Just how bad are "power users" from both an IT and auditor standpoint? A fiairly good academic study of 3,744 disclosure documents admitting error concludes that only about 8% of companies can do financial statements directly from their financial systems, with the rest massaging the data in spreadsheets - unauditable, uncontrolled, error prone spreadsheets presumably weilded by power users.
Do spreadsheets lead to compliance failures?
A full 92% of all US public companies use spreadsheets for critical accounting activities in their revenue reporting processes, according to a recent survey of financial executives. And that increases the likelihood of compliance failures and financial restatements. The research, which involved 685 companies, was conducted by www.RevenueRecognition.com and IDC and sponsored by Softrax Corp.
The reason for widespread spreadsheet use, says the survey, is that key revenue recognition and reporting tasks are still not automated in financial/ERP systems. Only 8% of all responding companies say they are able to complete their revenue reporting process without having to take data offline and into spreadsheets. The rest of the surveyed companies use spreadsheets, which are prone to errors, lack audit capabilities and resist internal controls.
According to the survey, more than half of all companies use spreadsheets to create their accounting entries for revenue. Other spreadsheet-based tasks include revenue scheduling, allocation and redistribution based on accounting guidelines. Surprisingly, public companies with more than $200 million in revenue are substantially more reliant than the overall sample on spreadsheets for revenue accounting entries.
Revenue recognition restatements increased 42% from 2002 to 2006 leading to a lot of speculation about the underlying causes. With all the hype about Sarbanes-Oxley, increased auditor scrutiny, and complex guidelines it is surprising to learn that mundane internal errors were the leading cause of restatements from 2003 to 2006. That's the conclusion of a new report entitled "An Analysis of the Underlying Causes of Restatements" by Marlene Plumlee, University of Utah and Teri Lombardi Yohn from Indiana University.
The authors analyzed 3,744 disclosures related to each restatement to identify and categorize the underlying causes. Of restatements caused by revenue recognition errors, approximately: 57% were due to a basic internal error, 28% were due to some characteristic of the accounting standards, 13% were due to intentional manipulation, and 2% were due to transaction complexity. That would make over half of all revenue recognition restatements avoidable if companies had better procedures for performing, monitoring, and controlling their revenue processes.
User spreadsheet abuse leads to compliance failure - and can be largely attributed to IT's failure to gain top management support for the provision and use of adequate integrated ERP/SCM and related functionality in central systems.
Speculation: the symptoms, frequent restatement requirements, are heavily correlated with large client-server installs. And why do I think that? because if you implement something like Oracle's combined ERP/SCM suite on Sun with tools like Hyperion for real time, cross functional, reporting you won't need Excel or any other PC client tools to get your reports out - but if you implement that same suite using Windows client-server you not only invite "power users" into the hen house, but I don't think you can actually get the reports out without them.