In the 21st century, technology has become pervasive and one of its great inventions is the spreadsheet. A spreadsheet is a computer application that enhances productivity by collecting, analyzing, and sharing tabular data sets. Typically, it presents cells in a two-dimensional matrix or grid composed of rows and columns, each containing alphanumeric text, numeric values, or formulas (Wikipedia, 2011).
According to Bagranoff (2010), spreadsheets offer users the ability to perform complex calculations automatically and to easily update multiple related numbers by changing a single number. Spreadsheets are widely used in various fields, including accounting, finance, marketing, taxation, engineering, education, science, and medicine (Ballantine, 1991). A study conducted by SimCorp USA Inc and the Financial Executives Consulting Group in 2004 found that approximately 64 percent of domestic companies rely on spreadsheets.
Many authors believe that spreadsheets are a valuable tool that can save time and money compared to traditional manual worksheets. Ballantine (1991) argues that spreadsheets have significantly changed the way many people work, as those who were already familiar with manual worksheets easily adapted to the concept of spreadsheets. However, some authors criticize spreadsheets for their weaknesses in information security control, model building, and process management.
This essay will critique the usefulness of spreadsheet modeling in financial accounting and reporting based on four areas: ease of use, usefulness of information produced, security and control, and compliance with financial reporting. Spreadsheets offer advantages over manual worksheets, such as ease of use and convenience. Unlike manual worksheets that require extensive recalculation when making budget assumptions or changing input values, spreadsheets simplify this process, saving time and reducing the likelihood of errors.
The spreadsheet allows users to be creative and imaginative. The modeler only needs to enter relevant input parameters for the model and recalculate. With a quick look, the modeler can see the final outcome of the scenario just created. Different scenarios can be set up using the same model by simply changing the input parameters (Ballantine, 1991). However, Ballantine (1991) also acknowledges that certain useful features in spreadsheet software, such as graphical and database capabilities, can be expensive. Ongoing expenses are necessary to maintain ease and convenience.
Using the spreadsheet instead of a manual worksheet offers the advantage of saving time and cost when printing financial reports. In the past, daily reports were difficult to produce without electronic spreadsheets. Manual worksheets had to be typed manually and possibly retyped if errors were found. However, using electronic spreadsheets significantly cuts down the time needed to obtain printed output.
The user can easily select the specific area of the worksheet to print and adjust the necessary print options directly within the spreadsheet. In previous attempts, Howcroft (2006) discovered that accountants believed using TMC for budgeting was unsuccessful due to its perceived lack of flexibility compared to spreadsheets. However, it is important to acknowledge the limitations of spreadsheets when handling large and intricate models. Managing and operating large spreadsheets can become challenging and may experience decreased performance if the hardware capabilities do not meet the processing demands.
Large models can be challenging to construct and users can easily become “lost” in the complexity of the entire model (Ballantine, 1991). There are varying opinions about the value of information generated in spreadsheets. Ballantine explains that numerous factors influencing an organization are qualitative rather than quantitative. These unquantifiable factors, such as staff morale, potential losses from poor management, and lack of enthusiasm, are difficult to measure using monetary terms and incorporate into a spreadsheet model.
Additionally, spreadsheets do not include important context such as methods, values, assumptions, and logic that were used to calculate the displayed results (Randles, 2005). Both the relationship between cells and potential errors are hidden within formulas, making them difficult to identify (Randles, 2005). Furthermore, validating a spreadsheet model requires comparing its outputs with real-world observations (Berry, 1991). Unfortunately, the process of building the model is often neglected in financial modeling, with model builders relying on their own interpretations of the world (Berry, 1991).
Due to variances in background and training, model builders and users may perceive the world differently, making validation during the model building process prone to failure. Although there is skepticism regarding the usefulness of information in spreadsheets, Ballantine (1991) suggests that spreadsheets have prompted businesses to take into account factors that were previously overlooked in the budgeting process when using manual worksheets, including internal and external environmental influences.
However, the speaker acknowledges that spreadsheets cannot account for intangible factors and feelings that the user may have towards a specific project. While the spreadsheet may indicate a positive outcome, the individual analyzing the information may have conflicting emotions or a sense of unease that external factors beyond the software’s capabilities could impact the project’s results. The general consensus is that issues related to information security and control in spreadsheet accuracy arise from the fundamental nature of spreadsheet software.
The main issue is the distinction between simply displaying a spreadsheet on a screen and creating a well-designed spreadsheet with integrity and built-in controls. This is especially problematic because spreadsheets are often used for long periods of time and are frequently copied and shared. If errors are present in the initial version of the spreadsheet, they will continue to impact the output and will be multiplied with each reproduction of the spreadsheet (Busbin et al, 1990).
Additionally, spreadsheet software enables easy modification of value and design. However, without proper built-in controls, subsequent users may unintentionally modify the structure of the spreadsheet and compromise the integrity of the original design. This can result in flawed decision-making if reliance is placed on erroneous information (Busbin et al, 1990). Furthermore, control users such as CFOs and auditors must be able to understand the relationships between financial accounts, informational reliability risks, and the existence of controls.
Failure to have this ability may result in incorrect design of control evaluation, and may hinder the CFO and auditors from tracking relationships between controls and risks (Leech, 2005). Compliance risks can arise due to certain limitations in spreadsheets. For public companies, it is vital to effectively comply with the Sarbanes-Oxley Act and meet all technical requirements stipulated by the law, SEC, and PCAOB.
For instance, the PCAOB mandates a completion of an assessment of general controls in information technology. Nevertheless, a study conducted in 2004 revealed that many companies were not conducting these assessments properly. According to Leech (2005), only 11 percent of 245 CFOs believed that report controls based on spreadsheets were accurate enough to support their certification of their companies’ financial data for Sarbanes-Oxley requirements. Additionally, Sarbanes-Oxley requires public companies to test whether key controls will lead to an acceptable error rate.
CEOs and CFOs should be able to assess the extent of work performed post-test conduction, ensuring the security of all information. It is a well-known fact that spreadsheets do not facilitate security testing conducted by management, internal auditors, and external auditors (Leech, 2005). Moreover, Sarbanes-Oxley Section 302 mandates that companies report any identified problems and weaknesses to the audit committee on a quarterly basis.
Companies are required to ensure that the CEO and CFO identify and report any significant changes in the control environment and security management to the SEC every quarter. Leech (2005) believes that using spreadsheets for quarterly monitoring of control status is not optimal, as it may not accurately reflect the active involvement of the CEO and CFO in the process. Additionally, the PCAOB requires external auditors to maintain a seven-year history of the company’s work to support proof of controls.
Leech (2005) states that using spreadsheets for maintaining figures and information, as well as ensuring effective control, poses practical challenges for companies. However, spreadsheet modeling has greatly influenced the nature of accounting work by simplifying it, making it more convenient, and increasing its speed.
Despite their widespread use, spreadsheets have been criticized for a variety of limitations including user-friendliness, security and control concerns, compliance with financial reporting standards, and the usefulness of their produced information. Therefore, it is widely recognized that electronic spreadsheets should be regarded as a valuable tool with various applications. In line with Ballentine’s (1991) viewpoint, they should be seen as a means to an end rather than an end in themselves. Users need to be aware of these potential drawbacks when using spreadsheets in real-world scenarios.
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