In the second quarter of 2022, the US met the criteria for an economic recession with two consecutive quarters of negative growth. A recession had been predicted for a while, given the disruption the economy has experienced in recent years. Recessions come and go as part of the regular economic cycles — but internal audit must position itself to continue the critical work we do within our organizations. Too often, internal audit is viewed as a cost center that could be reduced or eliminated, especially in cases where the audit team has not made a concerted effort to market the value it creates.
While a recession brings challenges for auditors and the organizations they serve, an economic downturn may also be an opportunity to leverage our risk and control skill set and become a change agent. As Richard Chambers recently reflected, “As past recessions approached, I strongly urged internal audit to turn its attention to demonstrating how it could help organizations navigate the looming economic downturn.” Here, I reflect on the last US recession back in 2008 and explore three lessons we can glean from past experiences to make internal auditors more recession-proof.
Lesson 1: Demonstrate Value to Avoid Staffing Reductions
In 2009, The Institute of Internal Auditors (IIA) surveyed members and found that 23% of Internal Audit departments had experienced staff reductions. The reductions were less in large companies, most likely because these saw “internal audit functions as a source of insight and assurance,” according to Richard Chambers, then President and CEO of The IIA.
Today, we should use this opportunity to demonstrate and market our value to our organizations so that others know exactly what we bring to the table. The most direct way to do so is by proactively educating management on recession risks and providing guidance on potential control environment gaps. We can do so during risk assessment interviews and closing meetings, but you can also leverage lunch and learn sessions or by offering internal webinars to facilitate the conversation while elevating the internal audit role within the broader organization.
Another opportunity to demonstrate our value is by proactively seeking out departments that need extra help. During any time with reduced revenues, companies will evaluate which departments need to increase or decrease head counts. Your own team could be in a good position to loan team members through a temporary rotation to support other areas of the business that are impacted by a reduction in workforce. By doing this, your team member gets to know the business better, add new skills, and the department can avoid losing good auditors. Auditors on rotation are also is a wonderful position to share best practices in internal control outside of an audit setting, which has the added benefit of creating some goodwill with your business partners.
Lesson 2: Update the Audit Plan for Recession Risks
In line with showing the value of our team, audit leaders should update the risk assessment and audit plan to include recession-related risks, especially fraud. An increase in financial pressure on the organization can lead managers and staff to look for ways to make the financial situation look better than reality. Another fraud driver comes from staff reductions. When control owners are let go, control processes can break down, and the opportunity to commit fraud increases. The risk is even higher now when the recession is coming at a time of historic inflation that is putting additional pressure on employees. Internal auditors are in the perfect position to educate management on recession risks and to increase testing and monitoring on the topic.
Pressure from a recession impacts all layers of an organization. Recession risks will be top of mind for senior management and the board, so make sure you are engaging in open communication with them to understand their most urgent concerns. The risks they bring up are likely to be different from managers in different parts of the organization. Understanding the variety of concerns can lead to unique audits that add value across all levels of management.
You can also take this opportunity to suggest specific audits. For example, auditing your organization’s accounts payable practices can uncover opportunities to take advantage of early payment discounts or to improve cash flows by reconciling actual payment terms to terms agreed upon in vendor contracts. Auditing payables, especially with data analytics tools, can lead to quick wins for the business that have direct financial impact.
Lesson 3: Market Your Skills and Credentials
The next lesson we can learn from the last recession is to market ourselves as risk and control subject matter experts. Some departments will be forced to make cuts as part of organization-wide staff reductions. As individuals, we can set ourselves apart by demonstrating our personal value by highlighting the skills and credentials that make us unique. Look for opportunities to highlight your risk and control expertise and use new skills like data analytics, auditing cybersecurity, or skills you picked up recently.
Finally, if you are not currently certified, start studying — there are over 20 audit certifications that can help you stand out. If you are considering getting a new certification, there are many factors to consider, but two factors are critical during a recession – will this certification add value to the department, and will it add value to your career as a professional internal auditor. If the answer to both is yes, then it is a certification you could consider worth the time and effort.
Thriving in a Recession
As subject matter experts in risk and control, internal auditors serve a critical function during a recession. We are trusted advisors to our organization’s leaders, and they need our insights to weather the uncertainty of a recession. The beginning of a recession period presents an opportunity to expand our influence within our organizations by offering education broadly to our companies on recession risks, auditing areas of greatest concern, and using our skills to our advantage. By applying the lessons we learned from the past and confidently demonstrating our value, we can thrive — not just survive — during a recession.