Our Chapter recently got a question from a reader of this blog about data privacy; specifically she asked about the Payment Card Industry Data Security Standard (PCI DSS) and whether compliance with that standard’s requirements by a client would provide reasonable assurance that the client organization’s customer data privacy controls and procedures are adequate. The question came up in the course of a credit card fraud examination in which our reader’s small CPA firm was involved. A very good question indeed! The short answer, in my opinion, is that, although PCI DSS compliance audits cover some aspects of data privacy, because they’re limited to credit cards, PCI DSS audits would not, in themselves be sufficient to convince a jury that data privacy is adequately protected throughout a whole organization. The question is interesting because of its bearing on the fraud risk assessments CFE’s routinely conduct. The question is important because CFE’s should understand the scope (and limitations) of PCI DSS compliance activities within their client organizations and communicate the differences when reviewing corporate-wide data privacy for fraud prevention purposes. This understanding will also tend to prevent any potential misunderstandings over duplication of review efforts with business process owners and fraud examination clients.

Given all the IT breeches and intrusions happening daily, consumers are rightly cynical these days about businesses’ ability to protect their personal data. They report that they’re much more willing to do business with companies that have independently verified privacy policies and procedures. In-depth privacy fraud risk assessments can help organizations assess their preparedness for the outside review that inevitably follows a major customer data privacy breach. As I’m sure all the readers of this blog know, data privacy generally applies to information that can be associated with a specific individual or that has identifying characteristics that might be combined with other information to indicate a specific person. Such personally identifiable information (PII) is defined as any piece of data that can be used to uniquely identify, contact, or locate a single person. Information can be considered private without being personally identifiable. Sensitive personal data includes individual preferences, confidential financial or health information, or other personal information. An assessment of data privacy fraud risk encompasses the policy, controls, and procedures in place to protect PII.

In planning a fraud risk assessment of data privacy, CFE’s auditors should evaluate or consider based on risk:

–The consumer and employee PII that the client organization collects, uses, retains, discloses, and discards.
–Privacy contract requirements and risk liabilities for all outsourcing partners, vendors, contractors, and other third parties involving sharing and processing of the organization’s consumer and employee data.
–Compliance with privacy laws and regulations impacting the organization’s specific business and industry.
–Previous privacy breaches within the organization and its third-party service providers, and reported breaches for similar organizations noted by clearing houses like Dunn &
Bradstreet and in the client industry’s trade press.
–The CFE should also consult with the client’s corporate legal department before undertaking the review to determine whether all or part of the assessment procedure should be performed at legal direction and protected as “attorney-client privileged” work products.

The next step in a privacy fraud risk assessment is selecting a framework for the review.
Two frameworks to consider are the American Institute of Certified Public Accountants (AICPA) Privacy Framework and The IIA’s Global Audit Technology Guide: Managing and Auditing Privacy Risks. For ACFE training purposes, one CFE working for a well know on-line retailer reported organizing her fraud assessment report based on the AICPA framework. The CFE chose that methodology because it would be understood and supported easily by management, external auditors, and the audit committee. The AICPA’s ten component framework was useful in developing standards for the organization as well as for an assessment framework:

–Management. The organization defines, documents, communicates, and assigns accountability for its privacy policies and procedures.
–Notice. The organization provides notice about its privacy policies and procedures and identifies the purposes for which PII is collected, used, retained, and disclosed.
–Choice and Consent. The organization describes the choices available to the individual customer and obtains implicit or explicit consent with respect to the collection, use, and disclosure of PII.
–Collection. The organization collects PII only for the purposes identified in the Notice.
–Use, Retention, and Disposal. The organization limits the use of PII to the purposes identified in the Notice and for which the individual customer has provided implicit or explicit consent. The organization retains these data for only as long as necessary to fulfill the stated purposes or as required by laws or regulations, and thereafter disposes of such information appropriately.
–Access. The organization provides individual customers with access to their PII for review and update.
–Disclosure to Third Parties. The organization discloses PII to third parties only for the purposes identified in the Notice and with the implicit or explicit consent of the individual.
–Security for Privacy. The organization protects PII against unauthorized physical and logical access.
–Quality. The organization maintains accurate, complete, and relevant PII for the purposes identified in the Notice.
–Monitoring and Enforcement. The organization monitors compliance with its privacy policies and procedures and has procedures to address privacy complaints and disputes.

Using the detailed assessment procedures in the framework, the CFE, working with internal client staff, developed specific testing procedures for each component, which were performed over a two-month period. Procedures included traditional walkthroughs of processes, interviews with individuals responsible for IT security, technical testing of IT security and infrastructure controls, and review of physical storage facilities for documents with PII. Technical scanning was performed independently by the retailer’s IT staff, which identified PII on servers and some individual personal computers erroneously excluded from compliance monitoring. Facilitated sessions with the CFE and individuals responsible for PII helped identify problem areas. The fraud risk assessment dramatically increased awareness of data privacy and identified several opportunities to strengthen ownership, accountability, controls, procedures, and training. As a result of the assessment, the retailer implemented a formal data classification scheme and increased IT security controls. Several of the vulnerabilities and required enhancements involved controls over hard-copy records containing PII. Management reacted to the overall report positively and requested that the CFE schedule future recurring views of fraudulent privacy breech vulnerability.

Fraud risk assessments of client privacy programs can help make the business case within any organization for focusing on privacy now, and for promoting organizational awareness of privacy issues and threats. This is one of the most significant opportunities for fraud examiners to help assess risks and identify potential gaps that are daily proving so devastating if left unmanaged.