Wall Street & Technology is part of the Informa Tech Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

Compliance

03:57 PM
Connect Directly
RSS
E-Mail
50%
50%

Finding Hidden Dangers in Spreadsheets

So much valuable information on Wall Street is stored in Excel spreadsheets, it's worth keeping an eye on them to spot fraud and errors before auditors do, says Ralph Baxter, CEO of ClusterSeven.

Excel spreadsheets still pervade Wall Street. They contain 20% to 30% of the information in a typical financial firm, says Ralph Baxter, CEO of ClusterSeven. In a survey conducted this summer by Tabb Group and Microsoft, 83% of participating organizations (brokerages, banks, asset managers, hedge funds, custodians, mostly U.S. based) said they use spreadsheets for modeling, analyzing and pricing financial instruments. Almost half (48%) use spreadsheets for handling trade data, 42% use them to keep track of positions, 42% use them to manage risk and 40% to handle compliance.

So what? you may ask. Well, not only are regulators seeking more transparency into the way Wall Street firms price derivatives and manage risk, but "toxic" spreadsheets, those within which fraud or errors lurk, have been known to wreak havoc on a firm. A few cases in point:

- Scott Hirth, former CFO of Ann Arbor, Mich.-based digital archiving vendor ProQuest, was fined $420,000 by the SEC and banned from serving as an officer or director of a public company after allegedly using Excel to falsify financial records and make the company look more profitable than it was. According to the SEC, he hid spreadsheet data in invisible cells by using white fonts on a white background. The company lost $437 million in market capitalization and changed its name to Voyager Learning Co.

- At Fidelity's Magellan fund, an accountant omitted the minus sign on a net capital loss of $1.3 billion and incorrectly treated it as a net capital gain on a spreadsheet, causing a $2.6 billion error.

- Some spreadsheets contain personally identifiable information, which by law have to be protected from unauthorized access.

- Firms have used conditional formatting in Excel to disguise questionable numbers, Baxter says. One company showed a 20% pay raise as a more modest 2% raise in the displayed Excel file. In the background, hidden to the human eye, was the true 20% value.

On the other hand, "most organizations are surprisingly full of diligent people who work hard to get their spreadsheets right," he says. Yet human and mechanical errors can still occur.

Baxter's company (as you may already have guessed) makes software for monitoring Excel spreadsheets, running rules against them and detecting potential errors or bad behavior. For example, the software can flag each time a user overwrites a formula, a possible sign of Excel abuse. Other rules could detect when a user removes a password from spreadsheet, overwrites a cell, introduces an error or changes VBA code.

Each time a spreadsheet is saved, it becomes a new legal document. The software can provide the history of every cell. Hedge funds have expressed interest in using the capability to do trend analysis, Baxter says.

Register for Wall Street & Technology Newsletters
Video
Stressed Out by Compliance, Reputational Damage & Fines?
Stressed Out by Compliance, Reputational Damage & Fines?
Financial services executives are living in a "regulatory pressure cooker." Here's how executives are preparing for the new compliance requirements.