Are Your Spreadsheets Creating Operational Risk?

October 5, 2011

As a global provider of middle-to-back office financial technology, PORTIA speaks with investment managers of all types and sizes, across all regions.  When we ask prospects how they manage their operations, we continually hear that their operations are being run by spreadsheets.  This holds true regardless of size, type or region.  And it’s very problematic.

We’ve seen research suggesting that over 95% of companies rely on spreadsheets for financial reporting and analysis.  Fortunately, we’d estimate that the percentage of investment managers using spreadsheets to run their operations is lower, but still inappropriately high.  So why is this a problem?  Because it is estimated that 94% of spreadsheets contain errors. 

Let’s look at some examples of spreadsheet errors, starting with honest mistakes:

  • Fidelity :  A missing ‘-‘ sign caused Fidelity’s Magellan Fund to overstate projected earnings by USD $2.6B and miss a promised dividend
  • Fannie Mae:  After releasing Q3 earnings data, Fannie Mae had to restate its unrealized gains by USD $1.2B. This was a result of “honest mistakes made in a spreadsheet used in the implementation of a new accounting standard.”
  • Provident Financial:  Provident earnings for 1997 to 2002 had to be restated by USD $70M, due to an error in a spreadsheet model calculating debt amortization.

Of course, not all spreadsheet mistakes are unintentional.  At Allfirst, the US Subsidiary of Allied Irish Banks, a currency trader began losing money in 1997. He used a series of spreadsheet entries to hide his losses, which continued to rapidly increase. When the fraud was discovered in 2003, his losses amounted to USD $691M.  AIB ended up selling off its US subsidiary because the losses were too substantial.

We’re not arguing that spreadsheets aren’t useful – in fact we use them constantly during our everyday course of business.  However, we strongly advocate against running mission-critical operations on spreadsheets.  Middle-to-back office solutions such as PORTIA not only provide far more functionality than spreadsheets, but they also ensure your operations have controls to avoid the types of errors cited above.  In fact, PORTIA excels at automating workflows, removing the potential for human error entirely.  And PORTIA’s performance attribution and reporting capabilities will help your firm evaluate performance quickly – you’ll never need 7 years to find $691M in losses.  That’s a promise.

For more information on the operational risks associated with using spreadsheets, see this report from Protiviti, a global risk and business consulting firm. 

Are you using spreadsheets to manage your operations?  Are you concerned about operational risk?  If so, please visit our website to learn more about how PORTIA can help you improve your middle-to-back office operations.

–          Anup Namboodiri, Regional Sales Executive, Middle East

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