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Natalie Melamed Designing financial models that work Spring 2010 Spreadsheet errors
Source>  *Freeman, 1996; **Panko, 2005b; ***Ditlea, 1987; ****Dent , 1995) Humans make mistakes, hence most spreadsheets are bound to contain errors An audit in a mining company found errors in about 30% of the audited spreadsheets****  90% of all spreadsheets with more than 150 rows that a consulting company audited contained errors** A Price-Waterhouse consultant audited 4 large spreadsheets and found 128 errors*** 20% to 40% of all spreadsheets contain errors* Spreadsheet errors exist in all spreadsheets, consistent with other human cognitive domains
Source>  classmate interviews and personal experience While it is difficult, it is very important to minimize spreadsheet errors “ While modeling possible profitability scenarios for the client, one input error could sway our final client recommendation” Management Consultant  “ Incorrectly calculating stock options expense could materially affect the calculated profitability of my employer company, which would result in providing false financial reporting to the SEC” Sr. Accounting Manager “  I made an error in cell reference when doing DCF analysis, which would have resulted in an incorrect recommended acquisition price for our client! Good thing, my mistake was caught by my boss!” Investment Banker A spreadsheet error can cost someone career or even freedom
There are numerous types or errors that require different error prevention techniques Source>  http://panko.shidler.hawaii.edu/SSR/Mypapers/whatknow.htm   Journal of End User Computing; Special issue on Scaling Up End User Development Volume 10, No 2. Spring 1998, pp. 15-21 Revised May 2008; personal expirience ,[object Object],[object Object],[object Object],[object Object],[object Object],Quantitative errors Qualitative errors Interpretation errors Mechanical errors Logic errors Omission errors Type Descrip-tion Personal example ,[object Object],[object Object],[object Object],[object Object],Different controls are required to battle different types or errors
To prevent spreadsheet errors, we need to first understand what is causing them Source>  Natalie’s analysis Educating spreadsheet creators on main causes of errors can be error-prevention already Microsoft Excel Excel User Error! Sense of urgency  Spreadsheets are frequently created under a time pressure Overconfidence  of the spreadsheets creators on the extent of their competency Lack of review Knowing that no one will ever look at the model to review it Lack of organized approach  to spreadsheet creation
Error minimiza-tion Source: Natalie’s analysis The best way to minimize spreadsheet errors is to implement front- and back-end controls ,[object Object],[object Object],[object Object],[object Object],[object Object],Preventative controls Detection controls ,[object Object],[object Object],[object Object],Employing error prevention and detection controls simultaneously can decrease prevalence of errors in the spreadsheet

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Spreadsheet Errors

  • 1. Natalie Melamed Designing financial models that work Spring 2010 Spreadsheet errors
  • 2. Source> *Freeman, 1996; **Panko, 2005b; ***Ditlea, 1987; ****Dent , 1995) Humans make mistakes, hence most spreadsheets are bound to contain errors An audit in a mining company found errors in about 30% of the audited spreadsheets**** 90% of all spreadsheets with more than 150 rows that a consulting company audited contained errors** A Price-Waterhouse consultant audited 4 large spreadsheets and found 128 errors*** 20% to 40% of all spreadsheets contain errors* Spreadsheet errors exist in all spreadsheets, consistent with other human cognitive domains
  • 3. Source> classmate interviews and personal experience While it is difficult, it is very important to minimize spreadsheet errors “ While modeling possible profitability scenarios for the client, one input error could sway our final client recommendation” Management Consultant “ Incorrectly calculating stock options expense could materially affect the calculated profitability of my employer company, which would result in providing false financial reporting to the SEC” Sr. Accounting Manager “ I made an error in cell reference when doing DCF analysis, which would have resulted in an incorrect recommended acquisition price for our client! Good thing, my mistake was caught by my boss!” Investment Banker A spreadsheet error can cost someone career or even freedom
  • 4.
  • 5. To prevent spreadsheet errors, we need to first understand what is causing them Source> Natalie’s analysis Educating spreadsheet creators on main causes of errors can be error-prevention already Microsoft Excel Excel User Error! Sense of urgency Spreadsheets are frequently created under a time pressure Overconfidence of the spreadsheets creators on the extent of their competency Lack of review Knowing that no one will ever look at the model to review it Lack of organized approach to spreadsheet creation
  • 6.