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Preventing Errors and Fraud in Spreadsheets
By Richard B. Lanza, CPA, CFE, PMP
The spreadsheet is one of the most brilliant software tools for almost any industry including accounting and finance. However, because everyone is so comfortable with them, spreadsheets can be excellent tools for committing fraud or for material errors. Spreadsheets therefore become a least expected weak-link in financial statement or operational data analysis.
Examples of such errors and fraud are rampant and have been summarized by the European Spreadsheet Risks Interest Group at the following link: www.eusprig.org/stories.htm . Following are some highlights:
- HealthSouth - Two ex-HealthSouth executives admitted that they prepared a false spreadsheet for auditors that inflated HealthSouth's assets and made the company appear to be worth more that it was.
- NASA - NASA's fiscal year 1999 budget was misstated by a reported $644 million due, in part, to a misinterpretation of guidance and errors in NASA's ad hoc spreadsheet process for generating budgetary information.
- AIB/Allfirst Trading Fraud – A fraudster substituted links to his private manipulated spreadsheet which exaggerated bonuses by more than half a million dollars.
The main cause for spreadsheet issues is that they don’t follow a standard software development lifecycle. Unlike most professionally-written applications, spreadsheets are generally not created with a diligent requirements, code review, and then testing process. Such process steps, when followed, lead to a higher quality application as:
· requirements will establish the precise need and flow of the data flow prior to any code being written,
· code reviews by independent parties will ensure the logic being used is accurate,
· and system and user testing will overall ensure that the spreadsheet meets the needs of the originally established requirements.
Given it is unlikely spreadsheets will ever be developed with such rigor, especially considering practically anyone with a computer can build one, the only other option is to complete diligent auditing to detect underlying issues. Microsoft Excel comes with an ability to complete precedent and dependent analysis. Other audit options include manual walkthroughs of the spreadsheet logic and a reasonableness analysis of the results based on expectations. Yet another option is to use a software tool that automates the above manual process. Products like EXChecker (which is available for a 30-day demo at http://www.spreadsheetauditing.com/exchecker/auditsoftware.shtml) provides some compelling reasons for making the switch from Excel’s native audit features.
For a more comprehensive article on the risks of spreadsheet error and fraud, as well as, tools to help review spreadsheets please see the below link:
http://www.auditsoftware.net/community/vendors/documents/SpreadsheetErrorFraud.pdf
ABOUT THE AUTHOR
Rich Lanza (CPA, CFE, PMP) is President of Cash Recovery Partners, LLC and enables organizations in the use of technology to (1) generate cash recoveries, (2) stop profit leaks, (3) move away from control issues, and (4) work towards process improvements. With automated report systems and personalized coaching, Rich helps companies get quality results in minutes. This is done by maximizing the technology companies already have and showing professionals how to become “info magicians”. He is the author of 12 publications and training courses in ACL, IDEA, Access, ActiveData, and Excel and has over 50 articles for major audit publications. While he has over 13 years of experience and is a recognized leader in the use of technology, Rich also founded of AuditSoftware.Net, a free website devoted to using technology for generating bottom line results. To contact Rich, receive his free e-newsletter, get a free planning session, or to order his products/services, e-mail him at rich@auditsoftware.net, call him at 973-601-3701, or visit his website at www.cashrecoverypartners.com.
