Eurozone latest victim of spreadsheets

I have written frequently on the many risks to businesses due to their reliance on spreadsheets for calculations. The lack of auditability of changes made to spreadsheets and subsequently, the difficulty in tracing errors mean that the risks they pose in highly regulated complex financial environments are huge.

So I wasn’t exactly surprised when it turned out that a spreadsheet error lay at the heart of the current failure of policy in the Eurozone.

A seminal paper on economics produced by two renowned economists Reinhart and Rogoff showed conclusively that countries whose debt rose over 90% of GDP would suffer low-growth for many years.

Those in favour of a full-blown austerity approach to resolving the Eurozone crisis have used this paper extensively. Imagine their dismay when it turned out that the 90% figure was incorrect as the spreadsheet that derived it missed a few rows in one of its calculations. The populations of the countries suffering from the worst effects of the crisis, which are having a rigid austerity process forced upon them by the bailout programmes, are less than impressed that the data that it was all based on was incorrect.

The fear that people who are suffering excessive cuts in services, increases in taxes and unemployment and general economic malaise would take to the streets has led to a hurried climb-down from the great and the good within the EU. They are now making speeches about austerity having gone far enough and hoping no one asks them directly why their entire failing policy was based on a document that has been discredited by a simple spreadsheet error.

While most spreadsheet errors will not cause this level of international misery, all companies are at risk of serious detriment if they rely on spreadsheets for key risk calculations within their business. There have been frequent cases of major fines being imposed by different countries’ regulators on firms who do not have fully auditable means of showing how they derived the values they do for complex financial products. For example in the UK the FSA have fined Citigroup £13.9 million (2005), Credit Suisse £5.6 million (2008) while in the US, the SEC have fined Goldman Sachs $225,000 (2010) for spreadsheet mismanagement.

Too many financial institutions seem happy to ignore the risk, particularly life and pension companies. The addiction of actuarial departments to spread sheets continues unabated. Fascinated to the point of paralysis by the power of spreadsheets, they continue to use them for key calculations and illustrations despite their unsuitability. Spreadsheets are extremely vulnerable to the quality of the data input and to the difficulty in tracking any changes made.

These risks are exacerbated by the mobility of the workforce in the 21st century. As a result, many spreadsheets now being maintained by people who were not around when the originator developed them. Once the originator is gone, poor documentation and specification means that the current maintainer has little ability to correct any errors that occur and may not even spot them until it is too late.

The recent debacle in the Eurozone should give all those who are responsible for risk management pause for thought.

Tom Murray

Twitter: @TomMurrayDublin or @Exaxe

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