Model Review Practices
Bryan Lapidus, FPAC
Director, FP&A Practice at the Association for Financial Professionals (AFP)
I have been hearing a lot about building financial models lately, so for this week's #throwbackthursday , I am posting a section from the Association for Financial Professionals ' Guide to Model Supervision, written by Rob Trippe . Once a model is in service, maintaining it for relevance is just as important! Enjoy.
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Finance executives are dependent upon modeling processes for a variety of needs including financial reporting, performance analysis, capital planning and budgeting, regulatory requirements, and M&A. Many of these models are used on a recurring basis, employing both accounting and financial theory and technique, and drawing from myriad input data sources.
Consider the dollar exposure these models represent and the number of times our recurring models are used; the corporate finance function is beholden to the quality of our financial modeling and analysis. Yet, a problem lies hidden in here. Rather than individually owned tools, we should view models as wing-to-wing decision-making processes (inputs, calculations, final outputs) to better align the entire work process with our overall corporate financial objectives and, at the same time, lower enterprise risk.
Governance processes cover the model lifecycle to provide toll gates for success and completion of models, and visually assist us when it comes to separating model roles and responsibilities. The chart below identifies common model governance and risk management activities at each stage in the process. Note that models change frequently, and practice of model governance needs to be right sized for your business and industry.
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Past?#throwbackthursday ?articles: