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Economic uncertainty amplifies insolvency concerns

Author: ICAEW Insights

Published: 18 May 2023

A recent business poll conducted by the Chartered Institute of Internal Auditors has revealed a growing apprehension among chief internal auditors regarding financial, liquidity and insolvency risks.

The ongoing economic uncertainty is marked by interest rate hikes, high inflation, the cost-of-living crisis, and turbulence in the banking sector. As a result, six in 10 auditors have highlighted their concerns about the economic downturn exacerbating these risks, according to the latest Chartered Institute of Internal Auditors (Chartered IIA) business poll. 

The study also reveals a significant shift, with financial, liquidity and insolvency risk moving from the ninth position to become the top concern for businesses.

Last year financial, liquidity and insolvency risk ranked well outside the top five risks to businesses, trumped by other key risks such as cyber security, changes in laws and regulations and digital disruption.

Commissioned to monitor the risks most affected by the economic downturn, the poll involved 799 chief internal auditors. It sheds light on several other risks that have been intensified by concerns about the economic outlook. These risks include market changes, competition, changing consumer behaviour, macroeconomic and geopolitical uncertainty, talent management and retention, and supply chains. The findings indicate that businesses are grappling with a complex web of interconnected risks.

Bob Pinder, ICAEW’s Director for Quality Assurance and Professional Standards, believes the climate for businesses is still very tough. “Businesses are trying to manage increased costs coupled with stubbornly high inflation, but things are likely to get worse before they get better.

“Companies should be looking to minimise risk and preserve cash ahead of what could be a turbulent time to do business.”

Chief audit executives identified the following as the top five risks exacerbated by economic uncertainty:

  • Financial, liquidity and insolvency (62%)
  • Market changes, competition and changing consumer behaviour (60%)
  • Macroeconomic and geopolitical uncertainty (50%)
  • Human capital, diversity, talent management and retention (48%)
  • Supply chain, outsourcing and third-party risks (43%)

These results emphasise the importance of business leaders collaborating with their internal audit teams to prepare for unforeseen circumstances. Recommendations include reviewing business continuity and crisis management plans to ensure their suitability in the face of economic uncertainties. It is also suggested that businesses engage in economic simulation exercises and conduct financial stress testing based on various economic scenarios.

The Chartered IIA is leveraging the poll's findings to urge the government to prioritise plans for audit and corporate governance reform. The Institute calls on ministers to promptly publish the statutory instruments for Audit and Assurance Policies and Resilience Statements, as well as include a commitment to an Audit Reform Bill in the upcoming King’s Speech. Such reforms are deemed crucial for enhancing the resilience of major businesses against future economic shocks.

Anne Kiem OBE, Chief Executive of the Chartered IIA, emphasised the significance of the poll's results, stating that ongoing economic uncertainty has brought financial, liquidity and insolvency concerns to the forefront.

Kiem said: “This research underlines the need for boards to collaborate with their internal audit functions to ensure they have identified, managed and mitigated the myriad of business-critical risks they now face. Internal audit has an important role to play in supporting the board in this.

“The more risky, uncertain and volatile environment businesses are now operating in means that planned reform to the audit and corporate governance framework is more urgent than ever. We urge the government to publish the statutory instruments for Resilience Statements and Audit and Assurance Policies without further delay, as well as ensure there is a commitment to an Audit Reform Bill in the King’s Speech. These reforms are vital to enhancing the resilience of our economy.”

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