Precisely wrong or approximately right – the mirage of false accuracy in financial forecasting

Whistlebrook’s CEO, David Webber explores false accuracy in forecasting for finance.

No building society or bank would believe that building your own in-house bespoke accounting system was the best use of resource when the market offered a myriad of proven product applications to do that task.

Likewise, no organisation would employ a single individual to build a series of undocumented, un-auditable, and probably untested, spreadsheets to produce their monthly accounting information.

However, when it comes to considering the same data set through the lens of the future, many building societies and banks seem content to take the DIY approach.

KPMG has published a survey that reported 70% of spreadsheets for financial modelling contained errors that were material to results and 75% of models had no formal quality assurance processes of any kind.

In PWC’s paper on managing spreadsheet risks, their key recommendation for good governance was that the processes should be fully documented.

Good governance should, at minimum cover, version, access, input and development controls, as well as back-up, together with, disaster recovery processes.

Even assuming an organisation has strong governance in relation to spreadsheet solutions, very often they are constructed from a granular data level upwards. There may be little regard as to whether that micro level of detail is necessary, or able, to provide the forward looking insight an organisation actually requires.

Often designers of spreadsheets take false comfort from layers of complexity or numerous iterative evolutions, when in fact the assumption that is key to the insight they are seeking, is a peripheral consideration.

For instance, if an individual has created a multi-year spreadsheet that is calculating any form of present value, the most material item with regard to the range of calculated outcomes in the workbook will be the discount factor.

Alternatively, if a spreadsheet is being used to calculate the effective interest rate on a loan for FRS102 income recognition, the assumptions on reversion behaviour have a more material impact on the values calculated than any other single variable.

At Whistlebrook, our financial planning product WFP® and our effective interest rate solution WBEIR® are specifically designed to provide all of the governance and control that spreadsheet solutions lack.

In addition, both products are designed specifically for the needs of, and in conjunction with, financial institutions. WFP® and WBEIR® enable business planning or income recognition to be calculated at three levels of granularity, ranging from individual products up to a product range.

Both solutions also offer the ability to run multiple business stresses and scenarios. That feature delivers a huge advantage over having a multitude of spreadsheet versions modelling these potential events. An organisation will be better able to focus on its critical success factors when not distracted by managing spreadsheet risk.

If you would like to see the wood from the trees, do give us a call.