Although the business community has witnessed the advent of accounting systems such as Oracle, SAP and Hyperion, more than 70% of global executives still rely on “spreadsheets to track and manage financial reporting on a daily basis” (CFO 2012) according to a survey by Oracle and Accenture.
Hence, it is no surprise companies continue to suffer financial loss from erroneous spreadsheets; this risk is called financial spreadsheet risk or financial risk. Reliance on erroneous spreadsheets by corporations for inaccurate financial reporting and business decision making has been reported in the financial media, because it has often resulted in profit downgrades, share price falls and a revision of corporate financial statements.
Chief drivers of Financial Risk
The main aspects of financial risk are:
- Financial misreporting;
- Reduced market or stakeholder confidence;
- Inaccurate or incorrect business decisions made by executives; and
- Incorrect financial summaries, dashboards or graphs
Examples of Spreadsheet Errors
There have been a number of publicised cases of large companies suffering financial cost, in part due to erroneous spreadsheets; here is a small sample of the financial risk associated with a spreadsheet:
- Drug-maker AstraZenaca was forced to revise its earnings forecasts because of a spreadsheet error “after inadvertently releasing confidential company information to analysts” (Reuters 2012).
- Outsourcing firm Mouchel incorrectly valued its pension fund deficit, which forced the company to “write down profits by £4.3million” (Daily Express 2011) and contributed to the resignation of the CEO and a material fall in its share price.
- JPMorgan’s internal findings into its trading operations that lost a significant sum of money, identified some spreadsheet calculations exhibited “insufficient controls and frequent formula and code changes” (JPMorgan 2013), which were a contributing factor in the Bank’s multi-billion dollar trading losses.
Persistent Factors causing Financial Risk
In certain cases, there could be specific reasons for continual financial risk surrounding corporate spreadsheets, which could be caused by:
- Resourcing issues around professionals, in terms of implementing changes and improvements to existing models;
- Staff turnover;
- Financial modelling fatigue;
- Unrealistic turnaround and time deadlines; and
- Information asymmetry, i.e. a company’s tax or strategic planning area failing to fully communicate specific tax implications to the corporate development area, about a proposed asset purchase or greenfield project
Averting Financial Risk
Recommended solutions to managing financial risk are:
- Undertake a detailed spreadsheet audit or peer review,
- Dedicate adequate time to properly review forecast assumptions,
- Full information flow and information symmetry across relevant spreadsheets to all stakeholders,
- Integrate all corporate spreadsheets into the internal corporate systems, and
- Ensure comprehensive error and alert checks are integrated throughout the spreadsheet