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The Hidden Risks in Financial Reporting

By Dr. Soheil Saadat, President and CEO, Prodiance Corporation

With over 200 million users worldwide, the Microsoft Excel spreadsheet is perhaps the most ubiquitous analysis and reporting tool on the planet. Business users with little or no programming experience can create powerful and incredibly complex analyses models in Excel. A Google search on the keywords “financial analysis spreadsheet” returns hundreds of results, including free templates for capital budgeting, risk valuation, cash flow, financial projections, option pricing, and break even analysis models. In fact, spreadsheets are being used everyday in businesses across the globe to drive critical business decisions. Yet, with this power and ubiquity comes an inherent risk for a variety of reasons, including:

The consequences of not effectively managing these risks can result in errors in the financial reporting process, financial restatements, loss of shareholder confidence, damage to company reputation and image, or non-compliance with SEC, SOX 404, FDICIA, FSA, and other regulatory mandates.

Being Proactive is Key to Success

The need to address these challenges has gained more attention in recent months due to heightened auditor scrutiny, and in several cases, material weaknesses. Organizations taking a proactive approach to managing spreadsheet risk have set clear goals for good corporate governance, followed auditor guidance, and aggressively adopted technology to automate internal controls. Organizations reacting to spreadsheet risk have found themselves in crisis mode, and are responding to quickly fill compliance gaps.

Follow the Spreadsheet Compliance Lifecycle

Some experts believe that eliminating the use of business critical spreadsheets and replacing them with enterprise IT applications can address these compliance risks. However, with the sheer volume of Excel users worldwide, Microsoft Office 2016, and business school requirements for mastering Excel, simply adding compliance may be a more cost effective approach to gain back control. In a recent study, an analyst firm indicated that “Given the heavy reliance on spreadsheets by so many businesses, companies are likely to purchase software that helps them deal with the defects of stand-alone spreadsheets rather than replace them.”

Building upon this approach, leading tax and audit firms have recommended that organizations take a lifecycle management approach to automating spreadsheet controls.
Key steps in this lifecycle should include: