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link to published version: Communications of the ACM, April, 2005

accesses since January 6, 2005

The Two Sides of 'ROI': Return-on-Investment vs. Risk-of-Incarceration

Hal Berghel

It wasn't that long ago that IT security was viewed by CEOs and CFOs as an avoidable, low-priority expense. Many organizations charged into the new millennium with those lingering thoughts. However, Congress and the courts are forcing C-level executives to reconsider. Major motivation is provided by three pieces of legislation:

In this column we'll discuss the implications of the confidentiality, privacy and security aspects of this legislation as it relates to IT within modern organizations. We'll look at each piece of legislation in the order in which it was implemented.


GLB began life as the Financial Modernization Act of 1999. As the title implies, it deals with regulations regarding the scope and inter-relationships of key financial industries -insurance, securities, and banking. A useful summary of all 7 sections of the act may be found at with a useful summary at

Prior to GLB, these three industries were covered by stricter regulations of the Glass-Steagall Act that was enacted in response to the market crash of 1929 and ensuing great depression. GLB sought to relieve these industries of some of the constraints imposed by Glass-Steagall. However, in deliberating GLB, Congress recognized that by enabling new types of mergers and acquisitions of financial institutions and by expanding the range of financial services these institutions could offer GLB would exacerbate consumer privacy problems. It is this latter consideration that concerns us here.

GLB addresses the concern for personal privacy in Title V of the summary mentioned above. GLB authorizes eight federal agencies and the states to enforce three rules regarding financial privacy, the safeguarding of personal information and pretexting. The Privacy Rule requires that organizations which engage in financial activity in the fairly broad sense -even down to the level of tax preparation and financial planning -provide customers copies of their privacy policy and explain their practices on sharing customer information. The Safeguards Rule requires businesses to protect the confidentiality and integrity of personal consumer information. While of great importance, a third GLB privacy provision on "pretexting," or the use of personal information under false pretenses, falls outside of the scope of this column (see below).

The business part of GLB as far as we're concerned is the Privacy and Safeguards Rules. The bottom line is taken directly from Sec. 6801 of the legislation:

"It is the policy of the Congress that each financial institution has an affirmative and continuing obligation to respect the privacy of its customers and to protect the security and confidentiality of those customers' nonpublic personal information ... In furtherance of [this] policy, each agency or authority ... shall establish appropriate standards for the financial institutions subject to their jurisdiction relating to the administrative, technical, and physical safeguards -

(1) to insure the security and confidentiality of customer records and information;

(2) to protect against any anticipated threats or hazards to the security or integrity of such records; and

(3) to protect against unauthorized access to or use of such records or information which could result in substantial harm or inconvenience to any customer."

The intent of 6801 seems straightforward: organizations that engage in financial activity must respect the privacy of customer data and undertake such measures as are necessary to protect them while in their care, custody and control. If that doesn't grab the attention of C-Level executives, the penalties provisions meted out by the 8 federal agencies certainly will. But remember that our focus is on IT! The real attention grabber is the implication of GLB on IT and the CIO.

To illustrate, one of the first successful GLB prosecutions was against Nationwide Mortgage and Sunbelt Lending Services for violation of the Safeguards Rule. Nationwide and Sunbelt were found remiss in their implementation of a written information security program, including the absence of a single contact for oversight of GLB compliance, the absence of a risk assessment, the absence of safeguards to control the risks, and failure to require service contracts to abide by the same security standards. In whose organizational lap do these responsibilities typically fall? -- The CIO. By default, GLB ports many of the more career-threatening responsibilities over to the CIO. The CIO may not be mentioned in the Act itself, but rest assured that gravity being what it is, the CEO and CFO will make sure that the CIO will play a prominent role in the accountability matrix.

An even more dramatic example is the Petco prosecution for violation of the Privacy Rule. The FTC claimed that security flaws in the company's Website, , violated the privacy promises it made to its customers by not applying "reasonable and appropriate measures to prevent commonly known attacks by hackers..."

The privacy promise was:

"At, protecting your information is our number one priority, and your personal information is strictly shielded from unauthorized access.

Entering your credit card number via our secure server is completely safe. The server encrypts all of your information; no one except you can access it."

The FTC interpreted this to mean that the typical customer has every right to expect that providing credit card information to Petco via its Website is essentially risk-free. Such was not the case. Petco was prosecuted because its Website was open to SQL injection attacks. The FTC concluded that it was Petco's responsibility to ensure that "reasonable and appropriate security measures" were taken to guard against well-known hacks. Again the issue of lap-targeting arises. If your organization is prosecuted for having a Website that is vulnerable to hack attacks, which C-Level executive do you think is going to take the fall?

The implications for the CIO and IT are onerous. Under GLB, due diligence now includes state-of-the-art expertise in hacking, malware, and social engineering. These are not skills over which the typical CIO has mastery.

GLB may be distinguished from prior legislation in many ways. Breadth and scope of purpose and the distribution of authority for administration and enforcement come immediately to mind. However, for those of us in IT, the organizational obligations to protect consumer privacy, and the requirement to completely and accurately disclose the organization's policies, may be the most important from the point of view of long-term job security. GLB not only protects and safeguards non-public information held in trust, it also places the CIO, CSO, and IT management in the hot seat for covering the proverbial organization's assets. We'll see below that this is a becoming a common theme.


Though HIPAA pre-dates GLB by three years, its implementation is so far- that some of its provisions still haven't been put in force.

Operationally, HIPAA applies to electronic protected health information (EPHI) as it relates to covered entities (CEs). Roughly, EPHI covers electronic health records that contain information that can uniquely identify individuals, and CEs are the folks that routinely transmit EPHI as part of their normal operation (e.g., health care providers, insurance companies, etc.).

As with GLB, the HIPAA statute is fairly broad-based in its objectives. It has 5 goals:

Title I: Portability
Title II: Administrative Simplification
Title III: Tax Benefits
Title IV: Group Health Insurance
Title V: Revenue Offsets

Of these, only Title II is relevant to our present discussion.

To quote the HHS summary, the purpose of Administrative Simplification is:

  1. to protect and enhance the rights of consumers by providing them access to their health information and controlling the inappropriate use of that information;
  2. to improve the quality of health care in the U.S. by restoring trust in the health care system among consumers, health care professionals, and the multitude of organizations and individuals committed to the delivery of care; and
  3. to improve the efficiency and effectiveness of health care delivery by creating a national framework for health privacy protection that builds on efforts by states, health systems, and individual organizations and individuals.

In short, the purpose is to protect the privacy of the data, secure the storage and transmission of the data, and create viable transaction and code sets to exchange information between CEs. These three goals are informally referred to as The Privacy Rule, The Security Rule, and the Transactions and Code Set Rule (see references, below). While we'll limit subsequent discussion to the Security Rule, it should be understood that the Privacy Rule has been in effect since April 14, 2003 and carries civil and criminal penalties up to $250,000 and 10 years in prison (see ), and the Transactions and Code Set Standards have been in place since August 17, 2000 (see )

With the exception of small CEs, the Security Rule will take effect about the time that this column appears in print, April 21, 2005 .If you're in the health care industry and you haven't implemented the HIPAA Security Rule by the time you read this, you're probably in deep yoghurt.

The logic of the HIPAA Security Rule seems baroque at first glance. It consists of three safeguards and two requirements, which are further subdivided into standards and implementation specifications. Standards are required while implementation specifications may either be required or "addressable." An addressable specification is one that requires attention and a documented decision to implement, not implement or provide some alternative. The reason for the vagueness is that HIPAA's Security Rule is technology-neutral. As long as an organization can legally achieve the desired subgoal, the means are essentially irrelevant.

The three safeguards with some of their attendant standards appear in the Figure below:

Safeguard 1: Administrative
  Standard 1: Security Management
    Implementation Specification 1: Risk Analysis (required)
Implementation Specification 2: Risk Management (required)
Implementation specification 3: Sanctions (required)
Implementation Specification 4: Information System Activity Review (required)
  Standard 2: Assigned Security Responsibility
  Standard 3: Workforce Security
    Implementation Specification 1: Workforce Authorization and Supervision (addressable)
Safeguard 2: Physical
  Standard 1: Facility Access Controls
    Implementation Specification 1: Contingency Operations (addressable)
Implementation Specification 2: Facility Security Plan (addressable)
Implementation Specification 3: Access Controls and Validation (addressable)
Implementation Specification 4: Maintenance Records (addressable)
  Standard 2: Workstation Use
  Standard 3: Workstation Security
  Standard 4: Device and Media Controls
    Implementation Specification 1: Disposal (required)
Implementation Specification 2: Media Re-use (required)
Implementation Specification 3: Accountability (addressable)
Implementation Specification 4. Data Backup and Storage (addressable)
Safeguard 3: Technical
  Standard 1: Access Control
    Implementation Specification 1: Unique User ID (required)
Implementation Specification 2: Emergency Access Procedures (required)
Implementation Specification 3: Automatic Logoff (addressable)
Implementation Specification 4: Encryption and Decryption (addressable)
  Standard 2: Audit Controls
Requirement 1: Organizational
Requirement 2: Policies, Procedures and Documentation

FIGURE 1: Selected Provisions of HIPAA (adapted from "HIPAA Security Implementation")

A brief illustration will make this easier to put into perspective. Safeguard 2 of the HIPAA Security Rule requires that certain minimal standards for physical security of an organization's information assets. This is spelled out in four standards that drill down from the access to the facility, through the use and security of the workstations in use, to the protection of storage devices and media.

The standard for the Device and Media Controls is to "Implement policies and procedures that govern the receipt and removal of hardware and electronic media that contain electronic protected health information into and out of a facility, and the movement of these items within the facility." What would that entail? Well, for a start it entails the disposal of peripherals and media that minimizes unauthorized access. This is required by HIPAA. For a barometer of what techniques are acceptable, we look to industry standards and practices. Cross cut shredding of removable media such as CDs and DVDs is probably acceptable, as would be the melt down of a hard disk into its constituent elements. However, merely erasing files operating system file managers would not be considered compliant. Software data recovery tools exist that can recover such data effortlessly. In fact, erasing data with multiple pass overwrites (e.g., using the cipher /w utility in Windows) might also fall below the compliance threshold because hardware data recovery tools recover magnetic residue from erased disk surfaces. However, that doesn't mean that the disks must be destroyed. HIPAA is accommodating of exceptions like hard disk reuse/repurposing, as long as the spirit of the law is followed. In such a case, documented chain-of-custody with a multipass disk erasing tool that complies with some government standard, say DOD 5220 22-M would likely be considered acceptable. We could then document that our disk cleaning policy complies with the latest DOD standard for the prevention of both hardware and software recovery of data. Again, HIPAA does not specify how we dispose of Devices and Media, but just that we do so in such a way that the information therein is protected from unauthorized view. One would approach other standards and implementation specifications similarly.

A quick review of the fragment of HIPAA Safeguards in Figure 1 will reveal that there are many slips twixt cup and lip in the compliance world, most of which falls within the purview of the CIO. What happens if the data on one of our elusive, data rich, partially wiped disk drives gets posted on the Internet (this has happened). Or suppose that some spyware accompanies a gratuitous Web access and shares confidential data. Or imagine that one of our users walk away from an unprotected, unlocked workstation and a bystander gains access to a health record. These breaches all fall within the CIO's IT domain. As with GLB, they also carry a stiff penalty. Civil penalties for HIPAA violations range from $100-$25,000, and criminal penalties escalate to $250,000 fine and/or 10 years in prison.

The implications for the CIO and IT are onerous. Under HIPAA, due diligence now includes state-of-the-art expertise in hacking, malware, and social engineering. These are not skills over which the typical CIO/CSO has mastery. The good news is that you've got most of April, 2005 to get it together.


SOX was the Congressional response to the corporate and accounting scandals of the past that basically spans the fifteen year interval between the Salomon Bros. T-Bond trading scandal on one end, and Enron and MCI-Worldcom on the other. Congress is making a definite statement with SOX: the "sleight-of-hand earnings" accounting philosophy that crept into U.S. business, and the C-Level excuse "I just can't recall," just won't cut it any more.

While no one would accuse Congress of being quick to act, by all admissions they did act decisively with SOX. The Preamble to H.R. 3763 makes it clear that SOX seeks "to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the security laws." SOX attempts to achieve this goal by setting higher standards for corporate governance and accountability, financial disclosure and the practice of public accounting.

SOX is actually addressed to the CEO and CFO. Under Section 302, both have to certify in each annual or quarterly report that

  1. they reviewed the report,
  2. the report does not contain any untrue statements or omissions of a material fact,
  3. the financial statements are accurate,
  4. they assume responsibility for the report and internal controls,
  5. they have disclosed all material facts and deficiencies to the auditors, and any fraud, whether or not material, that involves management or employees who have a significant role in the internal controls
  6. they have listed any relevant changes in internal controls or other factors that would reveal deficiencies or material weaknesses.

That doesn't leave much wiggle room. The CEO and CFO have to both tell the truth in the reports, rat out their greedy colleagues who have engaged in fraudulent behavior, and then take responsibility for everything. The list of penalties in Title IX of SOX is going to make the corporate top-down looters squirm a bit. For example, section 1350 provides a penalty of up to $1,000,000 and 10 years imprisonment for garden variety non-compliance, and $5,000,000 and 20 years for willful non-compliance. This is not to mention the "Fair Funds Provision," by means of which the courts may elect to hold executives who make false disclosures personally liable to their investors.

But forget all that, we want to see where the CIO fits in. We don't have to look far. The CIO is drawn into SOX at virtually every turn.

Let's start with section 302. How would "management and employees" most likely perpetrate the fraud? It's probably not by pawning the office furniture. Nor is it likely to be hauling out pickup loads of cash from the vault. In all likelihood, an insider fraud would involve some compromise of a computer or network system that is under the control of - you guessed it - the CIO.

Additionally, Section 404 of SOX requires that the internal control reports must "(1) state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting, and (2) contain an assessment... of [its] effectiveness." Well who is in charge of the data on which these reports were based? You guessed it, the CIO. So section 404 of SOX brings the CIO to the certification table. Even though the CIO may not have written the annual or quarterly report, if the it is found deficient or in error because of inaccurate corporate accounting or data processing, that fact is unlikely to be overlooked by the CEO and CFO.

What is more, section 409 of SOX holds that organizations are expected to disclose material information to the public "on a rapid and current basis such additional information ... as is necessary or useful in the protection of investors and the public interest." Let's think about this for a moment. What division of the organization has the capability of reporting disclosures like this in real time? Again, this has the CIO and IT written all over it.

Because electronic data processing is a staple of modern business and industry, provisions of SOX impose considerable responsibilities on the modern CIO. SOX makes it the CIO's responsibility to put fraud detection systems in place, prevent inside compromises of the IT environment, block unauthorized access to trade secrets and confidential information, secure the information infrastructure from external attack, determine the effectiveness of IT control mechanisms, perform routine IT security audits, and other IT activity that might compromise investor equity. By any measure this is an enormous responsibility.


I've drawn attention to HIPAA, GLB and SOX to show how the burden of risk management has slowly but surely moved toward the CIO. Even in the case of SOX, where the required certifications are signed by the CEO and CFO, a great deal of the responsibility for accurate reporting falls on the CIO. The challenge for the modern organization will be to find CIOs who are adequate to the challenge, or the entire C-level leadership team could end up bunking next to Martha Stewart in the brownie barracks. Ask yourself if your CEO could withstand the indignity of losing the clean cell award or, as in Martha's case, the jail decorating competition!

These three laws will change the role of the CIO forever, I predict. Where ten years ago their biggest fear was obsolescence and technology inversion, now they face jail time. The CIO position is not a good career goal for the ulcer prone. But, by the same token, this is a real opportunity for top-quality upper managers with superior IT security skills to move into an executive suite.

HIPAA, GLB, and SOX are not cast in concrete. As I write this, there are detractors who feel that they are draconian and prohibitively invasive. Legislative mandates mirror the swing of the pendulum, and it is possible, if not likely, that some provisions of this and future legislation will soften the treatment of executives who have steered their corporate ship aground. That said, the one part of HIPAA, GLB and SOX that is likely to remain in nearly full force is corporate and organizational accountability. And in the new millennium, accountability amounts to record keeping, fraud prevention and reporting, data security, risk management and mitigation in the IT department.

My advice to all CIOs is to make sure that your skills are adequate to the challenge, that your IT house is in order, and then request a significant increase in your compensation plan for all of the new risks that have come your way!


At this writing, the primary Government resource for detailed information regarding legislation is Thomas ( which has an interface that is as awkward and unintuitive as a 10-year old handheld GPS. However, the Library of Congress promises a "new look" with a streamlined interface and unified search capabilities January 4, 2005 -too late for this column, but hopefully implemented and effectively debugged by the time this column goes to press. Give it a try. If it works, it may provide one-click shopping for all of your HIPAA, GLB and SOX info-needs. Anticipate information overload if you use Google. As of this writing, there are 4.5 million hits for "HIPAA," 216,000 for "Gramm-Leach-Bliley," and 1.86 million for "Sarbanes-Oxley."

Other resources include:

Background information on Gramm-Leach-Bliley may be found from the Senate's Banking, Housing and Urban Affairs Committee Website at . See also the GLB link on the Federal Trade Commission's Privacy Website at that also includes links to other important privacy legislation. See for a list of the federal agencies involved, and the interagency form used for compliance. A discussion of Title V An independent overview of Gramm-Leach-Bliley may be found on the Electronic Privacy Information Center at .

Details concerning the Nationwide/Sunbelt and Petco prosecutions may be found on the FTC GLB site . Information on Web hijacking may be found in this column in the April, 2002 CACM).

Health and Human Services has its own HIPAA Website at , complete with regulation and statute summaries, compliance information, access to online information, and related links. Most important, there are links on this page to the Privacy Rule, the Security Rule and Transactions and Code Set Standards in a variety of downloadable formats. A copy of the actually document of Public Law 104-191 may be found at The best overview of HIPAA that I know of is "HIPAA Security Implementation", published by SANS Press, August, 2004. A revision is likely by the time this column goes to press. This is a "must have" if you're in IT in a CE.

Sarbanes-Oxley has it's own Website at . A PDF copy of H.R. 3763, along with useful summaries and commentary may be found on the Financial Executives Website at .

Pretexting is a huge societal problem, most especially because it may lead to identity theft. GLB makes it illegal to use any of the following instruments to obtain customer information:

  1. false, fictitious or fraudulent statements,
  2. forged, counterfeit, lost, or stolen documents,
  3. ask anyone else to do 1. or 2.

While GLB and the federal identity Theft and Assumption Deterrence Act make such activities federal crimes, they have yet to effectively derail identity theft -now the leading white collar crime. We'll deal with this in a forthcoming column. Interested readers should visit our Identity Theft and Financial Fraud Research and Operations Center Website at