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Newsletter Aug 2004

News update 2004-08: August 2004

A monthly newsletter on risk management in financial services,
operational risk and user-developed software from Louise Pryor

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In this issue:
1. Spreadsheets on the way out?
2. Mandelbrot
3. FSA update
4. Summer risks
5. Newsletter information

1. Spreadsheets on the way out?

A recent survey of “business leaders” indicates that many companies
would like to reduce their reliance on spreadsheet based accounting
processes. 80% of the respondents said that spreadsheets should not
be the foundation for critical accounting processes.

“When asked what major risks are associated with spreadsheet-based
processes, 63 percent pointed to the fact that they are prone to
errors, 58 percent cited the lack of audit trail and 56 percent
said they lacked internal controls. Only 5 percent claimed that no
risks existed.” I’d say that 5% of the respondents are living on
another planet. However, the implication that the more automated
processes that may replace spreadsheets are risk free is
unwarranted. Moreover, it is possible (though difficult) to
construct spreadsheet based systems that have effective controls.

We also have to wonder how the view that spreadsheets should play a
smaller role in accounting processes will actually translate into
action. The road to hell is paved with good intentions, and
spreadsheets are notoriously addictive. I am willing to bet that
even as new automated systems are introduced to replace existing
spreadsheets, further spreadsheets will emerge to supplement the
new system. And that’s supposing that the new systems are actually

2. Mandelbrot

You’re probably familiar with the name Mandelbrot in connection
with fractals, especially the Mandelbrot set. Over his career he
has shown that fractals can be found in many places in nature,
leading to entirely new fields of exploration in chaos theory.

He’s been looking at the variation of financial prices since 1960:
see In his
latest book he uses fractal geometry to propose a “new, more
accurate way of describing market behavior.” The description goes
on to say that “With his fractal tools, Mandelbrot has gotten to
the bottom of how financial markets really work, and in doing so,
he describes the volatile, dangerous (and strangely beautiful)
properties that financial experts have never before accounted
for. The result is no less than the foundation for a new science of
finance.” Don’t you just love the understated elegance of book
blurbs? And the respect they show to other practitioners?

He’s also called for some of the money set aside for “independent
research” in the April 2003 settlement to be spent on fundamental
research into financial markets. He says “Let the Wall Street
settlement help to fund an international commission for systematic,
rigorous, and replicable research into market dynamics.”

The (Mis)behavior of Markets: A Fractal View of Risk, Ruin and
Reward by Richard L. Hudson, Benoit B. Mandelbrot

3. FSA update

Although the rate of publication of consultation papers and policy
statements has slackened off, there are plenty of other
publications. Sometimes research is published as an Occasional
Paper, sometimes as part of a consultation paper, but this month
saw a Dear CEO letter outlining the results of a review of credit
risk management in life insurance firms. This builds on the paper
issued in October 2003: “Review of UK insurers’ risk management
practices”. The Dear CEO letter outlines a number of areas in which
weaknesses were found, although it does say that the project
findings generally indicated that credit risk is well managed in
the life insurance sector. Some of the weaknesses are very specific
to credit risk, though others can be generalised to other areas of

New consultation and discussion papers out this month:

CP04/13 Quarterly consultation (No. 1)
CP04/14 Treating with-profits policyholders fairly – Further
consultation, feedback on CP207 and near-final text

Feedback published this month:

None – but see CP04/14.

Current consultations, with dates by which responses should be
received by the FSA, are listed at

4. Summer risks

This newsletter is shorter than usual because it’s a reasonably
effective way to mitigate the risk of not having enough time to
write it. On this occasion I can’t quote Pascal, who wrote “I have
only made this letter rather long because I have not had time to
make it shorter.” Or maybe Pascal was quoting someone else – see .

5. Newsletter information

This newsletter is issued approximately monthly by Louise Pryor
( Copyright (c) Louise Pryor 2004. All
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