September 19, 2014
Several studies have revealed that almost 9 out of 10 spreadsheets contain errors and a majority of these errors can be classified among human errors, the ones which could have been avoided.
Some of the major financial blunders which were reported and later studied, over the past few years, were found to be caused due to spreadsheet errors.
These revelations have added fuel to this issue and has increased pressure for organizational action. A study published by Harvard economists Carmen Reinhart and Kenneth Rogoff in 2010 on the topic of – Sustainability of debt – contained a major math error. After the discovery of these errors, the economist duo’s popular economic theory, which was based on spreadsheet calculations, was nearly quashed .
In the 2012 ‘London Whale’ incident, JPMorgan Chase JPM +0.53% lost more than USD 6 billion due to Excel spreadsheet errors, which included alleged copying and pasting of incorrect information from multiple spreadsheets. Barclays Bank in 2008 also had to bear huge losses due to spreadsheet errors. In an offer to purchase another firm, the UK bank sent a report that hid – instead of deleted – nearly 200 spreadsheet cells. After studying these cases it could be very easily understood that even small spreadsheet mistakes can cost companies billions of dollars or ruin a professional’s career and reputation.
Researchers and accounting experts say that 88% of all spreadsheets have ‘significant’ errors in them, while claiming that the most carefully crafted spreadsheets even contain errors in 1% or more of all formula cells. The spreadsheet software provides a user-friendly data entry platform for students and marketing, sales and finance professionals. However, there are still equal chances that a user may overtype incorrect numbers or formulas, or incorrectly factor in numbers.
The effect of miscalculations in the balance sheets for families and small businesses may be small, but these errors can have a much greater financial and professional impact in the case of large organizations.
Like most of the computer programs, using spreadsheet software like Microsoft Excel is a manual process. This makes your calculations more susceptible to human error, which include keying in the wrong numbers or copying over the wrong amounts. Every formula in the program is unique and is created to perform a specific task. Unfortunately, the program doesn’t have an automated tool to check for spreadsheet errors.
Some industries are proactively avoiding spreadsheet miscalculations by creating industry-wide standards of financial modeling. On a smaller level, organizations can skirt many major errors by developing a company-wide comprehensive policy for spreadsheet development. And, a good practice for any business is to include a final peer review or ‘scrub’ of all spreadsheets before including them in analysis. Experts say that many mistakes can be spotted early visually or through double-checking formulas.