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Given the benefits, why is it that financial modelling is such a potential minefield? The risks are considerable, hence the importance of applying the appropriate care and skill in the performance of modelling assignments. |
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The risks associated with financial models in the corporate decision-making realm are analogous to software application development. Would you purchase a significant software application without being confident that it had been properly designed and thoroughly tested? |
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In business and financial modelling, users often create applications with no planning, structuring, testing or quality control. Without these basic fundamentals the risk of inappropriate, inaccurate and unreliable analysis increases exponentially. |
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These risks are a reality as evidenced by a number of high profile disasters in the last few years. Studies undertaken prior to 1997 indicate error rates of approximately 21%; however, studies from 1997 onwards indicate error rates have increased to an average of 91% of the 54 models reviewed. |
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Our experience is that the these increasing error rates are primarily linked to: - rapid growth in the usage of spreadsheets within the corporate and public sectors, without suitable modelling best practice training and risk management procedures; - the fact that training is provided for spreadsheet applications, but not in the techniques of spreadsheet development for decision-making; - increasing complexity of the decisions being evaluated with spreadsheets; - advances in spreadsheet functionality and the inherent flexibility of spreadsheet applications; - a lack of discipline in design, development and testing of spreadsheet models. |