Spreadsheets: What Can Go Wrong?

The rise of spreadsheets

Spreadsheets have dominated finance departments for four decades now. From its initial launch for Macintosh computers in 1985 to its widespread adoption in the mid-90s with the broader Microsoft Office suite, Excel has been particularly revolutionary for finance professionals.

With its introduction, an easily accessible tool allowed financial teams to carry out complex calculations and manage large amounts of data with custom-built formulas. The substantial increase in computer power that came with Excel paved the way for faster and increasingly complex products, in turn complicating financial products and corporate finance.

Excel is now firmly middle-aged, has seen several transformations and increases in its functionality, and is still the most used tool across many corporate functions, such as marketing, client management, procurement — but most importantly, accounting and finance.

Finance departments’ reliance on Excel cannot be overstated: according to a study from 2019, slightly over half of all companies used Excel as their primary accounting and corporate finance tool. The headline figure, however, is deceiving. While many have migrated towards cloud solutions for accounting, most of the input data from companies’ finance departments still originates and gets tracked in Excel. Often, it is then simply copied and pasted into more complex, cloud-based systems.

The overuse of Excel is a problem that primarily affects small to medium-sized enterprises, even though larger companies, such as Levi’s, are not immune. As recently as the end of 2021, two articles published in the Wall Street Journal created intense discussions amongst CFOs and controllers on the overreliance of their staff on the tool and the risks and limitations that come with it.

Excel is ubiquitous, but is it useful?

The main advantage of Excel is its flexibility. The program provides a framework for data management and analysis that can easily be customized and adapted to each company’s specific needs. Another substantial advantage is its ubiquity: anyone with a financial education has used the tool extensively and is trained in its use.

These advantages, however, are also its most significant drawbacks. The effectiveness of Excel depends on its users’ ability, the quality of the data that is generated and then analyzed, and on accurate tracking of changes and mistakes. The margin for error is extremely high, as some companies have painfully discovered.

A famous example is the embarrassing case of British retailer Marks & Spencer. M&S’s CFO was forced to retract their quarterly financial report in the summer of 2016, changing the headline from a small profit of 1.4% to a loss of 0.7%. Because of a clerical error in Excel, a revenue line had been duplicated and thus double-counted.

There are countless other examples in financial history — from Barclays’ purchase of worthless assets from Lehman Brothers in 2008 because some Excel lines were hidden in the spreadsheet, to the $2.6 billion mistakes at Fidelity’s Magellan fund, which was caused by an accountant missing a minus sign.

All of this serves to highlight that, while Excel is often beloved by its users and has its place at certain companies, it shouldn’t be the primary tool controllers and CFOs rely on. Mistakes are simply too easy to make — and they can be costly and damaging to the firm’s reputation.

Only as good as its users

User dependent

As highlighted above, Excel’s advantages and drawbacks are the same. The most notable feature is the extreme flexibility: users can build complex formulas and even use the “customize Excel” function. However, this flexibility makes each spreadsheet very dependent on the skill and the accuracy of the primary file creators and users.

It is common for a file to be nearly impossible to read and understand by other users. Furthermore, a lot of Excel users are self-taught. It is estimated that over 90% of all Excel files contain mistakes. Often, a small group of individuals within an organization will build complex files that are continuously built upon and patched with manually entered data. With each addition, the probability of a mistake or a wrong input increases, and in the case of complex linked files, it can significantly alter the results.

Versioning is also a vital issue. As several iterations of the same file are emailed and circulated across a company, the original source of the numbers becomes increasingly challenging to track. When the original file has undergone many changes, and the key personnel has changed functions or left the company, it may be impossible to restore a spreadsheet on which crucial historical data is calculated and stored.

Garbage in, garbage out

Most data in Excel is still manually transcribed. In fact, the Harvard Business Review found that employees in a finance role spend 30% of their workday on Excel tasks. When data is collected and analyzed across different departments of an organization, the information needs to be normalized and standardized. If that is not the case, any comparison is rendered invalid.

Discrepancies in data can be as simple as a typo or the wrong formatting of a cell (from a date to a number, for instance) or as complex as strategic issues. Are the different teams using the same inputs and calculating important KPIs the same way? Are CFOs comparing apples to oranges when they are looking at management accounts?

Finally, there is also the issue of maintaining data integrity when transposing it from the sources, such as payroll, POS, or other software that generates data. Each additional step that removes a figure from the point in which it is generated amplifies the probability of a mistake. User dependency also makes Excel an excellent tool to hide fraud and corporate misconduct — the cases of the JPMorgan whale and AIB come to mind.

Difficult to audit and track mistakes

Excel spreadsheets are challenging to review and audit, so much so that specialized parties check important files to potentially save companies embarrassment and money. These companies still rely on individuals who need to have extensive knowledge of the software, a lot of time, and more than a working knowledge of accounting and of the sector a company operates in to be effective at reviewing spreadsheets.

When cost control and compliance with regulation become increasingly important, controllers and CFOs must accurately understand all the workings of their firms. However, this does not appear to be the case. According to a study, 40% of boards lacked sufficient insight into their companies’ operations to make correct and valuable forecasts and decisions. Additionally, 50% have found errors that have led to disciplinary actions, up to and including termination.

To be continued…

Now that you’re familiar with the history, pros, and cons of spreadsheets, learn about the future of spreadsheets. How are hybrid workplaces affecting corporate spend and accounting operations — and what does that mean for your company? Read more.

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