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ComplianceÁrea FinanceiraTax & Accountingjunho 29, 2022

5 inflation risks internal auditors need to know about

From the gas pump to the grocery store, inflation is on everyone’s minds these days. While the economics behind inflation can be debated, the result is the same and many organizations face increased risk.

Global senior executives say inflation is a top-five risk, according to a 2022 Gartner survey. Likewise, for both short term (2022) and long term (2031) projections, the risk that “economic conditions, including inflationary pressures, constrain growth opportunities” ranks in the top five, according to a global survey of those in the C-Suite or on boards by Protiviti and NC State University.

But that doesn’t mean you have to just wait and see what happens. Instead, internal audit leaders can work with departments like governance, risk and compliance (GRC), and finance to ensure their organizations are proactively planning and adapting to inflation risk in its many forms.

Some of the top risks related to inflation that internal audit teams can address include:

Budget risk

Rising prices decrease your budget and cause you to exceed spend expectations. Even though your organization might benefit from economic growth that helps top-line revenue, that might not offset the loss of purchasing power in some cases. It’s good practice for internal audit teams to collaborate with finance departments to ensure that proper adjustments are being made both now and going forward based on expected inflation.

Budgets should be re-evaluated more frequently to account for changing vendor costs. Internal controls may also need to be adjusted, so that vendor quotes go through a sufficient review process. Depending on cash flow, you may need to take steps that pause certain business activities, rather than letting employees have as much discretionary spend as they may have been used to in the past.

Interest rate risk

To combat higher inflation, the Federal Reserve has been adjusting monetary policy. While some of the more direct changes affect the rates at which financial institutions lend to each other, central bank rate increases can also correlate with higher interest rates across other types of loans and fixed income.

Companies that previously took out variable-rate business loans or adjustable-rate mortgages on real estate could now (or soon) be facing higher interest rates, thereby making monthly payments more expensive. Corporate bonds could also yield higher rates, meaning companies that issue bonds effectively must pay more to borrow money.

Similarly, internal audit teams may need to work with finance departments to ensure that interest rate changes are being accounted for. Not only do you want to avoid going over budget, but other areas, like corporate investments, might also require further review.

Supply chain risk

In addition to affecting vendor costs, inflationary pressure can also create supply chain risk in the sense that supply chains may be less stable than they’ve been in the past. From suppliers going out of business due to the economic environment, to your organization deciding to switch vendors to stay within budget, there are many ways that your supply chain can change.

Internal audit teams should provide assurance that areas like vendor onboarding and vendor review processes are up to par. The last thing you want is for supply chain changes to result in additional risks - for example, a cybersecurity risk that resulted from a static review process.

Customer satisfaction/retention risk

Inflation risk can also extend to your customers. Whether you’re B2B or B2C, your customers are likely facing their own cost pressures due to this trend of rising prices. Those dealing with their own budget issues might be inclined to turn to lower-cost competitors. Or, if you’ve raised your prices to pass on higher costs to customers, you could be risking their satisfaction, which may eventually lead to a disruption in customer loyalty and overall lost business.

With these inflation risks in mind, internal auditors should help facilitate collaboration between teams such as finance and sales or marketing, and then communicate key insights to senior management and the board. That way, if the consensus is to raise prices, you can also devise customer loyalty strategies, like a new rewards program, to help ease that transition and ensure customer retention.

Employee satisfaction/retention risk

Customers aren’t the only ones affected by inflation. Your employees are likely hurting too. Salaries are not increasing as much, or as quickly, as inflation, and their dollar is being stretched to the limit. As a result, employees may be forced to look for employment elsewhere if they feel that their needs aren’t addressed.

Therefore, it’s imperative for internal audit teams to facilitate collaboration with HR and incorporate these types of risks into audit reports. If senior management can see compelling data from employee satisfaction surveys that indicate an increase in pay would go a long way toward boosting morale, then they might decide to allocate more budget to employee wages, directly impacting unnecessary turnover.

Using technology to manage inflation risk

As these examples show, inflation risk affects many areas of an organization. Not only can it affect near-term financial performance, but it can also extend into long-term areas like customer and employee retention.

Internal audit teams might not be able to solve all these problems directly, but they can provide oversight and collaborate for combined assurance with other departments to better account for these risks.

But keeping track of everything on a manual basis isn’t the way to go. Using technology like risk-based audit software can make inflation risk easier to manage.

TeamMate+ software uses data exchange APIs so that internal audit teams can access real-time data from other departments and systems. You can also use TeamMate Analytics to test large data sets, so you don’t have to rely on random sampling amidst changes to vendor lists and budgets.

Inflation and other types of economic pressures are not going away anytime soon, but taking these steps and using these specialized tools, internal auditors can reduce inflation risk.

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