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The Importance and The Importance and Criticality of Criticality of
Spreadsheets in the Spreadsheets in the City of LondonCity of London
Grenville CrollGrenville CrollManaging DirectorManaging Director
Frontline Systems UK LtdFrontline Systems UK [email protected]@solver.com
IntroductionIntroduction ““How Important are Spreadsheets to How Important are Spreadsheets to
Organisations” Organisations” Presented by Pat Cleary, EuSpRIG 2000Presented by Pat Cleary, EuSpRIG 2000
Lack of funding so not completed, therefore as of Lack of funding so not completed, therefore as of end 2004, we still had no real notion of how end 2004, we still had no real notion of how important spreadsheets were or are to important spreadsheets were or are to organisationsorganisations
Personal experience in a City of London financial Personal experience in a City of London financial modelling team only gave a narrow viewmodelling team only gave a narrow view
Noticeable reticence of management to be open Noticeable reticence of management to be open No perceived interest in disclosureNo perceived interest in disclosure Obvious problems with confidentialityObvious problems with confidentiality
IntroductionIntroduction
Obtained some useful early feedback from Obtained some useful early feedback from the the www.wilmott.comwww.wilmott.com internet Forum internet Forum
Decided to do a series of Decided to do a series of anonymousanonymous, , unstructured half hour telephone unstructured half hour telephone interviews with 24 senior managers in the interviews with 24 senior managers in the City (after MacMillan)City (after MacMillan)
City is well defined, and was a natural City is well defined, and was a natural follow up to an earlier paper documenting follow up to an earlier paper documenting Spreadsheet Audit Methodologies in the Spreadsheet Audit Methodologies in the City of LondonCity of London
City of LondonCity of London £13 Bn current account contribution£13 Bn current account contribution 3% UK GDP3% UK GDP $500Bn daily foreign Exchange Turnover$500Bn daily foreign Exchange Turnover 45% Global Foreign Equity Market45% Global Foreign Equity Market 70% Eurobonds traded in London70% Eurobonds traded in London $275bn daily turnover in OTC derivatives$275bn daily turnover in OTC derivatives $844Bn daily futures turnover$844Bn daily futures turnover $2000Bn per annum Metals trading$2000Bn per annum Metals trading £2500Bn assets under management£2500Bn assets under management
City of LondonCity of LondonMain SectorsMain Sectors
AccountancyAccountancy BankingBanking Business Business
InformationInformation ExchangesExchanges FinanceFinance Fund Fund
ManagementManagement GovernmentGovernment InsuranceInsurance
Management Management ConsultingConsulting
MaritimeMaritime PPP/PFIPPP/PFI RegulationRegulation Transnational Transnational
OrganisationsOrganisations TransportTransport
IntervieweesInterviewees AuditorsAuditors AccountantsAccountants ActuariesActuaries BankersBankers DirectorsDirectors InsurersInsurers LawyersLawyers Quants Quants IT specialistsIT specialists RegulatorsRegulators Tax InspectorsTax Inspectors Senior ManagersSenior Managers
Private FinancePrivate Finance Professional ServicesProfessional Services LawLaw Investment BankingInvestment Banking Fund ManagementFund Management BankingBanking RegulationRegulation InsuranceInsurance EnergyEnergy GovernmentGovernment Business ServicesBusiness Services MaritimeMaritime
23 IN TOTALFROM:
www.wilmott.comwww.wilmott.com
Original Forum Post: Original Forum Post:
“…“….. though I have been involved with .. though I have been involved with spreadsheets since 1984…….I have spreadsheets since 1984…….I have relatively less experience of how Excel relatively less experience of how Excel is used in the City/Quant environment is used in the City/Quant environment of today. If anyone could paint a of today. If anyone could paint a picture of how Excel is used picture of how Excel is used nowadays, it would be appreciated”nowadays, it would be appreciated”
www.wilmott.comwww.wilmott.com
““Put simply and succinctly, despite Put simply and succinctly, despite the higher operational risk, Excel the higher operational risk, Excel is everywhere - it is the primary is everywhere - it is the primary front-line tool of analysis in the front-line tool of analysis in the financial business. Most traders financial business. Most traders price deals in spreadsheets and price deals in spreadsheets and enter them in large-scale deal enter them in large-scale deal capture systems afterwards”capture systems afterwards”
www.wilmott.comwww.wilmott.com
““Excel is utterly pervasive. Nothing Excel is utterly pervasive. Nothing large (good or bad) happens without large (good or bad) happens without it passing at some time through it passing at some time through Excel”Excel”
www.wilmott.comwww.wilmott.com
““.. if a customer wants to do a bespoke .. if a customer wants to do a bespoke trade that cannot be handled in our trade that cannot be handled in our designated booking system then we designated booking system then we have to book it in a spreadsheet and have to book it in a spreadsheet and add a few bips to cover operational add a few bips to cover operational risk capital charge (and additional risk capital charge (and additional maintenance). How many bips to add maintenance). How many bips to add is subjective”is subjective”
Defining Importance & CriticalityDefining Importance & Criticality
Six point ScaleSix point Scale Outlined by a RegulatorOutlined by a Regulator Generalised for wider useGeneralised for wider use MayMay be adopted by regulator for be adopted by regulator for
future usefuture use
Defining Importance & CriticalityDefining Importance & Criticality
Critical Spreadsheet: if incorrect couldCritical Spreadsheet: if incorrect could Compromise a government, a regulator, a Compromise a government, a regulator, a
financial market or other significant public financial market or other significant public entityentity
Cause Significant Breach of the LawCause Significant Breach of the Law Cause Significant Breach of Individual or Cause Significant Breach of Individual or
Collective Fiduciary DutyCollective Fiduciary Duty Cause Possible Application of the Criminal LawCause Possible Application of the Criminal Law
Might get jailedMight get jailed Generate Significant Adverse PublicityGenerate Significant Adverse Publicity
Defining Importance & CriticalityDefining Importance & Criticality
Key Spreadsheet: if incorrect couldKey Spreadsheet: if incorrect could Cause Significant Business Impact in terms Cause Significant Business Impact in terms
of incorrectly stated Assets, Liabilities, of incorrectly stated Assets, Liabilities, Costs, Revenues, Profits or Taxation etcCosts, Revenues, Profits or Taxation etc
Cause Breach of Company LawCause Breach of Company Law Generate Adverse PublicityGenerate Adverse Publicity Require Remediation through Civil Require Remediation through Civil
ProceedingsProceedings NegligenceNegligence Breach of Contract Breach of Contract Might get finedMight get fined
Initiate Internal Disciplinary ActionInitiate Internal Disciplinary Action
Defining Importance & CriticalityDefining Importance & Criticality
Important Spreadsheet: if Important Spreadsheet: if incorrect incorrect Could Significantly Impact the individual Could Significantly Impact the individual
Perceived job performance Perceived job performance Compromise Career ProgressionCompromise Career Progression
But Limited Impact on the BusinessBut Limited Impact on the Business Not all of:Not all of:
Direct Direct GreatGreat ImmediateImmediate IrreversibleIrreversible
Defining Importance & CriticalityDefining Importance & Criticality
Store & RetrieveStore & Retrieve Spreadsheets used as databasesSpreadsheets used as databases
ExpiredExpired Spreadsheets over three years old, no Spreadsheets over three years old, no
longer required in the active management longer required in the active management of the businessof the business
PersonalPersonal Spreadsheets used by the individual in Spreadsheets used by the individual in
the day to day performance of their duties the day to day performance of their duties where the impact of material error is lowwhere the impact of material error is low
Use of Spreadsheets in Professional Use of Spreadsheets in Professional Services firmsServices firms
FindingsFindings Extensive use of spreadsheet based financial Extensive use of spreadsheet based financial
modelling to support major commercial modelling to support major commercial transactionstransactions
Many spreadsheets Key or CriticalMany spreadsheets Key or Critical Millions of pounds of time investment in some Millions of pounds of time investment in some
spreadsheetsspreadsheets Good error management in spreadsheets Good error management in spreadsheets
developed for clientsdeveloped for clients Less than 1,000 spreadsheets formally checked Less than 1,000 spreadsheets formally checked
p.a.p.a.
Use of Spreadsheets in Professional Use of Spreadsheets in Professional Services firmsServices firms
ConcernsConcerns No “Independence of mind”No “Independence of mind”
Undue reliance on the spreadsheet commissioned Undue reliance on the spreadsheet commissioned by the banks or the project sponsor and checked by the banks or the project sponsor and checked by the firmby the firm
Oil & Gas – loss of knowledge held in Oil & Gas – loss of knowledge held in spreadsheets as people retirespreadsheets as people retire
Key & Critical spreadsheets developed by Key & Critical spreadsheets developed by clients not subject to same scrutiny as clients not subject to same scrutiny as spreadsheets developed by professional spreadsheets developed by professional services firms services firms
Not clear to what extent spreadsheets used Not clear to what extent spreadsheets used by clients for financial reporting are by clients for financial reporting are independently checkedindependently checked
Spreadsheets in Financial Trading and Spreadsheets in Financial Trading and Fund ManagementFund Management
““The whole industry is run on a The whole industry is run on a spreadsheet”spreadsheet”
““Critical – couldn’t run the bank Critical – couldn’t run the bank without them”without them”
““Spreadsheets are the user interface Spreadsheets are the user interface into the deal”into the deal”
Spreadsheets in Financial Trading and Spreadsheets in Financial Trading and Fund ManagementFund Management
Regulator: Regulator:
““Spreadsheets are integral to the Spreadsheets are integral to the function and function and operation of the global operation of the global financial system”financial system”
Senior Investment Research Manager:Senior Investment Research Manager:
““Agreed. In addition I would say that Agreed. In addition I would say that the majority the majority of people who use the financial of people who use the financial system are not system are not appreciative of the appreciative of the rolerole that spreadsheets play”that spreadsheets play”
Spreadsheets in Financial Trading and Spreadsheets in Financial Trading and Fund ManagementFund Management
Used to Value Financial Instruments of all Used to Value Financial Instruments of all typestypes
Used to strategically run large institutionsUsed to strategically run large institutions Prime data source for complex transactionsPrime data source for complex transactions Key data/information manipulation toolKey data/information manipulation tool Main mechanism for reporting capital Main mechanism for reporting capital
adequacyadequacy Most heavily used in the more innovative ie Most heavily used in the more innovative ie
“more risky” parts of the market“more risky” parts of the market Used to guide/make decisions on what to Used to guide/make decisions on what to
trade trade Used to calculate fund’s daily P&LUsed to calculate fund’s daily P&L
Spreadsheets in Financial Trading and Spreadsheets in Financial Trading and Fund ManagementFund Management
Spreadsheet users almost all self-taughtSpreadsheet users almost all self-taught No wide appreciation of spreadsheet error No wide appreciation of spreadsheet error
riskrisk Spreadsheets near, at or beyond limitsSpreadsheets near, at or beyond limits Millions of untested uncontrolled Millions of untested uncontrolled
spreadsheetsspreadsheets Endemic denial of the use and extent of use Endemic denial of the use and extent of use
of spreadsheets at top management levelof spreadsheets at top management level Little discernable interest in Spreadsheet Little discernable interest in Spreadsheet
Error Risk & related issuesError Risk & related issues
ConclusionsConclusions
Some parts of the City don’t use key Some parts of the City don’t use key & critical spreadsheets much – law, & critical spreadsheets much – law, maritimemaritime
Some parts of the city use key & Some parts of the city use key & critical spreadsheets a great deal, critical spreadsheets a great deal, and manage them well – professional and manage them well – professional services, clearing banks, PPP/PFI, services, clearing banks, PPP/PFI, limited recourse financelimited recourse finance
ConclusionsConclusions
Large parts of the City are critically Large parts of the City are critically dependant upon untested key and dependant upon untested key and critical spreadsheets critical spreadsheets
Large parts of the City are almost Large parts of the City are almost unaware of the risks to which they are unaware of the risks to which they are exposing themselves – financial exposing themselves – financial trading, fund management, investment trading, fund management, investment research, corporate financial reportingresearch, corporate financial reporting
ConclusionsConclusions
““If the uncontrolled use of If the uncontrolled use of spreadsheets continues to occur in spreadsheets continues to occur in highly leveraged markets and highly leveraged markets and companies, it is only a matter of time companies, it is only a matter of time before another “Black Swan” event before another “Black Swan” event occurs causing catastrophic lossoccurs causing catastrophic loss””
ConclusionsConclusions
““It is completely within the realms of It is completely within the realms of possibility that a single, large, possibility that a single, large, complex but erroneous spreadsheet complex but erroneous spreadsheet could directly cause the accidental could directly cause the accidental loss of a corporation or institution, loss of a corporation or institution, significantly damaging the City of significantly damaging the City of London’s reputationLondon’s reputation ””
RecommendationsRecommendations
Identify, Prioritise, test, correct and control Identify, Prioritise, test, correct and control Key & Critical Spreadsheets to improve Key & Critical Spreadsheets to improve profitabilityprofitability
Improve Regulatory frameworkImprove Regulatory framework Promote the emerging discipline of Promote the emerging discipline of
Spreadsheet EngineeringSpreadsheet Engineering Train Management & Staff Train Management & Staff Deploy software tools to assistDeploy software tools to assist Develop next generation spreadsheet Develop next generation spreadsheet
technologytechnology