Newly appointed SEC Chairman Mary Schapiro gave a testimony before the Subcommittee on Financial Services and General Government on March 11, 2009. At several points in her speech, Schapiro made reference to the need for better fraud controls to deal with the complex trading strategies and financial products that exist in today’s market. As we have learned, the trading environment for derivatives is fraught with complex spreadsheet models. Schaprio also made reference to accounting issues and fraud related to off-balance sheet liabilities, and the unregulated world of credit default swaps.
What is common among these scenarios? In many cases, enterprise IT applications have been replaced with complex, uncontrolled, and unmonitored spreadsheets and EUCs. Although their flexibility has enabled firms to model very complex scenarios, left uncontrolled, these spreadsheets are the first place the SEC should look for any fraudulent activities, financial loss or internal control gaps.
You can read the full speech here.
Your comments?
Eric Perry
Anyone has a guess as to how much of the current economic crisis has been due to fraud hidden in spreadsheets?
Hi Larry, Thank you for your comment. There are numerous, well-documented stories of spreadsheet and EUC fraud in the news and many have surfaced within the past several months during the crisis. You can find a few of these in the Cases of Fraud category of our blog, and many others if you do a web search for “spreadsheet error” or “spreadsheet fraud”. EuSpRIG maintains an extensive list of spreadsheet horror stories and fraud cases on their site.
As to how much of the federal bailout is recovering from damage due to fraud, it is anyone’s guess, but fraud prevention and detection is a culture shift that must take place within firms as part of the reform. Also see the Bernanke and Schapiro posts.
I guess sooner or later the Fed’s need to do something about the uncontrolled spreadsheets.