Over the years I have worked on hundreds of financial models from both the development, delivery and the auditing side of the equation. I can honestly say that auditing ones own work pretty much defies the purpose of the exercise. This however is the only quality control process that many huge investment decisions go through; this is further compounded by many of the very helpful spreadsheet assistance tools on the market being mis-termed Financial Model Audit Software.
Engaging an external financial model auditor
Generally, the best running order is to engage an independent and appropriately qualified third party such as Corality Financial model audit, PWC or Mercer consulting to audit it and to provide a formal opinion. The benefits of this are that even though it is not an Audit under the true definition of the word it is as close as you can get. It can be argued that this is an expensive solution when a formal opinion is not required, well remember that Model Auditors also need to price the risk of being sued into their engagement, therefore if all you need is a fresh pair of eyes to look at your models and run the same procedures but without a formal opinion then the fee could potentially be a lot lower – you never know until you ask!
Auditing your own financial models?
If you don’t like the idea of someone else checking your work – ask why that might be! If you are still heading down this path then at the very least run through the following steps being very careful to avoid the voice inside your head urging you to skip through because of familiarity…
- Document what the model is intended to do on a single page – if you can’t explain it you can’t check it.
- Document some sensible integrity checks (these will vary from project to project but some will be the same no matter what, i.e.: the balance sheet balances!)
- Ensure the model has a Summary page that a user can run through with a pencil / calculator and validate inputs are flowing through.
- Ensure that scenarios / sensitivities can be readily prepared or exist already
- Ensure all inputs are clearly labeled and formatted.
- Ensure the worksheets are clearly labeled and there are not an excessive number of them. Even for the most complex of PF models 10 sheets will be sufficient although believe it or not some models have so many (200+) a navigation menu is needed!
- Ensure that all appropriate line items have just one unique formula (also called a schema) – a good test of your model will be to copy the first column of coding and copy all the way to the end of the live section of the workbook….did the model outputs change?!
…there are literally hundreds more check points which a professional audit firm will run through so take some time and think if the DIY approach is really worth the risk / time…