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Mitigating Operational Risk from Spreadsheets: Businesses must take control

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Mitigating Operational Risk from Spreadsheets: Businesses must take control

By Christopher Burke, CEO, Brickendon

What do accountants, risk professionals and finance modellers have in common? Their perpetual love for spreadsheets. If you ever speak with them about using spreadsheets, it may closely resemble talking with children about their favourite superhero or barbie doll. They will happily talk to you about the incredible speed at which they can manipulate data, prepare financial models and reports. They will also talk about the flexibility spreadsheets provide and how they themselves have customised their own spreadsheets to make their lives easier and their companies more efficient.

There is no doubt that spreadsheets form a core part of any business and whether it’s for tracking expenses or managing complex and highly sensitive financial data sets, they are a universally essential business tool.

So, given their obvious benefits, why would an organisation as respected as Forbes magazine describe Excel as ‘the most dangerous software on the planet’?[i]  Is it the addictive feeling of running the perfect formula? Or that some users just may not be able to handle the pure numerical truth of your bar graph?

No, it is simply because just one badly managed spreadsheet can open a business to risks that have the potential to singlehandedly cause colossal financial and reputational loss. 

Risks Unseen and Unheard

Having spent decades as an Excel and financial risk specialist, I’ve learned that there are many ways in which spreadsheets and databases can go wrong. From small firms with just a few employees and spreadsheets to global firms with hundreds of thousands of spreadsheets, the risk remains the same. One spreadsheet can cause catastrophic harm. Regardless of who or what is to blame, the most alarming thing is that most business leaders are unaware of the potential damage spreadsheets and other end-user tools can cause. Businesses need to take note now and not only recognise the risks but also learn how to mitigate them.

We recently polled a room of risk management professionals at an industry conference and alarmingly, only 33% of people we asked said they had any kind of policy for managing everyday tools like spreadsheets[ii].

Nearly half of the people we polled (47%) claimed their organisations use more than 1,000 spreadsheets for day-to-day work, and what’s more, according to research from the University of Hawaii [iii], 20% to 40% of spreadsheets are thought to contain errors.

 The Cost of Complacency

For an idea of the financial cost of spreadsheet errors, let’s cast our minds back to 2008 when Lehman Brothers went bankrupt and Barclays bought some of the company’s assets. It was reported that this included the unintentional purchase of 179 contracts which had been hidden rather than deleted in a spreadsheet containing nearly 1,000 rows and 24,000 cells.

However, when the spreadsheet was converted into a PDF to be posted to the bankruptcy court’s website, the hidden cells reappeared. Although Barclays Capital filed a legal relief motion, in the end it was reported that they had to swallow the losses for an undisclosed sum.

In another more recent instance in March 2019, less than a week after posting its latest quarterly earnings, Canopy Growth Corporation, the largest cannabis company by market value, had to issue a correction. The Canadian firm said it was restating one metric in its fiscal third-quarter and nine-month earnings release after a formula error in a spreadsheet. The Smiths Falls, Ontario-based company said the nine-month adjusted EBITDA figure should have been a loss of C$155.2 million ($117.8 million) but was incorrectly stated as a loss of C$69.0 million ($52.4 million). Apparently as a result, the organisation’s shares fell by 3.7% pre-market. These cases don’t even go into the world of legal compliance and data regulation, so we’ll save that for another time.

 To Err-or is Human

There are numerous possible points of failure, especially when you consider the quality of spreadsheet output has (up until now) usually been dictated and controlled by just one human working on computers using software with, at best, some manual checks.

Firstly, the challenge of multiple users copying someone’s “good” spreadsheet and making their own amendments without knowing the breadth of formulae and underlying structure should be of concern. With different people doing different things, often using different methods to manage the same or similar set of data, it is easy to see how quickly errors can escalate.

Such situations are very relatable and can happen to any business large or small, with the implications for version control alone leaving any business exposed to risk, especially if there aren’t mandated ways of working, or special document control protocols.

So, one perfectly natural reaction is to restrict people’s access to data, documents or processes, relying on a single expert with ultimate oversight. A typical scenario in smaller companies, where fewer contributors should, theoretically lead to fewer mistakes and more controlled ways of working.

This is great until that one controller then becomes a single point of failure without the back-up of proofing or cross-checking from other teams, let alone potentially overloading work on a single person.

Finally, the hardest to spot errors come in the shape of formulae or code errors themselves and whilst these can be completely beyond anyone’s control, there are some user habits that don’t necessarily help.

For example, if you repeatedly copy formulas from book to book, or use a single sheet for too long, formulas can fail but go unnoticed due to the trust built up by the users in their long-suffering spreadsheet. 

To Mitigate is Divine

So, how do companies protect themselves against these risks and mistakes regardless of where they come from? For me, the solution is two-fold. Firstly, every business should have an executable compliance policy for managing how all data is handled and allow software to instantly, and cost effectively verify compliance to the policy.

These policies should give guidance to staff on how to manage data, how to use and save spreadsheets in uniform ways and help reduce user errors and boost accuracy.

To back this up, companies should look to the latest technological tools including advances in AI and cloud computing as a means of double-checking, securing and locking down the most important data. This is why my team at Brickendon has built a customisable solution capable of scanning the most complex networks of spreadsheets to automatically detect inconsistencies, mis-performing formulas and/or erroneous trends in version control.

Fast and easy-to-use, EUCplus lets businesses take control of their data and protect their business. It takes away the risk, but still lets organisations carry on with business as usual. It is a simple process to ratify changes to models and calculations, whilst allowing day-to-day data changes to happen as usual.

We named the system EUCplus – or ‘End-User Computing plus’, because we saw the need for a tool that would go well beyond the limits of human error-checking or proofing and perform at great pace. By registering, scanning and securing the data, EUCplus gives businesses the peace of mind they need to get on with their day jobs.

By keeping the flexibility and simultaneously removing the risk from spreadsheets, EUCplus will enable organisations to safely allow spreadsheets to be used by any employee needing to manipulate financial data, rather than limiting access to only ‘love-struck’ accountants and risk analysts. After all, the immense flexibility and multiple functional abilities of spreadsheets do suggest they deserve more credit than they usually get.

[i] *Source: Forbes Magazine “Microsoft’s Excel Might Be The Most Dangerous Software On The Planet”

https://www.forbes.com/sites/timworstall/2013/02/13/microsofts-excel-might-be-the-most-dangerous-software-on-the-planet/#4f19dd85633d

[ii] *The poll was commissioned by EUCplus and conducted at the Cefpro new generation risk conference in London on 13th March. The 52 respondents were all senior operational risk professionals at director level or above.

(1) https://www.accountingweb.co.uk/business/financial-reporting/worlds-largest-weed-business-makes-blazing-spreadsheet-error

[iii] *Source: “What we know about spreadsheet errors” Raymond R. Panko, University of Hawaii, College of Business Administration Published in the Journal of End User Computing’s Special issue on Scaling Up End User Development Volume 10, No 2. Spring 1998, pp. 15-21 Revised May 2008

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Foxconn chairman says expects “limited impact” from chip shortage on clients

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Foxconn chairman says expects "limited impact" from chip shortage on clients 1

TAIPEI (Reuters) – The chairman of Apple Inc supplier Foxconn said on Saturday he expects his company and its clients will face only “limited impact” from a chip shortage that has rattled the global automotive and semiconductor industries.

“Since most of the customers we serve are large customers, they all have proper precautionary planning,” said Liu Young-way, chairman of the manufacturing conglomerate formally known as Hon Hai Precision Industry Co Ltd

“Therefore, the impact on these large customers is there, but limited,” he told reporters.

Liu said he expected the company to do well in the first half of 2021, “especially as the pandemic is easing and demand is still being sustained.”

The global spread of COVID-19 has increased demand for laptops, gaming consoles, and other electronics. This caused chip manufacturers to reallocate capacity away from the automotive sector, which was expecting a steep downturn.

Now, car manufacturers such as Volkswagen AG, General Motors Co and Ford Motor Co have cut output as chip capacity has shrunk.

Counterpoint Research says the shortage has extended to the smartphone sector, with application processors, display driver chips, and power management chips all facing a crunch.

However, the research firm predicts Apple will face a minimal impact, due to its large size and its suppliers’ tendency to prioritise it. Apple is Foxconn’s largest customer.

Foxconn is looking at other areas for growth, including in electric vehicles (EVs), and Liu said their EV development platform MIH now had 736 partner companies participating.

He expected it would have two or three models to show by the fourth quarter, though did not expect EVs to make an obvious contribution to company earnings until 2023.

Liu also said the company was still looking for semiconductor fab purchase opportunities in Southeast Asia after not winning a bid to take over a stake in Malaysia-based 8-inch foundry house Silterra.

(Reporting by Ben Blanchard and Jeanny Kao; Writing by Josh Horwitz; Editing by William Mallard and Ana Nicolaci da Costa)

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EU seeks alliance with U.S. on climate change, tech rules

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EU seeks alliance with U.S. on climate change, tech rules 2

By Sabine Siebold and Kate Abnett

BERLIN (Reuters) – Europe and the United States should join forces in the fight against climate change and agree on a new framework for the digital market, limiting the power of big tech companies, European Union chief executive Ursula von der Leyen said.

“I am sure: A shared transatlantic commitment to a net-zero emissions pathway by 2050 would make climate neutrality a new global benchmark,” the president of the European Commission said in a speech at the virtual Munich Security Conference on Friday.

“Together, we could create a digital economy rulebook that is valid worldwide: a set of rules based on our values, human rights and pluralism, inclusion and the protection of privacy.”

The EU has pledged to cut its net greenhouse gas emissions to zero by 2050, while President Joe Biden has committed the United States to become a “net zero economy” by 2050.

Scientists say the world must reach net zero emissions by 2050 to limit global temperature increases to 1.5 degrees above pre-industrial times and avert the most catastrophic impacts of climate change.

The hope is that a transatlantic alliance could help persuade large emitters who have yet to commit to this timeline – including China, which is aiming for carbon neutrality by 2060, and India.

“The United States is our natural partner for global leadership on climate change,” von der Leyen said.

She called the Jan. 6 storming of the U.S. Capitol a turning point for the discussion on the impact social media has on democracies.

“Of course, imposing democratic limits on the uncontrolled power of big tech companies alone will not stop political violence,” von der Leyen said. “But it is an important step.”

She was referring to a draft set of rules unveiled in December which aims to rein in tech companies that control troves of data and online platforms relied on by thousands of companies and millions of Europeans for work and social interactions.

They show the European Commission’s frustration with its antitrust cases against the tech giants, notably Alphabet Inc’s Google, which critics say have not addressed the problem.

But they also risk inflaming tensions with Washington, already irked by Brussels’ attempts to tax U.S. tech firms more.

Von der Leyen said Facebook’s decision on a news blackout on Thursday in response to a forthcoming Australian law requiring it and Google to share revenue from news underscored the importance of a global approach to dealing with tech giants.

(Additional reporting by Foo Yun Chee; editing by Robin Emmott and Nick Macfie; editing by Jonathan Oatis)

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Packaged food giants push direct online sales to gauge consumer tastes

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Packaged food giants push direct online sales to gauge consumer tastes 3

By Siddharth Cavale and Nivedita Balu

(Reuters) – Packaged food giants including Kraft Heinz, General Mills and Kellogg are pushing sales of their products to consumers directly via their own online channels, in a quest to gather more data about shoppers’ purchasing habits.

Velveeta-cheese maker Kraft Heinz saw its e-commerce sales double in 2020, now representing more than 5% of its global sales, Chief Executive Miguel Patricio said at the virtual Consumer Analyst Group of New York (CAGNY) conference this week.

The company sells Heinz baked beans and tomato soup by subscription or in bundles directly to consumers on a “Heinz To Home” website in the United Kingdom, Australia and Europe.

Sales on the site are “giving us valuable insights into consumer behavior, enabling us to quickly test and learn from innovations,” Kraft’s head of international business, Rafael de Oliveira, said at the conference.

Kraft would continue to use the site as a channel to generate strong sales in developed markets, he said.

The company also counts sales of its products through marketplaces such as on Amazon.com and Walmart.com as part of its e-commerce sales.

U.S. shoppers spent on average $1,271 buying groceries online last year, 45% more than they did in 2019 as the pandemic spurred shopping online, according to market research firm Earnest Research. In contrast, the average dollars spent in stores rose only about 7% to $3,849.

PepsiCo sells products including Doritos, Quaker oats and Gatorade directly to consumers through two websites, pantryshop.com and snacks.com, both launched in 2020.

Chief Financial Officer Hugh Johnston said that more than 45% of the company’s capital investments over the next few years would be dedicated toward manufacturing capacity, automation, and a “ramping up of investments in our e-commerce channel.”

As major online retailers including Amazon.com and Walmart.com continue to gather valuable data on shoppers, many packaged food manufacturers are keen to gather their own data on shoppers, too.

“COVID (has) simply accelerated our digital growth and has provided us with yet another source of data and insight,” Monica McGurk, chief growth officer at breakfast cereal maker Kellogg Co., told the conference.

Kellogg, producer of Corn Flakes as well as Pringles chips, said on Wednesday it had launched a direct-to-consumer website focused on digestive wellness. The group plans to sell its new Mwell Microbiome Powder for gut health via the site to gather data on customer interest before it launches the product more widely.

E-commerce sales have doubled in the past year and now represent about 8.5% of the group’s $13.77 billion in annual sales, Kellogg said.

Pillsbury dough-maker General Mills also sees the benefits of tracking consumer habits more closely.

“We’re aggressively investing in data and analytics. We are gathering unparalleled insights from the first-party data we collect through our brand websites,” General Mills’ Chief Executive Jeffrey Harmening said at the conference.

On its Bettycrocker.com website, General Mills provides hundreds of recipes using Betty Crocker cake mixes and frosting. The site leads people to the closest store or an online retailer where they can purchase the products, thereby generating data for General Mills on what a particular customer from a certain zip code is buying. The company does not sell the food products directly on its website.

Consumers, however, may have to shell out more if they shop directly from brand websites.

Prices on the two PepsiCo sites, for example, were generally higher than those on Walmart.com or Amazon.com, Reuters checks show. On Walmart.com, for example, a 10 oz pack of Doritos Nacho Cheese was on sale for $2.50 compared to $4.29 on Pepsico’s website.

Kraft Heinz offers tins of soup, beans, pasta and baby food bundled into packs ranging from six to 25 items and costing between 10 and 20 pounds ($14.01-$28.03) on its UK website. It told Reuters the relatively higher prices of items and bundling of packs than on some other online marketplaces was to be able to eke out a margin after including delivery costs.

“Longer term, we see real value in this channel to be an insight and data channel for us,” Jean-Philippe Nier, head of e-commerce for Kraft Heinz’s business in the UK and Ireland, told Reuters. People are more prepared to order directly from manufacturers than they were before. The time is now.”

Graphic: Direct online sales to cross $20 billion in 2021 – https://graphics.reuters.com/PACKAGEDFOODS-ECOMMERCE/rlgpdexngvo/chart.png

($1 = 0.7137 pounds)

(Reporting by Siddharth Cavale and Nivedita Balu in Bengaluru; Editing by Vanessa O’Connell and Susan Fenton)

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