People Make Mistakes

Let us face up to it. The list of investment decisions based on flawed models is large and growing; for example, a cut-and-paste error cost a Canadian corporation $24m; an unchecked economic model resulted in a plaintiff being awarded more than $12m in damages; and a US company blamed a typographical error for misrepresenting its profits by $140 m. ^[1] These models were developed by skilled and professional analysts working for world class institutions. The international accounting firm Ernst & Young has estimated that some 80% of financial models contained errors, whilst at the 2003 European Spreadsheet Risks Interest Group (EuSpRIG) conference the model auditing team from PricewaterhouseCoopers declared that they had never found a model that did not contain mistakes, and my own auditing team would agree. The reason we so rarely hear of this appalling track record is that the organisations involved invariably close ranks and matters are resolved outside the court room.

It doesn't Happen Here

Although most firms would profess to have modelling standards and procedures, the reality is that responsibility for the financial modelling function is often diffused, and individual analysts apply their own interpretation of quality control. I have even heard directors claiming that 'we only recruit the best MBAs from the most prestigious business schools' as if this mantra somehow protects them from poor modelling and its consequences.

Human error has been the...