GIGO

Garbage in, garbage out is a concept which holds that the quality of input determines the quality of output in a system. Thus, information provided by such a system and any decisions made on the basis he information are incorrect. The development of financial models involves making assumptions which are also based on the availed financial information. Therefore, the accuracy of the financial models will be only as good as the various assumptions used in creating them. For a person who is developing the model, they should be very careful with the GIGO concept.  There may be a lot of damages when liabilities or assets are priced incorrectly due erroneous calculation of inputs used for the valuation model. Assumptions that are flawed such as overestimation will result to garbage in and the results will be unrealistic models (garbage out) (Rezaee, 2007).

Posts audits allows the comparison of the actual results with the one that have been predicted in the analysis of the original capital budgeting. The general purpose of this feedback process is to improve operations and thus forecasting. It allows the confirmation of the information used in the forecasting against the actual one that is in the budget. This makes it possible to determine the reason for any discrepancies. This ensures that the forecasting capacity of the organization is improved significantly by use of the correct informational input (Rezaee, 2007). The incentive compensation plans can be used to communicate the importance of transparency and simplicity in the representing the correct information. Such plans should aim at rewarding the employees based on the outcome of the forecast that was done using the financial information they availed. This will make the employees be aware of the repercussions of using wrong information in financial forecasting (Rezaee, 2007). Tools that can be used to reduce GIGO include batch input and online input. Batch input allows business data entry to be done on a certain time schedule while Online input that allow information to be immediately validated (Shelly & Rosenblatt, 2010).

References

Rezaee, Z. (2007). Corporate governance post-Sarbanes-Oxley: Regulations, requirements, and integrated processes. Hoboken, N.J: John Wiley & Sons.164-167

Shelly, G. B., & Rosenblatt, H. J. (2010). Systems analysis and design. Boston, Mass: Thomson Course Technology.362