One of the things we do at Colbi Technologies is design and implement summarized reports. Recently a colleague noted what appeared to be an error in a one-page summary report of a billion-dollar building program. The summary report did not show any pennies, and when the dollar amounts were added up, the sum did not equal the totaled amount shown on the report.
Other colleagues responded that this is the result of “rounding error.”
My background is not in accounting. It’s in engineering, where one of the courses of study was error propagation in engineering calculations. The above response is incorrect. It is not “rounding error” — it is a “review error.”
In general, to minimize error propagation in engineering, all calculations are carried out to the finest detail possible and then the final result is rounded as appropriate. In accounting, the smallest unit possible is a penny. As a result, all accounting calculations must be carried out to the penny. Then, if appropriate, the final result may be rounded to the nearest dollar, or nearest thousand dollars, or even the nearest million dollars when displayed as a chart or graph.
Below is an illustration. On the left are actual numbers to the penny — as calculated using pennies, and as displayed to the nearest dollar. On the right I’ve illustrated a “review error” that adds up numbers displayed as whole dollars — in this case the “review error” is over $4. Or more precisely $4.41.
The “review error” is a result of not understanding that one-page report. It summarized a huge number of calculations onto one page. All numbers on that one-page report were accurate to the nearest dollar.
It’s important to build trust by being able to demonstrate the accuracy of reports provided. That’s why many of our reports include the option to drill-down interactively and/or to review the raw data (to the penny). The ability to demonstrate report accuracy is important. Most importantly it’s needed to fully understand where the numbers come from, because otherwise you won’t be able to explain it to others.
“If you can’t explain it to a six-year-old, you don’t understand it yourself.” -Albert Einstein