Avoiding the pitfalls of spreadsheets

Spreadsheets may be the wrong tool in private equity fund administration, argues John Wiencek of AltResources.

Spreadsheets are one of the most widely used financial and accounting tools in offices today. In a typical financial firm, they encompass an estimated 20-30 percent of all information—and more in most private equity firms. Spreadsheets are an appropriate tool for a host of number crunching tasks. But—to borrow a home improvement phrase—they’re not always ‘the right tool for the job.’  

While you needn’t get rid of all of your spreadsheets, here are some of the issues they present:  

They Might Be Wrong. The worst possible scenario, of course, is that your numbers are wrong. When it comes to spreadsheets, this is likely: errors happen easily in large and complex spreadsheets. In fact, university researchers in collaboration with major international audit firms estimate that anywhere from 70-90 percent of business spreadsheets contain errors. That’s

Anywhere from 70-90 percent of business spreadsheets contain errors

why large accounting firms consider spreadsheets no more reliable than manual records.

There are a few reasons for this. First, it’s impossible to verify each cell. The data could be too crowded, making it difficult to eyeball inputs and outputs, misplaced parentheses, or a link to corrupted data sources elsewhere, such as another spreadsheet. (Just because you got rid of all the “ERRs” doesn’t mean the underlying numbers are correct!)

Add the lack of an error- or change-tracking tool (such as Word’s “Track Changes”), and the probability of error increases—especially over time as changes and mistakes accumulate. As a result, you lose the ability to track data to a “Source of Truth,” and are held hostage to multiple sheets and files. 

Their Flexibility Degrades. Spreadsheets present a familiar, flexible, intuitive interface (one reason 99 percent of accountants use them daily). But their user friendliness is also their downfall. People who aren’t professional programmers jump right in and “figure it out as they go.” The result is file layouts that don’t lend themselves to updating, data replication, proper programming, and complex interlinking between files.  

After a while, speed and flexibility vanish under a delicate house of cards. You can’t reorganize your files or sheets into efficient file management systems. Like a makeshift beam in a house, data burdened by existing structures becomes insecure (not to mention inelegant). The mixing of data with reports means you are just one bad sort away from disaster…and throwing more people at the problem will only make matters worse.

They are More Costly Than You May Think. In private equity, spreadsheets used to be the only viable alternative. Now, there are numerous alternatives—but they can produce sticker shock, or dread of deployment and the inevitable learning curve that follows. 

But these barriers merely exist at the outset. What’s far more costly is an unwieldy spreadsheet support team, untimely information, and inaccuracy. Can you afford not getting your investors the information that they need, or getting it to them late? 

You Can’t Outgrow Their Drawbacks. You can outgrow some business problems and break through to a new level of performance. This is not the case with spreadsheets. No matter how big your firm gets, you will still struggle with lack of documentation, tracking, errors, and other spreadsheet issues. 

Rather than providing a solution, the addition of more people will only add aggravation, since spreadsheets do little to smooth collaboration. For example, there are functions that require single user access, making the addition of people of marginal impact to the completion date.  

You also have the “key person” risk. If one of your key people is leaving, you need to transfer his or her knowledge to a successor. There is no guarantee that the new person will be as good as his or her predecessor.  

Spreadsheets are also notoriously difficult to keep open for more than one accounting close at a time. How many times would you like to get a jump on the first quarter, but can’t because the YE audit isn’t done, and you need to finish those spreadsheets before you roll them over for the new year?

John Wiencek is a managing director at AltResources, a fund administration provider for private equity firms.