How JCPenney is Managing Corporate Risk

John Polarinakis, Audit Director Dave Miller, Senior Audit Manager

What is JCPenney doing? Ethics Program Internal Audit Function Anti-Fraud Programs Enterprise-Wide Hotline

On-line Ethics Statement A letter from our Chairman The purpose of the Statement of Business Ethics Our responsibility as an employee A great work environment Our duty to the Company

An Effective Ethics Program Communication with Employees Communications with Suppliers Employee Training The Use of Criminal Background Checks The Role of the Legal and Ethics Compliance Committee Measuring our Performance – how effective are the programs

How does Internal Audit support the Company’s corporate governance initiatives?

Perform an Annual Risk Assessment Risk rank each audit area Discuss with management Allocate resources Allow for flexibility

Fashion Triangle for Internal Auditing

Anti-Fraud Programs Fraud Risk Assessment Fraud Awareness Program Continuous Auditing and Monitoring Enterprise-Wide Hotline

Objectives of Fraud Risk Assessment Evaluated the adequacy of select controls to mitigate fraud risks Reviewed the oversight processes to prevent and detect fraudulent activity Identified additional anti-fraud control enhancements

Benefits of Fraud Risk Assessment Interaction with management Increasing management’s fraud awareness

Business Process Owner Fraud Schemes/Scenarios Fraud Risk Matrix Business Process Owner Fraud Schemes/Scenarios Controls Monitoring Stores Theft of merchandise Store access is secured and alarmed when not receiving merchandise or during “off” hours. Hotline established for use by employees to report theft issues. Written procedures related to physical security, shoplifting, and internal employee theft. The following areas monitor these activities: Store, District and Regional Management Store, District, Regional and Home Office Loss Prevention Internal Auditing

Increasing Fraud Awareness Established multi-department task force to oversee Conducting awareness and ethics presentations Red Flags of Fraud poster Senior Management presentations to Audit Committee

Continuous Auditing Continuous Monitoring

Monitoring Retail Store Operations Short cash expense Bad check expense Purchase card expense POS information

Anti-Fraud Continuous Auditing Matching vendor and employee name, address and telephone number Identifying duplicate vendor invoices Identifying duplicate expenses – travel

Establishing an Enterprise-Wide Hotline Required as part of SOX 301 and 806 Means of anonymous communication for employees and vendors Establishing Awareness programs No Retaliation Policy communication

Benefits of Outsourced Program Online database of all call activity Automatic notification of call activity Available 24/7 Multi-lingual service Experienced operators Call monitoring

Steps to Take Communicate what is expected of employees Provide a safe mechanism to report concerns Zero Tolerance for fraud

Questions?