Spreadsheet Errors: Part 2

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Last month I posted about the European Spreadsheet Risks Interest Group (EUSRIG) and their database (www.eusprig.org/stories.htm) of spreadsheet errors that make the news in some form. I promised a few more examples, so here they are:

Several of the stories pointed out budget miscalculations that occurred because of errors in spreadsheets. In Houston, for example, an audit report in 1999 found “Finance and Administration (F&A) was undercharged $25,652 for rent in fiscal 1999 due to an error in a spreadsheet formula.” (p. 2 of the audit; the recommendation immediately following was to charge F&A $25,652) (Story #55).

Likewise, the Common Council Minutes of the City of West Lafayette on May 6, 2002 quote Mr. Wayne Kjonaas [Vice President for Physical Facilities] as saying that a few years earlier “Purdue discovered an error in a spreadsheet used to calculate the water bill and that spreadsheet had been used for several years. So we went back and recalculated the bills and brought that to the City’s attention and then promptly paid that amount. I believe the amount is a little over $400,000, was the adjustment made at that time. ” (Story #54)

The story that I found most intriguing, however, was a court case. (Story #59). The link provided on EUSRIG’s site is broken, but I found the entire Judgment here and it made for some fun reading! Here’s the summary:

The Claimant: Champion Investments Ltd, represented by Saunders & Co
The Defendent: Mr. Eaitisham Ahmed, represented by Fenwick & Co
The Background: Champion Investments, Ltd, began proceedings in November 2003 against Mr. Ahmed in order to recover money that Mr. Ahmed owed from a £1,000,000 short-term high interest loan the previous July for “pure share speculation” (Bad idea, Mr. Ahmed.) That high interest was 8% per month for one month, then it went up to 2½% per week, then 3% per week, then 4% per week. (Kids, don’t try this at home!) But according to Champion Investments, Ltd, Mr. Ahmed didn’t pay back all of the money in time, so took him to court to get it back, and Mr. Ahmed counter-sued and said the interest rate was like extortion and it should only be 18% per year, and things were messy.

But the two parties did come to an agreement. By this point Mr. Ahmed had repaid £1,000,000 so the only amount he owed was whatever the accrued interest was. What they settled on was the following:

the Defendant shall on or before 4.00 pm 28 January 2004 pay to the Claimant the sum of £55,000 with interest thereon calculated at 48% pa from 14 January 2004 (being a daily rate of £72.33) in full discharge of the balance due to the Claimant … (see paragraph 23)

The problem: During the negotiations for this amount, Mr. Desai (working for Champion Investments, Ltd.) was trying to settle for a lower interest rate on the outstanding balance while Mr. Fenwick (working for Mr. Ahmed) was trying to negotiate a fixed sum for settlement. Mr. Fenwick offered £55,000, and Mr. Desai said he’d only accept that if he could verify that it corresponded to 45% annual interest. But no one had their laptops (really — it says so in the judgment). Fortunately, at least for Mr. Ahmed, Mr. Fenwick had prepared an Excel document on his office computer with all the payments and interest, that was printed out and Mr. Desai looked it over. And everything looked hunky dory and they settled.

But the spreadsheet was wrong. Interest was paid in arrears each month and (I just looked it up) that means that you’re making your payments at the end of the month for the month that just passed as opposed to paying at the start of the month to cover the month coming up. The loan had taken place in mid-July so the first payment was due in mid-August and covered interest for the past month. The spreadsheet only calculated interest starting at that first payment, rather than starting when the loan was issued. And when you’re talking about 4% weekly interest, skipping a month of interest payments is a big deal. When the mistake was found and corrected, it turned out that the £55,000 corresponded to an interest rate of “only” 33%. And coincidentally, this error of Mr. Fenwick benefited Mr. Ahmed, Mr. Fenwick’s client.

Mr. Fenwick said it was an honest mistake on his part — he thought the loan had been given out mid-August and the payments were in advance and yes, it seemed a little weird to make a payment the moment you got the loan, but he didn’t worry about it. Mr. Desai responded with something along the lines of “Liar Liar Pants on Fire.” The Judge felt that Mr. Fenwick was perhaps not so wise in the ways of loans but basically honest, and believed that this was a mutual mistake.

The result: Even though everyone agreed that there was a mistake in the calculation of how much interest £55,000 corresponded to, because it had been agreed to by both parties and the mistake was shared by both, the amount would stand.

The moral: Check your work. And don’t borrow money at insane interest rates.

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