There’s an argument to be made that modern finance began in 1979. VisiCalc, a “visual calculator” for the Apple II computer was the first iteration of what we now call spreadsheets, its development funded from the profits of an early Chess computer game.
Although this first iteration was a success, it was the launch of Lotus 1-2-3 which brought spreadsheets into the mainstream of business. Although VisiCalc and Lotus were the first, today the world of finance revolves around Microsoft’s Excel (and to a much lesser extent Google Sheets).
As you’d expect for a ubiquitous way of doing things, spreadsheets have the critics.
Firstly, let you put anything anywhere, with formulas referencing arbitrary cells, and there is essentially no structural protection against mistakes.
The most famous of these is the "London Whale" at JP Morgan. A manual copy-paste between spreadsheets contributed to a multi-billion-dollar trading loss.
Secondly, spreadsheets try and do three things simultaneously that most software keeps separate. In one place you have your data, the calculations performed on it, and how you display it displayed.
Data is scattered across thousands of cells, and no easy way to audit what a model actually does and often important processes end up running on a workbook only one person understands, with no documentation, that breaks when they leave.
The classic “solution” to this is to create or buy a bespoke system for important processes.
But allow me to be like the figure in Norman Rockwell’s famous painting, Freedom of Speech, and stand up and say something unpopular: Spreadsheets are usually miles better than the alternative.
Firstly, when you replace an excel spreadsheet, you replace a programme that every experienced new-hire knows how to use. Your fantastic new system may automate everything, but do you now want to base your hiring decisions from now on a person’s ability to use a specific programme? Or if not, are you open to the training requirements (potentially at a fee from your supplier?)
Secondly, the replacement systems are often a “black box” – they an give you many useful outputs, can explain how they came to them but rarely can you or your auditors actually see the input, calculation, output process clearly.
Excel on the other hand gives you a clear and easy to audit process. To give a recent example, Arlingclose helped many clients transition to IFRS 16. Although our approach of using spreadsheets was not glamourous, it allowed a smooth closedown and audit period as both clients and their auditors could easily understand how the calculations worked.
Finally, most systems require an ongoing subscription or contract for support. This bakes in an ongoing cost to whatever you’re asking the system to do. That’s the best case. The worst case is that your system supplier withdraws from the market or even goes bust, leaving you without support all of a sudden.
They’re hard to love, but there’s a reason everyone uses spreadsheets. If you want help with IFRS 16, or any other excel model building, contact skitching@arlingclose.com
