Much to our surprise, spreadsheet formulae have hit the news! A
student has exposed simple errors in a previously well-respected
Back in January 2010, Harvard professors Carmen Rienhart and
Kenneth Rogoff released a paper entitled Growth in a time of
debt1, which concluded:
"Our main finding is that across both advanced
countries and emerging markets, high debt/GDP levels (90 percent
and above) are associated with notably lower growth
This paper has received a huge amount of publicity and has been
relied on by politicians across the globe as support for
'austerity' economic measures.3
It has made the news because a critique was published by
graduate student Thomas Herndon and co-authors Professors Michael
Ash, and Robert Pollin of the University of Massachusetts. The
Hendon-Ash-Pollin paper outlined three central critiques:
selective exclusions of data
a coding error
According to the paper, adjusting for these items means that the
controversial conclusion that 90% debt/GDP levels are
"associated with notably lower growth" cannot be
As we're not experts in economic theory, we aren't best
placed to comment on the first two issues4. However it
is the coding error that has led to so much media attention.
Reinhard and Rogoff's paper contained a simple calculation
error in the Excel file that supported their paper - when
calculating the average growth where debt levels were more than 90%
of GDP, the formula calculating the average only included rows
30-44, rather than rows 30-49.5 The missing rows had the
effect of excluding New Zealand from the results.
This kind of calculation error is what keeps us awake at
One of the challenges of being a forensic accountant is that our
work is heavily scrutinised by others (and, as a matter of
practice, ought to be first heavily scrutinised by ourselves).
There are a large number of people including lawyers, barristers,
judges and other forensic accountants whose job it is to find
mistakes and flaws in any report we issue.
The perception of a simple error can also be much worse than the
effect of the error itself. It was in fact the other two criticisms
in Reinhart and Rogoff that made a larger difference to the
results. The coding error itself didn't change the results
dramatically. However, this didn't stop the media, whose
coverage focussed on their perception that the study
'couldn't even add up the numbers correctly' rather
than the validity of the overall academic research. Whilst Reinhart
and Rogoff may well be correct in their arguments rebutting
Hendon's claims, it may be hard for them to get over this
In many aspects of life, the prospect of a simple error can be a
significant cause of stress. Professional firms try to avoid such
errors by quality assurance procedures such as peer reviews of
reports and arithmetic checking. Whilst we try to be as efficient
as possible and explain the time we've taken to do things, it
is quite hard to explain the net benefits from such quality
assurance procedures. There is often no tangible outcome beyond a
lack of errors, something that our clients would expect anyway!
However, the experience of Rinhart and Rogoff has shown that a
failure to pick up a simple error can undermine the overall effect
of analysis. Even if the error itself doesn't make a
significant difference, it becomes the natural focus of a reader
(in our case an opposing barrister), causing the perception of
inaccuracy to outweigh the actual error itself.
The global economic slowdown is having an adverse impact on many businesses, often resulting in lower cash flows.
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