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Adapting to economic uncertainty

August 02, 2023

There is not a week that goes by without fresh headlines about the state of the economy, from interest rate hikes to news of the Eurozone in recession, and companies announcing job losses.  As businesses continue to grapple with an uncertain and volatile economic backdrop, fuelled by a potent combination of stubbornly high inflation, interest rate hikes, and an economic downturn, collaboration between risk management and internal audit has never been more vital for organisations to navigate these more risky, unique, and challenging times.  That is the key message from the Chartered IIA’s latest report “Adapting to economic uncertainty: Internal audit’s journey”.

The survey that the report is based on found that six in ten internal audit executives now regard the risk level posed by economic uncertainty to their organisation to be either high or very high.  This underlines that economic uncertainty is a risk that should be on every risk manager and internal auditors' agenda and is an issue that should be getting airtime at board-level discussions.  Economic uncertainty is also a strategic umbrella risk that interlinks and exacerbates a whole range of other risks.  Our research revealed that the top risks most impacted by economic uncertainty are financial capital, cashflow and liquidity risk (26%), along with changes in consumer demand and behaviours (22%).  However, market and trading risks, as well as fraud, bribery and financial crime also featured prominently in our survey results.  Meanwhile, risk management emerges as the most common business function for internal audit collaboration, with 81% of organisations recognising the value of cross-functional partnerships.

So, what should internal audit and risk management be collaborating on to support their organisations to navigate the economic headwinds?  Our survey findings found that internal auditors are engaged in a whole range of measures to support resilience from economic uncertainty.  This includes supporting risk management and framework assessments (73%), auditing cost savings measures (58%), and supply chain risk assessments (49%).  Along with other key measures including auditing pricing strategies, budgeting and forecasting reviews, contingency planning evaluation, financial stress testing and economic scenario planning.

Indeed, as a recent contributor to this blog quite rightly pointed out, the importance of implementing economic scenario planning, financial stress testing, and financial and economic simulations cannot be overstated.  This can ensure the response to ongoing economic challenges is proportionate, relevant, and impactful.  Close collaboration between audit and risk committees, its chairs, boards, internal audit, and risk management on economic scenario planning prepares the organisation for future economic shocks, ensuring a joined-up approach.

Internal audit can also work with risk management to provide proactive assurance on the organisation’s overall risk assessment processes and scenario planning to analyse whether they are in line with the current economic climate. This can include evaluating the potential impact of risks associated with economic uncertainty on the organisation’s objectives, operations, and financial liquidity.  Collaborating and coordinating with risk management to ensure that key risks identified are aligned is essential. Furthermore, working and collaborating with risk management in the second line can also help internal audit gain better insights into the risk landscape associated with economic uncertainty.

From the Covid-19 pandemic to the War in Ukraine, and now the cost-of-living as well as cost-of-doing business crisis, these are challenging times for both internal audit and risk management professionals alike, as well as the organisations they serve.  However, these challenging times also create great opportunities for both internal auditors and risk managers to step up, collaborate and work more closely together, as well as showcase their internal control and risk management skillset.

By working together to promote a culture of resilience, supporting effective economic scenario planning and financial stress testing, as well as providing timely and relevant assurance, internal audit and risk management functions can show how valuable they are and play their role in helping to navigate the stormier economic climate.


Gavin Hayes is Head of Policy and External Affairs at the Chartered Institute of Internal Auditors. The “Adapting to Economic Uncertainty” report can be downloaded at
www.iia.org.uk

Tags: Gavin Hayes
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