The Quaestor - Volume 2, Issue 1

The following text was excerpted from a March 4, 2005 Rochester Business Journal article written by Eric Cohen entitled “Relying on Spreadsheets Can Lead to Costly Errors.”

Spreadsheets are great, but it seems like most have some little error in them. What is the worst thing that a spreadsheet error might lead to?

History shows the answer might be public embarrassment, loss of business, fines and penalties, huge financial loss and even business failure.

I compare spreadsheet use within organizations with ants. The ant is a praiseworthy insect–and awfully hard to get rid of when they establish themselves in your home.

In the same way, the spreadsheet is the mighty mite businesses rely on for vital parts of their financial functions. However, spreadsheets proliferate and there is seldom one version of the truth– if any of them do express the truth.

You do not have to go much farther than the front pages of the business section to see examples of big problems from little spreadsheets.

• In October 2003, Fannie Mae had to restate their earnings by $1.2 billion due to “honest mistakes made in a spreadsheet used in the implementation of a new accounting standard.” A new accounting standard, Financial Accounting Standards 149, wasn’t handled by their normal accounting system, so they had to use spreadsheets to calculate the effect.
• An “isolated clerical error” cost TransAlta Power L.P. among Canada’s largest non-regulated power generation and wholesale marketing companies $24 million, according to their website, when in June 2003 they won a number of contracts at a higher price than they should have. Sometimes contracts can be corrected if there is an honest calculation error: not this time.
• The city of Macon, Ga. found itself in a difficult position in June 2004; the spreadsheet said they were doing fine; the bank account said that making payroll on an ongoing basis might be impossible. A spreadsheet error caused general fund expenditures to be understated by nearly $1.1 million. Fortunately, employee attrition, which hadn’t been budgeted for, helped make up the difference.

Given that spreadsheets have often been used for a very long time, and that we rely on the calculations performed, it is a good control to have someone who does not use a particular spreadsheet, periodically review the formulas contained within and give it a general check up. You may be surprised at what you find or what has been hiding in the cells.