Errors in financial models

Errors in financial models

The extreme reliance by companies on financial models to make decisions is reportedly creating a major risk in UK financial markets. As reported in the UK Telegraph, errors in financial models are not only prevalent but also causing series losses.

The article is well worth reading and the below extracts are some of the highlights in our opinion

  • Grenville Croll, a spreadsheet risk expert, said of the findings: “Spreadsheets have been shown to be fallible yet they underpin the operation of the financial system. 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.”
  • In 2012, a spreadsheet error in the rail franchise bid process for the West Coast Mainline cost the [UK] taxpayer around £60m.
  • Reports suggest that JP Morgan lost £250m because of a spreadsheet slip up in 2013.
  • Recent documents detailing the collapse of Enron in 2001, released following the conclusion of all legal proceedings, showed that 24pc of the corporation’s spreadsheet formulas contained errors
  • “What’s truly shocking is that there seemed to be a culture of total acceptance that mistakes were simply part of working with spreadsheets”

We have similar findings in South Africa and Africa in general. Spreadsheet use is prevalent and errors occur regularly.

As a result of these types of reports, all our training in the use of Excel in business has a focus on the safe use of spreadsheets.

It is critical that users understand not only how to use Excel, but (probably more importantly) how to use it safely. As shown above these errors cost real money.

If you cannot understand how errors can happen, have a look at some of the examples in the How Errors Happen section.

We are willing to bet you have all at one stage or another performed one of these simple tasks and forgot the knock on effects.