The past few years have been a difficult time for the global economy. From the pandemic to the war in Ukraine, to an energy crisis that has fuelled inflation and led to interest rate hikes and the cost-of-living crisis, businesses have been grappling with unrelenting economic volatility.
In these challenging times, boards should recognise the immense value that internal audit professionals can bring to the table. They can play a significant role in helping organisations to thrive amid uncertainty.
That’s the key message of the Chartered Institute of Internal Auditors’ latest report, which sheds light on how boards can harness the power of internal audit to their advantage. So, how can internal audit be utilised to support the board during periods of economic turbulence?
It’s important to acknowledge the myriad risks posed by economic uncertainty. According to the report’s survey findings, 56% of internal audit executives perceive the risk level posed by economic uncertainty as ranging from “high” to “very high” for their organisations. This underlines the significance of proactive risk management strategies during periods of economic volatility.
Safeguarding cashflow
As the economic downturn unfolds, certain risks come into the spotlight. Cashflow and liquidity concerns, along with changes in consumer demand and behaviour, top the list of risks exacerbated by the current economic backdrop. Additionally, financial stability, market and trading risks, and fraud and financial crime are significant areas of concern.
Boards should tap into the unique risk management and internal control expertise possessed by internal audit and seek assurance that these risks have been identified, managed, and mitigated effectively.
Internal audit functions can play a crucial role in strengthening an organisation’s defences and helping to build a culture of resilience. By collaborating closely with other departments such as finance, HR, risk management, and the CEO’s office, internal audit contributes to a cohesive and joined-up risk management effort.
While internal auditors may not be economic forecasters or stock market gurus, they do possess the skills to garner invaluable insights that can help boards. For example, internal audit can provide assurance on the organisation’s economic scenario planning or financial stress testing exercises, reinforcing resilience.
By validating assumptions, evaluating risk impacts, and testing the effectiveness of measures, internal audit enhances the board’s ability to make well-informed decisions.
To successfully prepare for and navigate economic crises, boards—and in particular their audit committees—must invest in enhancing the capacity and skill sets of their internal audit teams. This could involve the internal audit team hiring external subject matter experts, providing training opportunities, or seeking the guidance of experienced professionals who have weathered previous economic storms.
In today’s competitive jobs market, attracting and retaining skilled internal auditors can also be a challenge. While budget constraints can further complicate matters, with 42% of internal audit functions experiencing stagnant or decreased budgets/resources due to inflation rises. Recognising these limitations, boards should provide the necessary support and resources to enable internal auditors to fulfil their roles effectively.
Interconnected risks
Amid economic volatility, boards and internal audit need to ensure they adopt a holistic view of risks and recognise the increasingly interlinked risk landscape. For example, inflation rises can impact pricing structures, while the cost-of-living crisis may fuel fraudulent activity. By understanding the interconnectedness of risks, internal audit can identify risk pathways and connections that may otherwise go unnoticed.
As well as pinpointing risks, internal auditors can also be engaged by the board to help support the organisation’s road to recovery by highlighting opportunities. Boards should encourage internal audit to identify efficiencies and growth opportunities during the recovery phase.
Conducting rebate audits, assessing contracts with external suppliers, and evaluating the effectiveness of controls can unlock efficiencies and remove obstacles to growth. Internal audit’s insights into organisational weaknesses and contributions to recovery strategies can have a significant impact on both weathering economic downturns and capitalising on growth opportunities.
In a world of economic uncertainty, boards must recognise the vital role of internal audit in managing risks and promoting organisational resilience. By embracing the partnership between boards and internal audit, fostering collaboration, and adopting an agile mindset, organisations can navigate economic uncertainty with confidence and emerge stronger in the face of future challenges.
Mo Warsame is senior policy and external affairs executive at the Chartered Institute of Internal Auditors