How do boards evaluate the risk and potential impact of a recession — and how can internal audit help?
I do my own environmental scanning such as staying current with news sources and updates from professional organizations. I also look for management’s viewpoint on the economy and risks to the business, specifically. In budgeting or forecasting discussions, I expect a dialogue on the range of potential outcomes and am attuned to the risk attitude taken by management. Are they barreling ahead without regard to what is happening in the world? Are they afraid of the dark? Neither extreme is good. In particular, I look for ways in which business plans provide optionality — the quality of being chosen but not obligatory — and escape hatches to increase resilience in the face of uncertainty.
Internal audit also should be doing environmental scanning as part of its risk assessment processes. As auditors are on the ground with local management teams and having discussions deep within the organization, they may pick up signals before they make their way up the management chain. Developing a process for collecting and communicating this information in a way that is helpful to senior management, but doesn’t leave local management feeling exposed, is critical to success.
What should boards be looking at to ensure that the organization is prepared for an economic downturn?
As much as possible, make sure the key performance indicators (KPIs) reported to the board are forward-looking. This is harder than it sounds, and will be different for each company, but this should be a focus in the boardroom. It also is helpful to understand the historic patterns behind these KPIs to provide context for analysis. Understand how management, as much as possible, is building resilience and flexibility into the company's operations.