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​​Presidential Election Outcome Not Likely to Lessen Risk Uncertainty

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​The 2016 U.S. presidential campaign will go down as one of the most volatile and strident in the nation's 240-year history. Despite more than a year of bruising primary races, extravagant party conventions, three nationally televised debates, October surprises, and poll, poll, polls, many political pundits say the race for the White House still could go either way.

Whatever the outcome, you can be assured global economic forces will react strongly, and that reaction will be based on the one thing that drives markets crazy — uncertainty.

Internal auditors should be contemplating the risk effects on their organizations created by this uncertainty, both on the macro-economic level and closer to home. There already is plenty of evidence that Wall Street is edgy about the election's outcome, primarily because of the wide differences in the two major-party candidates' stances on tax policies, trade, and regulation.

A September survey of 576 finance executives by The Wall Street Journal found more than 73 percent expect the next president will have a moderate to large effect on the U.S. economy. Similarly, a Deloitte survey of chief financial officers found nearly 85 percent believe their company's future performance depends "at least somewhat" on the election outcome.

From an internal audit perspective, we must determine how risks could impact our organizations. The period between the election and the Jan. 20, 2017, inauguration of the nation's 45th president offers an opportunity to identify and possibly mitigate some potential risks.

In some ways, we can borrow what we know about sound succession planning to address these risks. The first step is to start early. I suspect that America's best internal audit functions already have been looking at this issue for some time. Here are three things that should be on every organization's "to do" list on the eve of the election:

  • Identify key business challenges and opportunities. This can take on many forms, depending on your organization. For example, businesses with heavy international operations will need to consider the potential impact and risks related to trade and tax policies signaled by the incoming administration. Both candidates have spoken against the Trans-Pacific Partnership (TPP) free-trade deal, but have wildly differing views on U.S. obligations to existing trade deals.
  • Create transition contingencies and strategies. Organizations are already strategizing on steps to mitigate the impact of the change in administrations, possibly slowing down or delaying major decisions until there is a clearer picture of what to expect in the next four years. The Deloitte survey ranked improved clarity on tax policy as a top priority, followed by monetary/rate policy. Fiscal/spending policy and trade policy tied for third.
  • Closely monitor the transition. After the election dust settles, announcements on Cabinet posts, plans for the first 100 days, and other predictable actions should provide additional information to refine transition contingencies and strategies.

Similarly, risk assessments should contemplate actions by the outgoing president, a lame-duck Congress, and regulatory agencies, such as the Federal Reserve. There are any number of scenarios that play into this. A Clinton election might see Congress move on the nomination of Merrick Garland to the Supreme Court. Supporters of TPP might push to have the deal approved before the new president is sworn in. Unshackled by the glare of the election environment, the Fed might move to raise interest rates.

I can't leave the topic without addressing one other important scenario: the potential for disputed election results. I'm certain no one relishes the idea of waiting any longer than necessary to get a clearer picture of the next presidential administration. Yet, as the 2000 elections showed us, it is possible to have a national election determined by just a few thousand votes. And, even if there is a clear winner in the popular or electoral votes, it is unlikely the wounds opened by the election will heal very soon – no matter which side wins.

These scenarios would do little to ease uncertainty and would likely intensify some risks. This is why it is imperative that internal auditors either continue frank and open discussions with stakeholders on the associated risks, or immediately begin that conversation, if it hasn't already started.

As always, I look forward to your comments.

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