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Compliance : Sarbanes Oxley : Auditing : Financial Close

Spreadsheet Errors That Make Auditors Blush

By Susan Parcells
Susan Parcells
Director of Finance Transformation
BlackLine Systems

We’ve heard about spreadsheet errors costing companies millions and even billions of dollars, but have we actually considered our own potential risks? Sadly, many of these errors were due to simple mistakes such as the cut and paste error which cost TransAlta an estimated $24 million.

Fidelity identified a $2.6 billion error when one of its accountants omitted the minus sign on a net capital loss of $1.3 billion and incorrectly treated it as a net capital gain. Similarly, a spreadsheet error at Fannie Mae cost the company in excess of $1 billion, causing the share price to fall from $73.10 to $2.25 after the error was announced publicly. These are just a few examples of errors that not only cost the organizations involved significant amounts of money, but also considerably damaged their reputations and credibility. According to a study performed by Raymond Panko and the University of Hawaii, “The issue is how many errors there are, not whether an error exists.”

There is no denying that spreadsheets can be a very useful tool. They are flexible, can assist with data analysis, “what if” scenarios, etc. But, while this tool can be quite powerful, it lacks the security controls necessary to compensate for potential human errors. What makes the spreadsheet discussion even scarier is that research has shown at least 88 percent of spreadsheets have errors within (Jeremy Olshan, 2013), yet companies continue to rely on them for recording and reporting their financial positions. For some companies, the sheer volume of spreadsheets they use makes it a challenge in and of itself to ensure adequate controls are in place and that they are effective. Let’s take a look at who is at risk for spreadsheet errors, common types of spreadsheet errors and ways companies can reduce or eliminate the risk of these errors occurring in the first place.

Risks around spreadsheets are not limited to large organizations. Companies of all sizes, in all geographic locations, and in all industries can be at risk. For instance, at the 2012 London Olympics, attendance at the synchronized swimming events was oversold by 10,000 due to a data entry error (20,000 available seats were keyed in instead of the correct 10,000). Imagine the disappointment for all of those attendees who “thought” they had tickets. Even government officials have faced embarrassment due to spreadsheet errors. In 2010, Harvard University economists Carmen Reinhart and Kenneth Rogoff created a budget-cutting agenda that was relied upon by numerous politicians including the House Budget Chairman and a former Treasury Secretary. The study was later found to have an error in one of the spreadsheets. While this error did not have a financial impact, per se, on the country’s economic state, it certainly was a public relations disaster.  

Are you worried yet? You should be, especially when we consider all of the activities where Finance and Accounting departments use spreadsheets. These activities include budgeting, forecasting, tax calculations, inventory or fixed asset tracking, task management and account reconciliations, to name just a few. Ultimately, the company’s financial position and its reputation are dependent upon these spreadsheets and their accuracy, making these risks a concern for everyone. With the deadline looming at the end of this year for companies to transition to using the new 2013 COSO Framework as the basis to monitor key internal controls in their Finance organizations, the pressure is on Finance and Compliance executives to do whatever they can to mitigate such risks.

We have established that all entities relying on spreadsheets can be at risk, but let’s look at where the vulnerability really lies. Part of the problem is that companies depend on controls placed around their spreadsheets that may not truly get rid of the most costly potential errors. Some  common controls around spreadsheets include multiple levels of review, password protection, version control and hash or batch totals. While these controls have some benefit, they do not completely protect the company from those hidden errors that have so often been the root cause of material inaccuracies in a company’s financials. Hidden errors can include things like hard-coded formulas, manual data entry errors, circular references, white font, hidden sheets/columns and formula errors. These types of errors are not always transparent, especially with some of the more complex spreadsheets.

The good news is that technology can enable companies to take advantage of other means to perform these same tasks without relying on spreadsheets, thus greatly reducing the potential for mistakes.  Whether you are looking to automate your budgeting and forecasting, your tax computations or your month-end close processes, solutions are available in the marketplace that can help. Why not eliminate the potential risk associated with these tasks so that your auditors, stakeholders, and most importantly you, can confidently rely on your numbers?

Account reconciliations are one of the most important controls during the financial close process that organizations rely upon to ensure financial integrity. More often than not, however, account reconciliations tend to be manual in nature and heavily reliant on spreadsheets. Unfortunately, there are often weaknesses and inefficiencies surrounding this fundamental, yet mission-critical, process. By automating these processes and reducing the reliance on spreadsheets, companies can improve their internal controls and reduce potential risk significantly – and be in a better position to comply with the new COSO Framework requirements, Sarbanes-Oxley and other regulations, at the same time. Additionally, companies can achieve a faster, more accurate close cycle all while ensuring the numbers making up their financial statements are correct. Sounds great, but how does this really work?

Account reconciliation software designed to automate and optimize these critical processes, such as the BlackLine Financial Close Suite, offers numerous ways companies can mitigate risk. To begin, when using a sophisticated, world-class solution (such as that offered by BlackLine), users—whether they are the actual preparers, reviewers or management – will typically have real-time dashboards that allow them to see what work has been completed versus what  is still open, at any given moment. This helps to ensure that all accounts have been reconciled in a timely manner. Companies no longer have to maintain checklists to ensure they are performing and signing off on their account reconciliations.  There is a built-in segregation of duties preventing the person who prepared the reconciliation from also reviewing and/or approving the reconciliation and ensuring that there is at least one other set of eyes looking at the reconciliation. General ledger balances are automatically populated, thus reducing the need for manual data entry. Sub-ledger balances can also be automatically populated and compared to the general ledger balances, quickly identifying out-of-balance accounts and potential issues. If a balance changes subsequent to the reconciliation being performed, then it will decertify that reconciliation and a notice will be sent to the preparer telling him or her to go back in and re-perform the reconciliation. Preparers utilize standard templates which make reconciliations easier to populate and more consistent across the organization. For those who need to review the account reconciliations, it makes it easier to have them all in a similar format, especially since all of the supporting documentation can be uploaded and associated with that particular reconciliation, ensuring it is complete. Best of all, with a SaaS (Software-as-a-Service)-based solution such as BlackLine, where the application is delivered in a secure, safe environment over the Internet, auditors and management can be given access to the reconciliations online at any time and from virtually anywhere. They will not only be able to review the reconciliation and its supporting materials, but they can also see an audit trail of when it was prepared and when it was reviewed.

While this is a fairly simplistic overview, it is easy to see that software solutions can offer more controls around the types of activities traditionally performed in Excel. Finance and Accounting organizations often receive little to no resources for new technology tools, but at what expense? If a company could employ technology that would help its Accounting team feel more confident in their numbers, comply with new and changing regulations – and ultimately translate to increased accuracy in the financial statements that are generated – then  wouldn’t that be worth it?

When considering whether or not to automate your account reconciliation process, here are a few suggestions:

1)     Take a critical look at your current account reconciliations and see where you might have some risk and vulnerability. Is an updated account reconciliation policy available to all parties involved? What is the process the accountants go through to prepare and review them? Is it manual? Where are there bottlenecks in the current process? Are the right people working on the right things? Are they really account reconciliations or just a roll-forward or repeat of what is in the general ledger?

2)     Consider whether it would be better to develop a solution in-house or buy one already available in the market. Some companies have large IT organizations that can provide some relief from the potential risks around spreadsheets. However, this is usually very time-consuming to create and maintain. Most companies have scarce IT resources, making existing solutions an attractive option.  Plus, when selecting a SaaS solution, there is no capital expenditure upfront and no hardware or software to install and maintain.

3)     Take the time to search for a solution that best meets the needs of the company. There are several solutions available to help companies ensure they are performing accurate account reconciliations but some specific features to look for include:

  1. A solution that can be used for the entire balance sheet
  2. A templates-based process for standardization and quality
  3. Multi-level approval workflow
  4. Auto-certification of low-risk reconciliations
  5. Automated e-mail alerts for proactive notification/monitoring
  6. Real-time status dashboards and reporting
  7. Centralized, 24/7 global access
  8. Easy integration with existing GL and ERP systems
  9. Multi-language and multi-currency capabilities for global organizations

When closing the books each month, whether you are a publicly traded or privately held company, you want the assurance that your financial statements are accurate. Automating the reconciliation process not only allows CFOs and Controllers to improve and gain more visibility into and control over the overall process, but also gives them and the Compliance officers peace of mind that they have integrity in the numbers that are going into their financial statements. 




Susan Parcells
Director of Finance Transformation
BlackLine Systems

Susan is a Certified Public Accountant who graduated cum laude with a Bachelor’s degree in Accounting from Northern Arizona University. Susan began her career in Audit and Assurance with Deloitte and Touche. She then served as the Assistant Controller for Beazer Homes, a publicly traded real estate company, followed by her role as Controller for NetPro, a small software company.

Throughout her career, Susan has focused on process improvement around the accounting close process. This led to her next role as Associate Director of Global Close and Strategic Initiatives at Apollo, one of the world’s largest private education providers, where she implemented BlackLine. Susan immediately saw the value in what BlackLine had to offer. This became the springboard to her joining the BlackLine team in February 2011 as Director of Product Management to drive the product design and help other accounting professionals focus on any problem areas.  Susan is currently BlackLine’s Director of Finance Transformation.

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