Some things are certain about this year's U.S. political landscape and how it will affect businesses. For one, President Joe Biden will make some major changes right away, both to put his imprint on U.S. policy and to undo some of outgoing President Donald Trump's more controversial moves. Next, Biden will follow up with multiple changes to advance his own agenda. Areas he's certain to prioritize for changes big and small include containing the COVID-19 pandemic, addressing climate change, and tackling the racial inequity issues permeating the country.
For internal auditors who spent 2020 helping their organizations weather the COVID-19 storm, it's time to shift to assessing the impact of the changes coming from the Biden administration and advising their organizations on what to expect. There's going to be a lot to cover, so auditors need to get up to speed.
Preparing for the Changes
Beyond those broader moves, the specifics of upcoming policy changes are starting to come into view — especially since the twin upsets in Georgia's Senate runoff elections in January have given Democrats the majority in both the Senate and the House of Representatives. That control ensures Biden can use both legislative and executive tools to advance his agenda. "From an internal audit perspective, there are still a lot of uncertainties," says Cindy Doe, principal at EY Consulting in Boston, "which makes it hard to always be prepared for the unexpected." Internal auditors should expect changes in trade relations, healthcare, technology, and taxes, she advises, stressing that "each will impact businesses in almost every industry."
An example Doe cites is an increased focus on climate risk as it impacts how businesses operate, such as carbon footprint commitments and investments focused on climate-related environmental, social, and governance issues. Another example is a greater emphasis on social justice, she says, such as making commitments to community actions on the digital divide and targeting charitable giving on not-for-profits with specific missions.
Change will affect medium-sized and small firms the most, "as they were very fragile in the face of the pandemic and many went bankrupt during the year," says Lishuang Fang, vice general manager of Internal Audit at Dalian Wanda Group in Beijing. Efforts to battle COVID-19 may include quarantine measures, for example, he adds, so small businesses in catering, entertainment, transportation, travel, and sports "will experience more difficulties and risks."
As Naohiro Mouri, former global chairman of The IIA, puts it, "I expect an increase in compliance work." Sustainability will be high on Biden's agenda, for example, so internal auditors can expect to perform work in that area. He advises auditors to keep an eye on infrastructure and on employee safety, equality, diversity, and pay. Plus, he adds, “COVID-19 will continue to impact how we do business and audit."
A More Regulatory Climate
Biden has already created a Coronavirus Task Force, and in January he introduced the American Rescue Plan, a $1.9 trillion COVID-19 relief package, including funds to support a national vaccine program. "Expect a Biden administration to implement a national testing strategy and national vaccine distribution and prioritization plan and encourage states to adopt mask mandates," says a report from BGR Group, a Washington, D.C.-based lobbying firm. The Post-Election Landscape report says organizations should look for the president to reinstate anti-discrimination protections for the LGBTQ community, restrict "junk" insurance plans, and use demonstration authority to expand coverage.
Biden's COVID-19 relief package includes economic stimulus, increased unemployment benefits, aid to businesses to keep employees on the payroll, and assistance for cash-strapped state and local governments. Also on the list of priorities are student loan forgiveness, increased Social Security benefits, and guaranteed immunity from costs for COVID-19 medical expenses, according to consulting firm Covington in Washington, D.C.
Businesses also will be impacted by labor and wage standards and compliance with environmental regulations, notes Brad Jones, The IIA's Washington D.C.-based director, Government Relations. In the workplace, the Department of Labor will address Occupational Safety and Health Administration regulations — especially related to COVID-19 — and the minimum wage. Watch for executive orders that reverse the previous administration's efforts to weaken workers' bargaining rights, plus new rights for gig workers and expanded mandatory overtime.
On the environmental front, Jones says the biggest changes will be in the Department of Energy, regarding fuel use standards; the Department of the Interior, regarding drilling permits and guidance; and the Environmental Protection Agency, regarding climate issues in general. Turning to finance, he adds that the Consumer Financial Protection Bureau will have more authority to implement regulations and guidance, and the Securities and Exchange Commission (SEC) will step up enforcement actions. "Regulations will promote and pursue more social and cultural diversity," he points out.
Taxes, Technology In Focus
"Tax issues will be addressed, but not immediately," Jones predicts. Except for one: Biden will raise the corporate rate from 21% to 28% "on day one."
Biden has "signaled that he wants to increase funding for the Internal Revenue Service (IRS)," says Kyle Pomerleau, a resident fellow at the American Enterprise Institute (AEI) in Washington, D.C. "The concern is that without proper funding, the IRS is struggling to enforce the tax laws. Businesses should expect that a higher enforcement budget will mean more scrutiny from the IRS to ensure the tax laws are being followed."
Tax laws Biden wants to put in place include:
- Increasing the Global Intangible Low Taxed Income rate from 10.5% to 21%.
- Creating a corporate alternative minimum rate of 15%.
- Increasing the top individual and capital gains rates to 39.6%.
- Restarting a 12.4% Social Security payroll tax on earned income over $400,000.
His proposals also would eliminate the direct-to-consumer drug advertising deduction, limit deductions for fossil fuel companies and the real estate industry, and introduce a financial risk fee, according to an October 2020 AEI analysis of Biden's tax proposals. Biden also wants to restore, enact, and expand several green energy, housing, and manufacturing tax credits, the AEI analysis says.
Business use of artificial intelligence (AI) also will come into focus. "The Biden administration may choose to use existing laws and enforcement capacity to provide new oversight into algorithmic systems," says Alex Engler, Rubenstein Fellow–Governance Studies, at the Brookings Institution in Washington, D.C. "This means that AI applications used for activities covered by federal law — such as hiring, rental approvals, and health insurance — might get the scrutiny they have largely avoided up until now."
Business use of algorithmic decision-making "poses serious challenges for regulatory enforcement of existing laws," explains a Brookings report, How the Biden Administration Should Tackle AI Oversight. Biden also will move to "re-establish utility-style regulation over wired and wireless broadband networks," the report adds, and to convert the broadband providers' Keep Americans Connected program into law.
Biden's policies will target large corporations primarily, but "any entity with significant supply chains overseas will certainly be impacted," Jones points out. Outside the U.S., changes will emphasize "cooperative efforts to combat the COVID-19 pandemic" — including rejoining the World Health Organization — "efforts to boost the economy by more active monetary and fiscal policies, and renormalization of the capital markets and trade relationships with major partners," Fang notes.
Policies also will require compliance with U.S. labor and environmental standards, Jones says, and will enable "more cooperation with Europe on climate and trade." The National Law Review reports that the SEC will require U.S.-listed companies to disclose climate risks and greenhouse gas emissions, for example. And rejoining the Paris climate accords will be a key priority — "notable by the appointment of Sen. John Kerry as special ambassador." Biden also wants to invest in green infrastructure, transit, and power, the BGR report notes, boosting the domestic economy and helping meet new climate targets.
Human rights will also be center stage under Biden. He intends to reinstate the Deferred Action for Childhood Arrivals program, halt deportations, and create a task force to reunite children separated from their families at the border, the BGR document says.
Trade policies will include maintaining tariffs on China, at least initially, and also will focus on labor standards and climate change, Jones says. China, in fact, will likely be one vexing spot on the map. Biden is expected to adopt a more multilateral approach, a statement from the U.S. Chamber of Commerce predicts, asserting that lower tariffs are ultimately positive for the economy — especially manufacturers and farmers.
Internal Audit Must Sync Trends, Tactics
"Many of the issues Biden will tackle will involve simply reinstating policies from the Obama administration," Jones says — the climate agreement, limited use of hydraulic fracturing, and an emphasis on renewable fuels, for example. Internal auditors will thus at least be familiar with what's required "and could even dust off their audit plans from four years ago," he adds. And "all businesses should start planning for changes to tax law implementation or even increased taxes eventually."
They should start planning now, Jones stresses, even preemptively, if necessary. Indeed, Doe urges all internal auditors to think about external factors — including technology, climate change, trade, and COVID-19 — in light of their organizations' operations. "You have to understand changes at the global level and what they mean to the strategy, governance, people, technology, and financial elements of your business," she says.
Then, internal auditors must find the opportunities as well as the need for mitigation or closer monitoring "to make sure they're doing everything they can to mitigate the impact," Doe advises. Problems and plusses both require consideration of the risks to the business and the changes to the internal control environment in developing a response strategy, she adds, noting that "use of data analytics to spot positive and negative trends will be critical."
In all cases, she emphasizes, "auditors need to consider the risk and control activities in place to confirm that public statements align with company practices." Fang urges practitioners to:
- "Think with due professional care about business continuity," such as in the online business environment, in human resources optimization, and in the face of abrupt changes to trade and fiscal policies.
- "Carefully consider the risks and challenges that macro policy changes pose for company strategies regarding business models and consumer habit change."
- Promote cooperation with operations and risk management leadership, "because they may be considering the same priorities and risks — and coordination is needed."
- Help management find business opportunities during the "crisis-mandated policy changing period."
- "Invest in the audit team's competency and capability, in terms of IT and deep data analysis skills, business and strategy analysis ability, and adeptness at change management."
Internal auditors have an advantage: Their role spans the entire organization — technology, financials, products, and human resources. "They can offer unique insights to the highest levels of the organization," Doe points out, "not only from an internal audit standpoint, but also in terms of what to do next." But to offer insight and advice, internal audit needs a seat at the table, she adds.
The profession prides itself on being prepared and anticipating potential scenarios, notes Seth Peterson, chief enterprise risk assurance executive and senior vice president at The First National Bank in Sioux Falls, S.D. "I don't think the administration change is any different," he says. "We need to continue to read from a variety of sources, understand the potential impacts, discuss them with management, and assess whether our organizations are prepared."