1. Session 11 Managerial Spreadsheet Modeling -- Prof. Juran1

2. 2 “The personal computer has allowed humankind to make more and bigger mistakes than any other invention in history, with the possible exceptions of tequila and handguns.” — Technology magazine

3. Managerial Spreadsheet Modeling -- Prof. Juran3 Outline Pervasiveness of spreadsheet errors Consequences of spreadsheet errors Types of errors Avoiding errors Detecting errors

4. Managerial Spreadsheet Modeling -- Prof. Juran4 Spreadsheets and Sarbanes-Oxley §404 of the Act requires that CEO’s assess whether or not their firm’s financial system has be “effectively controlled” during the reporting period. Independent auditor verifies the CEO’s assessment. Failing an audit: Stock price ↓ 4%; 60% of CFO’s replaced Public Company Accounting Oversight Board’s Auditing Standard 2 Internal controls are deficient if they do not allow for the timely prevention or detection of misstatements. Controls must involve all forms of IT used in financial reporting. Preventive controls Detective controls Corrective controls

5. Managerial Spreadsheet Modeling -- Prof. Juran5 Pervasiveness of Spreadsheet Errors 20% – 40% of all spreadsheets contain errors. (R. R. Panko) 90% of all spreadsheets with more than 150 rows contain errors. (Coopers and Lybrand) 1% – 5% of worksheet cells had errors. (R. R. Panko) 91% of decision-making spreadsheets contained an error large enough to change the decision. (KPMG)

6. Managerial Spreadsheet Modeling -- Prof. Juran6 Why So Many Errors? Human cognition built for speed, not accuracy. Very few organizations have policies on spreadsheet development and design. (Part of their attraction in the first place!) Users are overconfident in their own ability to avoid errors. Simple mechanical tasks:0.5% error rate More complex, logical tasks:5.0% error rate

7. Managerial Spreadsheet Modeling -- Prof. Juran7 Consequences of Spreadsheet Errors One recent example: JPMorgan value-at-risk (VaR) model for synthetic credit portfolio. “After subtracting the old rate from the new rate, the spreadsheet divided by their sum instead of their average, as the modeler had intended. This error likely had the effect of muting volatility by a factor of two and of lowering the VaR...” — February 9, 2013

8. Managerial Spreadsheet Modeling -- Prof. Juran8 Fidelity’s Magellan Fund (January 1995) “The error occurred when the accountant omitted the minus sign on a net capital loss of $1.3 billion and incorrectly treated it as a net capital gain on this separate spreadsheet. This meant that the dividend estimate spreadsheet was off by $2.6 billion ….” Florida construction company omitted a $250,000 item omitted from a $3,000,000 bid The firm won the bid (by seriously underbidding). Blamed Lotus for @Sum() misunderstanding Projection for CAD equipment market Costs rounded to whole dollar Inflation multiplier also rounded from 1.06 to 1.00 Market underestimated by $36 million

9. Managerial Spreadsheet Modeling -- Prof. Juran9 “Excel ate my DNA” Used in genetic research to process microarray data. Some gene names (e.g., SEPT2) irreversibly converted to dates (2-Sep). EPA Superfund Toxic Waste Miscalculation Bad VlookUp function overstated estimates of indoor air pollution by up to 200%. Emerson’s Bid to Build Barracks at Fort Hood The $3,702,025 price for electrical work in cell D159 was not included in the subtotal in D160. More examples: www.eusprig.org/stories.htm

10. Managerial Spreadsheet Modeling -- Prof. Juran10 Types of Errors Mechanical Typos, incorrect cell references, wrong ranges Logical Mistakes in reasoning / logic If() function, lookup functions, rounding functions Average() vs. AverageA() ? “Hardwiring” Overwriting equations with numbers

11. Managerial Spreadsheet Modeling -- Prof. Juran11 Avoiding Errors Preventing Inappropriate Modifications Errors inadvertently introduced later by users Cell / Worksheet Protection Data Validation Range Names

12. Managerial Spreadsheet Modeling -- Prof. Juran12 Range Names Allow a range (e.g., C4:K4 ) to be referenced by a reasonable, evocative name (e.g., Sales ). Advantage: Equations are easier to understand at first glance. Disadvantage: One more chance to go wrong. Wrong range is named. Can be hard to find that named cell. Relative references to named ranges are automatically converted to the absolute named reference. Most appropriate for a single cell that is referenced in many places.

13. Managerial Spreadsheet Modeling -- Prof. Juran13 Defining Range Names Define a name for the selected cell(s) Formulas | Defined Names | Define Names, or Ctrl-F3 | New

14. Managerial Spreadsheet Modeling -- Prof. Juran14 Defining Range Names Or just type the name into the name box at the very left of the formula bar.

15. Managerial Spreadsheet Modeling -- Prof. Juran15 Defining Range Names Name must start with a letter. Some characters not allowed. Can’t be a cell reference.

16. Managerial Spreadsheet Modeling -- Prof. Juran16 Defining Range Names

17. Managerial Spreadsheet Modeling -- Prof. Juran17 Using Range Names in Formulas To replace a cell reference with its defined name: Formulas | Defined Names | Define Names | Apply Names

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20. Managerial Spreadsheet Modeling -- Prof. Juran20 A Range Name does not need to refer to cells in the worksheet! It can be defined to be a constant that appears nowhere in the workbook.

21. Managerial Spreadsheet Modeling -- Prof. Juran21 More usefully, it can be an equation using Excel functions, provided that it uses only range names, and not ‘normal’ cell references (e.g., B4). This allows for some powerful functions with dynamic ranges and selectable objects and pictures.

22. Managerial Spreadsheet Modeling -- Prof. Juran22 Reference List for Named Ranges Insert a two-column reference list of all of the defined names: Include it if you ever use range names! Formulas | Defined Names | Use in Formulas Paste Name | Paste List, or F3 | Paste List

23. Managerial Spreadsheet Modeling -- Prof. Juran23 Trouble! If you edit (F2, or click into) a cell in the right column, it will change to #VALUE! (or the cell contents, if the range is a single cell), and you can’t get it back.

24. Managerial Spreadsheet Modeling -- Prof. Juran24 Hands-on Practice Define a range name for a single cell ( B20, TotalCost ). Define a range name for three multi-cell arrays ( Decisions, Reached, and Required ) Use the names in SUMPRODUCT formulas. TotalCost is a named range, calculated using named ranges! Use Paste List to document what your range names refer to. Optional: Use Solver to find the right answer.

25. Managerial Spreadsheet Modeling -- Prof. Juran25 Detecting Errors “Code inspection” is the only reliable way to catch bugs. Cell-by-cell examination of a spreadsheet 50% detection rate (individual) 80% detection rate (group) Display underlying formulas. Formulas | Formula Auditing | Show Formulas, or Ctrl-~ : Toggles formula display on and off

26. Managerial Spreadsheet Modeling -- Prof. Juran26 Error Checking Formula | Formula Auditing | Error Checking Performs the audit of the spreadsheet

27. Managerial Spreadsheet Modeling -- Prof. Juran27 Error Checking File| Options | Formulas Specifies what the spreadsheet audit should look for

28. Managerial Spreadsheet Modeling -- Prof. Juran28 Aside: Formatting Numbers as Text Sometimes you’ll want to treat numbers as text, rather than a numerical value Product part numbers, credit card numbers, 9-digit zip codes, etc. Home | Number | General → Text Warning: Numbers formatted as text can have a value of 0. Changing the number type to Text keeps its value. Typing a number into a Text cell has value 0. Only difference is in the alignment. Can lead to inconsistencies that are damn hard to figure out! Potential to be used for Evil as well as Good: Beware!

29. Managerial Spreadsheet Modeling -- Prof. Juran29 Summary Pervasiveness of spreadsheet errors Consequences of spreadsheet errors Types of errors Avoiding errors Detecting errors

30. Managerial Spreadsheet Modeling -- Prof. Juran30 Spreadsheet Fluency The Art of Mathematical Modeling What is this Course About?

31. Managerial Spreadsheet Modeling -- Prof. Juran31 Goal: Develop spreadsheets that can be easily and effectively used by others. Spreadsheets are the medium of business analysis Principles of good spreadsheet design Layout, documentation, commenting, structure Graphical design considerations Color, fonts, borders, conditional formatting Facilitating appropriate changes Graphical controls (sliders, check boxes, etc.) Preventing inadvertent changes Protection, data validation Dashboards and advanced graphing Waterfall, box-and-whiskers, bullet graphs Spreadsheet Fluency

32. Managerial Spreadsheet Modeling -- Prof. Juran32 Practice formulating and analyzing quantitative models. Cases, but only a little new theory Focus on arriving at quick and defensible heuristic (rather than optimal) solutions Less structured models than what you saw last year Spreadsheet models constructed “from scratch.” A few specific modeling topics “Dashboard” design and construction Excel tools for analysis (e.g., data tables) The Art of Modeling

33. Managerial Spreadsheet Modeling -- Prof. Juran33 Have a great break! Excel Discoveries … NBA 6470: Advanced Spreadsheet Modeling Case-Based Sequel (2nd half Spring 2014) Optimization (with Solver) Simulation (with @Risk) Moving towards “Business Analytics” Pivot tables, non-linear and logistic regression, time-series forecasting Similar Class at NYU B60.2350 Decision Models http://people.stern.nyu.edu/djuran/2350home.htm Please remember the Lifetime Guarantee What’s Next?