- Model Audit
A Model Audit is the colloquial term for the tasks performed when conducting
due diligenceon a financial model, in order to eliminate spreadsheeterror. A study in 1998 concluded that even MBAstudents with over 250 hours of spreadsheet development experience had a 24% chance of introducing spreadsheet error [http://panko.shidler.hawaii.edu/SSR/devexpt.htm] . Model Audits are typically requested by banking organisations, in order to reassure lenders and investorsalike that the calculations and assumptions within the model are correct, and that the results produced by the model can be relied upon. When a comprehensive review of the model is required, the scope of review is often extended to include taxand accounting, sensitivity testing and the checking of data contained within the model back to the original financing and legal documentation.
The purpose of a model audit is to provide reassurance that the results can be relied upon. For this reason, the party conducting the review will provide a level of reliance on the form of an amount of
liability. This may range from a multiple of the fee(2x, 3x, 4x fee, etc) to a fixed amount, often up to $20 million USD. In the event an error or omission is found in the model, the organisation relying on the report may choose to sue the model auditor in order to recover any loss.
How is it Conducted?
Most financial models are produced using
Microsoft Excel. The model will routinely contain a number of pages of input data, a sheet of formulas (the 'workings') which drive the model, and the output pages, which are usually in the form of standard financial statements( Balance Sheet, Income statement, Cash flow statement, etc.). The model auditor may choose to conduct the model audit using a combination on sheet reconstructions, cell-by-cell checks and spreadsheet audit tools.
Cost and Duration
A Model Audit may take between 1-5 weeks, but this does not include the time taken by the model author to rectify the errors identified by the model auditor. The fee is largely dependent upon the value of the project and scope of review.
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