Making it Real: How Making it Real: How Microsoft Approaches Microsoft Approaches Compliance Challenges Compliance Challenges

Making it Real: How Making it Real: How Microsoft Approaches Microsoft Approaches Compliance Challenges Compliance Challenges

Taylor HawesTaylor HawesGM Controller, FinanceGM Controller, FinanceMicrosoft CorporationMicrosoft Corporation

In partnership with

Where were you in 1983?Where were you in 1983?Social Social

Vanessa Williams first black women to win Miss America Vanessa Williams first black women to win Miss America pageantpageantSally Ride first women in space on space shuttle challengerSally Ride first women in space on space shuttle challengerGulon Bluford first African American in spaceGulon Bluford first African American in spaceMartin Luther King day becomes a holidayMartin Luther King day becomes a holidayHooters was opened in Clearwater, FloridaHooters was opened in Clearwater, Florida““Thriller” album of the yearThriller” album of the yearThe “computer” is Time magazine “Man of the Year”The “computer” is Time magazine “Man of the Year”

TechnologyTechnologyMore then 10 million computers are in use in the United More then 10 million computers are in use in the United StatesStates Motorola starts testing cell phones in ChicagoMotorola starts testing cell phones in ChicagoAudio music cassettes outsell LP recordsAudio music cassettes outsell LP recordsCDs (compact discs, not certificates of deposit) go on sale CDs (compact discs, not certificates of deposit) go on sale Apple's Lisa, the first microcomputer with a graphical user Apple's Lisa, the first microcomputer with a graphical user interface interface Lotus 123 was launchedLotus 123 was launchedMicrosoft Windows was announcedMicrosoft Windows was announcedTCP/IP becomes standard for Internet communication TCP/IP becomes standard for Internet communication between computersbetween computersInternet domains get names instead of hard-to-remember Internet domains get names instead of hard-to-remember numbersnumbers

Fast Forward to 2004Fast Forward to 2004Michael Jackson is still famous…not for his musicMichael Jackson is still famous…not for his musicPersonal computer are a commodity, power approaches Personal computer are a commodity, power approaches “super computers of 1983”“super computers of 1983”CD’s are now being replaced by iPods/MP3 playersCD’s are now being replaced by iPods/MP3 playersThe Air Force trains their pilots using computer simulated The Air Force trains their pilots using computer simulated gamesgamesGlobal cell phone usage will approach 1.4 billion in 2004Global cell phone usage will approach 1.4 billion in 200494 million or 27% of all households have a cellular phone94 million or 27% of all households have a cellular phone889 million or 13.9% of the population have access to the 889 million or 13.9% of the population have access to the internet worldwideinternet worldwideAsia is number one with 302 million users compared to Asia is number one with 302 million users compared to North America’s 221 millionNorth America’s 221 millionWe watch TV from fiber or satellite with over 100 channelsWe watch TV from fiber or satellite with over 100 channels Video on demand becoming a realityVideo on demand becoming a realityAccess based communication and graphical browser Access based communication and graphical browser created adoption of the internetcreated adoption of the internetToday, ubiquity of connectivity and web services will create Today, ubiquity of connectivity and web services will create solution customized to “YOU”solution customized to “YOU”

OutlineOutline

Complying with Sarbanes-Oxley Act, Complying with Sarbanes-Oxley Act, Section 404Section 404

Reducing time in the close processReducing time in the close process

Investing in XBRL and the SEC Investing in XBRL and the SEC Voluntary Filing ProgramVoluntary Filing Program

Complying with Sarbanes-Complying with Sarbanes-Oxley Act, Section 404Oxley Act, Section 404

Quick Company OverviewQuick Company Overview

Total RevenueTotal Revenue $39.7 $39.7 billionbillion

Operating incomeOperating income $14.5 $14.5 billionbillion

Pre-tax IncomePre-tax Income $12.2 billion$12.2 billion

# of Segments# of Segments 77

# of Locations# of Locations ~130 ~130

# of Employees# of Employees 66,00066,000For fiscal year ended June 30, 2005

Organizational LandscapeOrganizational LandscapeInformation TechnologyInformation Technology

Sales and Marketing ServicesSales and Marketing Services

IWIWInformationInformation

WorkerWorkerClientClient Server Server

& Tools& Tools

MEDMEDMobile andMobile andEmbeddedEmbedded

DevicesDevices

MSNMSN

Corporate Accounting/Global Platforms & OperationsCorporate Accounting/Global Platforms & Operations

Strategy, Planning & AnalysisStrategy, Planning & Analysis

Tax and Internal AuditTax and Internal Audit

Treasury Treasury

Corporate Shared Services Corporate Shared Services (Corp Services [A/P&Procurement; Real Estate/Facilities], HR/Payroll, LCA)(Corp Services [A/P&Procurement; Real Estate/Facilities], HR/Payroll, LCA)

RevenueRevenue

COGS and COGS and OperationsOperations

Sales and Sales and Marketing Marketing ServicesServices

R&D / Some R&D / Some Org Specific Org Specific S&MS&M

OpExOpEx

Non-OpNon-Op

TaxTax

Corporate Corporate Accounting Accounting and Controland Control

MBSMBSMicrosoftMicrosoftBusinessBusinessSolutionsSolutions

HEHEHome andHome and

EntertainmentEntertainment

When it Comes to 404, are When it Comes to 404, are We a Leading Company?We a Leading Company?

Fiscal year 2004 was our beta Fiscal year 2004 was our beta version…version…

Audit competencies: We trained 600 Audit competencies: We trained 600 new “internal auditors”new “internal auditors”

Business process rigorBusiness process rigorWe grappled with definition of key We grappled with definition of key controlscontrols

We struggled with level of We struggled with level of documentationdocumentation

We had to lead IT with our domain We had to lead IT with our domain knowledgeknowledge

404 in Fiscal Year 2005, 404 in Fiscal Year 2005, the Real Dealthe Real Deal

We ensured project management We ensured project management disciplinediscipline

Placed controls and compliance Placed controls and compliance managers in field positionsmanagers in field positions

Reduced number of key controls Reduced number of key controls through better definitionthrough better definition

We evaluated and conducted We evaluated and conducted remediation long before year-endremediation long before year-end

404 Key Metrics: 404 Key Metrics: Improvement in Fiscal Year Improvement in Fiscal Year 20052005Key ControlsKey Controls 30% 30% reductionreduction

ProcessesProcesses 2% 2% reductionreduction

LocationsLocations No changeNo change

Applications in ScopeApplications in Scope 13% 13% reductionreduction

Combined Processes by LocationsCombined Processes by Locations 14% 14% reductionreduction

$ Coverage (Balance Sheet and P&L)$ Coverage (Balance Sheet and P&L) 7% 7% reductionreduction

Hours investedHours invested 36% 36% reductionreduction

People InvolvedPeople Involved 25% 25% reductionreduction

External spendExternal spend 50% 50% reductionreduction

Lessons from Fiscal Year Lessons from Fiscal Year 20052005Keep up the training and frequent Keep up the training and frequent

communicationscommunicationsPeople are tired, be ready for People are tired, be ready for backlash to any changes from PMO, backlash to any changes from PMO, even if it simplifies work for fieldeven if it simplifies work for fieldContinue refinement and focus on Continue refinement and focus on reduction of key controlsreduction of key controlsTime savings not as great as we Time savings not as great as we expectedexpected

Documentation and testing took approx Documentation and testing took approx 75% FY 2004 spend75% FY 2004 spend

Synchronization of IT and business is Synchronization of IT and business is criticalcritical

Becoming a Leading Becoming a Leading Company – Fiscal Year Company – Fiscal Year 20062006Strive for preventative and Strive for preventative and

automated key controlsautomated key controls

Apply competencies and discipline to Apply competencies and discipline to 302302

Consolidate finance operations where Consolidate finance operations where possible, reduce key controlspossible, reduce key controls

Reliance on other forms of Reliance on other forms of monitoring we already conduct (think monitoring we already conduct (think XBRL)XBRL)

Reducing Time in the Reducing Time in the Close ProcessClose Process

The “Close” GapThe “Close” GapIdeal Number of Days to Close

(Controllers' Leadership Roundtable Research)

30%

45%

16%6% 3%

0

5

10

15

20

0-3 Days 4-6 Days 7-10 Days 11-15 Days More Than 15Days

Average Number of Days to Close Monthly or Quarterly

(Controllers' Leadership Roundtable Research)

4.3

10.4

0

5

10

15

Top Quartile Remaining Responding Companies

Expected Close Process FTE Requirements(Controllers' Leadership Roundtable Research)

2%

26%31%

23%

2% 2%

14%

0%

10%

20%

30%

40%

Decrease RemainFlat

Increase0-10%

Increase11-25%

Increase26-50%

Increase51% or >

Don'tKnow

Expected Costs of Finance Functional Performance

(Controllers' Leadership Roundtable Research)

1%

19% 19%

28%

15%

2%

16%

0%5%

10%15%20%25%30%

Decrease RemainFlat

Increase0-10%

Increase11-25%

Increase26-50%

Increase51% or >

Don'tKnow

75% surveyed believe 6 days or fewer is optimal; 75% are at 10 days or 75% surveyed believe 6 days or fewer is optimal; 75% are at 10 days or higher higher

Over 50% believe costs will increase; over 25% believe in the double Over 50% believe costs will increase; over 25% believe in the double digits digits

Common ChallengesCommon Challenges

Close and reporting processes are Close and reporting processes are related but managed separatelyrelated but managed separately

Everyone (reporting team, auditors) Everyone (reporting team, auditors) needs better access to the needs better access to the informationinformation

Users toggle between multiple tools, Users toggle between multiple tools, multiple documentsmultiple documents

Users need support documentation, Users need support documentation, validationvalidation

Workflow must support collaborationWorkflow must support collaboration

How has Microsoft How has Microsoft addressed some of these addressed some of these challenges?challenges?We’ve tied close & reporting activities We’ve tied close & reporting activities

togethertogether

Enabled collaborative workspace Enabled collaborative workspace environmentenvironment

Shared calendarShared calendar

Issue ManagementIssue Management

Supporting documentsSupporting documents

ReviewReview

Sign-offSign-off

Operate a paperless closeOperate a paperless closeMD&A written in the close processMD&A written in the close process

Online F/S distribution, completion of SEC Online F/S distribution, completion of SEC checklist, w/version control and real-time checklist, w/version control and real-time auditor accessauditor access

Collaborative workspace environment: Collaborative workspace environment: All tasks, workflow, document All tasks, workflow, document

management and so forth in common management and so forth in common locationlocation

Detailed disclosure task list – all supporting documentation attached, to ease review and confirm

key control activities

All disclosures internally checked for accuracy against the support retained in site. We incorporate links from the document to the underlying support the QC version.

Overall Benefits AchievedOverall Benefits Achieved

Reduced consolidated close by 5 days on averageReduced consolidated close by 5 days on average

We file Form 10-Q at same time as Earnings We file Form 10-Q at same time as Earnings ReleaseRelease

Reduced time-to-file between 7-10 days on averageReduced time-to-file between 7-10 days on average

Future plans: Reduce by one additional weekFuture plans: Reduce by one additional week

With 52 individuals involved, this saves 8K hours a yearWith 52 individuals involved, this saves 8K hours a year

Reduced auditor involvement through intuitive Reduced auditor involvement through intuitive processesprocesses

Fewer than 5 support questions on 10-KFewer than 5 support questions on 10-K

Minimal SOX controls documentation requestsMinimal SOX controls documentation requests

No custom tool development, all off-the-shelfNo custom tool development, all off-the-shelf

Investing in XBRL Investing in XBRL and the SEC Voluntary and the SEC Voluntary Filing ProgramFiling Program“Why are regulators so excited about “Why are regulators so excited about technology?”technology?”

UPC & Bar codesUPC & Bar codesBar code was developed in 1949Bar code was developed in 1949First used commercially in 1966First used commercially in 1966A standard was needed, UPC (Uniform A standard was needed, UPC (Uniform Product Code) invented 1973 Product Code) invented 1973 June 1974, the first U.P.C. scanner was June 1974, the first U.P.C. scanner was installed at a Marsh's supermarket in Troy, installed at a Marsh's supermarket in Troy, Ohio.Ohio.The first product to have a bar code The first product to have a bar code included was a packet of Wrigley's Gumincluded was a packet of Wrigley's GumWhat is the value of a bar code?What is the value of a bar code?

Labor efficiency for:Labor efficiency for:Store cashiersStore cashiersInventory managementInventory managementConsumption behavior analysisConsumption behavior analysis

What is XBRL?What is XBRL?Stands for - Extensible Business Stands for - Extensible Business Reporting LanguageReporting Language

Code for items in a financial Code for items in a financial statementstatement

A reporting standard similar to “UPC”A reporting standard similar to “UPC”

Each financial fact can be assigned a Each financial fact can be assigned a unique, predefined data tag like a unique, predefined data tag like a barcode…barcode…

Enables “Interactive data”Enables “Interactive data”

What is XBRLWhat is XBRL

StandardizationStandardization

CalculationCash = Currency + Deposits

CalculationCash = Currency + Deposits

FormulasCash ≥ 0

FormulasCash ≥ 0

ContextsUS $

FY2006, Budgeted

ContextsUS $

FY2006, Budgeted

ReferencesGAAP I.2.(a) Instructions

Ad Hoc disclosures

ReferencesGAAP I.2.(a) Instructions

Ad Hoc disclosures

XBRLItem

XBRLItem

LabelCashCashEquivalentsAnd

ShortTermInvestments

LabelCashCashEquivalentsAnd

ShortTermInvestments

ValidationValidation

Presentation現金及び現金等価物

Presentation現金及び現金等価物

PresentationCash & Cash Equivalents

PresentationCash & Cash Equivalents

Finance-specific use of XMLFinance-specific use of XML Open standardOpen standard Collaborative market effort – 350 Collaborative market effort – 350

member organizationsmember organizations Consortium established in 1999Consortium established in 1999 Implemented as a regulatory Implemented as a regulatory

standardstandard

Finance-specific use of XMLFinance-specific use of XML Open standardOpen standard Collaborative market effort – 350 Collaborative market effort – 350

member organizationsmember organizations Consortium established in 1999Consortium established in 1999 Implemented as a regulatory Implemented as a regulatory

standardstandard

Technology StandardTechnology Standard Crosses all industriesCrosses all industries Designed for extensibilityDesigned for extensibility Includes XBRL GLIncludes XBRL GL Taxonomies: IFRS, US GAAP (e.g. Taxonomies: IFRS, US GAAP (e.g.

Commercial & Industrial, Banking Commercial & Industrial, Banking & Savings Inst., Insurance, & Savings Inst., Insurance, Investment Management)…Investment Management)…

Crosses all industriesCrosses all industries Designed for extensibilityDesigned for extensibility Includes XBRL GLIncludes XBRL GL Taxonomies: IFRS, US GAAP (e.g. Taxonomies: IFRS, US GAAP (e.g.

Commercial & Industrial, Banking Commercial & Industrial, Banking & Savings Inst., Insurance, & Savings Inst., Insurance, Investment Management)…Investment Management)…

Broad ApplicationBroad Application

"The reason that everyone is not doing their financial reporting using interactive data is simple:  it's a new concept.  People will use it when they discover how much time and money it can save them, by automating and speeding up the process.  We want it at the SEC because it will make the financial reports much more useful.  Companies will want interactive data for the same reason. The truth is, it's inevitable -- and if the 21st century has shown us anything thus far, it's that technological change occurs extremely quickly. "As a result, it's not surprising that we're hearing from both filing agents and accounting firms that their clients are suddenly showing greater interest in interactive data.  Given its enormous potential, there's no doubt this increased interest in interactive data will soon translate into widespread adoption."

Chairman Christopher CoxU.S. Securities and Exchange CommissionQuote in January, 2006 Financial Executives Magazine ArticleOn XBRL

Why Care about XBRL?Why Care about XBRL?

Customers tell us about internal Customers tell us about internal reporting challengesreporting challenges

We believe technology can lower cost We believe technology can lower cost of managing business informationof managing business information

Market collaboration and industry Market collaboration and industry feedback: We all have an interest in feedback: We all have an interest in the solutionthe solution

Business Business Performance Performance ManagementManagement

Competitive Competitive AnalysisAnalysis

Risk Risk ManagementManagement

Auditor toolsAuditor tools

404 Monitoring404 Monitoring

Real-time Real-time ConnectionConnection

Enterprise Use of Enterprise Use of XBRLXBRL

DataData

Business Business OperationsOperations

Acquisition Acquisition IntegrationIntegration

ExternExternal al ReportReportss

SEC SEC FilingsFilings

SEC SEC DisclosurDisclosure e ChecklistChecklist

Dept of Dept of CommercCommercee

BanksBanks

Internal Internal ReportsReports

DatDataa

DataData

General General Ledger Ledger ConsolidatioConsolidationn

Drill Drill downdown

Evolving XBRL into a Evolving XBRL into a Comprehensive StandardComprehensive Standard

Repeatable, controllable business processRepeatable, controllable business process

Reducing the complexity for preparersReducing the complexity for preparers

Resolve deficiencies with US GAAP Resolve deficiencies with US GAAP taxonomytaxonomy

Rendering & analyzing XBRL documentsRendering & analyzing XBRL documents

Sustainable ownership of US GAAP Sustainable ownership of US GAAP taxonomytaxonomy

SEC Voluntary Filing SEC Voluntary Filing Program – What We Did Program – What We Did and Whyand WhyWe started early – 10Q, for quarter We started early – 10Q, for quarter

ending December 31, 2004ending December 31, 2004

Included financials WITH notes and Included financials WITH notes and management discussion & analysismanagement discussion & analysis

Focused on tagging in Excel and Focused on tagging in Excel and WordWord

Ensured external reporting team Ensured external reporting team provided quality assuranceprovided quality assurance

Financial leadership Financial leadership

Extend the taxonomy if Extend the taxonomy if necessarynecessary

Steps in Producing 10Q / Steps in Producing 10Q / 10K10K

Create an instance Create an instance document and validate document and validate

calculationscalculations

Publish Instance Document & TaxonomyPublish Instance Document & Taxonomy

Compare & Compare & map 10K/10Q map 10K/10Q

to GAAP to GAAP TaxonomyTaxonomy

Assess Scope of Assess Scope of Reporting & Reporting &

Download TaxonomyDownload Taxonomy

Review & Review & Validate Validate Instance Instance

DocumentDocument

Identify a team: Accountant & Identify a team: Accountant & Developer (XML)Developer (XML)

A Few Numbers on the 10-A Few Numbers on the 10-QQ

Developing taxonomy: 75 hours (iterative Developing taxonomy: 75 hours (iterative process)process)

Creating the XBRL document: 60 hoursCreating the XBRL document: 60 hoursCore financial statements: 5 hoursCore financial statements: 5 hours

Notes and MD&A: 40Notes and MD&A: 40

Edits and revisions: 15Edits and revisions: 15

Extensions for financial statements: 7Extensions for financial statements: 7

Total extensions for MD&A: 150Total extensions for MD&A: 150

Calculation linkbase edits: 300Calculation linkbase edits: 300

QA review: 40 hoursQA review: 40 hours

Few More Numbers on 10-Few More Numbers on 10-KK

175 pages printed on 8.5x11 in paper 175 pages printed on 8.5x11 in paper

4400 lines of XML code4400 lines of XML code

Document “validates” with two toolsDocument “validates” with two tools

2 known calculation errors2 known calculation errorsDue to incomplete information in overall Due to incomplete information in overall doc (Financial Highlights of 2002, 2003) doc (Financial Highlights of 2002, 2003)

To date: 213 MSFT elements added to US To date: 213 MSFT elements added to US GAAP taxonomyGAAP taxonomy

Approx 400+ extensions, modifications Approx 400+ extensions, modifications

Used for 1077 discreet facts Used for 1077 discreet facts

Lessons and ObservationsLessons and Observations

Requires paradigm shift from Requires paradigm shift from presentation view to datapresentation view to data

Creating that data view represents Creating that data view represents new tasknew task

Tools in the “v1” stage…they should Tools in the “v1” stage…they should only get betteronly get better

US GAAP taxonomies need sustained US GAAP taxonomies need sustained industry managementindustry management

Process gets easier every quarterProcess gets easier every quarter

Opportunity and Opportunity and ChallengeChallengeSEC Chairman Cox vision for interactive financial SEC Chairman Cox vision for interactive financial

datadataVoluntary Filing Program launched, effective Apr 4, 2005Voluntary Filing Program launched, effective Apr 4, 2005

Test effectiveness of tagged data Test effectiveness of tagged data Improve quality of information available to investorsImprove quality of information available to investors

Request for Information, Oct 4, 2005Request for Information, Oct 4, 2005How best to develop tools that will make “interactive How best to develop tools that will make “interactive financial data” a reality financial data” a reality How the Commission can meet the original goals of the VFPHow the Commission can meet the original goals of the VFP

XBRL as an approved filing format is XBRL as an approved filing format is comingcomingThere are a number of challenges that need to be There are a number of challenges that need to be addressed in order to enable broad participationaddressed in order to enable broad participationHow do we ensure this is a compelling solution for How do we ensure this is a compelling solution for all companies?all companies?

Call-to-ActionCall-to-Action

We need your involvement….We need your involvement….

Get acclimated with the XBRL filing Get acclimated with the XBRL filing process todayprocess today

Assist SEC by participating in the Assist SEC by participating in the XBRL Filing ProgramXBRL Filing Program

© 2004 Microsoft Corporation. All rights reserved.This presentation is for informational purposes only. Microsoft makes no warranties, express or implied, in this summary.