially subject to preservation obligations, just like any other form of information. The key thing to remember is that the type of media in which the records are stored is largely irrelevant when it comes to determining your obligations to preserve. And, as the types of media that are creating these records with different types of digital information multiply -- for example, records created through VoIP -- it becomes more and more critical for companies to be very focused on their policies and practices regarding information management.
How does a company decide what to retain?

What you need to retain is going to be dictated by subject matter, not by type of media. So, for example, if there are records created by a VoIP system that deals with your 10K, the fact that some records are created by VoIP has no bearing whatsoever on your preservation obligations. You're going to have to figure out a way to deal with that. You can't say, oh well, this is stored in this type of media and these records are created by this type of software application, therefore I don't have to worry about preservation.
When you talk to companies, do you find that many believe they don't have to keep a record of it because it was done over the phone?

Absolutely, there is a lot of uncertainty in terms of what exactly is the extent of preservation obligations with respect to certain types of media. The big issue that still predominates that discussion is backup tapes. While it is entirely possible that at the end of the day the court might say, 'Well, I really don't think it was reasonable to expect you to preserve that type of information,' the way the preservation obligation is generally interpreted is more media neutral. At the end of the day, there might be arguments you could make in terms of burden and cost, as to why you shouldn't have to keep that information, but in the absence of a ruling that says, for example, VOIP is not the kind of information you need to preserve, you'd better preserve it, if it's relevant to subject matter that falls under some preservation obligation.
What are the biggest errors in judgment companies routinely make when dealing with electronic records?

One is keeping information that they're not required to keep. The consequence of that is tremendous cost, when in response to either regulatory investigation or litigation they are required to retrieve and search that information and review it for production. They find they have needlessly multiplied their burden by keeping information that has no business use and wasn't governed by some legal preservation requirement.

No. 2, is not having thoroughly thought out and implemented information management policies and practices. You would be amazed at the big companies with vast sprawling corporate networks generating gigantic amounts of information -- a lot of it very sensitive -- that have not made much headway into implementing policies and practices, so they can have some measure of control and can explain why they have certain information and not other information.

No. 3, is they are not in touch with the de facto information policies -- what actually happens at the company. A lot of what happens is driven by IT people. So, for example, somebody in IT decides that because of storage capacity issues, they are going to purge e-mail on active servers every 90 days. Then a litigation happens, or there is an investigation, and either no one was aware of the purge or thought to communicate with IT that they need to perhaps to suspend the purge.

This gets to the heart of our audience. So CIOs need to be brought into the loop?

Absolutely, the interface between CIOs and lawyers is the story. In all these cases where companies have been punished for losing electronic information, 99% of the time it can be attributed to some kind of communications failure between lawyers and IT people. Not bringing IT into the loop on legal issues is a common and serious mistake. Morgan Stanley is probably the most prominent example. A few years back, there was a case, Keir v. UnumProvident Corp., a big insurance company. The decision gives a fascinating inside look at what happened in terms of the miscommunication between the outside lawyers and the in-house lawyers down to the inside tech people at the company and their vendor, IBM, which handled their backup systems.
What makes VoIP messages such a potential nightmare is that to produce voicemail that has been sent and saved digitally, you have to listen to it real time and transcribe it.

That's right, and the burden involved in that may result in not having to produce it. But it might not, and when you're dealing with regulators, they are less sympathetic to the burden argument.

Now you don't have to create records that wouldn't otherwise exist. If it is not your normal practice to record those oral communications, you're not required to go out and record them and create records just because you have some preservation duty. It doesn't mean I now have to walk around with a tape recorder and anytime I say something to someone that is relevant to a litigation or investigation I now have to tape record it.
Adam I. Cohen is a partner in the litigation department in the New York office of Weil, Gotshal & Manges LLP. Nationally recognized for his work on discovery and document retention issues associated with electronic information, he is the co-author of Electronic Discovery: Law and Practice. The authoritative 2003 primer has already been cited in four landmark e-discovery decisions by federal district courts. SearchCIO.com asked Cohen how CIOs should be treating that murkiest of electronic records -- Voice over Internet Protocol (VoIP) data. The takeaway? Do exactly as company lawyers tell you to.

Who do you report to?

The COO [chief operating officer]. We don't have a dedicated CIO role right now; our CTO is largely performing that function. However, my boss is a former CIO. The CTO and I report to the COO.
What percentage of your job is spent working on compliance regulations?

In 2004, I spent approximately 40% of my time on compliance. Things really fired up in 2004. When I came on board, compliance activities had been building for at least the last 12 months. I was originally hired NOT to do compliance directly. I was to handle the security aspects of compliance only. Then last fall, my boss asked for me to become corporate compliance officer, in addition to my role as CSO. So now I'm involved with other compliance issues. There was no single, executive-level focal point before I took it over. Prior to that, each business unit would identify their issues and address compliance at their own levels.
Do you have any other staff dedicated to compliance?

I have one full-time coordinator and two part-time coordinators working on compliance. We also involve the appropriate business people. The full-time coordinator is a temporary position, ending later this year (2005). Then we'll be relying upon the part-time positions to provide program coordination and help the individual contributors when they have problems. The full-time temporary person was needed initially to get the program on its feet.
What compliance regulations have you had to comply with in the past year? Which were the most challenging?

In 2004, our emphasis was on two areas. First with Visa. Visa has a cardholder information security program. We had to demonstrate compliance with that. Most people might not consider Visa compliance as a big deal compared with SOX [Sarbanes-Oxley] or GLBA [Gramm-Leach-Bliley Act] -- but it was important to our organization. There were real consequences if we didn't meet their test -- they could revoke our right to process Visa transactions. Visa has to approve anyone that wants to process transactions. This security program is a big strategic initiative for them. It also includes a lot of risk for us -- considering we could lose a huge revenue stream.

The other big regulation challenge in 2004 was getting our SAS 70 Type 2 compliance report. We needed to get this report for our customers -- all financial institutions. SAS 70 is a third-party attestation, a common instrument used when two parties work closely together and they want to make sure the other is doing what they're contractually obligated to do. When a bank outsources work to a vendor, examining the SAS 70 report is typically part of the financial institution's risk management program. The banks will look for certain controls in the vendor's organization.

It's an annual event for us; 2004 was our first one. Industry-wide, the increased emphasis on SAS 70, which has been around for quite some time now, has developed as a direct result of increased regulatory pressure on financial institutions. Financial institutions need to demonstrate good risk management practices when they are working with particular vendors or service providers. It's a reality for any financial institution because almost all of them outsource some aspect of their IT or tech operations, thus placing customer date at risk.
You're not a publicly traded company, so you didn't have to meet the SOX deadline. But do you have to meet any of the guidelines indirectly since you work with mostly publicly traded companies?

We have decided to adopt various aspects of the SOX requirements. We think it's just a matter of good business practice. We're currently analyzing now which practices we should adopt and how and when to do it. Most business leaders would probably tell you that if you're a company today that's not subject to SOX or other major regulations, it's just a matter of time before you will be. Eventually, I believe the government will extend these requirements to nonpublic institutions.
All of your customers are financial institutions. Is there even more pressure from them for you to be 100% compliant at all time?

Yes. Since we only serve financial institutions, we are getting increased pressure. I believe there are two specific reasons. First, the auditors themselves are getting more sophisticated on how they evaluate financial institutions. Secondly, the regulations are getting much more strict. As most people know, it's a common practice among financial institutions to outsource some or all of their IT to TSPs [technology service providers]. The regulators have guidelines that tell financial institutions how they should manage TSPs. One specific requirement is that financial institutions can not outsource risk management.

Banks in the past have tended to implicitly outsource risk management along with the systems. Regulators are now demanding that financial institutions prove they are actively conducting risk management on any technology outsourcing contracts. One thing we try to do is recognize what the burden is on the customer. From the auditors -- we try to deliver our services in a way that they meet that burden of proof. We see a lot of the compliance work we do on behalf of our customers as a way to differentiate ourselves in the market.
Do you send any work offshore? If so, is compliance an issue when working with an offshore customer or partner?

We don't send work offshore. We have customers who do that, though. We try to work with our customers on how to manage their risk with offshore partners. For example, we perform a certain amount of systems monitoring and forward anything we find to our customers. I'll give you a specific problem for which there is no easy answer: We bond all of our staff which requires a certain amount of background checking, which is fairly straightforward in the U.S. When a customer of ours is doing business with an offshore partner, our customer typically will want to perform similar background checks. However, it's not always clear how to do that with people overseas. It's usually an issue of how do you find a level of scrutiny that's equivalent to a check you've done with a U.S. worker. But, how does that work in India or wherever your offshore partner happens to be? What's considered to be equivalent?
Have you been audited for any compliance regulations? If so, did they uncover any issues?

Yes, we largely have had customers auditing us. In 2004, we had no less than 10 external audits. We also had six internal audits.

Issues have come up, but nothing I consider to be serious. One example is we had some faulty maintenance performed on an exterior door to our building. When the auditor was checking our physical perimeter, they found the door didn't close completely all the time. Even though that door provided no direct access to a protected area, the incident was noted in the report and we did a follow-up with the maintenance group to explain how important this issue was.

Some of our time and effort working with external auditors is spent working with auditors to help them interpret the regulations for our specific context. These regulations are very complex themselves. Issues brought up by the auditors are often matters of interpretation. We sometimes have to point out to the auditors that there isn't an issue and why -- typically because we have a different control or other compensating controls. But in the end, if the auditor is insistent, we will usually accept the issue and make the necessary changes for the customers. However, there have never been any real show stoppers.
Does the business side fully support any efforts and spending for compliance? Do they realize the value and importance of these initiatives?

Yes, for us it's very obvious. There's a clear connection between compliance and business success. We have no problems with having the business recognize the value of compliance. However, because there is so much compliance that needs to be done, the business often has a difficult time prioritizing what needs to get done.
I read that you have an off-site business continuity and disaster recovery site in Colorado. I assume DR/BC [Disaster Recovery/Business Continuance] plans are essential to the success of compliance regulations. Is that correct? Did you have this site set up before many of the regulations and auditors starting coming out?

There are several compliance initiatives that officially told us we had to have this; VISA CISP, for example. Even so, the reason we have DR/BC is that the business recognizes that the money spent today to ensure business continuity will pay off. You're talking about companies [our customers] that if they're not able to process transactions, the revenue loss for them could be astounding, much more than they are paying for the DR/BC plans. Therefore, the first priority is how to prevent loss of revenue. I think compliance issues are also addressed in there, but ensuring continuous revenue is our No. 1 goal here.
Do new customers ask about your compliance plans or situation? Is it as important to them?

We make sure our compliance goals are included in our initial marketing pitches -- we state we're very in-tuned with their compliance needs. In some cases we're more aware of their compliance regulations than they are. On their side, there's an initial line of questions about whether we're compliant -- basically to make sure we're credible. Most of the customer's effort then moves to making sure we can deliver on their technological goals and that we come in at a good price point. Once they know we're viable -- they'll do more due diligence on us. My point is that they're interested in our compliance efforts, but it's not their No. 1 priority. They want to make sure we can deliver the service first.
Kip Boyle was hired as chief security officer of Pemco Corp. in October 2003. Compliance was not originally part of the job. But as compliance activities grew and became more important at his organization, Boyle was asked to take on the role of corporate compliance officer -- in addition to his current role -- and oversee the company's compliance efforts. In this exclusive interview with SearchCIO.com, he discusses his most challenging compliance issues and how to deal with both internal and external audits.

of loan requests each month, and a compliance rule states that the company must respond to each request within 30 days. To meet that requirement, the group was looking...

continuity, information security, compliance and privacy, might undermine business performance as well as long-term goals and priorities.

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