Sarbanes-Oxley demands spreadsheet risk management

The recent introduction of Sarbanes-Oxley in the US has meant that US-listed companies need to ensure their spreadsheets are controlled. It won`t be long before the rest of the world needs to address this issue. The proliferation of error-prone spreadsheets threatens to undermine controlled financial reporting.

This is the first Industry Insight in a five-part series in which I investigate the problems and the solution.

Spreadsheets were designed to capture and manipulate financial information. However, with so many different inter-related spreadsheets, containing a variety of formulas and with simple human intervention, errors are bound to, and do, creep in.

PricewaterhouseCoopers research showed that 91% of spreadsheets have at least a 5% error margin. KPMG found the same percentage with major errors. Butler discovered that 86% of spreadsheet errors result in extra tax payments.

Any business that uses Excel, Lotus or similar products should be aware of the potential problem lurking in the business.

Adrian Miric, MD, Miricle Solutions.

The causes of these findings often have dire consequences in businesses. For example, a financial misstatement by NASA resulted in a difference of $644 million. The cause was a misinterpretation of guidance and errors in the administration`s ad hoc process for generating budgetary information, based on undetected errors in the spreadsheet process.

A Canadian company, TransAlta, took a $24 million knock on a bid for US power transmission when an employee performed a cut-and-paste error in an Excel spreadsheet. The bid went ahead in accordance with the law in New York, even after the error was discovered.

Controlling these potential problems is a straightforward process involving five steps, which are:

* Perform a high-level analysis
* Establish a spreadsheet review group
* Prepare an inventory of risks
* Help regular spreadsheet developers
* Control identifiable spreadsheets

By effectively handling the issue using this process, companies mitigate the risks and reduce the potential for error.

The benefits of effectively dealing with the problem are:

* Reduced errors, ensuring the business can accept lucrative jobs, avoid loss-making jobs, more accurately simulate model drivers, and have employees more focused on their core function.

* Confidence in results of financial data manipulation.

Any business that uses Excel, Lotus or similar products should be aware of the potential problem lurking in the business, particularly if important business decisions are based on the information they provide. An important question to ask is whether or not the models employed are tested or reviewed at all and whether or not costly errors have already been found.

In the next Industry Insight in this series, I will discuss the importance of a high-level analysis of spreadsheet proliferation throughout the organisation.