Give a Critique of the Usefulness of Spreadsheet Modelling in Financial Accounting and Reporting

Only available on StudyMode
  • Download(s) : 49
  • Published : December 12, 2012
Open Document
Text Preview
Prior to the evolution of computer software and eventually to the creation of electronic spreadsheets, accountants relied heavily on manual calculations for financial reports, budgetary projections, incomplete records accounting ect. As Ballantine explains, “much valuable time had been spent on repetitive calculations [...] if one or more input values were altered and the entire worksheet had to be recalculated manually.” (1991, p.204). Today the same logic behind manual worksheets apply but with the added power of spreadsheets.

The development of electronic spreadsheet programs some 40 years ago has helped change the way in which an organisation operates in terms of its financial position. Information could be presented in a similar way to the traditional – a large sheet of paper structured in rows and columns – but “yet allowing sensitivity analysis or ‘what if’ analysis to be performed.” (Ballantine, 1991, p.204). Visicalc was the first program designed by Bricklin –an MBA student at Harvard Business – that included sensitivity analysis, interrelationship of cells but most importantly a reduction in computational time for repetitive calculations. Leading to the success of Visicalc, several other programs emerged of similar use with enhanced features such as graphical representation and macro languages. Even though the impact upon businesses has been tremendous, there are several drawbacks that even today raise the question whether companies should continue the use of spreadsheets as their main software.

As Ballantine stated “spreadsheets have been used successfully in many different fields to help solve a wide range of problems.” involving repetitive calculations. (1991, p.205) Budgetary development is one the application spreadsheets evolved in terms of time management since manual worksheets where the main tool, involving a lengthy and hence error-prone procedure since lack of time did not allow extensive testing of the model. Spreadsheets allowed a better utilisation of the accountants’ time since the array of features available to manage difficult and often complex equation forms, but also the ability to interrelate cells could produce the results needed for different scenarios by just altering the input data (Berry and McLintock, 1991). Reports could now be prepared on a quarterly, monthly, weekly or daily basis giving management the needed information for more sound and informed decisions. In my experience using Microsoft Excel when imputing the data for Toton Teddies Ltd, was that once the input data was calculated using different formulas, the production of the financial statements for the year was a mere referencing of the values calculated saving the group a lot of time.

However, the use of spreadsheets has not eliminated human error – as Panko stated, even today “developers make uncorrected errors in 2% to 5% of all formulas” included in the model. He then explains that the easiest way to eliminate errors is through testing even though “testing among developers in the industry is extremely rare” (2006, p.73). TransAlta Corp. is one of the many examples that clerical error has resulted in a $24 million charge of earnings after a “cut-and-paste error in Excel” (O’Beirne, 2005). A decision was made on inaccurate data provided by the model, raising the issue whether managers should use spreadsheets as a tool and not as end in itself (Ballantine, 1991, p.211).

Creativity is at the hands of the developer, as spreadsheets offer minimal limitation in the way the model we be structured. The user can carry out detailed ‘what if’ analysis without any manual calculation for any kind of situation – whether that is the diversification of an organisation into a new market or a simple calculation for depreciation. Solving a problem is no longer constrained to manual worksheets, giving the opportunity to managers or accountants to use electronic spreadsheets as a first approach (Ballantine, 1991, p.208). Furthermore,...
tracking img