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Spreadsheet errors Natalie Melamed Designing financial models that work Spring 2010 Spreadsheet errors exist in all spreadsheets, consistent with other human cognitive domains An audit in a mining company found errors in about 30% of the audited spreadsheets**** 20% to 40% of all spreadsheets contain errors* 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*** Humans make mistakes, hence most spreadsheets are bound to contain errors Source> *Freeman, 1996; **Panko, 2005b; ***Ditlea, 1987; ****Dent , 1995) A spreadsheet error can cost someone career or even freedom “While modeling possible profitability scenarios for the client, one input error could sway our final client recommendation” Management Consultant “ 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 “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 While it is difficult, it is very important to minimize spreadsheet errors Source> classmate interviews and personal experience There are numerous types or errors that require different error prevention techniques Type Qualitative errors Personal example Descri p-tion Mechanical errors Logic errors Quantitative errors Omission errors Interpretation errors Data entry typos Wrong cell reference Mistakes in reasoning Excluding calculation or data Errors interpreting spreadsheet output The stock option expense calculation spreadsheet system required a lot of manual data entry and data referencing to spreadsheets in multiple workbooks, which resulted in many broken links on top of simple data entry errors In the spreadsheet forecasting gas station operating expenses in 2020, I applied a quarterly electricity cost increase to an annual forecast model In the stock option expense calculation spreadsheet system, I forgot to include a modification of a large stock option grant to VP Engineering, which resulted in understatement of expense for the quarter of $170,000 My subordinate misread the output of my stock options expense calculation model and booked an annual stock options expense into the general ledger instead of booking only the amount for rourth quarter Different controls are required to battle different types or errors 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 To prevent spreadsheet errors, we need to first understand what is causing them Sense of urgency Spreadsheets are frequently created under a time pressure Lack of organized approach to spreadsheet creation Microsoft Excel Excel User Error! 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 Educating spreadsheet creators on main causes of errors can be error-prevention already Source> Natalie’s analysis The best way to minimize spreadsheet errors is to implement front- and back-end controls Detection controls Preventative controls Prevent errors while the spreadsheet is created •Design spreadsheet •Walk someone through the spreadsheet creation process •Document the spreadsheet map •Use cross-footing Error minimization Detect errors before spreadsheet results are used, but after the spreadsheet is completed • Compare spreadsheet output with ballpark estimate • Audit cells for formula consistency Employing error prevention and detection controls simultaneously can decrease prevalence of errors in the spreadsheet Source: Natalie’s analysis