QueBIT Blog: Worried about Errors in your Financial Reports? Start by quantifying the problem

Google “Accounting Scandals” and you will find plenty of Top 5 and Top 10 lists that include companies like Waste Management (1998), Enron (2001) and Tyco (2002). These are famous examples where top executives were caught committing fraud, and were punished with fines and prison time.

If you are an honest person, you might indulge in a brief moment of schadenfreude, and enjoy the fact that powerful and dishonest people got what they deserved.

But Google a little deeper, and you will also find examples of “embarrassing accounting blunders” that cost companies dearly. Examples of these include Tesco and Bank of America (2014), and Rolls Royce (2012). If you work in accounting or finance and are responsible for any kind of financial or management reporting, these stories will probably make you shudder.

Why? Because your company still uses humans to produce critical reports, and we all know that humans make mistakes.

Sometimes the spreadsheet tool (like Excel) gets blamed for the problem, because Excel is the tool of choice for human accountants and financial analysts, charged with collecting the data, performing data analysis, pulling together the numbers, formatting the report and attaching the report to an email.

This is disingenuous and unfair. The senior executives who put the blame on Excel are showing how disconnected they are from the reality of how data flows through their organization. Threats to remove Excel, while offering nothing else in return, only make matters worse.

Adding fuel to the fire is the notion that after investing millions of dollars in ERP systems, financial planning software and reporting tools, the problem of lacking confidence in the numbers persists. Meanwhile, conscientious and stressed out financial analysts live in so-called “Excel Hell”, worried that they are just one spreadsheet error away from Excel disaster, and losing their jobs.

There is good news: it turns out that a combination of common sense and experience can make things better.

Start with following a tried and tested problem-solving framework, like George Polya’s:

1. Understand the problem
   • In this case, it is important to understand that Excel is NOT the problem.
   • The actual problem is a combination of:
     1. Needing to combine data from multiple disconnected systems in the report in a coherent way
     2. Needing to perform some manipulation of that data to get it into the correct form for the report
     3. Having multiple people in different functions involved in contributing to the report
     4. Running out of time to check and validate the report before the deadline because all the contributors work on different schedules and have other priorities

2. Devise a plan (translate)
   • Once you have properly quantified and understood the problem – which means that you have done an analysis of the business process of creating the report and you understand where the bottlenecks are – you can look for ways to reduce the risk of errors and increase efficiency (which gives you more time to check and validate the numbers).
   • Examples of things you might do:
     1. Eliminate unnecessary manual analysis, or duplicate effort. One example occurs when two contributors who are downloading and manipulating the same source data.
     2. Centralize common data operations, calculations or analyses. This appears when mapping is needed to unify two data sets. Perhaps it would be worth investing in performing this mapping in a data warehouse, in a governed and controlled way, eliminating a manual step.
     3. Admit that Excel is going to be part of the process for the foreseeable future, and explore the use of a tool like Certent CDM for managing collaborative workflow, and auto-generating combined reports from a variety of data sources (including ERP systems and Excel) to all common formats (Excel, Word, PowerPoint, PDF).

3. Carry out the plan (solve)
   • This should be self-explanatory!
4. Look back
   • Always assume that this is going to be an agile, iterative process. Make sure you check in with all the participants and contributors to evaluate the effect of the remediation steps.

Financial reporting issues will always be with us. Business conditions and strategies evolve all the time, which is why formal software systems will always lag behind the requirements of accounting and finance. Today, Excel is still the best tool for filling this gap.

So while there is no magic bullet or easy alternative to Excel, there are ways to make a material difference and significantly reduce the risk for reporting incorrect numbers. In 2014, Tesco’s accounting error was a £250 million overstatement of profits that wiped out £2 billion of stock value.

The process outlined in this blog post will help you reduce your risk of financial reporting errors. If you would like assistance implementing a process like this, process, please contact QueBIT for a Reporting Healthcheck.

Want to learn more? Join us for a complimentary webinar "Can I TRUST the numbers in this report?" on February 14th at 2pm est and get an in-depth look into causes of this problem and QueBIT’s methodology for addressing it.