Spreadsheet-Risk

Are you exposing your business to risk by basing critical business decisions on spreadsheet analytics? Did you know KPMG found that 91% of spreadsheets contained errors?
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Spreadsheets are the most pervasive data analysis tool on the planet, thanks to the broad distribution of the Microsoft Office bundle. Spreadsheets are easy to use for simple data analysis and calculations, and they’re a good tool for visualizing simple tabular data via charts and graphs.

However, spreadsheets address only a small fraction of an organization’s business intelligence (BI) needs. Reliance upon spreadsheets for sophisticated data analysis and business decision-support can be inefficient at best, and can expose your company to significant risk at worst.

In this blog series we’ll take a look at 5 things you should consider if spreadsheets are used for business decision support in your organization. We’ll also outline an action plan to help you transition your organization to a more appropriate business intelligence solution.

Spreadsheets are Notoriously Error-prone

Even small spreadsheets can contain thousands of links, formulas, and cell references – and that creates thousands of opportunities for error. Being off by even one row or column returns significantly different results than what you want.

Independent research consistently proves the error rate in spreadsheets is alarmingly high:

  • Researchers at the University of Hawaii found that 88% of spreadsheets contained errors [Source: “88% of spreadsheets have errors”, The Wall Street Journal, April 20th, 2013]
  • Coopers and Lybrand found that 90% of all spreadsheets that are 150 rows or more contained errors [Source: “How to Make Spreadsheets Error-Proof”, Journal of Accountancy, Volume 181, No. 5, May 1996]
  • In a sample of 22 spreadsheets, KPMG found 91% contained errors [Source: “Supporting the Decision Maker: A Guide to the Value of Business Modeling”, KPMG Management Consulting, July 30, 1998]

Which leads us to…

CONSIDERATION #1: Managing Risk

Don’t believe spreadsheet errors represent a significant risk? Just consider two recent headlines to see how simple spreadsheet errors can result in massive adverse financial consequences.

  • Spreadsheet Error Contributes to JPMorgan’s “London Whale” $6 Billion Trading Loss:
    A spreadsheet error was blamed for a $6 billion derivatives trading loss at JPMorgan Chase. Investigators found that “the Value at Risk (VaR) model that underpinned the hedging strategy operated through a series of spreadsheets, which had to be completed manually, by a process of copying and pasting data from one spreadsheet to another, and that it should be automated but never was.”
  • Spreadsheet Error Invalidates Rienhart/Rogoff European Austerity Economic Policy:
    Prominent economists Kenneth Rogoff and Carmen Reinhart used their spreadsheet analysis to advocate fiscal austerity measures for recession-plagued economies. However, researchers trying to replicate their work found a spreadsheet error that appears to call this assumption into question. Sadly, European policy makers had embraced the erroneous findings, which arguably prolonged the European recession for the past two years.

Business Intelligence Helps You Detect and Eliminate Errors, Mitigate Risk

True BI offers vastly superior error-checking and auditability than spreadsheets. BI extraction, transformation and loading routines can be automated so data updating occurs automatically, and the success or failure of each step is logged for a clear audit trail. As a result, you get information you can rely upon for making critical business decisions.

Read more of this blog series, “5 Important Considerations If You Are Using Spreadsheets for Business Analytics”:

Or download the free white paper, “5 Important Considerations If You Are Using Spreadsheets for Business Analytics.”

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