The Importance and Criticality of Spreadsheets in the - SPRIG ...
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The Importance and Criticality of Spreadsheets in the - SPRIG ... The Importance and Criticality of Spreadsheets in the - SPRIG ... Presentation Transcript

  • The Importance and Criticality of Spreadsheets in the City of London Grenville Croll Managing Director Frontline Systems UK Ltd [email_address]
  • Introduction
    • “ How Important are Spreadsheets to Organisations”
      • Presented by Pat Cleary, EuSpRIG 2000
    • Lack of funding so not completed, therefore as of end 2004, we still had no real notion of how important spreadsheets were or are to organisations
    • Personal experience in a City of London financial modelling team only gave a narrow view
    • Noticeable reticence of management to be open
        • No perceived interest in disclosure
        • Obvious problems with confidentiality
  • Introduction
    • Obtained some useful early feedback from the internet Forum
    • Decided to do a series of anonymous , unstructured half hour telephone interviews with 24 senior managers in the City (after MacMillan)
    • City is well defined, and was a natural follow up to an earlier paper documenting Spreadsheet Audit Methodologies in the City of London
  • City of London
    • £13 Bn current account contribution
    • 3% UK GDP
    • $500Bn daily foreign Exchange Turnover
    • 45% Global Foreign Equity Market
    • 70% Eurobonds traded in London
    • $275bn daily turnover in OTC derivatives
    • $844Bn daily futures turnover
    • $2000Bn per annum Metals trading
    • £2500Bn assets under management
  • City of London Main Sectors
    • Accountancy
    • Banking
    • Business Information
    • Exchanges
    • Finance
    • Fund Management
    • Government
    • Insurance
    • Management Consulting
    • Maritime
    • PPP/PFI
    • Regulation
    • Transnational Organisations
    • Transport
  • Interviewees
    • Auditors
    • Accountants
    • Actuaries
    • Bankers
    • Directors
    • Insurers
    • Lawyers
    • Quants
    • IT specialists
    • Regulators
    • Tax Inspectors
    • Senior Managers
    • Private Finance
    • Professional Services
    • Law
    • Investment Banking
    • Fund Management
    • Banking
    • Regulation
    • Insurance
    • Energy
    • Government
    • Business Services
    • Maritime
    • Original Forum Post:
    • “… .. though I have been involved with spreadsheets since 1984…….I have relatively less experience of how Excel is used in the City/Quant environment of today. If anyone could paint a picture of how Excel is used nowadays, it would be appreciated”
    • “ Put simply and succinctly, despite the higher operational risk, Excel is everywhere - it is the primary front-line tool of analysis in the financial business. Most traders price deals in spreadsheets and enter them in large-scale deal capture systems afterwards”
    • “ Excel is utterly pervasive. Nothing large (good or bad) happens without it passing at some time through Excel”
    • “ .. if a customer wants to do a bespoke trade that cannot be handled in our designated booking system then we have to book it in a spreadsheet and add a few bips to cover operational risk capital charge (and additional maintenance). How many bips to add is subjective”
  • Defining Importance & Criticality
    • Six point Scale
    • Outlined by a Regulator
    • Generalised for wider use
    • May be adopted by regulator for future use
  • Defining Importance & Criticality
    • Critical Spreadsheet: if incorrect could
      • Compromise a government, a regulator, a financial market or other significant public entity
      • Cause Significant Breach of the Law
      • Cause Significant Breach of Individual or Collective Fiduciary Duty
      • Cause Possible Application of the Criminal Law
        • Might get jailed
      • Generate Significant Adverse Publicity
  • Defining Importance & Criticality
    • Key Spreadsheet: if incorrect could
      • Cause Significant Business Impact in terms of incorrectly stated Assets, Liabilities, Costs, Revenues, Profits or Taxation etc
      • Cause Breach of Company Law
      • Generate Adverse Publicity
      • Require Remediation through Civil Proceedings
        • Negligence
        • Breach of Contract
        • Might get fined
      • Initiate Internal Disciplinary Action
  • Defining Importance & Criticality
    • Important Spreadsheet: if incorrect
      • Could Significantly Impact the individual
        • Perceived job performance
        • Compromise Career Progression
      • But Limited Impact on the Business
        • Not all of:
          • Direct
          • Great
          • Immediate
          • Irreversible
  • Defining Importance & Criticality
    • Store & Retrieve
      • Spreadsheets used as databases
    • Expired
      • Spreadsheets over three years old, no longer required in the active management of the business
    • Personal
      • Spreadsheets used by the individual in the day to day performance of their duties where the impact of material error is low
  • Use of Spreadsheets in Professional Services firms
    • Findings
      • Extensive use of spreadsheet based financial modelling to support major commercial transactions
      • Many spreadsheets Key or Critical
      • Millions of pounds of time investment in some spreadsheets
      • Good error management in spreadsheets developed for clients
      • Less than 1,000 spreadsheets formally checked p.a.
  • Use of Spreadsheets in Professional Services firms
    • Concerns
      • No “Independence of mind”
        • Undue reliance on the spreadsheet commissioned by the banks or the project sponsor and checked by the firm
      • Oil & Gas – loss of knowledge held in spreadsheets as people retire
      • Key & Critical spreadsheets developed by clients not subject to same scrutiny as spreadsheets developed by professional services firms
      • Not clear to what extent spreadsheets used by clients for financial reporting are independently checked
  • Spreadsheets in Financial Trading and Fund Management
      • “ The whole industry is run on a spreadsheet”
    • “ Critical – couldn’t run the bank without them”
    • “ Spreadsheets are the user interface into the deal”
  • Spreadsheets in Financial Trading and Fund Management
    • Regulator:
    • “ Spreadsheets are integral to the function and operation of the global financial system”
    • Senior Investment Research Manager:
    • “ Agreed. In addition I would say that the majority of people who use the financial system are not appreciative of the role that spreadsheets play”
  • Spreadsheets in Financial Trading and Fund Management
    • Used to Value Financial Instruments of all types
    • Used to strategically run large institutions
    • Prime data source for complex transactions
    • Key data/information manipulation tool
    • Main mechanism for reporting capital adequacy
    • Most heavily used in the more innovative ie “more risky” parts of the market
    • Used to guide/make decisions on what to trade
    • Used to calculate fund’s daily P&L
  • Spreadsheets in Financial Trading and Fund Management
    • Spreadsheet users almost all self-taught
    • No wide appreciation of spreadsheet error risk
    • Spreadsheets near, at or beyond limits
    • Millions of untested uncontrolled spreadsheets
    • Endemic denial of the use and extent of use of spreadsheets at top management level
    • Little discernable interest in Spreadsheet Error Risk & related issues
  • Conclusions
    • Some parts of the City don’t use key & critical spreadsheets much – law, maritime
    • Some parts of the city use key & critical spreadsheets a great deal, and manage them well – professional services, clearing banks, PPP/PFI, limited recourse finance
  • Conclusions
    • Large parts of the City are critically dependant upon untested key and critical spreadsheets
    • Large parts of the City are almost unaware of the risks to which they are exposing themselves – financial trading, fund management, investment research, corporate financial reporting
  • Conclusions
    • “ If the uncontrolled use of spreadsheets continues to occur in highly leveraged markets and companies, it is only a matter of time before another “Black Swan” event occurs causing catastrophic loss ”
  • Conclusions
    • “ It is completely within the realms of possibility that a single, large, complex but erroneous spreadsheet could directly cause the accidental loss of a corporation or institution, significantly damaging the City of London’s reputation ”
  • Recommendations
    • Identify, Prioritise, test, correct and control Key & Critical Spreadsheets to improve profitability
    • Improve Regulatory framework
    • Promote the emerging discipline of Spreadsheet Engineering
    • Train Management & Staff
    • Deploy software tools to assist
    • Develop next generation spreadsheet technology