Excel and Basic Accounting Error

Excel and Basic Accounting Error

Summary: Just how bad are "power users" from both an IT and auditor standpoint? A fiairly good academic study of 3,744 disclosure documents admitting error concludes that only about 8% of companies can do financial statements directly from their financial systems, with the rest massaging the data in spreadsheets - unauditable, uncontrolled, error prone spreadsheets presumably weilded by power users.

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From CA Magazine:

Do spreadsheets lead to compliance failures?

A full 92% of all US public companies use spreadsheets for critical accounting activities in their revenue reporting processes, according to a recent survey of financial executives. And that increases the likelihood of compliance failures and financial restatements. The research, which involved 685 companies, was conducted by www.RevenueRecognition.com and IDC and sponsored by Softrax Corp.

Revenue spreadsheets: the compliance killers

The reason for widespread spreadsheet use, says the survey, is that key revenue recognition and reporting tasks are still not automated in financial/ERP systems. Only 8% of all responding companies say they are able to complete their revenue reporting process without having to take data offline and into spreadsheets. The rest of the surveyed companies use spreadsheets, which are prone to errors, lack audit capabilities and resist internal controls.

According to the survey, more than half of all companies use spreadsheets to create their accounting entries for revenue. Other spreadsheet-based tasks include revenue scheduling, allocation and redistribution based on accounting guidelines. Surprisingly, public companies with more than $200 million in revenue are substantially more reliant than the overall sample on spreadsheets for revenue accounting entries.

From Revenue Recognition.com:

Revenue Recognition Restatements Increase 42% as Basic Accounting Errors Plague Reporting

Revenue recognition restatements increased 42% from 2002 to 2006 leading to a lot of speculation about the underlying causes. With all the hype about Sarbanes-Oxley, increased auditor scrutiny, and complex guidelines it is surprising to learn that mundane internal errors were the leading cause of restatements from 2003 to 2006. That's the conclusion of a new report entitled "An Analysis of the Underlying Causes of Restatements" by Marlene Plumlee, University of Utah and Teri Lombardi Yohn from Indiana University.

The authors analyzed 3,744 disclosures related to each restatement to identify and categorize the underlying causes. Of restatements caused by revenue recognition errors, approximately: 57% were due to a basic internal error, 28% were due to some characteristic of the accounting standards, 13% were due to intentional manipulation, and 2% were due to transaction complexity. That would make over half of all revenue recognition restatements avoidable if companies had better procedures for performing, monitoring, and controlling their revenue processes.

Bottom line?

User spreadsheet abuse leads to compliance failure - and can be largely attributed to IT's failure to gain top management support for the provision and use of adequate integrated ERP/SCM and related functionality in central systems.

Speculation: the symptoms, frequent restatement requirements, are heavily correlated with large client-server installs. And why do I think that? because if you implement something like Oracle's combined ERP/SCM suite on Sun with tools like Hyperion for real time, cross functional, reporting you won't need Excel or any other PC client tools to get your reports out - but if you implement that same suite using Windows client-server you not only invite "power users" into the hen house, but I don't think you can actually get the reports out without them.

Topics: CXO, Banking, Enterprise Software, Microsoft, Software

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84 comments
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  • We should go back to manual ledgers...

    VisiCalc was created to eliminate accounting errors. Now the spreadsheet is now being blamed for accounting errors. Perhaps the real problem is GIGO. Garbage in, Garbage out.

    The real culprit is slick sleaze ball corporate accountants and managers that are trying to manipulate their financials for financial gain. The tool is the new scapegoat for corporate malfeasance. After all, it can?t talk back or testify in court.

    They are almost as sleazy as Paul Murphy for introducing Excel into this story to create FUD. None of the underlying articles refer to any one product. After all, accounting practices are Mr. Murphy?s specialty and I?m sure he is heavily involved in corporate accounting departments giving them advice on how to do their job. After all, IT guys are such experts in these matters.

    Blogging about something does not make one an expert. Paul, stick to Unix matters where you belong.
    TheTruthGiver
  • It's not just power users....

    In some of the financial spreadsheets I've seen, the software
    is used as a primitive presentation format. Basically, they are
    manual ledgers typed into spreadsheet software. All of the
    calculations are done offline. Default cell sizes are left in
    place and multiple cells are treated like a single column in
    something that looks like the way lined ledgers were used
    back in the day.... Someone who does that is NOT a power
    user.
    palmwarrior
  • What's the Alternative?

    Could a company survive without Excel or any other flexible tool (ie paper) which is susceptable to error?

    Corporate IT systems take time and money to implement. Business needs to be able to move fast, to address new issues.

    I have seen situations where the IT estimates for a system or modification far exceeded the total value of the monies to be administered. Is Excel so wrong in those situations?

    Most of my colleagues would happily dump their spreadsheets in exchange for a powerful, IT supported system. We know the risks and are not out to sabotage our firms by using Excel to bypass the appropriate controls.

    You want a nice safe error-free system, forget about Excel, take the humans out of the picture altogether. Make everything 100% automated. Fun thing is, I suspect that such a company would not survive long in today's competitive environment.
    kurio99
    • Larger publicly owned companies

      should be able to afford the kind of in-house IT that offers that kind of flexibility.

      I agree with Paul in that moving away from spreadsheets would be a wonderful thing, however the fact is that most small- or even mid-sized businesses cannot afford the solutions Paul is talking about. And the other thing that Paul really doesn't address is that with or without automation and error checking you will always need skilled human beings checking and rechecking the books in any company. Because bookkeeping is never static, there will always be tweaks and such to the system. And anytime you have changes you need someone in the background checking the results.
      Michael Kelly
      • In many cases

        the Excel sheet comes into play becuase many of these systems are not quick to adapt, not because of shoddy programing, owing more to the "nature of the beast".

        If I need to add a report to system as that described, how long before it is actually designed, tested, and implimented into the system?
        GuidingLight
        • Agreed - another people + organization problem

          And not really a tech problem at all except insofar as the overall architecture defines both the people you hire and what you can do with them.

          With the right people, the right organization, and the right tools you can adapt the system literally overnight because your production systems are prototypes that continually evolve - and the use of ZFS + containers means that you can roll back the clock at any time - or even operate on several different clock/system combos at the same time.

          With the wrong systems, the wrong people, and the wrong IT organization (all of which are dirt common) flex just isn't a built in function - and the more process bound you become, the worse it gets.
          murph_z
      • Reports From Travel Among the Small Business World

        Having completed a wonderful year of free-lancing and
        seeking administrative work, I can report the small
        business world is accounting on QuickBooks. Spreadsheets
        may be used to provide employee forms, such as expense
        reports and time cards, but these are simple enough that I
        trust their accuracy.

        Ran into a situation last month where expenses were
        submitted in two other nations' currencies and this has me
        thinking about a web-based app for expense reporting. I
        had something similar I wrote in Access years ago at
        another place. Nowadays, I prefer to use a cheapo pc
        running Linux for the database and web server.
        DannyO_0x98
        • Very small businesses

          Don't pay consulting rates - and so I know very little about how these really operate.

          Now if you'd like to write one or two things describing your experiences and generalizing from them ..? my blog is your blog - just let me know.
          murph_z
  • Perl DBI and Spreadsheet::WriteExcel()

    Spreadsheeting doesn't have to be 'manual and error-prone' if you have Perl DBI and Spreadsheet::WriteExcel() at your disposal.

    Truly powerful and will allow you to join queries to spreadsheet output in true Excel binary format, inclusive of any formatting and formulaic requirements your client throws at you. Pivot tables and graphic charts to boot.

    Assuming you've worked out the 'bugs' those month-end hand-tooled spreadsheets go away and you can cron and email the output spreadsheets or post them to your reporting portal and they work correctly every time they run.

    It's like everything else, once you know how it's easy.

    Perl. It's a beautiful thing.

    Thanks Murph.
    D T Schmitz
    • Is There Nothing Perl Can't Do?

      Seriously, thanks for the tip and I'll be taking a look.
      DannyO_0x98
      • Not that I know of

        Although coming out of the closet about its own name might be one...?
        murph_z
      • Trust me, it can do the heavy-lifting for you

        [url=http://www.oreillynet.com/windows/blog/2004/12/perl_success_story_perl_tackle.html]FYI[/url]

        Just one of many uses on the campus, electronic ANSI X12 837 claims, service auths, general ledger interface reporting, patient scheduling.

        If you can drive a fork-lift then Perl is for you! ;)
        D T Schmitz
  • Why do you think that?

    Well [i]of course[/i] it allways boils down to "Windows is wrong, OSS is right".

    Why not just come straight out and say

    [b]"I am trolling for a flame war, as that generates hits/income for me, and so facts can be bent to better suit my wallet."[/b]

    Truely, I have never read someone who continues to "get it wrong" as much as you do.

    I can see no other logical reason other then what I stated above.
    GuidingLight
    • It takes a lot of hits...

      ...to generate any sort of significant income. I don't know, but I rather suspect Murph blogs here more because he enjoys the pulpit than for the financial benefits.
      Erik Engbrecht
    • Troll is accurate

      While many of us regular readers are up to snuff on ole Murph's trolling, the unfortunate aspect is that new readers may not be aware of his FUD slinging. He really has no idea when it comes to MS products other than what, in his mind, is in vogue to complain about. He also seems to have no enterprise experience.

      This blog is another example of his drivel. He could have written this and made it spreadsheet agnostic, but he had to put Excel in the title because, in his mind, MS is evil and the title will elicit responses.
      anonymous
      • How many non-Excel spreadsheets are there?

        Yes, I am aware that there are plenty of spreadsheet applications available, but how many are actually used in business? Especially by non-technical users?
        Erik Engbrecht
        • So take Excel away

          and the problem magically disappears?
          I think not. The very same people will grab the next tool to do the very same thing.
          However, lets say it is OpenOffice they choose. The next post by Murph will be praising the power and versatility offered by OO, and how nice it is that users can help themselves to data and be empowered.

          Even if they are using 1:1 ports of what were Excel sheets...
          mdemuth
    • because spreadsheet abuse is a symptom

      of a cluster of problems one of whose other characteristics is a deep devotion to Microsoft products.

      I've met dozens of people who do this - and not single one had genuine technical depth or any interest in stepping outside the BS zone defined by his ability to speak and act as an MS "power user".
      murph_z
      • You have it wrong way around.

        Why do you think that Excel is so widely used? It's very simple:

        1) IT has been tradionally very slow or expensive to respond to users needs, and has focused on certain areas, and left others dangling...

        2) Some accounting type [i]has[/i] to make certain statutory fillings. Telling the man that IT say they'll be done in 12 years isn't helpful.

        3) Microsoft (and others, of course) offer a product that solves this person's problems - not perfectly, but FAR BETTER than the actual alternatives they got.

        This is a failure of IT to deliver appropriate solutions. Instead of shouting about how evil Microsoft is for solving this guys problem in a less than satisfactory way, you should be hanging you head in shame for not solving it at all.
        TheTruthisOutThere@...
      • That's riduculous

        Of course, we all know that no accounting errors were ever made before Microsoft came along and invented the spreadsheet. Heaven forbid we should actually give the users a little autonomy and power; much better to keep them bottled up using whatever software we decide to install on the servers. If it doesn't meet their needs, too bad.

        All sarcasm aside, "spreadsheet abuse" started long before Excel became the dominant spreadsheet software. You would be better off asking why IT hasn't yet solved the problems that lead people to turn to a product such as Excel in the first place. And please, get over your disturbing obsession with Microsoft and "Wintel".

        Carl Rapson
        rapson