Budgeting Basics and Beyond

17.7. A caveat - Perils of spreadsheets

Numerous companies rely on spreadsheets to develop complex financial models, organize financial reporting, and analyze data, not to mention budgeting. Note, however, according to the University of Hawaii, between 78 and 97 per cent of spreadsheets contain "serious material errors" with a potential to devastate the bottom line.

1. A number misrecorded in just one cell of a spreadsheet meant one company had to reduce drastically its fourth quarter outlook. Its shares lost more than 25 per cent of their value.

2. A cut-and-paste error led to another company underbidding for an electricity supply contract.

3. A missing minus sign caused a fund's projected earnings to be overstated by $2.6 billions.

4. Falsely linked spreadsheets covered up a fraud totaling $700 millions at one bank.

5. A faulty macro delayed the introduction of a drug, savaging a pharmaceutical company's profits.

6. A wrongly named spreadsheet led to the inflation of natural gas prices in the U.S. when one company submitted erroneous gas storage figures.

Here are some suggestions that can prevent costly spreadsheet errors.

• Companies need to conduct an inventory of all spreadsheets to identify which are critical and where problems might arise.

• At a bare minimum, those developing spreadsheets should design them meticulously, and once they are completed should test them using known results according to a written plan, test them again using a commercial auditing tool and then attack them for a third time ...