This document discusses spreadsheet errors, how prevalent they are, the types of errors that occur, and stories of errors that caused embarrassment, loss of investor confidence, wrong results, and bad PR. It notes that even experienced users make errors, errors are difficult to detect, and lack of policies and training contribute to errors. It recommends establishing standards, training, imbedding controls, ballparking answers, peer review, and sensitivity analysis to prevent errors.

1. Excel Spreadsheet Errors: What we need to know Designing Financial Models That Work Kristen Mannix: 21239318 April 5, 2010

2. Spreadsheet Errors: How prevalent are they really? The question to ask is how many errors there are, not whether errors exist Research shows that: Even after careful development, 1-5% of all formula cells have errors 85-95% of spreadsheets have errors Both experienced and novice modelers make errors – just because you work in excel all day doesn’t mean you’re immune to making errors! There are 3 major types of errors Mechanical: typos, incorrect data entry, wrong cell reference Logical: mistakes in formulas or reasoning Omissions: misinterpretation of the situation that is to be modeled, left out analysis Not only are we prone to making errors, we also aren’t very good at catching them

3. Why should we care so much about spreadsheet errors? Spreadsheets are everywhere! Excel serves a variety of simple to complex functions: maintaining lists, tracking data, budgeting, analyzing data, determining trends, forecasting and building projections, evaluating alternatives, scenario analysis, etc. Avoid embarrassment and looking careless Prevent wrong results, which could have negative consequences for you and your company Avert the establishment of poor practices within your company Follow the law – Sarbones-Oxley Act (2002) 95% of firms use spreadsheets for financial reporting systems, many of which are not well controlled Any chance of a “more than remote” possibility of material error or fraud in its reporting system requires auditors to give an adverse opinion on the reporting system

4. Here are some stories on why we should care about errors… Avoid embarrassment "Gov. John Lynch's budget team .. has to find another $70 million to make its budget balance. Figures that the Health and Human Services Department provided to budget writers in the fall contained an error that double-counted more than $17 million of Medicaid money in each of the next two years. Maintain investor confidence, shareholder value, and your job! Shares of RedEnvelope Inc. tumbled more than 25 percent Tuesday after the online retailer of specialty gifts drastically reduced its fourth-quarter outlook and said its chief financial officer will resign in April. Stanford Group analyst Rebecca Jones Kujawa said in an interview. "...they were underestimating the cost of goods sold....it is likely CFO Eric Wong is being pushed out because of this error." RedEnvelope spokeswoman Jordan Goldstein said the budgeting error was simply due to a number mis-recorded in one cell of a spreadsheet that then threw off the cost forecast. Get the right results CECO's in-house accounting staff has discovered an accounting error in the spreadsheet calculations used by the Company's construction division for its 'percentage of completion' accounting. The net effect will be a cumulative reduction in revenue of $1,969,000 over the four year period 2000 to 2003 with an equivalent charge to pre-tax net income. Avoid bad PR A snafu in the posting to the web site of minimum bid prices for the first phase of North Port's abandoned lot auction led to confusion as the cost of some lots seemingly tripled overnight. The appraiser hired by the county put the auction lot number, the property ID number and the minimum bid amount onto a spreadsheet in sequential order and, inadvertently, he did not sort the value column.

5. If the impact of errors can be so bad, why do they happen so often? Overconfidence People tend to be very confident about the accuracy of their models The lack of awareness on error prevalence fuels the fire Errors are difficult to detect Data testing and use of safeguards are limited 80% of experienced users use common sense to check for errors 70% test for extreme cases 65% examine formulas individually Lack of corporate policies on end-user development 50-80% of spreadsheet users report that their firm has no standards for spreadsheet control Standard policies are rare: 58% of firms report to have guidelines Enforcement of policies is even rarer: 27% (of the 58%) admit to being compliant with guidelines We are human – we all make mistakes now and then

6. How can we prevent errors from occurring? Take Designing Financial Models That Work! Provide training to employees in spreadsheet design 60% of surveyed employees report that they don’t have spreadsheet training offered to them yearly Establish standards at the company level Imbed control checks Ballpark the answer before building the model Compare results with other benchmarks and perform sensitivity analysis Work in groups The number of errors are reduced as the number of people who look as the spreadsheet increases