Why do we need a methodology?

April 21st, 2013 by Stephen Jones Leave a reply »

Excel is one of the great boosters of individual productivity. So why do auditors treat it with suspicion despite usually being expert users themselves?

One problem is that very few people get formal training in Excel. If they do, then the training will cover navigation and features like use of formulas or pivot tables, formatting etc and be far too short with little evaluation of training effectiveness, or time for structured practise. How many people have been trained how to design a spreadsheet? Most of the design guidelines come from, yes you guessed, audit companies and many of those guidelines are frankly awful and lead to bloated sheets that are difficult to audit and to validate. If an accountant uses pencil and paper to total a series of numbers then it is normal practise to do a square check to ensure that adding across and totalling gives the same result as adding down and totalling across. In Excel the extra work to do this is trivial ….but who ever bothers?

Estimates are that as many as 70% of Excel worksheets contain calculation errors. The problems often manifest when someone else uses a spreadsheet they did not design. a row of figures is the sum of the columns above, but in one cell maybe it was just typed in without a total. When you are doing a one off exercise that may not matter, but its not the basis for a business system. When you do a budget for a group company with 10 companies each with 10 departments and each department with 10 cost centres you have a 100 spreadsheets to check, and to maybe adjust and to combine with cut and paste or look up formulas. Then you go to version 2 or 3… and that is when mistakes creep in. That is why tools like Prophix have such an impact on the the accuracy and speed of the budget process, plannng, forecasting and month end processes. Standard templates and workflow automation minimse the risk of error while also reducing administrative workload and time.

Over recent weeks there have been several articles in the financial press challenging a research paper linking % GDP debt to declining growth rate. A paper, written by Carmen Reinhart and Kenneth Rogoff, and published in 2010, stated with authority that growth rates for countries where debt was over 90% of the GDP was 1% slower than it would be otherwise.That analysis may have seriously misled global economists and politicians since 2010 about the growth of companies in a time of debt. Their reasoning and evidence has become a foundation of the arguments for spending austerity and debt reduction in the developed world, especially in the EU. The Greek Irish, Spanish and portuguese and even Cyprus debt crisis might have been handled differently without it. It has now been discovered that it is riddled with methodological errors and inconsistencies, one of which is a fairly bad error in an Excel spreadsheet used for part of the calculation

Some of the blame has been put on “Excel Error”, “Flaw in Excel Spreadsheet” etc rather than the more accurate version of the truth which is a combination of some peculiar mathematics, some strange and poorly-explained methodology, and the calculation logic used. Excel gave the right answer for the calcualtions it was tasked to perform. The error was in the question. Just because you can calculate to many decimal places does not mean the assumptions or the logic behind the formulas are correct.

There have been some previous spectacular disasters blamed on Excel:
- a first-year associate at Cleary Gottlieb Steen & Hamilton made an Excel reformatting error that mistakenly added a massive 179 contracts to an agreement to buy Lehman Brothers assets,
- JPMorgan lost $6 billion in 2012 on a credit-derivative bet due to an incorrect risk calculation on an excel spreadheet that drastically underestimated the risk,
- The same company admitted misreporting their ‘Value at Risk’ risk exposure for years due to an Excel error.

Excel is a tool, and like any tool can be used well or used badly. We suffer the same problem with the misuse of mrp and find a warehouse full of stock or system drowning in expedite messages. There is a right tool for the job, and a right way to use it. Scoping, Analysis, Design, Test, Training, Audit, are all familiar terms and the right way is usually the cheapest and fastest in the long run.


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