The coronavirus outbreak is quickly becoming one of the greatest global risks we have seen in a decade. Its rapid emergence and maturation into an imminent health and economic threat is disrupting businesses and markets, slowing productivity, and generating huge public-health expenditures. The possibility that it could usher in a global recession is real.
Yet, the most astounding aspect of this dynamic global threat is that it was not on anyone's radar three months ago.
While the current outbreak of the COVID-19 virus was unexpected, strains of coronavirus have caused epidemics twice this century: SARS in 2003 and MERS in 2012. But in those cases, the number of infections was significantly smaller, never exceeding 10,000 confirmed cases. In contrast, the number of confirmed COVID-19 cases topped 100,000 last week, having spread to about 90 countries. While the outbreak had not been labeled a pandemic — a disease that has spread globally — by publication of this blog post, it certainly is working its way toward that terrifying threshold.
I have written extensively about internal auditors and organizations preparing to operate at the speed of risk. COVID-19 is a significant test of that concept.
Organizations are being pressed to make decisions affecting not only their business, but the health and safety of their employees. According to a survey by Willis Towers Watson in mid-February, most of the 158 respondents said they are taking specific action to protect employees. This includes 47% who said they would cancel attendance at planned conferences for North American employees in certain countries.
PwC's 2019 Annual Corporate Directors Survey reflects the unforeseen nature of the outbreak. The report has no mention of any health-related risks. My guess is that there was not even a remote contemplation of a COVID-type epidemic when PwC did its survey.
To be clear, I am not being critical of the PwC report in any way. It provides significant insights into how boards view risks. Indeed, one part of the survey focused specifically on crisis management and business continuity. However, the focus of the question was on crisis management oversight relating to cyberattacks, natural disasters, and financial fraud allegations.
The positive news is that the survey found strong board interest on the issue. From the report:
"Almost all directors (96%) say they have discussed management's plan to respond to a major crisis, a 12 point increase since 2018. Directors are also increasingly engaging in what have traditionally been less common activities, including creating a written escalation policy and participating in tabletop exercises. These efforts can provide directors with some of the concrete tools they would need in a crisis situation."
This finding paints a picture of organizations that are increasingly prepared for managing crises. So, why has the impact of coronavirus been so dramatic? The answer is the speed of risk.
I added the "The Speed of Risk" to the second edition of my first book, Lessons Learned on the Audit Trail, to reflect the dramatic changes in how threats emerge and mature in the modern risk landscape, and to urge internal audit practitioners to let go of rigid annual audit plans. Indeed, chief audit executives who remain tied to an annual plan are doing a disservice to their organizations. In the modern risk landscape, organizations and their audit plans must be flexible and agile enough to respond to dynamic threats that can emerge overnight.
In the five years between the first and second editions of the book, risk events that trigger crisis management responses have typically revolved around cybersecurity breaches, corporate scandal induced by toxic cultures, and natural disasters.
However, the new awareness of and commitment to nimble risk management has never been tested by a threat that has so many facets. In less than 100 days since its emergence in China's Wuhan province, COVID-19 has affected businesses as diverse as Princess Cruise Lines and Apple Inc. Beyond the obvious impact on health and safety, it has become a direct threat to cruise lines, airlines, hotels, conferences, catering, and tourism. The U.S. State Department even went so far as to tell U.S. citizens, particularly those with underlying health conditions, to avoid taking a cruise. And it is so straining the global supply of personal protective equipment, as a result of increased demand and panic buying, that the World Health Organization warned last week that health-care workers are increasingly endangered.
A significant impact also may be on global financial markets, which have seen sizable declines fed by uncertainty about the medical community's ability to contain COVID-19's rapid spread. Prolonged uncertainty about containing the outbreak, and the disease's ultimate impact on productivity and business transactions, will determine whether this remains a medical crisis or evolves into a global economic one, as well.
All organizations and internal auditors should prepare for the latter possibility by reviewing their budgets, updating and testing crisis management plans, and considering a reasoned reordering of their audit plans.
As always, I look forward to your comments.