The realities of spreadsheet risk

The use of spreadsheets remains highly common among finance and actuarial teams. Traditionally employed for increasingly critical business functions, they allow for quick and flexible analysis of data, but with this flexibility comes complexity. As the reliance, overuse and undue trust of spreadsheets increases so does the danger they bring.  

Because of their nearly infinite flexibility, it's easy to understand why spreadsheets have become a staple in businesses today. Many companies rely on spreadsheets as key applications that support operational and financial reporting processes. Spreadsheets are an interactive, relatively user-friendly solution for mathematical requirements..

However, despite their ubiquity, spreadsheets have proven hard to control. They were never designed to be enterprise-level applications. The growing use of complex and user-defined functions and systems has led to the development of highly complicated applications.

Through this growing complexity and the inability to avoid human error, the number of costly mistakes that have come about as a result of spreadsheets is increasing. The potential risk is evident through the numerous multi-million dollar errors and fraud cases that have been the result of spreadsheet errors.

One of the main risks associated with spreadsheets originates from data input error. Spreadsheets involve a manual process of entering data, therefore making them highly susceptible to human error. Keying in incorrect values or copying over the wrong digits could drastically alter the end result of a calculation and thus have disastrous effects on an organisation. The worst thing about this risk is it is not eliminable. As long as businesses and organisation still utilise spreadsheets, the risk of incorrect data input will not go away, additionally making you not as competitive as you would have once hoped.

Additionally, through their flexibility, duplication of data and data formatting errors are also key risks when it comes to the use of spreadsheets. Through this lack of transparency, there is a real difficulty for anyone aside from the creator knowing what is going on, or where the errors are. This, therefore, makes spreadsheets a very individual program, where peer checking and takeovers are very difficult. These risks make the use of spreadsheets a dangerous and potentially costly activity.

That being said, there will always be a place for spreadsheets. They are a powerful tool. The key situation to avoid is where spreadsheets grow into having a function that no longer meets business requirements in terms of:

  • costs
  • time
  • computational power
  • risk (key person and model risk)

The reasons why this is currently happening time and time again is that spreadsheets are a good starting point. They’re not, however, always an appropriate end solution.

In order to mitigate the risk caused by spreadsheets, you need to reduce the overall dependence there is on them. Instead, focus on utilising purpose-built software that facilitates collaboration, control and gives proper structure to data. Innovation is a vital aspect of insurance business today, but as long as businesses keep relying solely on spreadsheets, innovation will be a struggle to achieve.

Companies need to embed a formalized strategy to manage spreadsheets and eliminate them when they present too much risk. It’s also important to have policies on when to replace spreadsheets with enterprise software from a business requirements perspective. Without it, these million dollar errors will keep happening, and unnecessary expenses will continue to be incurred.