The document discusses spreadsheet errors, categorizing them into mechanical, quantitative, and logical reasoning errors. It notes that spreadsheet errors are common, with 88% of examined spreadsheets containing errors. The prevalence is due to human error, lack of standardization and accountability in spreadsheet development. The implications are that one error can render a spreadsheet useless, and inaccuracies can have serious financial and legal consequences given spreadsheets' important business uses.

1. The Prevalence ofSpreadsheet Errors Paul Collins / Designing Financial Models that Work / 2010 Spring B 4/5/10

2. What are Spreadsheet Errors? There are many, but we’ve categorized them into three over-arching types: Mechanical Errors Data Entry Typing 376 in a cell instead of 367 Quantitative Errors Misplaced parenthesis: D26+(E12/E26) instead of (D26+E12)/E26 Failure to “lock” cells: $D$4*E12, $D$4*E13 instead of D4*E12, D5*E13… Logical Reasoning Errors Using the incorrect function to complete calculations based on fundamental misunderstanding of the mathematical concept Calculating the Variance =VAR(E12:E26) when Standard Deviation =STDEV(E12:E26) is the appropriate calculation Basing calculations on inaccurate or unclear assumptions Using incorrect or unreasonable interest rate when evaluating an investment Sources: Panko, Raymond, What we Know about Spreadsheet Errors; SERP Survey, Tuck School of Business at Dartmouth; Simkin, Mark, Ferret Out Spreadsheet Errors; Collins’ analysis

3. Why do they Happen? Human Error People make mistakes Lack of Standardization Most organizations do not have formalized spreadsheet development policy or training programs Most spreadsheets are created by business analysts with varying degrees of spreadsheet experience and expertise, not computer programmers No governing body creates standards or captures best practices Lack of Accountability Spreadsheet development is generally a solitary assignment Most organizations do not employ rigorous checks and balances systems to stress test models Fraud Largely as a result of #2 and #3, there is an opportunity for spreadsheet experts to manipulate the system for personal benefit Sources: Panko, Raymond, What we Know about Spreadsheet Errors; SERP Survey, Tuck School of Business at Dartmouth; Simkin, Mark, Ferret Out Spreadsheet Errors; Collins’ analysis

4. How Big of a Problem is it? Formal studies and anecdotal evidence have concluded that spreadsheet error is imminent Formal Studies Of 113 real-world spreadsheets examined from 1987-2007 by a variety of field audits, 88% were found to have errors Spreadsheets, even after careful development, contain errors in 1% or more of all formula cells Anecdotal Evidence Broadly speaking, when humans do simple mechanical tasks (typing, data entry), their error rate is about 0.5% When they do more complex logical activities (writing programs, mathematical computations) the error rate increases to about 5% The Bottom Line: ITS NOT A MATTER OF IF A SPREADSHEET CONTAINS ERRORS, IT’S A MATTER OF HOW MANY Sources: Panko, Raymond, What we Know about Spreadsheet Errors; SERP Survey, Tuck School of Business at Dartmouth; Simkin, Mark, Ferret Out Spreadsheet Errors; Collins’ analysis

6. Many spreadsheets are complex and link data together from various parts of the worksheet, meaning one error can render an entire spreadsheet useless

7. Proliferation of spreadsheet use

8. 95% of US firms use spreadsheets in their financial reporting systems

9. Spreadsheets are used across a variety of organizational functions including finance, operations, sales & marketing, R&D and are often used to share information and communicate between groups

10. About half of spreadsheets become “permanent assets” for the organization

11. Importance of spreadsheet accuracy

12. Spreadsheets are used for many of the most important business activities, including financial budgeting, forecasting, sales tracking, executive compensation and others

13. Auditing of inaccurate reporting in financial reporting spreadsheets under the Sarbanes-Ox ley Act can result in fines, prison time and serious stock value lossesSources: Panko, Raymond, What we Know about Spreadsheet Errors; SERP Survey, Tuck School of Business at Dartmouth; Simkin, Mark, Ferret Out Spreadsheet Errors; Collins’ analysis