more-arw search

Is Your Love for Excel Misplaced?

It's no secret that spreadsheet errors are very easy to make. Inaccuracies in spreadsheets - both minor and innocuous - occur fairly frequently. One measly error can throw off an entire document and those related to it. In finance departments, this can lead to misinformed reporting and decision-making. CFOs and accounting professionals know all too well it's crucial to eliminate the risks of errors in spreadsheets, but they may not realize just how rampant the problem actually is. Moreover, many of them have never been able to let go of Excel and their familiarity with the popular program.

The Weight of the Problem
Nearly 90 percent of spreadsheets contain errors, according to a study published in 2008 in the Journal of End User Computing's "Scaling Up End User Development" issue. The research compiled error rate data from 113 spreadsheets audited in seven separate studies and found 88 percent contained inaccuracies.

"[T]here has long been ample evidence that errors in spreadsheets are pandemic," stated Raymond Panko, author of the study. "Spreadsheets, even after careful development, contain errors in 1 percent or more of all formula cells."

While regulations require businesses to abide by certain financial reporting review practices, errors remain a major and often unnoticed problem at companies that cannot afford to invest in solutions tailored to specific processes and needs. In addition, Panko suggested many firms are in denial or believe instituting spreadsheet policies is impractical because the use of such tools varies immensely across organizations. 

Organizations that do recognize the severity of the problem can turn to specialized consulting organizations like the European Spreadsheet Risks Interest Group. MarketWatch pointed out the mere existence of such an entity is evidence that spreadsheet errors truly are a big deal.

Patrick O'Beirne, the chairman of the spreadsheet risk group, told the news site that Excel and other programs are very effective and often play a central role in business processes, but they can also be used to unintentionally cause severe damage.

"Chainsaws are also a very good tool, but who would use one without a chain guard," O'Beirne said. "People don't take safeguards to ensure their work is correct - in fact, in many cases, all it would take to catch these errors is a second set of eyes."

The Mistakes We Make
So, what types of errors are we talking about? In a recent white paper, Sage Fixed Assets outlined a list of errors that occur in spreadsheets. While the software provider tailored the list specifically to fixed asset management, those carrying out a variety of financial functions should consider why mistakes get made. Here are just a handful of the reasons behind inaccuracies:

  1. The spreadsheet's purpose is undocumented: Those who aren't familiar with the project or process could attach the information contained in a document to a completely separate task.
  2. Dependencies are often unclear: Certain formulas are based on other formulas compiled from information that may have been collected from other spreadsheets. This trail opens the door to many opportunities for error.
  3. Formulas are created manually: Human error is practically unavoidable and one typo can ripple across a spreadsheet and translate into an organization-wide problem.
  4. Versions can be overridden: If several people alter a spreadsheet at the same time, the risk of information getting lost is incredibly high.
  5. Lack of consistency: Without a universal spreadsheet language, users may refer to items differently, causing confusion and inaccuracies.

It Happens to the Best of Us
Most recently, the research many economists rely on to back government spending arguments proved to include spreadsheet errors. Carmen Reinhart and Kenneth Rogoff had a theory that once a country's ratio of public debt to GDP hits 90 percent, the economy tanks. This was recently debunked when researchers at the Roosevelt Institute attempted to replicate the study and failed. They discovered that Reinhart and Rogoff left out five countries, leading the growth rate among countries with a 90 percent higher debt-to-GDP ratio to be off. It should be 2.2 percent, not -0.1 percent, as the original study claimed. 

If even a highly reputed study contained a spreadsheet error, consider the chances of this occurring within businesses' financial departments.

Mitigating the Risk of Error 
No matter how many times CFOs, accountants and other finance professionals are told spreadsheets are prone to errors, the cost-effectiveness, availability and mainstream use of such tools keep companies from dropping them. As such, it's important to keep in mind the following best practices, outlined in "How do You Know Your Spreadsheet is Right?":

  • Draft effectively before creating a spreadsheet.
  • Know who sponsors, develops, reads and audits each document.
  • Create a prototype that allows developers to refine definitions and user-friendliness in the real version.
  • Create a spreadsheet with change in mind, as most sheets develop over time.
  • Keep reports, input and logistics in separate areas of the spread.
  • Opt for one formula per row or column.
  • Use links to other sheets and external sources wisely.

Comments

Mandla Ngwenya
Title: Finance Manager
Company: SWACAA
(Finance Manager, SWACAA) |

This was a very informative writing, thank you. Excel is widely used by companies, small or big, simple to sophisticated spreadsheets excel has been the solution on very key data for decision making. Knowing her prone to errors and mitigation strategies is much imperative.

Products and Companies: