Updated May 15, 2020
Dependency on spreadsheets exposes an investment services firm to risk, especially when they rely on spreadsheets for their business-critical functions (such as managing their incentive compensation program). If spreadsheets play an integral role in your daily operations and are part of manually intensive processes, then you should assess this dependency and its inherit risks. Research compiled by University of Hawaii professor and spreadsheet expert Ray Panko showed errors in 88% of 113 spreadsheets audited. The larger and more complex the spreadsheet, the greater the risk.
5 Reasons to Rethink Your Dependency on Spreadsheets
The reasons listed below are a mixture of actual corporate accounting blunders and general risks inherent to relying on spreadsheets.
1. Omission of a Negative Sign
In 1994 while transferring financial records onto a spreadsheet, an accountant at Fidelity mistakenly omitted a minus sign while doing a tax calculation, turning a $1.3 billion loss into a $1.3 billion gain. As a result, this error caused dividend estimates for their Magellan fund being off by $2.6 billion. Ultimately, this gaffe required Fidelity to renege on its forecast that Magellan shareholders would get $4.32 a share in a year-end payment.
2. Demonstrating Regulatory Compliance
Using spreadsheets hinders a firms ability to meet the demands of audits and demonstrating regulatory compliance. Enforcing access control and version control, while possible, is limited and cumbersome. Tracking access, revisions, and updates is a challenge with spreadsheets. By themselves, spreadsheets lack the ability to produce historical audit trails that will sufficiently demonstrate compliance. Additionally, there are limited options for managers to approve changes.
3. Accidental Copy/Paste
In 2012, a simple copy and paste error in Excel cost JP Morgan $6 billion. Due to an error in a spreadsheet used to model risk, JP Morgan underestimated the volatility of its synthetic credit portfolio, which ultimately led to the bank to declare $6 billion in losses. The model “operated through a series of Excel spreadsheets, which had to be completed manually, by a process of copying and pasting data from one spreadsheet to another.”
4. Data Loss and Integrity
Data quality suffers when its compiled from numerous disparate sources via spreadsheets and only gets worse when it’s transferred from one stage to the next. It becomes a cumbersome process to ensure links between workbooks aren’t broken and that the related workbooks have up-to-date data. A way of controlling data quality is restricting access to a single user; however, this runs the risk of creating bottlenecks and reduce productivity.
Your firm must recognize the potential threat of fraud due to malicious tampering of spreadsheets. Vulnerabilities include links redirected to different data sources, calculations using hidden cells, manipulating macros, and altering the presentation of a spreadsheet. As an example of this last point, a CFO used “hidden rows” to keep falsities from hard copy and covered up information by using a “white font” in spreadsheets.
Of course, the goal is not to eliminate spreadsheets. They have and always will play an essential role in your business. The main point here is first to be aware of the potential risks and second take measures to mitigate these risks. There are methods to help reduce spreadsheet risk and their potential single point of failure for your firm’s back-office. However, the ultimate question is, to what degree does your firm depend on spreadsheets; in particular managing daily operations that support your critical business functions. When your firm decides that it is too dependent on spreadsheets, consider business automation solutions that can help your firm mitigate risk and accelerate business performance.