On June 17, 2004, the Public Company Accounting Oversight (PCAO) Board finally approved Auditing Standard No. 2, "An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements," which it had been considering since mid-March in response to the Sarbanes-Oxley Act of 2002 (SOX). As this new accounting standard is received within SOX-impacted companies, a small sigh of relief may be heard from many IT managers. Why? Because until the PCAO accepted the standard, IT felt like it was getting harassed by auditors to meet a variety of requirements that were often conflicting, confusing, and counterproductive.
The Section 404 Nightmare
At issue for these IT managers was Section 404 of SOX, which required that registered public accounting firms "attest to and report on an assessment of internal controls" made by the client's management. In other words, before a company could pass the financial audit, it had to prove to the auditing firm that its processes and controls on information systems were, in fact, adequate and accurate.
But, unfortunately for IT, this might include any information source that the auditors deemed important, whether the source was internal to the company or a part of the company's relationship with other organizations. This has been particularly confusing because, as supply chains and customer relationships became automated in the 1990s, control over those sources of information has been difficult for local IT to achieve. This was not only a security issue, but a content issue as well. How could IT verify the accuracy of information from a supplier or a distributor? What controls were auditors going to require?
Standards and the Lack of Them
Further complicating the problem was that there were no accepted standards for identifying what adequate and accurate controls for those information sources might be. Rules and auditor opinions were evolving quickly, and just keeping up with the latest requirements and proposed requirements was beyond the ken of most IT managers.
Meanwhile, deadlines for complying with SOX continue to loom (though extensions for meeting the Section 404 IT requirements have been extended until 2005), and software implementation schemes to exert control are dependent upon a clear understanding of what, exactly, is going to be required by the auditors.
SEC Approves PCAO Auditing Standard No. 2
On June 18, the Securities and Exchange Commission (SEC) approved the PCAO's Auditing Standard No. 2, laying the first firm basis from which auditors can now ask questions of IT and set control requirements. And though IT is still not out of the woods on compliance, at the very least it will start to receive clear messages from the auditors themselves.
IT Control Objectives Released
In addition, on July 4, the IT Governance Institute released its final document on the control objectives for SOX, entitled "IT Control Objectives for Sarbanes-Oxley: The Importance of IT in the Design, Implementation and Sustainability of Internal Control over Disclosure and Financial Reporting."
This report can now serve as both a guideline for IT managers and a legitimate wedge within corporations to keep IT involved in management decision-making. It is the first real IT roadmap that explains both the SOX IT requirements and the methodology by which new application software can be developed or implemented to comply with SOX.
The Management Bridge
This report is a perfect bridge between what upper management needs to know about their IT systems and what IT managers need to plan for to meet the needs of their CFOs. In addition, if you are a developer or IT administrator, the report will help you understand the framework by which the entire IT organization can be measured. It explains the philosophy behind SOX-compliant control of information systems and the means by which IT organizations can begin to exert their influence. I highly recommend that every IT employee--especially those in development--read this document. It will clear the air of SOX-compliance misinformation and explain the significance of what IT will be asked to do in the future.
Ongoing and Future Benefits for IT Organization
To be certain, SOX compliance is still a long, hard road for most IT organizations (a recent survey by Ziff Davis showed that only 37% of organizations were going to make the deadlines.) But, in the long run, IT will see a number of internal benefits that seemed a bit remote before SOX was written into law.
First of all, Section 404 of SOX stresses the importance of a centralized IT infrastructure that controls the sources of information by which the company does business. This requirement, in and of itself, will hike the visibility of IT in helping to determine the business processes it can support.
Secondly, as IT implements the auditing requirements, there will be opportunities to retire a lot of legacy systems and to finally structure many of the ad hoc user systems that grew topsy-turvy as companies automated in the late 1990s.
Finally, implementing the SOX auditing functions locally will require hands-on manpower--not only to install new systems of information, but also to monitor and control the growth of systems in an ongoing fashion. This will help stave off some of the momentum to outsource development because financial liability will require in-house accountability.
From IT to IS (Again!)
How much will this help IT in the long run? If SOX is successful, we can expect to see the resurrection of entire Information Systems departments and a scaling down of the reliance on simple Information Technology departments. Instead of simply implementing "information technology" in the form of more PCs and isolated empires of departmental servers, we'll once again be asked to implement entire "information systems" that are compliant with SEC and SOX rules and regulations.
That re-transformation of the our skills and services is something we haven't seen since Data Processing turned into Information Systems in the early 1980s. It may slow the development of new systems, but in the process it will help to re-establish in-house standards for SOX-compliant information resources.
Thomas M. Stockwell is Editor in Chief of MC Press Online, LP.