According to revenuerecognition.com:
92% of Public Companies’ Revenue Processes at Risk for Compliance Failures and Restatements
New study by RevenueRecognition.com and IDC reveals widespread reliance on spreadsheets, which greatly increases the likelihood of control weakness and accounting errors.
I was going to read the full report, but I didn’t want to give some unknown company all of my personal information for the privilege. If every field on your registration form is required, you don’t need to put the asterisks by each one. Just say that every field is required. If someone has access to the report and wants to give it to me without me giving them my phone number, I’ll be happy to read it.
My first reaction to this article was “Yawn”. My second reaction was that their numbers are wrong. The headline should have read “8% of Public Companies Lie About Using Spreadsheets”. Maybe they didn’t lie, maybe they just didn’t understand the question. Or maybe the surveyors asked the wrong person. Ask the CFO of General Motors whether spreadsheets are used to create journal entries. He will say in a very dignified voice “Our journal entry creation procedures are fully compliant with Sarbanes-Oxley”, or some such thing. Now ask the two-year accounting clerk that actually makes the journal entry and he’ll say “Of course we do. Now get out of my office.”
First a word about SOX. (Note that I don’t work for a public company and am not a Sarbanes-Oxley expert). SOX is the unholy bastard child of the Enron scandal. A lot of voters lost a lot of money when Enron tanked and our brave men and women on capitol hill came to the rescue. I don’t believe that anyone is above the law, including the FASB or any other accounting standards body, but just as I cringe when Senator Stevens legislates my Internet, I cringe when non-accountant politicians meddle in my business.
There are two overriding concepts that control my thinking regarding Enron, SOX, and fiduciary responsibility in general. First, the people who lost their life savings when Enron went bankrupt were speculators, not investors. Investors properly diversify their portfolios so that one company/industry/decision cannot wipe them out. Many, if not most, of the people who were hurt by Enron probably didn’t know they were speculators, but ignorance is not a defense in my opinion. Does that make me a heartless prick? Yeah, probably. I lost everything I had invested in Inacom when they went bankrupt. I didn’t end up on the dole because Inacom was less than 5% of my portfolio. Why wasn’t Congress passing laws when that happened? Okay, enough kicking the Enron-homeless when they’re down.
The second concept, and I’m not sure if anyone realizes this, is that Enron didn’t fail because of spreadsheet errors. No, it’s true. Look it up. In fact, Enron didn’t fail because of accounting errors at all, whether spreadsheet related or not. Enron failed because of fraud. We already have laws against fraud and breach of fiduciary duty and Enron executives and directors should be prosecuted under those laws. Some of them are. If SOX was in place before the Enron collapse, it would have prevented exactly nothing. Enron execs would still have defrauded the public by recognizing revenue inappropriately and by hiding losses off balance sheet.
The article states
Surprisingly, public companies with more than $200 million in revenue are substantially more reliant than the overall sample (61% vs. 52%) on spreadsheets for basic accounting entries.
Surprising to whom? First, I have to admit that I’m a little unclear on what “reliant … on spreadsheets for basic accounting entries” means, which I’ll address later. I, for one, am not surprised that larger companies use spreadsheet more than small companies, but I am a little surprised that they admit to it. The fact is, no accounting software program can cover every type of business, every type of business in an industry, nor seemingly identical businesses. There are a lot of variables in accounting, and there are many accounting software packages that do their job well. Yet not one of them does it perfectly.
When I worked for a general contractor in the construction industry, we used Timberline. It is a truly magnificent accounting package that was built specifically for the construction industry. And while they have been branching out to become a useful solution for many subcontractors, it was developed for general contractors. And yet, it didn’t account for our flexible spending account. Guess which program I used to create journal entries for that account. That was for a mid-size general contractor in a mid-size city in the middle of America. I think a $200 million company might have a few complex issues that their accounting software doesn’t handle exactly right.
What does it mean to rely on spreadsheets for basic accounting entries? Does that mean that they use Excel to compute amounts that make up the accounting entry? Does it mean that they use Excel to determine in which accounting period a transaction belongs? Are they using Excel in some way that makes determinations about generally accepted accounting procedures? Accounting systems are not black boxes. You don’t feed source documents into one end and get financial statements out the other. The process involves human beings that make errors and it always will. If you take away spreadsheets, you will be forcing users to make their errors using some other technology. Give them a pencil and a notepad and see how they do. Accountability and proper internal controls are how you produce reliable financial statements, not legislation. And certainly not by maligning the noble spreadsheet who, despite her flaws, has preformed admirably lo these many years.