Most companies today are using spreadsheets, in at least some form or fashion, for part of their financial reporting. However, most don’t realize just how prevalent errors are in those spreadsheets and how much it’s costing businesses each year. While spreadsheets have their place, they’re being used for things of which they weren’t designed and expected to perform tasks far beyond their abilities.
Looking at reporting in the 21st century has made two things clear: First, spreadsheet use is nearly universal, and second, every study measuring its errors shows rates that would be unacceptable in any other functional area of an organization.
According to the latest numbers, a whopping 71% of organizations depend on spreadsheets for collecting data throughout their business – and 88% of those spreadsheets contain errors, often significant. This leads us to ask why would any organization rely on technology clearly not suited for the complexities of financial reporting?
There’s two quick and easy answers:
The limitations of Enterprise Resource Planning software. Because company’s underlying data comes from either one or multiple ERP system(s), and ERP systems were built to aggregate data, not report on it.
Already over-burdened IT departments. As you know, when any finance team needs new or updated information, they have to ask an already strained IT department.
That’s why the majority of finance departments resort to using spreadsheets to fill the gap in their reporting process. Smart finance people can import data into a spreadsheet and perform lots of calculations and summary information by themselves. That’s great and all, except for the errors which follow. Unfortunately, that’s precisely what’s led to what the “Future of Financial Reporting” survey calls an uncontrollable “spiral of spreadsheets”.
Also, spreadsheet development is analogous to programming; but unlike programming, spreadsheet developers rarely implement disciplines long known to be necessary for software development. Much like programming where code multiplies and errors cascade, spreadsheet users can develop reports with thousands of cells – and unless the percentage of incorrect cells is nearly zero, there’s a high probability of bottom-line errors.
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Digging into the details, we can see more clearly why this is the case. It’s been shown that when humans do simple mechanical tasks, such as typing, they can make undetected errors in about 0.5% of all actions. When doing more complex activities, such as writing programs or creating a spreadsheet formula, the error rate rises to about 5%. We can’t stop there though. Unfortunately the situation is much worse than just that. We’ve known for a long time that in tasks containing many subtasks, error rates multiply along cascades of subtasks. In spreadsheets, many bottom-line values are computed through long cascades of numerical and formula cells.
Piece it all together and it’s not hard to see why it takes a full week or more for 35% of organizations to produce monthly reports and at least two weeks for 33% to produce quarterly reports. Based on our considerable experience, we suspect that the latter two percentages are actually larger than reported. The bottom line is that the data is unequivocal and demands action by finance executives.
Next week we’ll dive deeper into the psychology behind why finance professionals are still using spreadsheets for reporting in spite of knowing its inherent errors. We’ll discuss why this should matter to you and what you can do about it to improve your strategic decisions.
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