Utilizing a Quantitative

Risk Approach

Glenn R. Wi lson

TO DRIVE STRATEGIC IT COMPLIANCE

VA SCAN OCTOBER 3, 2013

Classifying IT Risk

Data risk

• Breach, loss, corruption, unavailability

Operational risk

• Performance degradation, denial of service, outages

Non-compliance risk

Common IT Risks Unauthorized data access and changes

Data loss, corruption, unavailability

Denial of service attacks, malware

Physical device failure, theft or destruction

Inadequate system capacity, network architecture

Poor application coding, failed implementations

Inadequate change management controls

Regulatory compliance violations

Common IT Risk Impacts Reduced customer satisfaction permanent customer loss

Business process interruption lost productivity / revenues

Penalties, fines, sanctions, reputational damage, personal liability

Fraud, identity theft, loss of financial assets

Failure to achieve core business objectives

What are the common themes? Mission risk Monetary loss Legal liability

Why Comply?

Compliance reduces exposure to penalties and litigation

Compliance provides a baseline for risk management

Compliance is integral to proper corporate governance

Compliance requires a business to adopt best practices

Compliance promotes organizational effectiveness

What does it mean to be “in compliance”?

How do you know when you have achieved it?

How do you sustain a state of compliance?

What do we have to comply with?FERPA, HIPAA, HITECH, GLBA, SOX, PCI DSS, FISMA, ECPA, COPPA, EFTA, Bank Secrecy Act, USA Patriot Act, Basel II Accord …

The short answer: “industry standards, federal, state and local laws”

How many organizations put this statement into their policies and aren’t exactly sure what they are obligating themselves to?

In Compliance

Approaching Compliance “Compliance should be the floor, not the ceiling, of your efforts” “It’s the

fundamental layer for every security program.” (Rafael Diaz, CISO of the State of Illinois, quoted by Security Magazine from a Nov 2012 Chicago SC Congress event of SC Magazine)

Other speakers warned against using compliance as the be-all-end-all of an information security program.

“Compliance is a great hammer – if you have a nail”. “Don’t use a hammer if you have a screw”. “Using a FAIR report (Factor Analysis of Information Risk), which can translate the risk into real dollar amounts, making it easier to sell to the C-suite”. (Ward Spangenberg, CISO of Pearl.com, formerly of online gaming giant

Zynga, quoted by Security Magazine from a Nov 2012 Chicago SC Congress event of SC Magazine)

Source: http://www.securitymagazine.com/blogs/14-security-blog/post/83788-cisos-look-past-compliance-for-new-solutions-to-old-problems

Successfully Achieving Compliance

Know your organization’s specific compliance exposure

Know the processes by which its objectives are achieved

Gain executive level support

Obtain managerial and staff commitment

Where do you start?

The invariable starting point is…

Business Impact Assessment

Compliance is not equal to Risk Management (although achieving compliance does mitigate risk)

Can achieving compliance create risk? Yes. What kinds? Operational, Financial, Legal

Failure to achieve compliance is itself a risk category

Realities of Compliance

Drivers of Compliance What is the primary driver of organizational compliance?

Non-compliance risk – Penalties, sanctions, liabilities

Other risk drivers: Financial, Reputational, Operational & Individual risk

Who primarily drives organizational compliance?

Board? Executive Management? Compliance Officers? Internal Auditors? Middle Management?

Effective programs are driven by a culture of compliance and align withthe organization’s strategic planning

Degrees of Compliance To what extent should an organization ‘be in compliance’

with a given regulatory requirement or industry standard?

100%? 80%? 50%? 0%?

How fast should an organization achieve compliance?

How long should an organization be in compliance?

How far? How fast? How long?

Ris

k

Compliance

How does risk vary with compliance?

Risk Versus Compliance

Greater compliance can decrease risk at many levels

Greater compliance may increase risk at many levels

Risk Mitigation Versus Cost

What costs may be associated with risk mitigation?

Financial resources Human resources Competitive advantage loss

Ris

k

Cost

Diminishing Return

“Selling” Compliance

The need for compliance sells itself

The degree of compliance needs to be driven to

levels appropriate for the organization.

Compliance costs can be expensive at many levels

Risks are well known but often not well understood

Do not overstate the merits or consequences

Do determine and promote impact awareness

Quantifying Risk To Drive Compliance

Are numbers persuasive? Join now for only $19.95 per month 4 out of 5 dentists recommend sugarless gum More doctors smoke Camels than any other cigarette (133,597 surveyed) Gartner Group says that 43 percent of companies were immediately put

out of business by a “major loss” of computer records, and another 51 percent permanently closed their doors within two years — leaving a mere six percent “survival” rate; (homelandsecuritynewswire.com Feb 19, 2010)

Qualitative

• Faster, not data intensive• More cost-effective or is it? It does not provide numerical impact making cost benefit analysis difficult• Analysis based on likelihood and impact • Results stated in terms of low, med, high or similar numerical scale• Good for prioritizing risk and identifying high risks that need immediate mitigation

Quantitative • Data intensive simulation and decision analysis• Results stated in terms of probabilities and costs• Primary advantage is the cost benefit analysis for efficient use of resources• Results that are not clear will be qualitatively determined

Not every risk requires or is suited to quantitative analysis Define a criteria for meaningful quantitative analysis of your organization’s risks Identify technique(s) to be utilized and develop methods for consistent application Define the expected outputs of the chosen quantitative analysis methods

Qualitative vs Quantitative Analysis

Like

lihoo

d

ImpactLow Med High

Low

Med

Hig

h

Risk / Impact Models

Which Likelihood - Impact pairs should be analyzed?

Risk / Impact Assessments Inherent risk = high (9/10), Residual risk = medium (6/10) Risk = (Probability) x (Impact) More scientific ‘closed form’ methods exist using Convolution and

Fourier Transforms which require large amounts of data to calculate frequency and severity distributions to obtain an aggregate losses (expected, unexpected, confidence levels)

‘Open form’ solutions such as Monte Carlo simulation and Latin Hypercube sampling that evaluate scenarios for frequency and severity

of losses by generating random numbers using each type of distribution (identified using actual loss data).

Risk / Impact Distribution Calculations

Events and

Losses

Risk Loss Matrix

Frequency &

Loss ImpactDistribution

s

Value

At Risk

Calculation

Periodic

Aggregate Loss

Distribution

PROB IMPACT RISK20% $5,000.00 $1,000.00 3% $25,000.00 $750.00

10% $12,000.00 $1,200.00 7% $9,000.00 $630.00

35% $75,000.00 $26,250.00 Pn% $In $Rn

𝑓 (𝑥 )=𝑎0+∑𝑛=1

∞

(𝑎𝑛cos𝑛𝜋 𝑥𝐿

+𝑏𝑛sin𝑛𝜋 𝑥𝐿 )

VaR = VaR12 + VaR22 + 2 * C2* VaR1 * VaR2

PeriodicAggregate Loss

EF = (((TP×(C/E))×(VF×AP))/100)

Risk / Impact Calculation Models

EF: Exposure factor (% loss of asset)TP: Threat probabilityC: Criticality factorE: Effort requited to exploit the threat

Risk Exposure = ALE = SLE * AROALE: Annualized Loss ExpectancySLE: Single Loss ExpectancyARO: Annual Rate of Occurrence

Risk Score = log(10Risk Score1+10Risk Score2)Likelihood Score =log(10Likelihood Score1 + 10Likelihood Score2)Consequence Score = Risk Score – Likelihood Score

Σan: Sum of the asset riskΣram: Risk sum for each combination of criterion,

vulnerability and threat per assetCm: Criterion value for the current combinationVm: Vulnerability risk level for current combinationOm: Threat occurrence for current combination

Adrian Munteanu, Alexandru Ioan Cuza University, Iasi, Romania Information Security Risk Assessment: The Qualitative Versus Quantitative DilemmaManaging Information in the Digital Economy: Issues & Solutions 228

Abbas Asosheh, Bijan Dehmoubed, Amir Khani Tarbiat Modares University Tehran, IranA New Quantitative Approach for Information Security Risk Assessment2009 IEEE

Xun Guo Lin & Richard JarrettDivision of Mathematical and Information SciencesA Practical Approach to Quantitative Risk AssessmentCanberra & MelbourneRisk Conference, Wellington, 2009

Return On Security Investment (ROSI) – A Practical Quantitative ModelWes Sonnenreich, Jason Albanese and Bruce StoutSageSecure, LLC 116 W. 23rd St., 5th Floor, NY, NY 10011 USAJournal of Research and Practice in Information Technology, Vol. 38, No. 1, February 2006

Risk = Σan (Σram (Cm*(Vm*Om)))

Practical ConsiderationsWhat are the primary objectives of quantifying risk to drive compliance? To quantify in whole or in part losses, expenses and liability

(Some quantification is better than none) To use the methods and results to inform executive decision makers

What are the most useful numbers to consider? Loss Expectancies (single and recurring) Occurrence (actual or estimated) Asset Value (tangible and intangible) Recovery Costs Long Term Costs

Establishing Impact Scales Risk appetite is organization specific

with dependencies on:

Industry Business Mission Capitalization and Cash Flow Board and Executive Management

Define risk / loss levels in terms of:

Monetary value Liabilities / penalties Mission specific factors

IMPACT LOSS $ SCOREInsignificant $10,000 1

Minor $100,000 2Moderate $500,000 3

Severe $1,000,000 4Disastrous $10,000,000 5

IMPACT LOSS (Units) SCOREInsignificant 500 1

Minor 1,000 2Moderate 2,500 3

Severe 5,000 4Disastrous 10,000 5

Is this a valid quantitative analysis?

Annual threat probability 75% Incident cost $1,000,000 Weighted cost $750,000Annual counter cost $600,000Cost benefit $150,000

Case Specific Factors

What are the case specific factors?

Risk type and nature Basis for numeric values Cost types considered

Compliance Checklists Strengths Identifying gaps and deficiencies (a very necessary activity)

Weaknesses× Prioritizing remediation of deficiencies× Tracking corrective actions× Cost management× Resource deployment× May not result in value to the organization× Does not ensure adequate security or risk mitigation× May lead to an overburden of overlapping / unnecessary controls

Making The Case

How related or specific is the compliance type to your business?

Exactly what are the associated compliance risks?

What are the expected costs and impacts to comply?

How much return will be realized in reduction of risk or increased effectiveness?

Numbers are most persuasive when they are validly derived, understandable and relevant to a given situation. They can be mixed with qualitative factors.

The new XYZ federal ecommerce regulatory act will go into effect in 3 months. Even though your organization derives significant revenue from ecommerce activities, the new act is not on the radar of executive management even though you first brought the need to comply to their attention 18 months ago and again 3 months ago. You are not directly responsible for ecommerce revenues but are responsible for operating the organization’s ecommerce system within ‘industry standards, applicable federal, state and local laws. Major infrastructure reconfiguration and architectural changes are needed to comply. How can you re-approach the subject with executive management to gain the necessary support?

! According to the last quarter financials, $6k per hour or 46% of revenues come from ecommerce activities.

! There is a new threat vector that we have never faced before and there is a high probability that within months our system will be exploited if it is not hardened to the new standard. The IDS upgrade will cost $200k, and to comply within 3 months it will require 300 staff hours and $240k off peak ecommerce downtime.

! If we do not act and an incident occurs, it will likely be viewed as “willful negligence” and we would incur the maximum fine of $10k a day plus average clean up costs of $80 per affected record of which we have 2 million. Our ecommerce operation could be disrupted or suspended by an external investigation for 7-10 days.

! Every week that this project is delayed will cost an additional $20k in peak downtime and $10k in shift differential compensation.

Example – XYZ Act Compliance

Case 1 – PCI DSS Essential Elements of Compliance: Secure collection, handling, storage and transmission of card-

holder data, quarterly system scan by a PCI SSC Approved Scanning Vendor (ASV), annual SAQ

Non-Compliance Risk: The payment brands may, at their discretion, fine an acquiring bank $5,000 to $100,000 per month for PCI compliance violations which will pass to the merchant. Bank will also most likely either terminate your relationship or increase transaction fees.  PCI is not a law.

Compliance Risk: Potential adverse effects on business processes and IT workload

Added Value: Mitigate risk of cardholder data breach, improved IT vendor contractual relations

Quantifying Risk Factors

Payment card revenue (gross and relative amounts) Payment card transactions (gross and relative amounts) Current transaction and processing fees Cost to achieve compliance Recurring costs

Case 2 – Sarbanes Oxley (SOX) Essential Elements of Compliance: Publicly traded companies must maintain all controls needed

for accurate financial reporting. Financial reports require an internal controls report.

Non-Compliance Risk: Exchange de-listing, loss of investor confidence, loss of liability insurance. Incorrect submissions carry up to a $1 million fine and 10 years in imprisonment. Willful incorrect violations allow for up to $5 million fine and 20 years imprisonment.

Compliance Risk: Drain on available resources, business process changes, IT requirements are not well defined and attempts to comply may not pass an external audit.

Added Value: More reliable financial and asset controls, increased market capitalization

Quantifying Risk Factors

Stock ownership Current market capitalization Industry sector volatility

Case 3 – E911 Essential Elements of Compliance (Virginia): All PBX/MLTS installed after July 1, 2009 must

provide ANI and ALI to the local PSAP for 911 calls unless alternate methods of notification have been approved. (Article 8. Emergency Calls on Multiline Telephone Systems.§ 56-484.23)

Non-Compliance Risk: (Varies by state) Fines, OSHA sanctions, worker’s compensation claims caused by safety violation, common law liability, reputational damage

Compliance Risk: Significant cost to upgrade or replace existing phone system, business interruption, transient risk of media relation issues

Added Value: Employee trust, increased productivity, public goodwill, decreased liability

Quantifying Risk Factors

Age of the existing phone system Cost to upgrade versus replace Number of facilities, geographic distribution and occupancy habits Case law

Case 4 – Gramm Leach Bliley (GLBA) Essential Elements of Compliance: Protect consumers’ personal financial information held by financial

institutions. There are three principal parts to the privacy requirements: the Financial Privacy Rule, the Safeguards Rule and pretexting provisions. The safeguard rule requires a plan that “contains administrative, technical, and physical safeguards” to “insure the security and confidentiality of customer information; protect against any anticipated threats or hazards to the security or integrity of such information; and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.

Risk of Non-Compliance Risk: Fines up to $100,000 for each violation, Personal liability to officers and directors of up to $10,000 for each violation, Criminal penalties include imprisonment for up to 5 years. More serious willful violations call for the fine will be doubled and imprisonment for up to 10 years. (Monetary losses (immediate and future), reputational damage, personal liability)

Risk of Compliance: Business process and operational change management

Added Value: Customer relations, decreased legal liability

Quantifying Risk Factors

Implementation / recurrent costs versus volume / revenue associated with qualifying financial activities

Comments? Questions?

Glenn R. Wilson, IT Audit ManagerOld Dominion University, Norfolk, VA

gwilson@odu.edu

757-683-3202

Thank you!