An Excel file that feeds a financial decision must be controlled like a management tool, not treated as a simple spreadsheet. JPMorgan’s so-called “London Whale” affair made this risk visible on an exceptional scale.
What the JPMorgan case really shows
In 2012, a risk-measurement model handled in Excel underestimated the volatility of a portfolio. JPMorgan’s internal report documents a formula error: a division by a sum instead of an average. That error does not explain the losses on its own. It illustrates a whole chain: a fragile formula, an abnormal result nobody challenged, and insufficient governance.
Three levels of control
- The cell: is a formula correct and tested against known values?
- The model: is the result consistent with an order of magnitude or with another method?
- Governance: can someone independent of the author review and challenge the file?
An SME does not have a derivatives portfolio. It does, however, have budgets, cost prices, cash-flow forecasts and payroll simulations. When one of these files drives a decision, it deserves an owner, a reference version, a periodic review and a recovery method.
FAQ
Which Excel files should you control first?
Those that feed a financial, contractual or regulatory decision, or those where an error would have a material impact.
What simple control can you put in place?
Have the file reviewed by an independent person and regularly compare its result with an alternative estimate.
Sources
JPMorgan Chase, Management Task Force Report, 16 January 2013; U.S. Senate Permanent Subcommittee on Investigations, 15 March 2013.
