Navigating Unprecedented Challenges: A Guide for Internal Auditors and Auditor Officers in the Face of an Imminent Recession

In the ever-changing landscape of global economics, the possibility of an impending recession looms on the horizon. While opinions and forecasts may be divided, there is a consensus that within the next 12 months, a recession is more likely than not. However, what sets this potential recession apart is the presence of three compounding pressures that most executives have never experienced simultaneously: persistent high inflation, scarce and expensive talent, and global supply constraints. As internal auditors and auditor officers, it is crucial to understand and prepare for the unique risks associated with these challenges.

The Main Squeeze: Managing Upward Cost Pressure
The foremost challenge organizations will face is the overall upward cost pressure. A significant majority of CEOs globally have reported facing upward price pressure for inputs, and this trend is expected to persist into mid-2023. What distinguishes this scenario from previous recessions is that the pressure is not limited to just product inputs but also extends to talent costs and borrowing costs. Moreover, anticipated changes in tax codes might further increase the tax burden. As internal auditors, it becomes crucial to assess the impact of these rising costs on financial statements, budgeting, and operational efficiency, and develop strategies to mitigate the risks associated with increased expenses.

Resilience in Supply Chains
Over the past year, supply chains have experienced significant strain due to a combination of factors, including COVID-19-related disruptions, lockdowns, misjudged forecasts, geopolitical tensions, and energy costs. Consequently, the delivery of critical products, from semiconductors to construction materials, has been severely curtailed. Organizations are now reevaluating their assumptions and seeking to enhance the resilience and stability of their supply chains. As internal auditors, it is essential to examine the vulnerabilities in the supply chain and recommend measures to address these risks. This may involve diversifying suppliers, implementing contingency plans, and establishing stronger relationships with key partners.

Navigating Labor Scarcity
The “great resignation” phenomenon, coupled with ongoing skills shortages in technology areas, has created a labor scarcity challenge in the job market. Organizations are struggling to fill critical positions and accurately forecast labor supply. This poses a significant workforce management risk, requiring internal auditors to collaborate with HR departments to analyze talent needs, assess succession planning, and identify strategies to attract and retain skilled professionals. Specifically within IT, where IT governance is paramount, the low intent of IT staff to stay within organizations and the difficulty of recruiting IT talent pose a threat. Internal auditors must work closely with IT teams to ensure adequate IT governance and minimize potential disruptions.

As internal auditors and auditor officers, being proactive and adaptive is crucial in navigating the unique risks associated with an imminent recession marked by persistent high inflation, scarce and expensive talent, and global supply constraints. By understanding the challenges ahead and collaborating with key stakeholders, internal auditors can play a pivotal role in identifying and mitigating risks, enhancing resilience, and contributing to the overall success of their organizations. By embracing these challenges as opportunities for growth and innovation, internal auditors can emerge as trusted advisors and guardians of organizational stability in the face of an uncertain economic future.

Audit management can be difficult, but it certainly doesn’t have to be. While the future may be uncertain, you can take control of that uncertainty. Empowered Systems for the last three decades has dedicated itself to listening to internal auditors about how we can both empower and assist you with your day to day duties.

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