Spreadsheet Risks
The potential for making errors in using spreadsheet programs in finance
What are Spreadsheet Risks?
Spreadsheet risks do exist even in large businesses that use such programs. Though spreadsheets are considered among the most important and powerful tools for organizations and businesses over the past several decades, that doesn’t take away the fact that spreadsheets are subject to human errors. In addition, they can be easily altered and manipulated, and they often lack internal control.
Spreadsheet Errors and their Impact
Spreadsheets are convenient to use, especially for accountants and other finance professionals. However, spreadsheets wait for units and figures to be inputted into them by the human component of the auditing process. With humans being prone to making mistakes, errors can be made on spreadsheets.
There are basically three main categories of spreadsheet errors, namely:
- Data input errors
- Calculation or formula errors
- Formatting errors
Errors are the beginning of risks. When such errors take place frequently and become a habit, the risk increases. Often, there is a lack of error-checking and review, which can be detrimental to the business. In fact, errors in spreadsheets happen very frequently, at an estimated rate of 88%.
Examples of Spreadsheet Risks
In order to create spreadsheet reports that are accurate and error-free, it is important for accountants and business owners to understand the different spreadsheet risks. They are explained below:
1. Unskilled users
Many people think that basic knowledge in the use of Microsoft Excel is already equal to knowledge in using spreadsheets. This is not true, as using spreadsheets requires rigid training not only for beginner auditors but also continuing training for updates. Mediocre knowledge and experience can lead to inaccurate computations, use of the wrong formulas, and even linking to other spreadsheet presentations.
2. Insufficient guidelines for spreadsheet preparation
Spreadsheet use should be prepared for by the users by equipping themselves with the right knowledge. Therefore, organizations should provide a guidebook that explains how spreadsheets are used in the simplest language possible. It should contain information and instructions on how to use the spreadsheet software.
3. Recycling of data
Cut and paste is a common habit of people. Though it saves a lot of time and allows people to do more in a shorter period of time, it isn’t always a good idea. This is because, through time, formulas can be damaged and changed, and links broken, which can lead to inaccurate reporting.
4. Errors in spreadsheets
No matter how good a user is at performing spreadsheet calculations, the risk of making mistakes is still always high because of human factors. This is especially true with people’s habits of chatting, taking frequent bathroom breaks, checking phones, and other habits.
5. Data loss
In so many instances, a lot of data is lost due to breakdowns and power failures. In such cases, hours of data entry are lost in the blink of an eye, causing the accountant to have to redo everything from the beginning, wasting time and resources.
How to Address Spreadsheet Risks
Just like other forms of risks, spreadsheet risks need to be addressed in order to minimize them or eliminate them once and for all.
1. Training and continuous development
As already mentioned above, training programs are necessary for every company that uses spreadsheets in their reporting. Such training should be provided to all users of the software, whether they are beginners or veterans in the process. Regular training should be conducted to make sure that everyone is updated with changes and new trends in spreadsheet use.
2. Security of data
Passwords must be in place in order to secure spreadsheet reports and restrict access to only the company’s accountants. To address the recycling of data and data entry, it is advised that business calculations are kept separate from input data.
There should also be the presence of data validation options that help accountants and auditors restrict the entry of data if unauthorized.
3. Data backups
Loss of data can be avoided by constantly saving the spreadsheet report as the accountant goes along with his work. Additionally, the files should always be saved into the network and not just on the desktop to secure a backup copy should either of the machines fail.
4. Good quality software
Companies should invest in good-quality spreadsheet software. The more expensive ones can cost the company more, but it is usually just a one-time expense that can be recovered by creating accurate reports.
Final Word
Spreadsheet risks are real, and they pose great problems to businesses and organizations if left unresolved. With spreadsheets, both humans and machines work together to create accurate business reports.
More Resources
CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.
To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:
