IT Strategy: Spread betting

Historically the accountants’ best friend, but fast becoming the finance
directors’ worst enemy, the humble spreadsheet is increasingly coming under
attack.

Countless software companies are attempting to cash in on its failings, from
Adobe to Cartesis to Oracle. And, rightly so. The spreadsheet is a weak link in
the corporate reporting chain, with directors, managers, individual members of
staff and sometimes entire departments maintaining their own mini
spreadsheet-empires.

Companies must gain far greater control over their data and information, or
compliance will go down the toilet faster than you can say “that would never
happen to me”. Consider the recent horror story when, in November last year,
Kodak was forced to increase its already swollen third-quarter losses by an
extra $9m. The relatively modest increase to $1.038bn was due entirely to a
spreadsheet error.

While it was only a small restatement, in contrast to the company’s already
jaw-dropping losses, what little confidence investors and analysts may have had
left in the company could have suffered irreparably.

In a separate, but perhaps even more embarrassing incident, that same month
Australian bank Westpac was forced to halt trading on its shares and deliver its
record results a day early because details of its $2.82bn profit were
accidentally sent to research analysts. The bank’s latest results were embedded
in a template of the previous year’s results and accessible with a minor
manipulation of the spreadsheet.

Both incidents show how easy it can be to let seemingly minor errors or
oversights snowball into a major market-effecting event. In a statement at the
time, Kodak’s chief financial officer, Robert Brust, was forced to concede that
the error was due to an “internal control deficiency that constitutes a material
weakness”. The reality was that too many zeros were added to an employee’s
accrued severance in an Excel spreadsheet.

At a recent event, James Bennet, director of technology, communications and
entertainment at Ernst & Young, summed it up when discussing the current
compliance demands faced by companies and how they fit with the technology
frameworks many organisations are maintaining. “A patchwork quilt of financial
systems glued together with Excel spreadsheets simply won’t work in today’s
world,” he said. This is especially true when we consider frequent claims that
up to 80% of spreadsheets contain errors.

Small cap JKX Oil & Gas made for better reading recently, with news that
it has signed a deal to implement Cartesis Magnitude, a management reporting and
financial consolidation package, to replace its current spreadsheet environment.
It is worth a closer look. JKX has grown exponentially over the past four years.
Listed on the LSE, with headquarters in London, the company’s principal overseas
operation is in the Ukraine.

Until now, the company has been using a spreadsheet-based reporting
environment, and as part of the tender process, when Cartesis was ultimately
chosen, it actually considered keeping it. “We felt that there was too much
concern over its integrity on an ongoing basis,” says Sue Rivett, financial
controller at JKX. “There is always a certain amount of concern with the
integrity of spreadsheets, particularly if someone builds them and someone else
takes them on and doesn’t know the full set up,” she says.

With one, albeit substantial, cast of the die, JKX has gained greater control
over its business. Rivett can access data from the company’s operations more
easily, rather than having to rely on spreadsheets manually-produced in the
Ukraine. “Spreadsheets are updated on an automated basis from Magnitude, so our
risks are greatly reduced,” she says. And for a company which has operations in
some of the less settled regions of the world, this has to be for the best.

Organisations now have so much information that it is almost impossible to
maintain proper controls using legacy applications, disparate spreadsheets and
Access databases. But while compliance is a buzzword too often used by the
software industry to try and frighten finance directors into buying their
products, it can also offer substantial value-creating benefits.

Rivett says that the Cartesis software implementation will allow her company
to grow, as well as cope with any industry step-changes far better than it ever
could using traditional spreadsheets. It will also allow her greater control and
improve confidence over the integrity of that data.

In a recent research paper for the European Spreadsheet Risks Interest Group,
its membership secretary, Grenville Croll, interviewed several senior financial
executives about the uncontrolled use of spreadsheets. “It is completely within
the realms of possibility that a single, large, complex but erroneous
spreadsheet could directly cause the accidental loss of a corporation or
institution,” he says. Don’t let it be yours.