SAP Enables Better Corporate Governance

mySAP ERP Enables Better Corporate Governance

mySAP ERP Solution Management

High Level Features and Functions

Customer and Analyst Validation

Overview

Business Issues and Solutions

© SAP AG 2005, mySAP ERP – Corporate Governance / 3

CORPORATE GOVERNANCE OBJECTIVES

Corporate governance involves the responsible management and supervision of a company focused on long-term value creation.

Corporate Governance Objectives

Speed• Fast close• Fast transformation• Fast reporting

HRMS Enterprise Applications

Compliance Speed

Transparency

Compliance• Compliance with rules

and regulations• Detection of exceptions

Transparency • Accurate, auditable

accounting• Consistent internal and

external information


CORPORATE GOVERNANCE – EXTERNAL INFLUENCES

CFO

Auditors

Public authorities(Tax, Regulators,Stock Exchanges)

Creditors(Banks, Investors)

Analysts &Rating Agencies

Rules and regulationsIFRS (International Financial Reporting Standards)

US-GAAP

other GAAPs (e.g. HGB)

Basel II

Country-specific tax regulations

Corporate Governance Codex

Sarbanes-Oxley Act

COSO

COSO II

KonTraG (Germany)

LSF (France)

Other geographic specific rules

External Influencers


ACCOUNTING REQUIREMENTS

Accounting RequirementsAccurate, auditable account transactionsParallel accounting capabilitiesTransparency of accounting and treasury Timely access to financial informationCompliance with accounting standardsCompliance with corporate governance standardsDocumentation of relevant tax informationMid-term planningStrategy outlookTransparency of risk situation

Auditors

Public authorities(Tax, Regulators,Stock Exchanges)

Creditors(Banks, Investors)

Analysts &Rating Agencies

External influences drive multilple, often overlapping accounting requirements.


YOUR ERP PLATFORM CAN IMPROVE CONTROL

Organization & Structure

Entity-Level Controls

Process-Level Controls

Business Processes

General Ledger

AccountsPayable

AccountsReceivable

OrderManagement

Inventory

ERP Platform

SecurityAdministration

Change Management

DataManagement

ITOperations

DisasterRecovery

Your ERP platform probably has the most sweeping single impact on your control structure.


mySAP ERP SUPPORTS CORPORATE GOVERNANCE

Built-in Controls of SAP ArchitectureInherent controlsConfigurable controlsSecurity controlsReporting controls

→ SAP NetWeaver & mySAP ERP

Additional CapabilitiesGeneral LedgerFast CloseSupport for IFRSTransfer PricingSEM Business ConsolidationSEM Business PlanningSEM Strategy & Performance Mgmt.SEM Risk ManagementTreasury

→ mySAP ERP

Corporate Governance ApplicationsManagement of Internal ControlsAudit Information SystemWhistle Blower ComplaintsTransparency for Basel IIOperational Risk Management*

→ mySAP ERP

System IntegrationReduce complexityReduce custom integration Reduce cost of system integration

→ SAP NetWeaver

* not licensed with mySAP ERP – available via SAP Custom Development


mySAP PROVIDES COMPLIANCE BENEFITS AT ALL LEVELS

Meet strategic goal of achieving global complianceAccess information in easy-to-use, appropriate formatProvide information to external & internal auditors in reliable and cost efficient manner

Leverage scalable infrastructureExtend and Integrate new requirementsLower integration costs

View a clear overall of business processesFulfill compliance requirements faster and easierIncrease efficiency via faster access to appropriate information

Rely on consistent and clear overview of tasks, to do‘s, and reportsEasily access appropriate functionality Enjoy intuitive usabilityUse unique role-based concept

Users Users

CC--Level Level

InformationInformationTechnologyTechnology

ManagementManagement

Line ofLine ofBusinessBusiness

ManagementManagement

Insight Insight Adaptability Adaptability FlexibilityFlexibility Productivity Productivity


External Validation

Overview

Business Issues and Solutions


BUSINESS ISSUES OF CORPORATE GOVERNANCE

Corporate governance and compliance issues require a CFO to execute effectively on:

Internal and external audits

Sarbanes-Oxley and other corporate governance standards

IFRS and parallel valuation

Fast close

Risk management and COSO II

Basel II requirements

IT landscape


COST OF CORPORATE COMPLIANCE

These requirements are especially challenging given the associated cost of compliance:

$4.4 M Average 1st year expense for a Fortune 1000 companies on Sarbanes-Oxley compliance*

125% Percentage Sarbanes-Oxley spend exceeded budget for those same companies*

118% increase in internal hours (from 12,265 to 26,759)121% increase in external audit fees (from $590k to $1.3M)

* Financial Executives International surveys performed in January 2004 and March 2005


SAP SUPPORTS ALL ASPECTS OF CORPORATEGOVERNANCE

Support internal and external audits

Comply with Sarbanes-Oxley and other corporate governance standards

Comply with IFRS and execute on parallel valuation

Execute a fast close

Manage risk and COSO II requirements

Conform to Basel II requirements

Create a supportive IT landscape

SAP uses a comprehensive solution of built-in controls, dedicated corporate governance applications, system integration, and additional capabilities to help CFOs:


SUPPORTING INTERNAL AND EXTERNAL AUDITING

SAP helps improve audit quality while reducing costs.

FunctionalitySupport of system, business, and tax audit in the SAP environmentStructured collection and pre-setting of standard functionality Monitoring of system inherent, configurable, and reporting controlsData export to external analysis and audit tools

Business benefitsStructured, easy-to-lean access to audit-relevant data in the SAP system

Easy to tailor to the specific audit situation

Improve the quality of auditing

Reduce the cost of auditing

Reduce the risk of non-compliance


COMPLIANCE WITH SARBANES-OXLEY

SAP improves the ability to comply with Sarbanes-Oxley Act.

FunctionalityBuilt-in controls in SAP softwareManagement of Internal Controls (MIC)Support for “Whistle Blower“ processAudit Information System (AIS)Plus supporting capabilities in the area of Business Planning, Strategy & Performance Management, and Risk Management

Business benefitsHigh-degree of system-based internal controls inherent in SAP architectureCost-effective documentation, assessment, and testing of internal controlsTransparency for management and auditors via personalized dashboards

Sarbanes-Oxley Act

§301: “Whistle Blower”

§302: Certification of DisclosureControls & Procedures

§401: Disclosure of material correcting adjustments

§404: Internal Controls over Financial Reporting

§409: Rapid disclosure of material changes


IFRS COMPLIANCE

SAP supports parallel valuation for IFRS compliance.

FunctionalityIssue financial statements according to IFRS rules

Balance sheet, P&LSegment reportingCash flow statement

Execute parallel valuation for international and local standards

Business benefitsAvoid costs of non-compliance

Protect market value

Easier access to international financial markets


FAST CLOSE

SAP supports an enterprise-wide Fast Close.

FunctionalitySAP Enterprise PortalmySAP ERP Financials

General LedgerClosing CockpitIntercompany reconciliation tools Legal / management consolidation

Business benefitsEfficient collaborationQuality at sourceEnhance process managementAccelerate processing of critical activitiesEasily monitor for closing activitiesAutomate activitiesPerfect decision support


RISK MANAGEMENT

SAP addresses complete risk management process—from operational activities to strategic objectives.

FunctionalitySupport of existing and future frameworks, such as COSO II and KonTraG

Using SEM Strategic Risk ManagementUsing Operational Risk Management*

Business benefitsTransparency of the risk situation

Event identification and risk assessment via standard roles of the organization

Quantitative and qualitative risk impact

Planning of risk responses

CO

SO II

Fra

mew

ork

* available via SAP Custom Development (not included in ERP license)


COMPLIANCE WITH BASEL II REGULATIONS

FunctionalityIntegration of strategy- and risk-managementFinancial Statement Planning Flexible consolidation of company resultsFast Close for rapid preparation and processing of financial information Parallel accounting for local GAAPs, IFRS, and more

Business benefitsReduce the costs of capital

Faster strategy execution

Increase business plan transparency

Make smarter use of available cash resources

Increase control and tighten corporate governance

Fast close of accounting books

Analysis ofcompany‘s

current situation

Analysis ofcompany‘s

current situation

GAP Analysisand

Action Plan

GAP Analysisand

Action Plan

ImplementationImplementation

RatingRating

ContinuousImprovementContinuous

Improvement

SAP improves Basel II compliance while reducing cost of capital.


SUPPORTIVE IT ENVIRONMENT

SAP applications create an IT environment supportive of corporate governance and compliance.Sarbanes-Oxley Act Corporate Governance Codex COSO II Basel II

This way ...

FIN

FIN

FIN

FIN

FIN

FIN

FIN

FIN

CRM SCM HCM

Compliance Disclosure ManagementInfo

ManagerialAccounting

SECReporting

RegularityReporting

Local Regional Corporate

Agencies

Investors

C-Level

Business Managers

Auditors SEC

LOBTransactional ERP System

Information Portal

Business Consolidation

Corporate GovernanceApplications

...or like this?mySAP ERP


Overview

Business Issues and Solution



Scoping andSet-Up

Document Processes &

Controls

Sign-Off, Prepare

Certification / Internal Control

Report

Assess Control

Design & Remediate

Issues

TestOperatingEffective-

ness

Attest and

Report

ManagementManagement AuditorAuditor

MIC SUPPORTS SOX COMPLIANCE PROJECTS

Review

Attestation

Reporting

Assignment of Processes to BU‘s

Initial Control documentation

Initial target setting for control maturity

Documentation of Management Controls

Process and Control Design Assessment

Control Efficiency Assessment

Management Controls Assessment

Identification of Issues

Validation of Assessments

Remediation of Issues

Progress Tracking and Analysis

Documentation of Testing Results

Identification of Issues

Remediation of Issues

Progress Tracking and Analysis

Identification of Org. Units and Processes in scope

Org. Unit Hierarchy

Central Process Catalog

Assignment of Processes to FS Accounts

Central Catalog of Control Objectives and Risks

Analysis Overviews with Drill-down Functionality

Management Reports

Workflow-triggered Sign-off supporting 404 Reporting / 302 Certification

SAP Management of Internal Controls (MIC)


MIC OFFERS FLEXIBLE REPORTING OPTIONS

30 “Out-of-the Box” Online Reports1

Executive Dashboards and Custom BW reporting*

2

Documentation Print Reports3

Management gets information about the current state of controls.

* This dashboard was created with existing SAP BW 3.5.3 and MIC functionality; customizing effort is required for implementation.


BUSINESS BENEFITS OF SAP MIC

Cheaper Reduces the cost of communications and administration regarding internal control management

FasterSends tasks via SAP Workflow to the appropriate users to get the testing process concluded in time for public filings

Smarter Provides management with reporting about the current state of internal controls including drill-down

EasierEnables a fast cascading of responsibilities via the role and task concept; eliminates navigation, taking user from the start page directly to controls

Safer Centralizes control-related documentation; creates an audit trail using time-dependent controls and processes


SAP AUDIT INFORMATION SYSTEM (AIS)

In an environment of mass transaction, a result-oriented audit view is only possible with computer-supported audit or control procedures.

Toolbox for the Auditor in the SAP environmentStructured collection of predefined reportsSuitable even for auditors with limited SAP knowledge

Comprehensive functions for system, business, and tax auditsMonitoring of inherent and security controlsImplementation of all important reporting controls

Structuring of audits by balance sheet and income statement accounts Drilldown from AIS report-tree to multiple documentsAIS supports data extraction into external systems for subsequent data analysis and auditing.


SAP AUDIT INFORMATION SYSTEM (AIS)

• Audit planning

• Work program

- System audit- Business audit

Expo

rt in

terf

ace

Online controls onthe SAP database• System information• Reconciliation• B/S, P&L• Account balances• Documents

Data export• Account balances• Line items

Non-SAP Environment mySAP ERP Environment

Work paperprep.

Report

Analysis software( ACL/IDEA/ … )

Reporting software

Line items

Balances

...Accounts

CustomersVendorsAssetsMaterialOrders

Invoices…


SAP AUDIT INFORMATION SYSTEM (AIS) ROLES

AIS allows roles to be flexibly created to accommodate specific auditing needs.

BusinessBusinessAuditAudit

Tax Tax AuditAuditSystem System AuditAudit

Internal Auditor

Roles

External Auditor

Tax Auditor

....


HANDLING WHISTLE BLOWER COMPLAINTS

SAP accelerates compliance with section 301 of the Sarbanes-Oxley Act and improves stakeholder confidence.

Establish procedures for “Whistleblower” process, adapted to the companyReact on anonymous complaints from employeesKeep track of history of all complaints and reactionsIntegrate whistleblower access into the intranet and make available to all employees via URL call


SUPPORTING BASEL II REQUIREMENTS

Speed the collection, preparation, and processing of relevant financial informationIncrease control and provide for tighter corporate governance Make smarter use of available cash resourcesIntegrate strategy and risk management practicesOptimize and automate the planning of risk management on all levelsIncrease transparency of financial results and improve trust in company financial ratings

mySAP ERP helps address all IT-based Basel II requirements through financial and analytic functionality.


SAP PROVIDES TWO COMPLEMENTARY RISK MANAGEMENT APPLICATIONS

SEM Strategic Risk Management Operational Risk Management

Unlimited number of hierarchy levelsBased on Balanced Scorecard framework where one scorecard represents one organizational unit

Unlimited number of hierarchy levelsOrganizational units represent legal entities, business units, or departments.

OrganizationalUnits

… performance metrics of an organizational unitExamples: Net Sales or EBITPerformance metrics can be linked to strategic objectives in the organizational unit

… activities within an organizational unitActivities can be processes, projects, and other business activities

Risks affect…

Based on “impact” and represents deviations from the performance metric target amountInstead of probability, the impact can be expressed in categories such as “expected value”

Impact is quantified as “total loss” in monetary unitsQualitative impacts can be expressedProbability of occurrence expressed as a percentage

Risk Quantification


SEM STRATEGIC RISK MANAGEMENT IN DETAIL

Data compilation for subsequent analysisAnalysis of current financial situationSelf assessment of qualitative areas via management meetings

Analysis ofcompany’s

current situation

Analysis ofcompany’s

current situation

GAP Analysisand

Action Plan

GAP Analysisand

Action PlanImplementationImplementation RatingRating Continuous

ImprovementContinuous

Improvement

Determine and transfer data for external or internal ratingPerform internal or external rating

Activities based on rating resultsAdjustments of current actions plansUpon availability of rating rules: Calculation of future rating results including the effects of actions plans

SEM Business Planning & SimulationSEM Balanced Scorecard

SAP BW QueriesSEM Business Consolidation

Planning and simulations of future rating relevant quantitative and qualitative figuresIdentification of required actions to achieve the planned targets including cost / benefit analysis

SEM Business Planning & Simulation

Execution of action plansValue-based Mgmt. and active Risk Mgmt. leading to improved transparencyImprove disclosure and external communicationOptimize financing conditions

SEM Business PlanningSEM Rolling ForecastSEM Business ConsolidationSEM Balanced ScorecardSEM Risk ManagementSEM Management Cockpit

SEM Business ConsolidationSAP BW QueriesSEM Management Cockpit

Supporting SAP SEM Components


SAP OPERATIONAL RISK MANAGEMENT IN DETAIL

RiskPlanning

Risk Identification

Risk Response

Risks

OrganizationalUnits

ActivitiesA specific operation that may lead to risks in an organization unitThree types of activities can be assigned to organizational units:

Processes: potentially all operational and administrative processes within an enterprise

Projects: potentially all internal and customer projectsObjects: generic activity that is neither a project nor a

process (e.g. “Production Plant A”)

Arranged in an organizational unit hierarchy, e.g. according to organizationHeaded by a named manager of organizational unitMain entry point for analyzing the risk situation

Named uncertain event or condition that has a negative effect onthe businessRisks are assigned to processes, projects, or objects within a certain organizational unit

Risk Monitoring

Risk AnalysisRM Process


GENERAL LEDGER IN mySAP ERP FINANCIALS

General ledger functionality in mySAP ERP Financials enhances transparency and financial disclosure.

Unified managerial and financial accountingExtensible and flexible by industry specific and/or customer-defined fieldsComprehensive support of parallel accounting proceduresBalanced books for any dimensionCorporate governance functionality TCO reductionSupport of fast close using the closing cockpit to accelerate the process, support compliance, and provide an overview of closing status



Overview

Business Issues and Solution


ANALYST FEEDBACK ON SAP FOR COMPLIANCE

SAP ranked first or second on a survey related to the delivery of compliance functionality.

SAP Rankings in Forrester Compliance Wave Report, March, 2005*

#1 Product Strategy and Vision#1 Technical Strategy and Vision#1 Resource Investment in Compliance#1 Customer Support Strategy#1 Market Presence – Delivery Footprint#2 Strategic Alliances#2 Financial Viability#2 Integration

Source: The Forrester Wave™: Sarbanes-Oxley Compliance Software, Q1 2005 (April 7, 2005); Markham and Hamerman.


COMPLIANCE KEY CRITERIA FOR CUSTOMERS

mySAP ERP provides a comprehensive compliance solution.

CA Picks SAP for Global ERP SystemSays rollout will help it fulfill settlement with DOJ, address accounting issues

.... plans to roll out SAP AG's ERP software globally, partly to help meet the requirements of the deferred-prosecution deal CA reached with the U.S. Department of Justice in September.

SAP ERP Adheres to FDA, DEA, SOX, and Other Pharmaceutical Requirements Industry dominance drives adoption of SAP ERP by Lannett

….the pharmaceutical-specific solution adheres closely to standard operating procedures and the requirements of FDA, DEA, SOX, and other regulations. SAP puts tighter control on the process.

Software Helps Spot Big ErrorsProgram brought accounting mess to CP Ships' attention. Uses SAP systems to “create transparency.”

http://www.cwsubscribe.com/cgi-win/cw.cgi?add&p=cwhomepgad1

http://www.thestar.com/


CUSTOMER QUOTES“SAP's Management of Internal Controls is a very scalable application that provides global support for E.ONs Sarbanes-Oxley 404 project. With more than 100 organizational units and more than 1000 users involved in the assessments of internal controls in our Sarbanes-Oxley 404 project, we rely on SAP's stability and scalability to ensure that we meet our reporting deadlines."

Michael Hoefer, Head of IT-Audit 2, E.ON Audit Services

“SAP SOA-MIC is an easy to use documentation tool that Biomet uses for full compliance with the requirements of the Sarbanes Oxley Act 2002. The simplicity to use was confirmed during our first training session held last week. We therefore expect further training costs to be limited.

SAP SOA-MIC workflow functionality used in assessments and testing fullyfacilitates and supports our approach to the implementation of SOA at Biomet. This workflow and related 'real time tasking' are a great feature of MIC, one that I have not witnessed yet in other tools currently available.”

Christiaan Koreman, Internal Audit, Biomet Merck

“We have found SAP's Management of Internal Controls to be a useful system that provides a logical structure for organizing our Sarbanes-Oxley documentation. The role and task concept gives process owners the ability to perform role assignment and maintenance without requiring involvement from our IS department. However, the most important benefit of MIC to THQ is that control/process assessments, testing and sign-off activities are scheduled, and then workflow tasks are sent to each responsible person. Since our internal controls were originally documented in Excel, we have been able to take advantage of the upload functionality and transfer this documentation into the system quickly.”

Al Hunt, Director of Internal Audit, THQ


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