I love Excel! It’s a great tool and is my go to application for everything from an on-screen calculator to running ROI or IRR scenarios to calculating loan covenant compliance and doing various kinds of analyses. It’s great for comparing investment alternatives and lease vs. buy decisions. I even use it to produce work-in-process calculations and reports to accompany financial statements for my construction clients. But, let me share a cautionary tale that made me realize why Excel can easily lead to errors and why it is not a best practice to use it for financial reporting.
While on a consulting engagement a year or so ago at a $50M construction company I was surprised to encounter an accounting system that was not being used to generate any kind of reports other than accounts receivable and payable aging. The accounting system was fully capable of producing financial statements. Revenue, cost and expense data was being recorded regularly and accurately in the system. But the reporting was being done through Excel by periodically dumping the entire general ledger into an Excel workbook, where through a series of lookups, pivots and macros, it was transformed into the company’s financial statements – all of them – balance sheet, income statement, statements of cash flows and changes in equity, without any explanation of the process, and which were issued for external use.
So why is this a poor practice and why should you avoid it? First, any good accounting system will be capable of producing financial statements and should be able to handle modifications to how and what accounts are rolled up into the ones that appear on the financials. If it can’t do this, you shouldn’t be using it. Also, the accounts can be arranged in pretty much any order you want them, so whoever owns the general ledger should know what they are doing when they design the financial statements.
Here are some really good reasons to take the time and effort to configure your accounting system to produce the reports you need in the format you want without resorting to Excel. Nothing against Excel but errors do and will happen.
The real issue is how will you know that they have occurred? Even in the most sophisticated accounting systems the persons entering data make errors from time to time. Good accounting systems are built to enable errors to be found and corrected. When they are found, the correction is made and a record of both the original entry and the correction is kept. In a spreadsheet, the errors can easily go unnoticed.
Take for example the much publicized sale in 2014 of Tibco Software to Vista Equity Partners. Goldman Sachs represented Tibco. Using a spreadsheet, Goldman produced a report that accidentally overstated the number of Tibco’s outstanding common shares. No one caught it. This led to an understatement of Tibco’s equity value by about $100,000,000. Vista Equity Partners got a significant savings in the deal. Of course, there were lawsuits afterward.
When an Excel spreadsheet is constructed by most users, it is rarely documented. That is to say the author of the spreadsheet does not provide information on how it was done and in many cases provides no instructions on how to use it. This leaves the knowledge of the spreadsheet design restricted to a single person – a single point of failure, if you will. If a formula breaks, it may not be detected, let alone repaired. Further, if a change is made to a formula or a data cell, whether accidentally or intentionally, the previous version is overwritten. Unless a new version is saved every time a single change is made (again, how do you know?) there is no audit trail, no way to find out how the data got to where it is. Excel’s version tracking is useful for collaboration, but not for recognizing a break in a formula. Even though the data source may balance, manipulation of the data in the worksheet will eliminate the double entry feature that causes a trial balance to balance. And even though the resulting balance sheet “balances,” that is no guarantee that all relevant entries made it to the final report.
There is more. Since the accounting system resides on a server or in the cloud and the Excel spreadsheet resides on the computer of the designer or owner, there has to be a backup policy and procedure that grabs that spreadsheet from the workstation and backs it up along with all of the other accounting data that lives elsewhere. This is not only an IT function that is often overlooked, but in larger companies these two exercises, server backup and workstation backup, are the responsibility of different IT departments.
So, the moral of my story and my firm belief is that it is bad practice to use Excel for financial reporting. Most accounting systems allow you to customize standard reports and to design reports from scratch for special purposes. Learn those reporting features in your accounting system and use them. If they can’t produce the reports you want or need, consider getting a new accounting system.