Thursday, September 10, 2015

BNY Mellon Software Glitch: Cost of IT Control Failure

In the previous post on the BNY Mellon's technology woes, we explored what the company did right as well as the overall need for independent evaluation of the technology that runs the Information Age. In this post, we explore the costs and consequences of the breach.

One of the challenges for putting in controls around information integrity is that it is a hard sell: what's really the value of accurate information? This is in contrast to something like information security where it is also hard sell, but much easier. The reason? When an information security breach occurs, it is largely to access something of value that can be monetized. The Poneman Institute puts this cost at approximately $174 per record.

Consequently, it is easier for someone to go to the CEO/CFO and explain how tightening controls around information security will protect the company's bottom line. Furthermore, information security breaches are something that has entered the mass consciousness within the business community: SunGard was quick to reassure everyone that the issue affecting BNY Mellon's accounting software was NOT attributable to "any external or unauthorised systems access".

When making the business case for controls over information, it can be challenging to show how the control will lead to savings in terms of "decision failure", i.e. the cost of making the wrong decision due to unreliable information. Let's face it: most companies are willing take big risks on their information by continuing to rely on spreadsheets that have an error rate of 88%. Furthermore, as highlighted by this Protiviti study, internal auditors understand the information integrity challenges but are not getting the funding to tackle them.

So the incident at BNY Mellon is rare occurrence where something that is mis-priced can actually lead to costs. As noted in the Wall Street Journal:

"A software glitch this week at fund administrator Bank of New York Mellon Corp. caused difficulties in pricing many mutual funds and exchange-traded funds, prompting some fund sponsors to publish lists of funds whose stated asset values were erroneous.

What can you do if one of your funds is on the list, meaning you may have overpaid for shares?

Reach out to your fund company and ask for a refund. They don’t have to give you one but firms may do so because of their often long-term relationships—ones they want to keep—with investors, analysts said."

The other costs include:

Of course we won't know the full cost until, the regulatory probe finishes and the publish their findings or the cost was material and this shows up in the financial statements. Regardless, organizations should be proactive in ensuring that sufficient technology controls are in place and that these types of risk are controlled. 

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