Reviewing Financial Models

  

Are you using a financial model to support decisions in areas such as tender analysis or pricing? Are you using a model to support a corporate transaction? Or do you use the information output from your model to support assessments you make regarding the future of your organisation?

If so, then you want this information to be accurate and reliable. You want to have the confidence that the decisions you make are based upon meaningful information.

Surveys by professional auditing firms and academic research report that error rates in spreadsheets are high. Therefore the questions you should be asking include:

  • How does my organisation reduce the potential for an error occurring in the financial model?
  • How would I know if there is an underlying problem?
  • Where are the errors in our spreadsheets?
  • How big is the problem?
  • Am I making incorrect decisions due to spreadsheet error?

Think about this in the context of how it impacts on your organisation’s performance. If there is an error in your tender submission that is in your favour, generally resulting in a higher price, this may mean that you are uncompetitive and potentially you may lose the tender. If it is too low it may mean that you are not able to make a profit or worse that the outcome is unsustainable.

Consider a recent example: the New South Wales Auditor General found 37 errors that amounted to a cumulative $1 billion error in the State’s accounts. The audit found that “data entry errors, mistakes in spreadsheets and poor reconciliations were responsible for much of the disparity in projections”. In this situation it turned a deficit into a surplus but imagine if it had been the other way around?

Having financial models reviewed by a specialist means that it increases the likelihood of errors being detected and therefore it will increase your confidence in the decisions you are making.

The team that reviews a model, whether they are part of your internal audit function or externally sourced, should be experienced in the process of reviewing spreadsheets. They need to use appropriate spreadsheet auditing tools and have a testing review methodology that is designed to help you detect and resolve issues in your financial models.

Are you 100% confident in the data and information that you are basing your decisions on?