Excel in the City

A financial time bomb?

David Blundell
Originally published in the April 2006 issue

Spreadsheet errors are costing fund management companies millions of pounds. With no control to ensure the integrity of the critical financial reporting process, spreadsheets are a costly time bomb, just waiting to go off. Should companies be banning them or finding new ways of managing them?

Spreadsheets are pervasive in the financial markets and many of them are critical to business and financial success. However, as a tool they can be flawed, inaccurate, and, most importantly, lack the controls that companies need to ensure the integrity of their critical financial reporting processes. Almost every member of staff has access to a spreadsheet application, and yet the application doesn't provide an audit trail to enable managers to track changes and new entries while identifying the author.

Trends towards using spreadsheets to provide greater model complexity with increased numbers of unique formulae and a corresponding increase in model size are compounding the problem. Experts are warning that it is within the realms of possibility that a single, large, complex but erroneous spreadsheet could directly cause the accidental loss of a corporation or institution, significantly damaging the City of London's reputation. Indeed, losses of millions of pounds are already happening due to compounded accidental, as well as deliberate, errors in vital corporate spreadsheets.

One of the real problems for spreadsheet users is that the spreadsheets themselves have become so large. Indeed there is evidence in the financial markets that spreadsheets are operating close to and even beyond, the present technological limits for their size and complexity. As the value and intricacy of financial deals going through London increases, so spreadsheets are becoming an even more integral part of the whole system. Large institutions that handle complex trades worth huge amounts of money are using spreadsheet systems that may not be either appropriately managed or controlled.

Financial time bombs

One of the biggest dangers is that many firms are not even aware of how reliant they, and their business, have become on their home-grown spreadsheets, or indeed of the number of complex spreadsheets on which their business now depends. Nor are they aware of the inherent danger that potentially lurks in even the tiniest spreadsheet error – a misplaced decimal point or badly formatted column. These are financial time-bombs just waiting to go off.

The reasons for the popularity of spreadsheets, and Microsoft Excel in particular, are numerous. The application is pervasive. Microsoft Excel has established itself as a key business application that has helped companies, of all sizes, to communicate everything from their past performance and future expectations to manufacturing performance and business modelling. It's easy and intuitive to use, staff don't require additional training when moving to a new company, and most corporate financial personnel are extremely skilled in its use. The raw analytical power of an application such as Microsoft Excel, together with its ease of use and ready availability, means that it has become the tool of choice for financial and business analysts. And while the experts may say that the application is so inherently flawed in security and traceability terms as well as prone to user error, that the only way to deal with it is to ban its use completely from every financial institution, the reality is that the humble spreadsheet does have a role to play.

The challenge for organisations is how to reduce or remove the risks associated with the spreadsheet. It needs to be given robustness, accountability and security so that it can confidently take its place in the institutional toolkit with the accompanying knowledge that it will stand up to the close scrutiny demanded by compliance procedures and the regulators. Some organisations are choosing to simply ignore the problem, working on the premise that as the disaster hasn't happened yet there is no urgency to the problem. Others are taking a more serious view and urging users to move away from spreadsheets towards more proprietary and rigid applications that will give the control and audit functionality demanded by the organisation. Using this approach, loss to the company will be in the creativity and ease of response to a new challenge, as well as the problem of converting all existing spreadsheets to conform to the new application.

The answer to this problem is simple. Encourage traders, analysts and those creative mathematicians who come up with the latest financial models to keep working within their beloved and well-known spreadsheet application. However, in addition, put in the security measures that will give management and the institution the traceability, accountability and responsibility that they need to satisfy their own board and shareholders as well as the financial regulators.

Once full accountability, tracking and reporting is available, the systemic risk is removed. Transparency means that every single action on the spreadsheet can be monitored, tracked and traced to an individual – no more blacked out cells hiding millions of pounds, version control issues, or fictitious data being pulled off unauthorised systems into seemingly innocuous cells.

"Corporate-weight security"

Spreadsheets are integral to the function and operation of our global financial system – therefore it's unreasonable to expect them to be replaced. Microsoft Excel is here to stay – it has a significant role to play in the City, but it needs to be integrated into the corporate data pool and be given some corporate-weight security. Institutions need to know that they can use it with absolute confidence.

And it doesn't need to be a complicated or expensive exercise. By deploying a technology platform, for example, that provides in-built spreadsheet control and security, giving the necessary Excel spreadsheet lifecycle management, financial institutions will be able to track both the usage and users of a particular spreadsheet, providing a framework for responsible spreadsheet design and use, and will also be able to meet regulatory requirements much faster and for the fraction of the cost of any other proposed application or solution

In any major financial institution it is essential that key and critical spreadsheets are identified, prioritised, tested, corrected, secured and then controlled. Only then can the City of London continue to operate its business using the ubiquitous and magnificent tool that is the corporate spreadsheet.

David Blundell is COO of Netstore