Auditing in times of cost constraint

Cost control makes good financial sense. And in our current era of polycrisis it’s critical to survival!

Internal auditors know the value of well-planned budgets and forecasts, analysing spend, effective time management and change control systems. And not forgetting monitoring of profit, benefits and outcomes. While cost control is a positive, cost constraint which can be driven by crisis, especially polycrisis, is challenging. Polycrisis is when multiple crisis converge together – climate, pandemic, Russia’s invasion of Ukraine, energy prices, inflation …

A cost constrained organisation is a challenge that many internal auditors are facing in 2023 as although the Bank of England expects the UK to narrowly avoid recession, the economy is still forecast to shrink.

Here are five organisational challenges that internal auditors might be experiencing.

1. Budget reductions

Organisations typically react to financial stress with wholesale budget cuts, including internal audit. This can be counter intuitive as it is a time when more assurance should be requested.

It is logical to cut costs from activities that add little value. Internal auditors therefore need to educate and advocate for the value provided by internal audit. You need to BE of value to do this successfully. Does your function have a consistent, long-standing reputation for delivering efficient, timely, risk-based, insightful assurance and advice?

2. Cost reduction

Additional to budget cuts an organisation is likely to reduce its expenses, curtailing spend on travel and subsistence and other spend deemed non-essential.

In his blog recession clouds are forming, Richard Chambers highlights five areas where organisations successfully trimmed costs as a result of the financial crisis back in 2008:

• Supplier payments
• Contract compliance/administration
• Organisational control structure/span of control
• Construction and capital projects
• Revenue assurance

An adaptable approach to the audit plan means internal audit can react constructively to uncertainty and changing conditions. Relevant and timely assurance and advisory engagements are essential.

Chambers also suggests ideas for easily tackling the low hanging fruit:

• Take overdue personnel actions on known issues (underperformers etc)
• Reduce spending on department management
• Gain control of “miscellaneous” spending
• Hold down pay increases despite the challenging environment with risks of strikes, working to rule and demotivated staff
• Re-propose rejected cost-saving ideas

This final idea is one where internal audit can often excel having experienced countless findings meetings and monitored managements completion of agreed actions.

3. Knee-jerk reactions

Decision-making is not always rational. Times of stress can increase snap decisions, misinformation and the impact of personal agendas across all levels including boardroom executives.

The advisory role of internal audit can bring objectivity to the table at steering groups and other decision forums. Stress testing and scenario planning are useful tools that internal audit can bring to the table to avoid those knee-jerk reactions. A respected, proactive chief audit executive can help ensure risk appetite is appropriately discussed and revised where necessary to mitigate against group think. Reassessing risk might be regarded as an academic exercise but it’s a useful grounding exercise and can be done quickly when time is of the essence. Internal audit can also provide assurance over the quality of information for decision-making.

4. Disruption

An organisation with reduced financial resource will face disruption. A pressing need to evaluate ongoing investment in projects and planned developments, the cost/benefit of existing risk mitigations and wastage. Stifling investment or cutting costs in the wrong place runs the risk of unintended consequences in the near and longer-term.

Advising on controls when processes are being reengineered is a practical use of internal audit resource when organisations are reacting to cost challenges. Facilitating cross-functional or end-to-end process workshops to identify cost leakage may also be valued. It’s a time for demonstrating relevance and business acumen by aligning assurance-findings-recommendations with risk appetite.

 5. Siloed ways of working

Individuals, including executives and heads of functions, can become protectionist during times of stress. Examples of possible responses may include protecting resource, false claims of success, exaggerating workload, posturing self-importance and refuting/denying support.

Internal audit can encourage collaboration such as early conversations with suppliers/partners which can help to find win-win solutions for all parties. There is also the opportunity to make temporary changes to the use of resource, particularly people but also budgets and assets. Moving people into different roles, to where there is a business need can be a positive response to maintain core processes. Internal audit should also be part of this in times of crisis or challenges organisational survival.

Creating an assurance map is also a great way for internal audit to demonstrate the value of collaboration as it mitigates against duplicate assurance and gaps. 

Against this backdrop, internal auditors need to work smarter as well as harder.