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Calculating IT Security Risk

By Ron Lepofsky

Executives who are asked to spend money on larger information security budgets inevitably ask for ROI business cases to defend the funding requests. Although the executive committee is well versed in the downsides associated with security breaches, they still need to quantify the risk, and understand the financial correlation between risk and cost.

Risk is best conveyed to executives in a numeric format for both:

  1. Estimating the category of business risks in a business case.
  2. How well the IT department is progressing with fixing the security vulnerabilities identified in the business case.

Categorizing Security Threats

Security threats are aggressive acts, either performed in person by hacking or in an automated fashion by using aggressive technology agents, which are intended to steal, damage, or to deny access. Security threats are of course, directed at specific targets, with specific information housed on servers and on other network components.

Threats may be categorized into two broad categories—malicious and non-malicious. Examples of malicious threats are well publicized such as viruses, worms, Trojan Horses, external hacking attacks, and denial of service attacks. Non-malicious threats are created without malice or intent, but can result in serious damage. Examples of non-malicious threats are improperly patched software, employees using peer-to-peer file transfer software and instant messaging, allowing firewall rules to become outdated and ineffective, and employees allowing their children to use a corporate laptop to access the Internet.

Generally non-malicious threats are less serious, as they can in theory be dealt with by a corporate security policy and by an IT security policy. Lack of adherence to policy is the bane of non-malicious threats. Malicious threats are generally more serious, as a corporation cannot elicit cooperation from a party with ill intent. While a non-malicious threat may have a lifespan only as long as corporate security policy is not properly enforced, the lifespan of malicious threats are ongoing.

The targets of threats are aptly described by what best practices define as the three pillars of security. The three pillars of information security are "confidentiality, integrity, and availability," as illustrated in Figure 1.

Figure 1: Three Pillars of Security (Targets)

Confidentiality refers to protecting information from being revealed to unauthorized parties. Typically associated with ensuring confidentiality are access controls, user names and passwords, authentication mechanisms, protection from hackers including intrusion detection, protection from malicious code such as Trojan Horses which could steal data, viruses / worms which can cause unauthorized distribution of data, SPAM / phishing, and social engineering.

Confidentiality is categorized in more security- oriented organizations such as military, government, and banks. The more common classifications are: non-classified, authorized for classified, secret, and top secret.

Integrity deals with keeping information accurate and free from unauthorized change. Sarbanes—Oxley, Ontario Bill 198, HIPAA and other confidentiality regulations, and NERC 1300 are all strong business drivers for ensuring data remains untainted. Security issues surrounding integrity are the same as for confidentiality, with additional attention paid to regular monitoring and auditing of data file logs, audit trails, recovery planning, and enforcing compliance with security and privacy policy.

Availability deals with the ability to access data without any obstruction or delay. Many organizations "live" on their email, ERP, realtime control (i.e. SCADA) systems, and billing systems, and cannot afford to have these systems compromised for any significant time. Security issues associated with availability include physical security, disaster recovery planning, business continuity planning, firewalls and redundant firewalls, plus all the issues associated with confidentiality.

Four Quadrants of Security Threats

To calculate risk of a particular security vulnerability, one must first associate a target with a threat. For instance, a very serious threat to a UNIX system which may come in contact with a Windows target that is not adequately protected with an updated patch presents a combined risk level categorized as "low." Risk is still present, as the insufficiently patched Windows device may be susceptible to other threats.

Figure 2 shows the relationship between threats and risks. Low risk targets are assets that if compromised result in little consequence. Non-malicious threats have no intent. So a combination of a low risk vulnerability with a non-malicious threat generally falls into the "green" low risk quadrant. Similarly high-risk vulnerabilities associated with malicious threats are generally found in the "red" quadrant.

Figure 2: Security Risks vs. Threats

Calculation of Risk

As described in Figure 2, risk can subjectively categorized as high, medium, and low. For purposes of tracking success of implementing repairs to security vulnerabilities, particularly for large enterprise audits with multiple regions or locations, risk can also be quantified as a numerical score. The numeric score is typically calculated using a spreadsheet shown in Figure 3, instead of the quadrant classification of Figure 2.

    Error in financial
report resulting
in SOX breach
Loss of
of billing
Loss of
Loss of
availability of
email service
at head office
... Total
    5 4 5 3    
Trojan horse, worm, virus 5 25   20      
External hack attack 2   8   6    
Employee Internet abuse 4 20     12    
Patches on servers not kept current 4 20 16 20      
Firewall not configured correctly 3       9    
Total   45 28 40 30   143

Figure 3: Score of Risk vs. Targets

As depicted in Figure 3, a numeric value is assigned to each threat and vulnerability identified in a security audit report. The more dangerous the threat, the higher its associated value, and similarly for the risk level for each vulnerability.

In the example of Figure 3, the audit identifies an initial risk score of 143. This figure can then be translated into a percent, where the initial score is translated into 100%, and as risks are mitigated, the reduced score can be expressed either as a number or a reduced percent.

Executives who are monitoring the implementation of the audit recommendations will see the risk score or percent score decrease as the IT staff successfully implements the recommendations. This exercise provides proof that value was accrued for the expenditures to implement the recommendations.

Source of Risk Information

The most dependable source of information for assessing actual threats and risks faced by a corporation is an audit report created by an external, impartial information security audit firm. The firm should conduct the audit from a position of least prior knowledge, and should provide in the report:

  1. A detailed description of all security vulnerabilities, and the threats to which they are susceptible.
  2. High-level recommendations of how to mitigate each vulnerability.
  3. A categorization of each vulnerability into a business risk, possibly including a risk score. The risk scores of each vulnerability are totaled for a total audit risk score.
  4. An executive summary, which explains all of the above in business terms, which executives can understand and upon which they can make decision.
  5. A pro-forma business case to cost justify all the recommendations of the audit, which is populated with all the key risks, categorized by criticality.

The results of the security audit should be used as input for the following three processes, as illustrated in Figure 4:

  1. Use the very detailed technical observations of vulnerabilities and recommendations to create a plan to actually fix the problems. The mitigation plan should be implemented within sixty to ninety days of the publication of the audit report.
  2. Use the pro-forma business case to secure funding to pay the costs to fix the problems, and potentially for a larger security budget.
  3. Executives can use the diminishing risk score to monitor the progress of the post-audit mitigation plan. Once executives authorize expenditures for mitigating specific risks, they subsequently want to ensure the funds have been well spent. Specifically they want progress reports, on the progress of implementing risk mitigation. Once again, risk is most easily conveyed to executives numerically, or in terms of a score.

Figure 4: Flow of Information from a Security Audit

Since new risks and threats are always evolving, the overall risk score of the corporation tends to increase with time, as indicated by the top line in Figure 5. These new risks and threats arise, principally due to:

  1. Changes made to the corporate network.
  2. New Internet threats created since the completion of the last audit.
  3. Changes in employees and changes in employees' adherence to corporate security policy.

Figure 5: Cycles of Developing and Fixing Security Vulnerabilities

Since new risks may not be uncovered until a new audit is performed, their risk value and a plan to mitigate them will likewise remain undetermined until the results of the next audit are published. However, the total true corporate risk score is in reality a sum of the (decreasing) score of the known risks plus the increasing score of the unknown risks.

If risks are expressed as a percent, then the total corporate risk score cannot be quantitatively evaluated. In other words, a percent risk score from an audit report cannot be mixed with an estimated numeric score for new risks. Therefore, it is incumbent upon the sponsor of an audit to determine the score method which will most suit the intended use of the risk analysis.

Two caveats need to be expressed with regard to this methodology of calculating risk, as follows:

  1. The third-party auditor should perform an impartial follow-up audit to ensure the recommendations of the previous audit are effectively implemented. This due diligence audit provides assurance to executives that the risk score is accurate and that the vulnerabilities are indeed mitigated.
  2. Ongoing regular third party audits should be regularly conducted to identify newly developing risks and threats.

Conclusion and Call to Action

Executives can hire experts to identify and quantify the security risks faced by their organization. Risks can be quantified by a risk score, which is of most use for a large enterprise audit report. Risks can be expressed as numeric values or percent of the initial numeric value, depending upon the intended use of the risk analysis.

The recommendations to mediate the risks can be cost justified by an ROI based business case. As the IT staff progresses with the mitigation plan over a two to three month period, executives can monitor the progress by tracking the diminishing risk score. This quantitative score reduction provides executives with a method of measuring the accrued value of their investment in implementing the recommendations.

However, it is prudent to continue the security process with a followup audit to ensure the recommendations have been implemented effectively. The follow-up audit provides due diligence for the accuracy of the reduced score.

Since new risks and threats continue to develop, it is prudent for executives to advocate ongoing regular security audits to discover and quantify new risks that threaten their organization.

About the Author

Ron Lepofsky is the President and CEO of ERE Information Security Auditors, information security and security standards compliance auditors. ERE provides services to large publicly traded corporations, the financial industry, electrical utilities, and to large law firms (



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