Spreadsheet Compliance with ClusterSeven for the 2007 Microsoft Office System White Paper

Transcription

1 Spreadsheet Compliance with ClusterSeven for the 2007 Microsoft Office System White Paper July 2006

2 Executive summary The exponential rise in concern over corporate control and regulatory compliance has exposed spreadsheets as a major source of business risk. ClusterSeven provides a solution to this challenge that can meet the needs of regulatory compliance, operational risk and auditors without reducing business flexibility and the ability of Excel to power innovation and opportunity. The largest single list of publicised spreadsheet errors ( shows that almost all significant risk incidents in spreadsheets have been caused by authorized users working in spreadsheets that are being used and consumed as business applications. ClusterSeven is focused on addressing this problem. It does this by focusing on the spreadsheet as an application, rather than as a document by understanding, reporting and alerting the critical changes to cell level and VBA content (both formulae and data) during business operations. This complements and contrasts with the document level management capability offered by Microsoft Office Sharepoint Server 2007 and Office Excel Most importantly, ClusterSeven delivers spreadsheet change information in a way that it can be analyzed and signed off as part of regular business workflow. ClusterSeven customers are regularly finding significant issues in seconds that would have previously taken hours or would never been discovered until a financial loss had been created. This paper addresses the additional benefits that ClusterSeven brings to the capabilities of the Microsoft Office System and, in particular, the 2007 release. It does this by examining the five dimensions of a complete solution: 1. The spreadsheet lifecycle 2. Regulatory requirements 3. Business scalability 4. Operational usability 5. Data management We are really impressed with the positive effect that ClusterSeven has had on our operations and culture. We now have a fully-automated and systematic set of business controls that actually encourages our spirit of innovation while ensuring best practice in terms of operational risk and compliance. Investment Bank When ClusterSeven approached us, it was the first time that we had seen such a product. We immediately realised its value to us as a company, Hedge Fund ClusterSeven is the only company that we found which offered a practical solution to spreadsheet management within our organisation Energy Trader All of these dimensions drive toward the overall objective of delivering a sustainable, adopted solution that can deliver benefit to all stakeholders the business, the operational risk managers, compliance, IT and audit. ClusterSeven provides a unique power over the visibility, integrity and analysis of business processes supported by spreadsheets. Its integration with the 2007 Office System provides an enterprise platform that can fully protect and exploit Excel s strategic value to the business. Copyright ClusterSeven Ltd June 2006 All Rights Reserved Page 2 of 16

3 Contents The solution to enterprise spreadsheet management 4 The five dimensions of a complete solution 5 The spreadsheet lifecycle 5 Regulatory requirements 6 Business scalability 8 Operational usability 9 Data management 10 Technology framework 12 Conclusions 14 References 14 Links 14 Financial regulation documents 14 Appendix Spreadsheet Compliance in the 2007 Microsoft Office System, Microsoft April 2006 (reproduced with the kind permission of Microsoft Corporation) Copyright ClusterSeven Ltd June 2006 All Rights Reserved Page 3 of 16

4 The solution to enterprise spreadsheet management The white papers by PricewaterhouseCoopers 1, Microsoft 2 and Panko 3 have become the must-read literature on spreadsheet compliance. All these papers identify critical spreadsheet management requirements in two dimensions: At a functional level, the need to manage and monitor the changes occurring to business critical spreadsheets. At an organisational level both papers recognise that a sustainable solution is critically dependent on engaging all the key stakeholders in the organisation. ClusterSeven delivers the technology to achieve both these objectives. The behaviour and impact of users are monitored at the highest level of granularity (i.e. cell and macro level). This capability extends the functionality available in the 2007 Microsoft Office System and fills the gap recognised in the Microsoft white paper. Furthermore, ClusterSeven ensures operational adoption by delivering new benefits across the organisation without detracting from the enormous productivity benefits that Excel provides. These benefits include: Reduced risk including the rapid identification of common errors and bad practice, an integrated sign-off environment, improved resilience against fraud, improved disaster recovery and the ability to directly integrate validated spreadsheet output with central systems. Regulatory compliance including a demonstrable control framework, a clear segregation of duties and the rapid location of material issues that may require stakeholder reporting. Increased business opportunity by enabling faster product release, rapid observation of previously inaccessible business trends and improving the confidentiality of the intellectual property of the business. Financial savings including lower capital adequacy requirements, a major reduction in the many hours spent chasing spreadsheet problems (both business and IT), a major reduction in the number of control checks and improved workflow and audit efficiency 1 The Use of Spreadsheets:Considerations for Section 404 of the Sarbanes-Oxley Act, PricewaterhouseCoopers, July Spreadsheet Compliance in the 2007 Microsoft Office System, Microsoft, April Spreadsheets and Sarbanes-Oxley: Regulations, Risks and Control Frameworks, Panko, Copyright ClusterSeven Ltd June 2006 All Rights Reserved Page 4 of 16

5 The five dimensions of a complete solution The functional and organisational requirements for sustainable compliance, together with the advances in capability provided by the 2007 Microsoft Office System, create a demanding set of criteria against which to test any solution. Any solution (be it manual or technology) must therefore be understood and assessed against a range of business dimensions. ClusterSeven believes they are best captured under the following headings: 1. The spreadsheet lifecycle 2. Regulatory requirements 3. Business scalability 4. Operational usability 5. Data management 1. The spreadsheet lifecycle The file servers of a large organization will contain hundreds of thousands of spreadsheets. Of these, as many as a few thousand will be critical to the operational fabric of the business, with such spreadsheets being used repeatedly with continuous changes. When spreadsheets are employed in such operational roles they become true business applications. Each version of an operational spreadsheet is final in the sense that it represents a snapshot of the business at a specific time point. A sequence of such snapshots contains the history of that business activity in terms of changes and trends of data, plus the evolution of functionality. If something abnormal has occurred it will be in this history, but extremely difficult to locate. For regulators and operational risk managers it is the operational spreadsheets that present the greatest concern. This is because they are handling the regular transactional flows of the business where error (and occasionally fraud) is unlikely to be spotted and, if it occurs, is likely to impact multiple external parties. These risks are minimized by: 1. Preventing changes by unauthorized users 2. Monitoring changes by authorized users These objectives are achieved by the integration of Office Sharepoint Server 2007, Excel Services and ClusterSeven as shown in Figure 1 below. This figure shows how an initial spreadsheet created in Excel enters the operational cycle of Release-Operations- Validation-Maintenance. Typically the completion of this cycle is slow and expensive, with data validation and functional testing consuming high levels of resources. This expense is often minimized by reducing the frequency of validation but, in so doing, this creates major exposure to operational errors between validation dates. ClusterSeven integrates with the 2007 Microsoft Office System to provide a complete and continuous solution for the operational lifecycle by: Enabling the immediate monitoring of spreadsheet integrity after it is released from testing, so there are no gaps in the handover. Tracking the trend of all cell values over time. This enables the trends of Key Performance Indicators (KPIs) to be easily reported to the business. Providing rapid alerts to users or controllers based on cell, range or worksheet level content changes (against both formula and value-based criteria) Capturing an audit trail defining who, what, where and when for all changes at a VBA and cell level. Copyright ClusterSeven Ltd June 2006 All Rights Reserved Page 5 of 16

6 Delivering scheduled reports on all important changes, thereby accelerating integrity validation so that it can be performed as part of regular business workflow. Accelerating repair and maintenance by providing a user-friendly, drillable interface for all changes, reducing turnaround time and costs. Enabling changes to be signed off prior to the next phase of operational usage. Exposing spreadsheet maturity by displaying the rate of change of functionality. This demonstrates to IT whether it should be migrated into a central application or whether the functional volatility is still too high for system specification. Figure 1 The operational management of Excel Document management Risk: Unauthorised access Solution: Office Sharepoint Server 2007 plus Office Excel 2007 Information Rights Management Document sharing/publication Risk: Unauthorised viewing/changing of selective spreadsheet content Solution: Office Excel 2007 Services Business operations Risk: Erroneous changes to logic or data by authorised users Solution: ClusterSeven Key performance trends Migrate to central systems Release Operations Business alerts Sign off Spreadsheet Creation in Excel Cell level audit trail Change history Maintain Test functionality and validate data Integrity reports It may be noted that the metadata created by ClusterSeven (e.g. alerts, reports, sign-off approvals, audit trails) offer the opportunity for direct integration with workflow management environments such as Office Sharepoint Server 2007 in order to provide complete business process assurance. 2. Regulatory requirements Regulators are rarely prescriptive about their requirements for information systems and, not surprisingly, there are no direct regulations on spreadsheet compliance. Instead Copyright ClusterSeven Ltd June 2006 All Rights Reserved Page 6 of 16

7 regulators define a set of high level requirements against which to test the risks of financial information processes. What is clear is that regulators expect executives to know what is happening in their business, to know when something is going wrong, to have processes in place to exert remedial action and to pay the penalty if they don t. Information systems, including spreadsheets, must measure up to these tests. From a solution perspective these control objectives may be considered against the following themes of corporate governance: Segregation of duties: this principle goes back to some of the earliest standards of business control. In a spreadsheet context this requires the ability to separate the roles of spreadsheet builder/modifier from the application user. Since the complex world of financial products inevitably requires these two roles to overlap, ClusterSeven solves this problem by providing an independent monitoring and sign-off environment for all critical changes. This is done without restricting the freedom of the business user to change their models. ClusterSeven users are already frequently discovering critical changes that they would not have picked up in any other way or would have required major investigative effort. Frequency of control checks: The main focus of the Sarbanes-Oxley Act is a company s control framework, requiring both management attestation and auditor confirmation as to its effectiveness. Where manual controls are utilised, the Public Company Accounting Oversight Board (PCAOB) has given guidance for auditors in the form of recommended test frequencies, which depend on how often the control is utilised in the business. The table below is taken from the Pricewaterhouse Coopers publication and interpretation of this guidance (Sarbanes-Oxley Act: Section 404 Practical Guidance for Management July 2004): Frequency of manual control s performance Typical number/range of times to test controls Annual 1 Quarterly 2 Monthly 2 to 5 Weekly 5 to 15 Daily 20 to 40 Multiple times a day 25 to 60 Factors to consider when deciding the extent of testing Complexity of the control Significance of judgement in the control operation Level of competence necessary to perform the control Impact of changes in volume or personnel performing the control Importance of the control - addresses multiple assertions - period-end defective control - only control that covers a particular assertion Where spreadsheets form a key control this guidance places a heavy administrative overhead on the business in order to repeatedly satisfy the standard control test requirements of inquiry, observation, examination and reperformance. By contrast, ClusterSeven is an automatic control. By focusing on just the critical changes, it reduces the level of complexity and judgement required to operate the control and provides clear repeatability even during changes in volume and personnel. On average, ClusterSeven clients are able to audit a full days trading activity in a large (e.g. 50Megabyte) trading book in less than 10 minutes, when previously it may have taken hours. Copyright ClusterSeven Ltd June 2006 All Rights Reserved Page 7 of 16

8 Understand the end-to-end supply chain: a map of an end-to-end business process (such as financial trade to settlement) against the supporting central applications will commonly look like Figure 2 below. Since the fit of applications to business requirements is not complete, there are a number of processing gaps where information is manipulated and supplemented in spreadsheets before being re-entered into other applications. These gaps represent control weaknesses in the ability to track a transaction through the entire process. ClusterSeven addresses this problem by tracking all the changes to data through any managed spreadsheets. More importantly, since all the spreadsheet data is centralised in the ClusterSeven data repository this provides a more robust source for direct integration with other applications. Figure 2: A sample/typical information supply chain Business Process Risk Layer Order Cash Central Systems Infrastructure Speed of resolution The pressure to rapidly disclose material events to stakeholders creates a major burden for spreadsheet-sourced information. Indeed, a control test applied by regulators to financial business processes is to ask how quickly they can see any unexpected changes to key business outputs (such as P&L) and then how quickly they can locate the cause of the change. By broadcasting alerts on key business parameters, and enabling a rapid drill down on all changes, ClusterSeven dramatically reduces the resource requirement to locate the source of change, demonstrating improved control and providing more time for the analysis of the business reasons for the change. 3. Business scalability Any solution to the problem of managing spreadsheets must be able to scale in all the technical dimensions of the problem such as the number of spreadsheets, their size, their complexity, the level of user activity and their distribution across the business. The number of operational spreadsheets in a large business will be hundreds or even thousands, but this number can easily become obscured by the hundreds of thousands of previous versions of these same spreadsheets that will also be saved. For ClusterSeven each sequence of version saves is seen as one timeline (even where the title of the spreadsheet is revised to fit regular Copyright ClusterSeven Ltd June 2006 All Rights Reserved Page 8 of 16

9 business process), that is attached to the current operational spreadsheet. This immediately eliminates much of the confusion caused by the proliferation of these old files. In addition, using in-built load management (including clustering and fail-over) ClusterSeven is able to scale to monitor and manage the largest volume requirements. The size and complexity of spreadsheets varies greatly. The most sophisticated will exceed 100MB in size and run to hundreds of sheets, containing tens of thousands of formulae and many thousands of lines of VBA code, testing the capability of Excel to the limit. With the expansion of the maximum sheet size in Office Excel 2007 to one million rows and 16,000 columns this challenge is set to get even greater. ClusterSeven manages spreadsheets that exceed 100MB and has an architecture that scales to the maximum capabilities of Excel. ClusterSeven also detects changes across the range of Excel content, including formulae, data, named ranges and VBA code. By analysing the different types of formula changes it can also highlight those that are most likely to lead to operational risk events. The distribution and activity of spreadsheets across the business presents another dimension of challenge. For a business seeking to achieve spreadsheet control there is an immediate question as to whether the spreadsheets will be managed in their existing locations (central file servers or desktop drives) or whether the business will be obliged to relocate its spreadsheets to particular file repositories, such as enterprise content management systems. Relocation will create the onus of business process change and may delay successful implementation or even frustrate adoption. ClusterSeven is able to monitor spreadsheet activity across a wide variety of file environments, both on central file servers and on networked user machines as well as formal enterprise content management repositories. This provides a range of alternatives from which businesses can (if desired) make multiple choices. Since ClusterSeven does not rely on the establishment of formal repositories, it can immediately establish a control framework, from which an informed understanding of spreadsheet activity can then be used to determine the requirement for more formal data repository environments. Equally, because ClusterSeven is independent of the business choice of enterprise content management system the solution is able to maximise existing investment in these infrastructure components (such as Office Sharepoint Server, Hummingbird, FileNet et al). An additional dimension of activity is the peakiness of spreadsheet usage. Many business processes supported by spreadsheets incur most activity at period ends (for example end of day or end of month). ClusterSeven uses an asynchronous framework, combined with a tiered and clusterable architecture to ensure that the load during intense periods of activity can be handled across the available hardware with minimum impact on performance. 4. Operational usability The sustainability of a solution can be viewed from a number of different perspectives that may create user resistance or otherwise frustrate business adoption: these are the degree to which it may disrupt the familiarity and flexibility of Excel; the degree to which it impacts on the technical performance of client machines or Excel itself; and most importantly for any technology that presents itself as a real world solution the degree Copyright ClusterSeven Ltd June 2006 All Rights Reserved Page 9 of 16

10 to which it can be incorporated into regular business processes so that important information can be extracted and remedied from what will be a large volume of spreadsheet activity. In order to maintain the Excel user experience the ClusterSeven solution is a background monitoring solution, providing a detective approach to highlighting changes that may impact spreadsheet integrity, rather than a preventative approach. Equally, to ensure compatibility with the current file management experiences of users, ClusterSeven can watch spreadsheets held on existing file servers, without requiring any relocation of files. In order to ensure that there is no deterioration in the performance of client machines the ClusterSeven solution is a non-invasive, server-based application, operating remotely from client machines. This also enables the solution to manage all versions of Excel from 97 onward. Information on spreadsheet change activity is then made available only to authorised users via the ClusterSeven Enterprise Spreadsheet Management client component. Beyond these areas of potential user resistance, ease of operation is the most important aspect of ensuring adoption. For large workbooks, containing many sheets and millions of cells, the volume of change information will be large. This information can only be managed as part of real business processes if it can be filtered to ensure that only the key changes relevant to the user are returned for business management. These key changes are likely to vary from user to user for example operations will be interested in one set, financial reporting in another and front office IT in yet another. The ClusterSeven solution meets these challenges by providing userdefined reports, locating just those cell changes that are relevant to individual business roles. For example one user may focus just on changes to formulae and VBA while another can focus just on data changes. In addition, ClusterSeven provides a suite of business alerts that may be linked to a wide range of changes within the content of the spreadsheet and across either single or multicell ranges. These alerts are delivered through the messaging layers of the organisation (such as and netsend) and include structurally-based aspects (e.g. formulae changes) and value-based thresholds (e.g. maxima or minima). ClusterSeven even offers a no change alert to indicate when a certain area of the spreadsheet should have been updated, but has not. 5. Data management The primary reason for adopting a spreadsheet compliance solution is to ensure confidence in the output of spreadsheets so that this information can be utilised elsewhere in the business. If the spreadsheet itself is the document of record then validation of this piece of business information completes the information supply chain and no further risk should be created. However, if the information that has been validated in a spreadsheet is then required elsewhere in the business that data must be extracted from the spreadsheet and passed into other systems or other spreadsheets. If the process of extraction is manual then all of the effort in validating the integrity of the data will be lost. This demonstrates that an additional key piece of any spreadsheet compliance solution is to enable automatic extraction and loading into other systems. Copyright ClusterSeven Ltd June 2006 All Rights Reserved Page 10 of 16

11 By providing a centralised and structured data repository based on Microsoft SQL Server ClusterSeven ensures that the validated data captured from spreadsheets can now be integrated directly with other systems (e.g. for back office reconciliation). This removes the need for further re-keying or the use of links to spreadsheets which are notoriously prone to failure. This approach provides a further contribution to increasing efficiency and reducing operational risk. In addition, each version of a spreadsheet represents successive snapshots of the business at those time points. If a user wishes to understand the trend of any business parameter over time (as represented by a particular cell value through many successive version saves) the work involved is extremely arduous, error-prone and rarely pursued. As a result the data stored in historical spreadsheets is virtually inaccessible and any business intelligence that might be gleaned from understanding the way in which the business has evolved is effectively lost. The value history of every cell is captured in the ClusterSeven data repository. This information is available for direct interrogation enabling ad hoc observation of business trends or the correlation between separate business trends (in the same spreadsheet or others). This information may also be exported into analytical and business intelligence packages for more sophisticated interpretation. One example is the determination of the co-variance between individual cells from the histories of different spreadsheets to deliver an arbitrage opportunity such as the sparkspread between gas and electricity prices. This new power over distributed and unstructured data is unique. Copyright ClusterSeven Ltd June 2006 All Rights Reserved Page 11 of 16

12 Technology framework The ClusterSeven solution may be integrated with the 2007 Microsoft Office System as shown below in Figure 3. It may also be implemented with earlier versions of Excel from 97 onwards. ClusterSeven does not require any component to be installed on the client machines of monitored users it is neither an Excel add-in nor does it place any code (VBA or otherwise) in the workbook. This avoids any impact on client performance and also ensures that there are no compatibility issues if users wish to utilize the new server-side functionality available in Office Excel This independence means that ClusterSeven is not impacted by the most recent Excel file format changes. ClusterSeven provides the option to monitor native file systems (e.g. Microsoft Windows Server, DFS, NetApps, EMC Clariion) without the need for proprietary content management repositories. Alternatively, ClusterSeven may be integrated with Enterprise Content Management (ECM) software to maximise the value of existing infrastructure and utilise their document management functionality (e.g. access control, versioning and vault capabilities). Within this sector, the advances in Office Sharepoint Server 2007 mean that it is set to become a key platform for work management components and applications. This makes the combination of the 2007 Microsoft Office System and ClusterSeven a highly adaptable and future-proofed environment for spreadsheet compliance. The ClusterSeven solution comprises a suite of components built in 100% Microsoft technologies as described below: Figure 3: Integrated architecture of ClusterSeven and Office 2007 ClusterSeven component (.Net) Microsoft Component MS or Third Party component Administration Generation Validation Workflow Analysis ClusterSeven Console Office Excel 2007 ClusterSeven ESM Office Sharepoint Server 2007 BI Analytics Office Excel 2007 Presentation Layer ClusterSeven File Watchers IIS Web Services Communication Layer Office Sharepoint Server 2007 File Storage Excel Services ClusterSeven Servers (clustered) Application Layer Microsoft Windows Server ClusterSeven Data Warehouse ClusterSeven Datamart Output Layer ClusterSeven Database (MS SQL) Data Layer Copyright ClusterSeven Ltd June 2006 All Rights Reserved Page 12 of 16

13 The ClusterSeven file watchers detect user interactions with those spreadsheets nominated for management. These spreadsheets may be located on local desk-top drives, native file servers or Enterprise Content Management document repositories. This flexibility means that ClusterSeven is fully compatible with Office Excel 2007 files, whether or not they utilise the new server sidefunctionality. When a relevant user interaction is detected a new version of the spreadsheet is retrieved by the ClusterSeven application servers. The ClusterSeven application servers conduct the change analysis between the relevant versions of the spreadsheet, together with the generation of business reports and alerts. The complete set of changes in cell content and VBA are added to the database, alongside the time and user stamp for the relevant interaction. The ClusterSeven enterprise spreadsheet manager provides authorised users with the primary user interface for the reporting, analysis and sign off of important spreadsheet changes. Authorised users are given selective access to key functionality and spreadsheet histories according to security roles determined in the ClusterSeven console. The enterprise spreadsheet manager also provides the configuration environment for business users to select those spreadsheets to be managed, to determine the critical areas for integrity reporting, to complete the sign off of validated changes and to conduct ad hoc analysis on the trends in key performance indicators. Alerts on critical changes may be delivered through the chosen message layer of the organization e.g. , netsend. The ClusterSeven database (based on Microsoft SQL Server) provides a centralised and structured information resource, holding the full temporal history of all managed spreadsheets. This frame-by-frame sequence builds the movie version of the spreadsheet. ClusterSeven is not a business intelligence solution. However, the changing cell values within successive versions of a spreadsheet contain a rich and detailed transcript of the evolution of the business much of which will not be available from central systems. Under conventional spreadsheet usage it is very difficult to interrogate this history. ClusterSeven allows users to see the value changes over time for any cell, thereby offering the opportunity to observe ad hoc data trends. Alternatively, the information may be exported to tools such as Excel or other business intelligence applications for more sophisticated analysis. The ClusterSeven datawarehouse and ClusterSeven datamart are optional components to support this extraction process. The ClusterSeven console is an administrator resource that enables configuration of the solution for local network and server infrastructure, to define user roles and to allow the bulk selection of spreadsheets to be placed under management. ClusterSeven also recognises that spreadsheets are not always the end of the business process - they are commonly intermediate parts of larger business processes. This requires the information to be communicated elsewhere. ClusterSeven enables captured spreadsheet data to be directly integrated with other business systems. This avoids the loss of integrity that may occur if spreadsheet data is returned to other locations via manual processes or fragile spreadsheet links. Copyright ClusterSeven Ltd June 2006 All Rights Reserved Page 13 of 16

14 Conclusions The most important step toward achieving spreadsheet compliance is the recognition of Excel as a key component of the enterprise application infrastructure and a strategic business asset. This requires a collaborative analysis between the key stakeholders in the organisation, including the business, IT, regulatory compliance and audit. The 2007 Microsoft Office System marks a major step towards exposing the previously under-recognised strategic value of Excel. It includes the new server-based technology of Excel Services and the establishment of Office Sharepoint Server 2007 as the hub for all record management processes. These capabilities address many of the enterprise requirements to achieve regulatory compliance over spreadsheet assets when considered as a document. To augment the 2007 Microsoft Office System, ClusterSeven provides an unprecedented level of transparency over any spreadsheet activity in the business. It does this in a way that allows the ClusterSeven platform to become a practical part of business workflow and thereby establish a sustainable compliant environment. More importantly, however, ClusterSeven enables the spreadsheet to maintain its enormous value as an instrument of business speed and innovation whilst allowing it to deliver validated, high integrity information to the rest of the business. References 1. The Use of Spreadsheets:Considerations fro Section 404 of the Sarbanes-Oxley Act, PricewaterhouseCoopers, July Spreadsheet Compliance in the 2007 Microsoft Office System, Microsoft, April Spreadsheets and Sarbanes-Oxley: Regulations, Risks and Control Frameworks, R.Panko, Communications of the AIS, 2006 Links Information about ClusterSeven Information about public spreadsheet errors Information about the 2007 Microsoft Office System /preview/default.mspx blogs.msdn.com/excel Financial regulation documents Sarbanes-Oxley Act, Data Protection Act, Basel II: International Convergence of Capital Measurement and Capital Standards Copyright ClusterSeven Ltd June 2006 All Rights Reserved Page 14 of 16

15 Appendix Copyright ClusterSeven Ltd June 2006 All Rights Reserved Page 15 of 16

16 Spreadsheet Compliance in the 2007 Microsoft Office System White Paper April 2006

17 Table of Contents Executive Summary... 3 Introduction... 4 Regulatory Compliance... 4 Background... 4 Spreadsheets: An Enterprise Software Resource... 4 Process Challenge... 5 Every Situation is Unique... 5 Compliance Strategies for Spreadsheets Evaluate the Current Situation Implement Appropriate Controls Develop a Long-Term Spreadsheet Development and Maintenance Methodology... 9 How the 2007 Microsoft Office System Can Help Address Compliance Challenges Preventing Unauthorized Access to Spreadsheets Managing and Monitoring Spreadsheet Changes Retaining and Archiving Spreadsheets Developing Robust Spreadsheet Models Conclusion Links Information About the 2007 Microsoft Office System Financial Regulation Documents Appendix Table of Relevant Regulations Microsoft Office System Capabilities Matrix... 23

18 Executive Summary Spreadsheets offer the flexibility and ease of use of a desktop application, combined with the power to perform complex data analysis. As a result, spreadsheets are used to support critical business processes in most organizations. In fact, research indicates that over half of financial management reporting is performed with spreadsheets. Despite this, a disparity exists between the importance of spreadsheets to business processes and the level of corporate resources devoted to spreadsheet development, testing, and maintenance. Organizations today are under considerable regulatory pressure to ensure that financial reporting processes are both transparent and well-documented. Three visible examples of such legislation are the Sarbanes-Oxley Act (United States, 2002), the Data Protection Act (European Union, 1998), and the Basel Capital Accord (Basel II, 2006), which together impact most publicly-traded companies around the world. However, corporate finance is just one area affected by compliance legislation; separate industry and local regulations also exist. An organization must take into account all applicable policies and requirements when developing a regulatory compliance framework. Implementing a sustainable spreadsheet compliance framework requires cooperation between each level of an organization, from executive management to the individual business user. Such a framework must meet the needs of both the business and the IT department. This paper will describe the steps that should be taken to identify and control spreadsheets once an overall compliance frame work has been implemented. An example of the approach taken by the Microsoft Corporation Financial Compliance Group is also included. When combined with a sound compliance strategy, technology can help enforce policies and increase business productivity. The final section will discuss capabilities available in the 2007 release of the Microsoft Office system that can help address the following common compliance challenges: Preventing unauthorized access to spreadsheets Managing and monitoring spreadsheet changes Retaining and archiving spreadsheets Developing robust spreadsheet models The strategies and technology described in this paper can help organizations achieve success in establishing spreadsheet control policies that meet both regulatory requirements and business needs.

19 Introduction Because of the ease of use, flexibility, and power of spreadsheets, they support many critical business functions and often fill roles where other solutions would be too slow or costly to implement. As a result, spreadsheets have quietly become a key component in the analysis and reporting processes within most organizations, including the mission-critical area of financial reporting. In the United States and around the world, there has been increasing focus on demonstrating regulatory compliance, especially within corporate financial processes. This is due in part to new legislation, such as the Sarbanes-Oxley Act and an increased public scrutiny of corporate accounting practices, that has highlighted a need for stricter controls over the analysis supporting financial statements. Because spreadsheets are an enterprise resource that support key business processes, it is important to determine how they fit into an overall strategy for regulatory compliance. This paper will provide the reader with a set of practical strategies for addressing spreadsheet compliance from an organizational level. It will also describe capabilities in the 2007 release of the Microsoft Office system that can help support and enforce a compliant spreadsheet environment. While these strategies highlight financial analysis and reporting scenarios, they are not regulationspecific and can be applied to scenarios where spreadsheets are employed across different industries and geographies. Regulatory Compliance Background Regulatory compliance is now, more than ever, a key issue for organizations around the world. Financial compliance is one area in particular that has received much scrutiny in recent years. New legislation has been written to ensure that organizations financial analysis and reporting processes are both transparent and accurate. The three most visible examples of this legislation are the Sarbanes-Oxley Act (United States, 2002), the Data Protection Act (European Union, 1998), and the Basel Capital Accord (Basel II, 2006), which together affect most publicly traded companies 1. Corporate finance, however, is just one of many areas where compliance policies have been defined and enforced. The pharmaceutical and health industries, for example, have been subject to strict regulation for years. Compliance policies also are subject to local legislation, with regional governments often establishing their own compliance requirements. An organization must take into account all applicable policies and requirements when developing a regulatory compliance framework. Spreadsheets: An Enterprise Software Resource Though they may not be thought of in the same manner as database or custom software systems, spreadsheets are a key enterprise asset for most organizations. In the words of auditor PricewaterhouseCoopers, spreadsheets are an integral part of the information and decision- 1 A list of relevant regulations can be found in the Appendix.

20 making framework for companies. 2 However, evidence has shown that in some organizations there is the general perception that spreadsheets are a tactical tool without strategic importance. As a result, the resources dedicated toward the implementation and control of critical spreadsheets are small in comparison to other information technology assets. These disparities represent the most significant road block to spreadsheet compliance. Before controls can be implemented and enforced, management must acknowledge spreadsheets as a critical enterprise resource and then budget and plan accordingly. Process Challenge One common misconception in organizations is that spreadsheet compliance can be achieved through the use of technology. While technology plays a role in any compliance strategy, the most important component is process. Critical spreadsheets and other enterprise IT resources require sound development and usage practices that include controlled testing, deployment, maintenance, and use. An effective plan will incorporate these steps into the larger compliance framework for spreadsheets and other enterprise resources. The points listed below are prerequisite to developing such a plan. Executive-Level Commitment The need for compliance policies must be recognized at all levels within the organization. Cooperation between managers across functional departments is important to defining robust controls that are in line with business objectives. Without executive-level commitment it will be difficult, if not impossible, to enforce and maintain an effective compliance strategy. Getting IT and Business Users on the Same Page To be successful, a compliance strategy must be driven by the needs of the business and its users. A plan that fails to do so will hinder business productivity and prove unsustainable. This problem can be addressed from the start by engaging both IT staff and individual users. Collaboration is particularly important when defining spreadsheet controls because members of the business team often serve as both users and developers of critical spreadsheet applications. Because IT staff have knowledge of spreadsheet functionality, getting them involved early can help reduce duplication of work and increase the robustness of the solution. Allocating Appropriate Resources Implementing an effective compliance strategy takes time and effort. Representatives from many different groups must assist in defining controls that meet business objectives. Representatives often include members of the IT, internal audit, and finance departments, but can involve others depending on the needs of the organization. Additionally, it may make sense to use software to help monitor and control spreadsheets, but this can require financial and development resources as well. Once implemented, the control processes must be monitored and enforced by dedicated people with an understanding of the overall compliance strategy. Every Situation is Unique Every organization is unique in how it uses technology in its business, and each has its own set of challenges and goals to consider when developing a compliance framework. As a result, there is no single prescriptive compliance solution that satisfies the needs of all. An effective strategy will 2 PricewaterhouseCoopers. The Use of Spreadsheets: Considerations for Section 404 of the Sarbanes-Oxley Act. July 2004.

21 consider the operational risks, business objectives, and specific regulations with which the organization must comply. The following section offers specific steps for identifying and controlling critical financial spreadsheets, but these strategies can be adapted to meet the particular needs of the organization s larger compliance framework. Compliance Strategies for Spreadsheets Once an organization has an overall framework for regulatory compliance, the following steps can help identify and control critical spreadsheets in a way that can be maintained. There are three key steps to implementing this process: 1. Evaluate the current situation. 2. Implement the appropriate controls. 3. Develop a long-term spreadsheet development and maintenance methodology. This section will cover each of these in detail. 1. Evaluate the Current Situation Inventory Relevant Spreadsheets Before critical spreadsheets can be controlled they must first be identified. Perform an inventory to count the number of spreadsheets in the organization that may have an impact on compliance. In most organizations this applies to spreadsheets concentrated in specific high-risk departments. In the case of corporate finance this includes areas that support the analysis and reporting of financial accounting data. During the inventory, note each spreadsheet s purpose and relationship to critical business processes. This information will be important for determining the appropriate controls for each spreadsheet. Inventories can be completed manually by inspecting hard drives and shared folders, or automatically by using software that scans a corporate network to target spreadsheets. Identify Business-Critical Spreadsheets Not all spreadsheets in an organization require rigorous compliance controls. An inventory may return thousands, if not hundreds of thousands of spreadsheets, many of which will likely have little or no compliance impact. It would be overwhelming and unproductive to implement strict controls for each spreadsheet. Therefore, teams must identify and isolate the spreadsheets that support critical business processes, where a lack of controls could lead to material errors. In corporate finance, materiality is often defined as an error that involves 5 percent of net income or total assets, but this definition should be tailored to satisfy the organization s compliance requirements and the departments involved. In most cases, only a small percentage of an organization s spreadsheets match these criteria. Case Study: Microsoft Corporation As an example, the Microsoft Corporation Financial Compliance Group works with management, internal auditors, and external auditors to perform an inventory of important spreadsheets used for financial reporting. A recent inventory yielded 42 business-critical spreadsheets in use. The following filtering criteria were used to identify these spreadsheets.

22 Quantitative Criteria Microsoft uses the following criteria to flag inventoried spreadsheets for further analysis. 1. A spreadsheet that documents a journal entry greater than a pertinent dollar threshold. This threshold is derived as a percentage of materiality on a quarterly basis to support quarterly reporting. 2. A spreadsheet that serves as a recording ledger for an account with a balance greater than a pertinent dollar threshold. This threshold is derived as a percentage of materiality roughly four times greater than the threshold for supporting a journal entry. 3. A spreadsheet that directly supports a financial statement disclosure. Qualitative Criteria Qualitative criteria are formed by an assessment of the inherent and historical risks of the information contained within a spreadsheet. Microsoft conducted a risk assessment to identify these important criteria. Examples of qualitative criteria used by Microsoft include: 1. Whether the spreadsheet contained a high degree of complexity. For example, the spreadsheet includes complex use of formulas and calculation, a high number of connections to multiple worksheets or external data sources, or employs macros or other code. 2. Whether the spreadsheet is used by a new department or division that lacks an established report history. It is important to note that quantitative and qualitative criteria are not applied sequentially; instead they form a two-pronged approach to identifying business-critical spreadsheets. While it is often the case that business-critical spreadsheets meet both quantitative and qualitative criteria, this is not a requirement. 2. Implement Appropriate Controls Once business-critical spreadsheets have been identified and the risks defined, the next step is to implement appropriate controls for each one. Often this process cannot be implemented all at once. It may be necessary to break up the work by division or business unit, addressing the most important areas first. The section below describes the risks and corresponding control activities Microsoft uses to manage its critical spreadsheets. Control Activities Control activities are the steps taken to mitigate risk and to meet the control objectives. The control activities employed by Microsoft corporate controllers fall into two categories: Preventative controls that prevent undesirable events from occurring. Detective controls that detect undesirable events that have already occurred. The table below specifies the potential compliance risks for business-critical spreadsheets and the corresponding control activities defined by the Microsoft Financial Compliance Group.

23 Potential risk Unauthorized access and modification of data or formulas may result in output or reporting errors. Loss of the archived (prior reporting period) spreadsheets may damage the audit trail. Control activity Save spreadsheets to a location that allows restricted user access and regular backups. Unauthorized modification of historical data may damage audit trail. Spreadsheets may be initially set up with incorrect formulas or inadvertent changes may degrade the model integrity of the spreadsheet, resulting in output and reporting errors. Convert spreadsheets from previous reporting periods to a read-only format and securely archive them for later retrieval. 1. Test overall model mechanics and material changes before the spreadsheets are used. 2. Retest spreadsheets once annually. 3. Lock formula cells to prevent inadvertent changes. 4. Review mechanics each reporting period in sufficient detail to detect inadvertent changes. Entered data is incomplete or disagrees with the source, which results in output and reporting errors. Lack of knowledge about how to properly use spreadsheets compromises the current and future ability to generate correct results and accurate reports. Check cells* are used to validate data accuracy and the completeness of entry. *A check cell is subtotal cell that counts how many records (line items) are entered and the value of the records entered. Divide spreadsheets into three worksheets to separate input values, formulas, and resulting calculations. Document key elements of spreadsheets, such as input cells, formula cells, output cells, and data sources; and summarize calculation methodology and spreadsheet use procedure. Defining and implementing control activities, including those described above, is an important step toward addressing the compliance risks associated with business-critical spreadsheets. The next section describes how an organization can apply these principles to new business-critical spreadsheets through a controlled development process.