Usefulness of Spreadsheet Modeling in Financial Accounting and Reporting

21st century is the century of technology, and spreadsheet is one of the great technological inventions that greatly improve working efficiency. Spreadsheet is a computer application with functions that can improve the user’s productivity in collecting, analyzing, and sharing tabular data sets. It displays multiple cells usually in a two-dimensional matrix or grid making up of rows and columns. Each cell contains alphanumeric text, numeric values, or formulas (Wikipedia, 2011).

Bagranoff (2010) thought spreadsheet allows users to make complex calculations automatically and to change single number and update all related numbers at the click of a mouse. As one of the most popular financial software, spreadsheet is widely applied in areas such as accounting, finance, marketing, taxation, engineering, educational, scientific and medical fields (Ballantine, 1991). In 2004, SimCorp USA Inc and the Financial Executives Consulting Group found that about 64 percent of domestic companies depend on spreadsheet.

Need essay sample on "Usefulness of Spreadsheet Modeling in Financial Accounting and Reporting" ? We will write a custom essay sample specifically for you for only $12.90/page

Many authors view spreadsheet as a very useful tool for saving much of time and cost as an alternative to the manual worksheet. For example, Ballantine (1991) considered spreadsheet has had quite a dramatic effect on the nature of the work of many people, those who have been exposed to the spreadsheet concept have adjusted to the idea in a fairly easy manner since they were already familiar with the concept via the manual worksheet. At the same time, some authors see spreadsheet as a defective software because of its weakness in information security control, model building and process management.

This essay will criticize the usefulness of spreadsheet modeling in financial accounting and reporting in four areas: ease of use, usefulness of information produced, security and control, and compliance with financial reporting. Easier and more convenient are the major factors that spreadsheet being an alternative to the manual worksheet. One important problem users encountered with manual worksheets was the large number of recalculation when basic assumptions to the budget were made, or when input values were changed. It ultimately proved to be not only very time-consuming but tedious and hence like to cause errors.

The spreadsheet enables users to be creative and imaginative, modeler will just enter the input parameters which relevant to the model and recalculate. At a glance the modeler can see the final outcome of the scenario which has just been created, and different scenarios can be set up using the same model just by changing the input parameters to the model (Ballantine, 1991). Even so, Ballantine (1991) also admitted that some useful facilities within spreadsheet software are expensive, such as graphical and database facilities, continuous expanse is needed to keep the ease and convenience.

Another benefit of using the spreadsheet as an alternative to the manual worksheet is the saving of time and cost when printing financial report. Before the development of electronic spreadsheets, the production of daily reports would not possible. The use of manual worksheets required that the worksheet was typed manually and perhaps retyped if mistakes were discovered. Using the electronic spreadsheet for printing greatly reduces the time required to obtain printed output.

The user simply specifies the area of the worksheet to be printed, and sets the required print options through the spreadsheet. And Howcroft (2006) found two attempts to move away from using spreadsheets to produce budget by using TMC in the past failing because the accountants think TMC is “too inflexible” than spreadsheets. However, it is necessary to realize the weakness of spreadsheets when they are used for models which are large and complex. Large spreadsheets can become difficult to control and may even slow to operate when the hardware capability does not match the processing requirements.

Large models can also be difficult to build and the user can get easily “lost” in the logic of the entire model (Ballantine, 1991). There are some different views about usefulness of information produced in spreadsheet. Ballantine illustrates that many factors which affect an organization are qualitative instead of quantitative. These invariable factors are hard to quantify and include within a spreadsheet model. For example, it is difficult to measure in monetary terms the quality of staff morale, the losses that could occur because of poor management and lack of spirit.

In addition, spreadsheets omit context such as methods, values, assumptions, and logic that led to those results while displaying calculation. Both relationship and potential error are hide in formulas and difficult to be found out (Randles, 2005). Furthermore, validation of the spreadsheet model needs to be examined by comparing the outputs of it with what happens in the real world, and Berry (1991) see the model building process as the neglected area of financial modelling. The problem is that model builders operate with their perceptions of the world.

Because of differences in background and training, it is possible that model builders and users will see the world in different ways, so validation in the model building process is probably a failure. Despite there is so much doubts about usefulness of information in spreadsheet, Ballantine (1991) argued that spreadsheet has tended to encourage businesses to consider factors which were previously not considered in the budgeting process when using manual worksheets, including internal and external environmental influence.

However, he also admitted spreadsheet can not take account of intangible factors and feelings that the user may have about a particular project, whilst the position may look good from the spreadsheet point of view, the individual reviewing the information may have mixed feelings or a forebode that something outside the parameters of the model may affect the output of the project. It is widely agreed that problems with information security and managerial control over spreadsheet accuracy stem from the inherent nature of spreadsheet software.

The first problem is the difference between making a spreadsheet simply appear on the display screen and constructing a well-designed spreadsheet characterized by integrity and build-in controls. This is particularly troublesome since once they are set-up, spreadsheets may be used for an extended period of time and are often copied and distributed to others. If errors have been programmed into the spreadsheet’s original version, they will affect the spreadsheet’s output forever and be replicated and compounded each time the spreadsheet is reproduced (Busbin et al, 1990).

Secondly, because spreadsheet software allows convenient alteration of value and design, without built-in controls subsequent users may alter spreadsheet structure and thereby unknowingly compromise the integrity of the original design, and at the worst, could be flawed final decision-making due to a reliance upon erroneous information (Busbin et al, 1990). Moreover, relationships among financial accounts, informational reliability risks, and the existence controls must be able to know by control users such as CFO and auditors.

The evaluation of control may design incorrectly without this ability, and the CFO and auditors may fail to track one-to-many relationships between controls and risks (Leech, 2005). Spreadsheet can have some limitations that could cause compliance risks. An important thing for public companies is find out a method to meet Sarbanes-Oxley Act effectively, it is also important for companies to meet all the technical requirements from the law and by the SEC and PCAOB.

For example, a completion of information technology general controls assessment is required by PCAOB. However, many companies were not assessing them according to an official research in 2004. Leech (2005) also found that only 11 percent of 245 CFOs believed report control based on spreadsheet to be accurate enough to support their CFO about certifying their companies’ financial data for requirements of Sarbanes-Oxley. Furthermore, public companies are acquired to test whether key controls will result an acceptable error rate according to Sarbanes-Oxley.

CEOs and CFOs should able to see how much work has been done after test conduction to make sure all information secure, and it is a fact that spreadsheets do not allow the security test conducted by management, internal and external auditors (Leech, 2005). Furthermore, Sarbanes-Oxley Section 302 provides that companies have duty to report any potential problems and weaknesses that are found during the year to the auditor committee every quarter.

Companies must also have to ensure the CEO and CFO to identify and report any significant changes in the control environment and security management in their filings to the SEC every quarter. Leech (2005) thought spreadsheets are not ideal for quarterly monitoring of control status and supporting that CEO and CFO are actively and actually control the process. Moreover, according to PCAOB, to support their control proof, external auditors must keep seven years of history of the work of the company.

Even though it is possible for company to maintain figures and information, using spreadsheets to maintain this data and ensure to support the existence for great control status is very difficult in reality (Leech, 2005). In sum, the spreadsheet model has had great effect on the nature of the accounting work, and it is a fact that spreadsheet modeling makes accounting work much more simple, convenient and fast. However, spreadsheet is not perfect, many insiders have pointed out its limitations in ease of use, security and control, compliance with financial reporting standards, and sefulness of information produced. It is widely agreed that electronic spreadsheet should only be used as a useful tool which has applications for many different purpose, like what Ballentine (1991) said, it should be seen as a mean to an end and not as an end in itself. Users should be aware of the potential limitations of the tool and these should be kept in mind when modeling real-life situations. (1578 words)

Refernces: Bagranoff, Simkin and Strand. (2010). Core Concepts of Accounting Information Systems. 1th edition, The U. S. A: John Wiley press. Berry, R. H. and McLintock, A. J. (1991). The impact of information technology. London: Chapman& Hall press. ISBN 0412392100 Ballantine, J. (1991). The Impact of Information Technology. London: Chapman & Hall press. ISBN 0412392100 Busbin, J. W. Gross, E. P. and Dillon, T (1990). Improving Spreadsheet Control For Sales Managers Through the Use of the Systems Development Life Cycle. Journal of Personal Howcroft, D. (2006). Spreadsheets and the financial planning process: a case study of resistance to change. Journal of Accounting & Organization Change, Vol. 2 No. 3, 2006. UK: Emerald Group Publishing Limited press. ISSN 18325912 Leech, T. J. (2005). Spreadsheets Under Pressure. International auditor June 2005 Randles, C. (2005). We’re asking spreadsheets to do too much. Selling& Sales Management. Vol. X (Summer 1990), PP. 101-107 Wikipedia. (2012). Spreadsheet [Online]. Available from: http://en. wikipedia. org/wiki/Spreadsheet

Didn't find a paper?

Lets us create the best one for you! What is your topic?

Haven't found the Essay You Want?

Get your custom essay sample

For Only $13/page