Spreadsheet Risk Management
What Is Spreadsheet Risk?
Spreadsheets have long been the bedrock of businesses of all sizes, providing a powerful and adaptable toolset that helps companies simplify and manage complex business processes, projects and reports. Helping to facilitate businesses in their day-to-day running and project management, spreadsheets are essential in allowing companies to drive productivity, efficiency and more effective data analysis, ensuring better business management and faster revenue growth.
Yet, it is due to the simple and adaptable format of the spreadsheet that businesses have become dependent upon them, often using them to store and track integral company information like budgeting, invoicing and revenue calculations. It is due to this reliance on spreadsheets that they can quickly become a single point of failure for businesses if ineffectively managed. Because of this, it is therefore essential for companies to ensure they are implementing appropriate measures to protect against and avoid potential for spreadsheet risk.
Spreadsheet risk is the impact on a business caused by undetected mistakes, errors and omissions in vital spreadsheets that a company depends on for things like cost management. As this can directly affect a business’s revenue, it’s integral that companies protect themselves against spreadsheet risk.
Five Common Examples of Risks
Though spreadsheets are valuable management tools because of their flexibility and ease of use, it is because of this that they represent huge potential for loss. Various studies have found that almost 90% of spreadsheets contain errors. Yet, while this continues to be a prevalent risk for businesses, very little has been done to mitigate this threat. Though a majority of errors are the result of human mistakes, there are a number of specific ways that spreadsheet risk can occur, such as:
- Linked spreadsheets that use data from one or more spreadsheets to calculate results in another.
- Multiple versions of a spreadsheet in circulation across a company & inadequate version control.
- Recycling and copying data from older spreadsheets – one cut and paste error cost JP Morgan $6 billion in 2012.
- Spreadsheets that use complex functionalities, macros or formulas to calculate results, hide worksheets etc.
- Human error when inputting data.
Managing Spreadsheet Risk
As a business comes to rely on spreadsheets more and more, the risk of errors increases and so too does the risk of these errors going undetected. Yet, because a majority of spreadsheet risk is born out of the flexibility of spreadsheets, this makes it difficult to notice changes to functionality and data. Therefore, in order to effectively manage this risk you must identify the most critical spreadsheets to your business, establish a clear EUC control framework, implement this structure and then consistently monitor this for any changes.
Priority Questions to Ask
When evaluating your business’s spreadsheet risk, there are a number of key questions you should address in order to help reduce potential threat. These are:
- What are the most integral spreadsheets to your business and what impact would a potential error have?
- Are those creating and accessing your most integral spreadsheets fully trained in how to build, use and manage them?
- Do you have a means of monitoring whether the spreadsheets your business is creating are effectively carrying out their intended purpose?
- How can you develop sustainable and future proof methods of managing your spreadsheet risk within your internal business model?
Mitigating and Minimising Spreadsheet Risk
Perhaps the best way of effectively monitoring spreadsheet risk is to make use of a comprehensive spreadsheet management system that takes into account all potential risks. However, there are also a number of other steps that you can take in order to mitigate your business’s spreadsheet risk.
1. Assess and prioritize – Establish what spreadsheets are most crucial to your business and what the impact would be should there be any error or issue.
2. Train all end users – Ensure those creating, using and managing your critical spreadsheets have been effectively trained in their use.
3. Determine the best tool – Spreadsheets are often the go-to tool, but would another application suit better for this purpose?
4. Simplicity is key – Keep your formulas short and simple to prevent any potential issues & avoid hard-coding results into a spreadsheet.
5. Focus on results – Always have your end goal in mind. Understand the results that you need from a spreadsheet to determine how the data, formulas and output will work with each other.
6. Maintain your process – Maintain consistency to make finding errors easier.
7. Test and improve – Get users to test your spreadsheets and asking for feedback to identify any potential threats that might otherwise be overlooked.
8. Version control – Maintain a consistent version control & naming convention, retiring spreadsheets once outdated or replaced.
9. Protect key cells – Lock any cells that you do not want changed to users unintentionally replacing cells and therefore affecting data.
10. Back up data – Identify and back up your business’ most crucial spreadsheets. This will help to reduce risk and make business data recovery much simpler in the future.
The Real World Consequences of Spreadsheet Errors
Spreadsheet errors can have very real world consequences, as is evident from a number of cases. Yet despite the potential for financial and reputational loss that spreadsheet errors present, it is an often overlooked threat.
- Kensington and Chelsea Council were fined £120,000 after a pivot table error led to the data of hundreds of property owners being breached. In addition to the financial loss incurred by the fine the nature of this error has also led to a considerable reputational loss for the council.
- Clallum County Sherrif’s Office were hit by two spreadsheet errors created by copying and pasting salary data across worksheets. Though a seemingly minor fault, this error cost the county $494,157 altogether and lead to a reduction of budgeting for personnel by 12%.
- A spreadsheet error at Conviviality contributed to the company going into administration. The business attributed the profit warning to an arithmetic error made on a spreadsheet by its financial team, with material discrepancies in the financial forecasts directly impacting budgeting and therefore contributing to its downfall.
Clearly, spreadsheet errors have very tangible real world consequences, contributing to financial mismanagement which is costly to remedy later on, and often resulting in reputational loss from having to publicly acknowledge and amend these errors.
Spreadsheets are a uniquely valuable and flexible tool, helping companies to optimize business processes and better manage complex data sets. However, it is precisely due to the adaptable nature of spreadsheets that they have become a single point of failure for businesses that have come to increasingly rely on spreadsheets for critical information.
Because of the threat to business growth that this poses, it is more important than ever for organizations to ensure that they are effectively managing their spreadsheet risk. If not appropriately managed and mitigated, spreadsheet risk can quickly become a costly issue for businesses, making it therefore essential for companies to assess and manage this risk before it is too late.
One of the most effective ways of monitoring spreadsheet risk is to make use of a spreadsheet management system that takes into account all potential risks, allowing you full confidence over the accuracy of critical business data. Get in touch with us today to learn more about how ClusterSeven can help your business gain control and transparency of your key spreadsheets, allowing you to develop and grow.