Over-Relying on Spreadsheets?

Spreadsheets — Excel in particular — are a modern technological marvel. Most businesses, Terrapin included, couldn’t function without them. However, it’s important to take stock of our reliance on spreadsheets and understand that there comes a point at which we may be expecting too much of this technology. Over-relying on spreadsheets exposes wealth management firms to unnecessary risk, especially when they solely depend on spreadsheets for their business-critical functions. For example, if you exclusively rely on spreadsheets to manage your entire incentive compensation program and processes, then you should assess this dependency and its inherent risks.

Put simply, the larger and more complex the spreadsheet, the greater the risk. Research compiled by University of Hawaii professor and spreadsheet expert Ray Panko showed errors in 88% of 113 spreadsheets audited. Still not convinced? Read on to discover real-world examples of corporate accounting blunders and general risks inherent to over-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

The quality of data suffers when it’s 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 reducing productivity.

5. Fraud

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.

Conclusion

Of course, as indicated earlier, 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, to 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, particularly in managing daily operations that support your critical business functions? When your firm decides it is over-relying on spreadsheets, consider business automation solutions that can help it mitigate risk and achieve scalable growth.

free whitepaper