Unhealthy appetite

Finance directors may be putting their companies at risk by continuing to rely heavily on Excel spreadsheets to collate and report a wider range of financial and management information.

IT consultants and some finance directors believe that despite a growing awareness of the limitations - and problems - associated with the popular software package, companies are continuing to rely heavily on it for financial and performance management reporting, without implementing effective controls and protocols on how the data is inputted and checked - and without due regard for the importance of the paper trail that more sophisticated platforms allow. Many FDs seem to choose understandability and control of programmes over sophistication of financial reporting.

According to research conducted by software vendor Oracle in association with Financial Director, 60 percent of FDs responding said they use Excel spreadsheets to perform financial reporting analysis, with only 26.6 percent using either a dedicated business intelligence or performance management tool to do the work. Yet, despite such popularity, analyst IDC has found that dependence on spreadsheets is the second most commonly-named challenge in implementing revenue policies and the “timely and accurate generation of revenue numbers”.

At Financial Director’s first-ever Technology Forum event last November, a show of hands demonstrated that many FDs in attendance still see Excel as their primary tool for gathering, analysing and disseminating various data. They say that its simplicity and ease of use - plus the fact that updates are regularly issued for it, so it is evolving - and the price tag mean it wins out over the kinds of multifaceted mega-platforms companies such as Oracle sell.

A look through news cuttings will show that there have been some high-profile casualties because of problematic spreadsheets. In July 2009, shares in C&C, the group that owns Magners cider, fell 15 percent after it said total revenue in the four months to end-June had not risen three percent as originally reported, but had actually dropped five percent. The company’s group FD and chief operating officer said the error occurred after data was incorrectly transferred from an accounting system used for internal guidance to a spreadsheet used to produce the trading statement.

In August 2008, the Financial Services Authority (FSA) fined banking group Credit Suisse £5.6m because the booking structure that its structured credit business relied on “was complex and overly reliant on large spreadsheets with multiple entries” resulting in “a lack of transparency” and “inhibited the effective supervision, risk management and control”.

As Mel Glass, director of business development at software developer EASA, says: “Spreadsheets may not come with a business health warning as tobacco has done for the last few years, but there is an argument that they should.”

Clearly, vendors of these platforms would say that. But there are many examples of businesses suffering losses because FDs insist on relying too heavily on Excel. And there are FDs who are responding to the challenge by melding purchased bolt-on systems with bespoke in-house built systems that reduce that reliance, so there is a middle way.

The main problem with Excel occurs when inputting data, or trying to change incorrect data entries. People see an incorrect entry and change it within the cell, but they often forget to make sure that the new entry does not corrupt the data for the entire column. As the software does not enable an audit trail to find the original error, users have to find the original data source - if they can.

Corruption fears

There are a host of other common problems with spreadsheets, one of which is the use of formulae. When sorted, these can produce corrupt results, especially if care has not been taken to address these risks. While the use of the software’s ‘edit’ and ‘paste-special’ functions may well resolve these difficulties, it will still require the user to amend the data. Joining databases up also poses problems. It can make the analytical spreadsheet very complex to develop and even more difficult to review.

Tool for fraudsters

Dennis Keeling, a business software analyst, says that organisations should never use spreadsheet interfaces to import data, but should instead use an accounting package. “Most organisations are using the spreadsheet interface to input data into their systems when they already have comprehensive accounting packages,” he says. “This is simply crazy. Anyone can easily manipulate a spreadsheet and, given that it leaves no audit trail, it is a welcome tool for fraudsters.”

Keeling says that those companies with a US listing are taking spreadsheet risk more seriously because they are duty-bound to do so under corporate governance legislation. Section 404 of the US Sarbanes-Oxley Act requires nearly every public company’s chief corporate officers to assess whether the company’s financial reporting system has been effectively controlled during the reporting period. And it specifies that the company must hire an independent external auditor to assess the officers’ assessment. As Excel is one of the key IT tools commonly used in companies’ financial reporting, spreadsheet risk and control is one of the areas on which US regulators want greater assurance.