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Boards urged to collaborate with internal audit as interest rates rise

Author: ICAEW Insights

Published: 05 Jul 2023

The risk level posed by economic uncertainty is seen as high or very high by more than half of all businesses.

The Chartered Institute of Internal Auditors (CIIA) is urging boards to work closely with internal audit functions to build resilience against a possible recession. A report published today, ‘Adapting to Economic Uncertainty: Internal Audit’s Journey’, provides guidance to internal audit and boards for navigating the multitude of risks associated with the economic downturn. 

The report surveys more than 100 internal audit executives from across a number of sectors and the UK and Ireland. It examines lessons learned from previous economic shocks, the current response to economic uncertainty, and how internal audit can support the path to recovery.

It reveals that 56% of respondents perceive the risk level posed by economic uncertainty to their organisations as high to very high. The top risks identified by respondents were financial capital, cash flow and liquidity risk (26%), along with changes in consumer demand and behaviours (22%). Market and trading risks, fraud, bribery and financial crime also featured prominently in the survey results.

Internal auditors are currently most engaged in supporting risk management and framework assessment (73%), auditing cost savings measures (58%), and supply chain risk assessment (49%). They are also engaged in auditing pricing strategies, budgeting and forecasting reviews, contingency planning evaluation, financial stress testing and economic scenario planning.

However, they are often overlooked as an asset in supporting organisations to navigate economic uncertainty.

“During these more risky, uncertain, and volatile economic times boards and internal audit teams need to forge a strong partnership,” Anne Kiem OBE, Chief Executive of the Chartered Institute of Internal Auditors, said. “Working closely together will ensure they can diligently and effectively identify, manage, and mitigate the long list of risks exacerbated by economic uncertainty. Greater collaboration can help ensure that the organisation is resilient enough to weather the economic storm and support greater preparedness for unforeseen economic shocks in the future.”

Internal auditors need to seize the opportunity to showcase their internal control and risk management skill set, said Richard Chambers, Senior Internal Audit Advisor of AuditBoard. “These volatile economic times mean internal audit professionals need to keep their eyes firmly focussed on what may be coming over the horizon, as well as be agile and responsive to what is a rapidly evolving macroeconomic risk environment. Close engagement and collaboration with the board is also key.”

ICAEW’s Director, Corporate Governance and Stewardship, Peter van Veen believes businesses are right to be concerned in light of economic uncertainty. “Internal auditors certainly have a role to play to improve business’ resilience, internal controls and ensuring stronger assurance to boards as the report outlines. We certainly concur with the report’s call on boards to work with internal audit to strengthen these areas.”

He added: “However, protecting the organisation from economic turbulence is not down to one function. Close collaboration between all functions is required to strengthen resilience and navigate the company through turbulent economic times. The finance function will be at the forefront of managing cost, protecting cashflow and ensuring the budgets and forecast reflect the changing reality.

“Other functions also have key part to play in managing critical risks such as ethics and compliance and data security. The Audit Committee and the Board should be engaging with functional leadership to assure themselves that all the key risks have been mapped and are being managed actively.”

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