In the realm of financial modeling, the art of reviewing models is crucial for ensuring accuracy and reliability. Yet, the lack of standardized steps often leads Financial Modelers to undertake reviews in a haphazard manner, potentially missing critical aspects that could impact the Model’s outcomes. While some may embark on reviews by delving into calculation blocks, inputs, or outputs, a more structured approach is essential to assess the model's integrity comprehensively.

Model Review is often used interchangeably with Model Audit, which has more or less the same objective, i.e., to ensure the model’s accuracy and validity. Still, they differ in scope and assurance provided. The former is generally less intensive and does not come with any assurance certificate. In contrast, the latter is a formal report with all the findings and comes with written assurance from the auditor. Therefore, Audit is used for very high-stakes situations such as project finance or Merger and Acquisition transactions.

Financial Models undergo review or audit to ensure their Technical and Logical accuracy as well as Commercial appropriateness. In this blog, we have outlined some key checkpoints for Financial Model review, recognizing that the review’s scope can vary depending on the depth, objective, and assurance the end user is looking to achieve from the review exercise.

Some of the key best practices checks include:

Formula Inconsistencies: This includes checking formulas for mathematical correctness and consistency, i.e., ensuring that each calculation line under the Model timeline employs one unique and consistent formula across columns.

Circular Reference: Circular references occur when a formula refers back to its own cell or depends on another cell's value derived from the formula cell itself. This creates a loop of calculations that Excel cannot resolve, leading to incorrect results. It can usually be found in the status bar at the bottom left after calculating the Model.

Excel Errors: We usually see three main Excel errors causing problems in Model outputs. They are #REF! (Caused if the reference cell used in the formula is deleted), #DIV! (Occurs when divisor in a calculation becomes 0), and #N/A! (Happens if the range Lookup formula cannot find a reference value in the data set).

Model Size: Increased model size often leads to sluggish workbook performance and calculation delays. Common factors contributing to this include incorrect “end cells” (last used cell on a worksheet), excessive formatting “styles”, big data sets in the workbook, etc. Addressing these issues involves optimising the model's structure, formula choices, and data management.

VBA Testing: When Visual Basic is used to resolve circular reference problems and fully recalculate Model outputs, it’s imperative to thoroughly test macro buttons to verify their functionality.

Stress testing: It means checking the plausibility of results by changing variable assumptions to extreme values. It provides valuable insights into the model's robustness and better preparation for uncertain future events.

Logical and Accounting review: It involves a comprehensive assessment of the results generated by the financial model and the calculations performed within it. This evaluation ensures that the model's outputs align with logical reasoning and accounting principles.

Commercial review: The attention is on the appropriateness of the results produced by the Model. The objective is to ensure that the Model’s projections align with the business’s strategic goals, market realities, and industry trends.

Financial Models assume a critical role in almost all significant finance transactions, underscoring the importance of comprehensive model review in the decision-making process. The checklist provided above encapsulates a structured procedure prevalent in the professional financial modeling industry. At FAB, we use our in-house software checks to conduct detailed Model reviews and report our findings in a formal report. This process is supplemented by interactive discussions with clients and subsequent model refinements, ensuring a robust and accurate Financial Model that aligns precisely with the desired outcome.