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.

Some companies have recognised the potential dangers and are trying to wean themselves away from relying too heavily on Excel. “We have greatly reduced our reliance on Excel spreadsheets for our budgeting and forecasting processes,” Andrew Cherry, group finance director at Volex Group, a producer of electronic and fibre optic cable assemblies, tells Financial Director. “Until 2009, the annual budget was completed exclusively within Excel. However, as the sophistication of our budgeting and forecasting processes improved, we found that Excel alone was not sufficient to accommodate the number of users – with all of the inherent challenges posed over version control – nor could it facilitate the granularity and multi-dimensionality of our business.”

The headline risk for Volex, says Cherry, was that it did not have the correct information to support the strategic business decisions it needed to make to the business. “Excel did not provide a robust and detailed enough view of either the historical or future business performance,” he says.

David Manson, chief financial officer at Craegmoor, an organisation that helps people with learning difficulties, admits his business is still relying too heavily on Excel. He reports a “proliferation of spreadsheets being used throughout the business, which increases the risk of the numbers being wrong”. He adds that he is trying to wean the organisation away from Excel and is about to trial alternative solutions.

Excel is not a difficult programme to master, “but it is very easy to make massive mistakes very early on when inputting data,” says Manson.

A key problem Manson has found is that, because financial and management data on spreadsheets is shared among management and staff, it is easy for people to amend the figures on their own PCs and laptops. As a result, employees inadvertently create multiple sets of figures ostensibly based on the same data. “There are times when we have to debate which numbers are right and this can take time and can impact management decisions. The software is just too easy to manipulate without leaving an audit trail,” says Manson.

David Finch, head of group business risk and assurance at building merchants Travis Perkins, says that determining an audit trail of how results have been calculated is a serious issue.

“If the review is only destined for consumption within the organisation as a ‘nice to know’ statistic, then the route by which you reached your conclusions may well be irrelevant,” he says. “However, if the analytics are destined for a criminal court, then you may need to be able to demonstrate that the data has not been interfered with. Other data analytics solutions retain a full audit trail and provide the evidence of what steps were taken to arrive at a conclusion, but Excel doesn’t.”

Building an inventory

Andrew Craig, former FD for travel group Hogg Robinson and now part-time FD for a range of entrepreneurial businesses, sees his businesses continuing to use Excel. He says that to reduce the likelihood of creating different sets of figures, companies should ensure that business-critical spreadsheets are held on the organisation’s network rather than on PCs or laptops, and that these are regularly backed up.

He recommends building an inventory of business-critical spreadsheets with designated owners accountable for their integrity and development. And he believes there should be rigorous, ongoing testing of the calculations within spreadsheets and that the results are reconciled back to the underlying data each time.

To the chagrin of Oracle and its rivals, Excel is likely to continue enjoying the support of FDs for now. But that does not have to be a bad thing if there is a plan to ensure it is used properly and supported by programs that give it the audit trail it lacks.

“Organisations should use an accounting package to store financial data, and only use Excel to analyse that data to create financial reports,” says Craig. “Spreadsheet errors often arise when organisations use Excel to store financial data. The package just isn’t designed to do that.”