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MITIGATING OPERATIONAL RISK FROM SPREADSHEETS: BUSINESSES MUST TAKE CONTROL

Christopher Burke, CEO, Brickendon

 

What do accountants, risk professionals and finance modellers have in common? Their perpetual love for spreadsheets. If you ever speak with them about using spreadsheets, it may closely resemble talking with children about their favourite superhero or barbie doll. They will happily talk to you about the incredible speed at which they can manipulate data, prepare financial models and reports. They will also talk about the flexibility spreadsheets provide and how they themselves have customised their own spreadsheets to make their lives easier and their companies more efficient.

There is no doubt that spreadsheets form a core part of any business and whether it’s for tracking expenses or managing complex and highly sensitive financial data sets, they are a universally essential business tool.

So, given their obvious benefits, why would an organisation as respected as Forbes magazine describe Excel as ‘the most dangerous software on the planet’?[i]  Is it the addictive feeling of running the perfect formula? Or that some users just may not be able to handle the pure numerical truth of your bar graph?

No, it is simply because just one badly managed spreadsheet can open a business to risks that have the potential to singlehandedly cause colossal financial and reputational loss.

 

Risks Unseen and Unheard

Having spent decades as an Excel and financial risk specialist, I’ve learned that there are many ways in which spreadsheets and databases can go wrong. From small firms with just a few employees and spreadsheets to global firms with hundreds of thousands of spreadsheets, the risk remains the same. One spreadsheet can cause catastrophic harm. Regardless of who or what is to blame, the most alarming thing is that most business leaders are unaware of the potential damage spreadsheets and other end-user tools can cause. Businesses need to take note now and not only recognise the risks but also learn how to mitigate them.

We recently polled a room of risk management professionals at an industry conference and alarmingly, only 33% of people we asked said they had any kind of policy for managing everyday tools like spreadsheets[ii].

Nearly half of the people we polled (47%) claimed their organisations use more than 1,000 spreadsheets for day-to-day work, and what’s more, according to research from the University of Hawaii [iii], 20% to 40% of spreadsheets are thought to contain errors.

 

The Cost of Complacency

For an idea of the financial cost of spreadsheet errors, let’s cast our minds back to 2008 when Lehman Brothers went bankrupt and Barclays bought some of the company’s assets. It was reported that this included the unintentional purchase of 179 contracts which had been hidden rather than deleted in a spreadsheet containing nearly 1,000 rows and 24,000 cells.

However, when the spreadsheet was converted into a PDF to be posted to the bankruptcy court’s website, the hidden cells reappeared. Although Barclays Capital filed a legal relief motion, in the end it was reported that they had to swallow the losses for an undisclosed sum.

In another more recent instance in March 2019, less than a week after posting its latest quarterly earnings, Canopy Growth Corporation, the largest cannabis company by market value, had to issue a correction. The Canadian firm said it was restating one metric in its fiscal third-quarter and nine-month earnings release after a formula error in a spreadsheet. The Smiths Falls, Ontario-based company said the nine-month adjusted EBITDA figure should have been a loss of C$155.2 million ($117.8 million) but was incorrectly stated as a loss of C$69.0 million ($52.4 million). Apparently as a result, the organisation’s shares fell by 3.7% pre-market. These cases don’t even go into the world of legal compliance and data regulation, so we’ll save that for another time.

 

To Err-or is Human

There are numerous possible points of failure, especially when you consider the quality of spreadsheet output has (up until now) usually been dictated and controlled by just one human working on computers using software with, at best, some manual checks.

Firstly, the challenge of multiple users copying someone’s “good” spreadsheet and making their own amendments without knowing the breadth of formulae and underlying structure should be of concern. With different people doing different things, often using different methods to manage the same or similar set of data, it is easy to see how quickly errors can escalate.

Such situations are very relatable and can happen to any business large or small, with the implications for version control alone leaving any business exposed to risk, especially if there aren’t mandated ways of working, or special document control protocols.

So, one perfectly natural reaction is to restrict people’s access to data, documents or processes, relying on a single expert with ultimate oversight. A typical scenario in smaller companies, where fewer contributors should, theoretically lead to fewer mistakes and more controlled ways of working.

This is great until that one controller then becomes a single point of failure without the back-up of proofing or cross-checking from other teams, let alone potentially overloading work on a single person.

Finally, the hardest to spot errors come in the shape of formulae or code errors themselves and whilst these can be completely beyond anyone’s control, there are some user habits that don’t necessarily help.

For example, if you repeatedly copy formulas from book to book, or use a single sheet for too long, formulas can fail but go unnoticed due to the trust built up by the users in their long-suffering spreadsheet.

 

To Mitigate is Divine

So, how do companies protect themselves against these risks and mistakes regardless of where they come from? For me, the solution is two-fold. Firstly, every business should have an executable compliance policy for managing how all data is handled and allow software to instantly, and cost effectively verify compliance to the policy.

These policies should give guidance to staff on how to manage data, how to use and save spreadsheets in uniform ways and help reduce user errors and boost accuracy.

To back this up, companies should look to the latest technological tools including advances in AI and cloud computing as a means of double-checking, securing and locking down the most important data. This is why my team at Brickendon has built a customisable solution capable of scanning the most complex networks of spreadsheets to automatically detect inconsistencies, mis-performing formulas and/or erroneous trends in version control.

Fast and easy-to-use, EUCplus lets businesses take control of their data and protect their business. It takes away the risk, but still lets organisations carry on with business as usual. It is a simple process to ratify changes to models and calculations, whilst allowing day-to-day data changes to happen as usual.

We named the system EUCplus – or ‘End-User Computing plus’, because we saw the need for a tool that would go well beyond the limits of human error-checking or proofing and perform at great pace. By registering, scanning and securing the data, EUCplus gives businesses the peace of mind they need to get on with their day jobs.

By keeping the flexibility and simultaneously removing the risk from spreadsheets, EUCplus will enable organisations to safely allow spreadsheets to be used by any employee needing to manipulate financial data, rather than limiting access to only ‘love-struck’ accountants and risk analysts. After all, the immense flexibility and multiple functional abilities of spreadsheets do suggest they deserve more credit than they usually get.

 

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Business

CAPITAL MARKETS – LIQUIDITY MANAGEMENT DURING COVID-19

COVID-19

Tony Farnfield, Partner at management and technology consultancy, BearingPoint

 

When “Dr. Doom” predicted the 2008 financial crisis back in 2006, and spoke of a necessitated market correction and was calling for the repricing of riskier assets; predicting a continuation of a global financial slowdown, or even a global recession starting in 2020, this prediction was based on known factors affecting the global economy. The unforeseen outbreak of Covid-19 and the increased volatility this has brought to global financial markets was not taken into account.

Three months on from the initial outbreak, and we have already witnessed the biggest intraday drop in the Dow Jones Industrial Average. The outbreak, coupled with the oil price shock, triggered responses from the Federal Reserve, the Bank of England and Central Bank of Canada to cut benchmarks rates in an effort to even out the shock to the wider economies.

There is a high degree of uncertainty on how the coronavirus crisis will unfold. We could experience only a temporary disruption – lasting from a few weeks to a few months, or a prolonged stress in markets, assuming that it will be months until vaccine clinical trials begin and with rate cuts (already reaching bottom) having limited effects on the required stimulus.

Banks have undeniably improved their liquidity following regulatory guidance post financial crisis; however, treasury departments will need to prepare and caveat for a wide range of possible outcomes. Traditional stress testing, scenario development and re-calibration have not taken into account conditions such as the ones experienced with the Covid-19 outbreak or the speed with which things evolved.

At a generic level, there are three key steps Treasurer’s should look to take:

 

  1. Convert uncertainties into emerging and quantifiable risks

This is already being considered by some of the larger financial institutions under their crisis management responses. However, it’s important to highlight that even for those that have triggered the crisis management process, the forecasting, rebalancing and risk assessment should be continuous, taking into account new developments in the following manner:

Continuous forecasting

Continuously monitor and develop scenarios of potential sources that could disrupt funding and liquidity usage. With the right analytical capability, cash-flow projections should adapt to changing scenarios, including scenarios coming from the different business lines. Scenario sources could include unexpected credit usage that could encourage either large prepayments or defaults, or changing corporate customer behaviour – deposit inflows from corporates and depositors affecting leverage-constrained institutions. Also, there should be some consideration given to the availability of funding sources or, for wholesale funding, acceleration or reduction of funding plans.

Continuous re-balancing

Take immediate actions in increasing liquidity and cash holdings in the short term to cover for the uncertainty.

Continuous risk assessment

Account for emerging risks previously not accounted for, such as the temporary closure of operations or reduced capacity of market utilities. Assess those scenarios and how these are captured and factored in stress tests. Intraday liquidity should be the primary focus to understand immediate cash requirements.

 

  1. Refine your liquidity risk measurement

Better identification, measurement and analysis of key liquidity drivers should become core for an institution’s ability to effectively manage and mitigate particularly unique risks not previously considered. To do this, Treasurers should consider the frequency of their monitoring, and increase levels to daily stress tests and daily Early Warning Indicator testing to include daily developments.

In-depth analysis of risks

Re-run your liquidity risk identification exercise to understand better your current exposures, especially examining certain instances of this outbreak crisis, e.g. oil-related exposures, airline, marine or supply chain related exposures etc.

Re-calibrate based on new understanding

Re-assess existing scenarios or add new scenarios in covering a range of events and timeframes (e.g. sustained spread of the virus over x months vs limited spread and containment). Revisit your Early Warning Indicators to monitor emerging risks. At a later point, revisit these to assess if market signals existed and if they were picked up by your indicators.

 

  1. Review your mitigation plan

Identification, assessment and measurement is only part of the overall response. Stresses or risks that can be crystallised need to be accompanied by mitigative actions, agile and feasible enough under the current market conditions. Contingency funding actions might need to be revisited to determine if additional actions need to be considered.

Revisit and verify the availability of near real time reports, such as positions of securities holdings reports. Such information should be readily available and synthesised in the event that you will need to communicate clear and concise plans to investors, regulators or other market participants in relation to liquidity management strategies to foster confidence in the market.

In summary, reviewing and preserving an institution’s liquidity under extreme and volatile circumstances is the core responsibility of any treasurer. However, we know that any scenario or contingency planning is unlikely to be fully predictive of unprecedented scenarios such as this. Re-visiting already set practices and testing their efficacy and completeness should be the first step before considering inserting new scenarios and new actions into the mix. Nothing tried and tested can always remain true.

 

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Business

STOP THE CONFUSION: HOW TO KNOW IF YOUR BUSINESS MAY BE INSURED AGAINST COVID-19

COVID-19

By Alex Balcombe, Partner at Harris Balcombe

 

The last few weeks has seen businesses in hospitality, tourism, retail, leisure and more forced to close their doors following the Government’s orders that they should close to prevent the spread of coronavirus.

While this is expected to flatten the curve and reduce the number of coronavirus cases, it will of course have an impact on businesses and employees alike.  For small businesses especially, there are many concerns about how they can claim on their insurance to weigh the fall of this impact.

 

Mixed Messaging

In response to calls to help struggling businesses, the Government has informed the public that companies who are facing turmoil will be able to claim on their business interruption insurance during this difficult time. For most, this is wrong.

Alex Balcombe

The insurance industry has also been extremely vocal that there is no cover for any coronavirus-hit businesses during this tough financial period. This isn’t strictly true either.

How can businesses see through the mixed messaging and best secure their future and their livelihoods and reduce money worries? It’s an extremely stressful time for many companies, and confusion over whether or not they can be covered can only cause more unnecessary stress.

Since it’s a new disease, most businesses will not be covered for business interruption due to COVID-19. In fact, the vast majority of policies do not cover anything related to COVID-19.

That said –  don’t rule out the idea that you may be covered. There is a chance that you will be covered against COVID-19, but not know it. This is a very small chance, but your current cover may already protect your business against the consequences of coronavirus, and the nationwide response to it –  though those with this cover are unlikely to realise it.

 

How Could I Be Covered?

Not everyone has business interruption insurance, as it’s not a legal requirement. It is entirely up to the policy holder to weigh up the benefits of having it, and their ability to trade should a disaster happen.

To be considered for cover for COVID-19, there are two types of policy extensions to your business interruption cover that can potentially cover you for this situation:

Infectious Disease Extension 

Many policies expressly state which diseases fall within the realm of being an infectious or notifiable disease. If this is the case, your policy will not provide cover. As it is a new disease, these policies will not have included COVID-19.

Other infectious disease extension policies will define the disease with reference to the actions of the government. Since the UK Government has named COVID-19 as a notifiable disease throughout the UK, it is possible that your business may fall into this definition, thus meaning you may be able to make a claim.

However, again, it’s not always that simple. Many policies require the disease to have been on your premises, while others specify a radius from your premises in order to qualify.

 

Denial of Access Extension (non-damage)

Denial of Access Extension (non-damage) policies may cover you if you’re prevented from accessing your property. This could be due to an event, or by the actions of a competent authority, which could cause your business interruption cover to engage.

If covered by this clause, there are often very subtle differences in wording in your policy. This could depend on the insurer or policy. You may well be covered, but it will depend on your particular circumstances, and the specific policy wording.

 

What now?

It’s clear that the Government needs to do more in ensuring there is clear messaging for businesses, and to help the insurance market look after policy holders. This is an unprecedented situation, and with many people looking to claim on their insurance, we’re already seeing major delays which could have a domino impact.

People throughout the world are understandably facing all kinds of worries because of the current pandemic. Our ways of living have changed, and many business owners will not have experienced a situation like this in their life times. If you own a business and are unsure about whether you can claim for business interruption, or are confused about ambiguous wording, get in touch with a loss assessor.

These claims are not simple, but loss assessors will be experts in business interruption insurance, and will specialise in large and complex claims. They will be able to help and guide you along the way, check your wording and work on your behalf to make sure you get everything you are entitled to.

 

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