Every analyst's nightmare

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It's enough to make the average analyst feel faint: Terra Firma is being sued over a flaw in one of its models.

According to the Financial Times, and numerous other sources, Terra Firma's being put on the spot over a fault related to cash flow calculations for Boxclever.

The dodgy model allegedly served to inflate calculations of the net present value of Boxclever's TV rentals business. The company was duly refinanced by Natixis in 2002, only to default one year later. Now Natixis is suing Terra Firma.

How pervasive are erroneous models? Very, very, according to those who live and breathe them. "Every model has its mistake," says one associate. "Most of the time they're minor - someone will have linked the wrong cells on an Excel spreadsheet. Whether or not it's spotted is purely a question of how much time is spent checking it. Personally, I've never seen a mistake make it through to the pricing stage."

Guy Eastman, European investment director at fund of private equity funds SVG Capital, agrees that mistakes rarely see the light of day: "So many people on a deal are involved in the numbers that it's very unlikely for a deal to go to completion with an error in the modelling."

And if it does? "If a mistake went through to the pricing stage, the MD would take a bad hit," says the associate. "If the error's more mundane, the associate will get all the blame and the analyst will get a black mark."

One error won't end a career, but a flood of them will. "If you consistently make mistakes, you'll become known as someone who can't be trusted with numbers," says the associate. "It's the kind of reputation that takes around a year to establish, and if it happens then this isn't the job for you - you have 12 more years of numbers to come."

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