The business and risk environment has changed dramatically over the past year, with greater geopolitical instability, surging inflation, and the prospect of a global recession now added to the mix of macroeconomic risks companies are facing in 2023. Audit committees can expect their company’s financial reporting, compliance, risk and internal control environment to be put to the test by an array of challenges in the year ahead – from the convergence of economic and regulatory stressors to the tight talent market.
Drawing on insights from our interactions with audit committees and business leaders, we’ve highlighted eight issues to keep in mind as audit committees consider and carry out their 2023 agendas.
Keep an eye on macro-economic issues
We are in a challenging business environment. Rising inflation rates has become prevalent. Central banks around the world are aggressively raising rates, supply chain disruptions persist and consumer demand that was strong during the strictest of the pandemic measures may taper off. According to the latest KPMG International CEO Outlook most CEOs (86%) believe a recession will emerge over the next 12 months.
Geopolitical and social forces including developments in supply chain disruptions, insecurity, fuel scarcity, upcoming general elections, recent CBN’s monetary policy on the introduction of new naira notes and re-introduction of the cashless policy may impact organisations.
The talent flight (Japa) is intense, and employeesare demanding dramatic changes to work and theworkplace.
Stakeholders - including regulators - have demands around the environment, social issues and corporate governance. Even large companies with skilled management are experiencing difficulties because the macro factors are moving so quicklyagainst them.
Additionally, many management teams, boards and audit committees have never experienced the combination of a global recession, inflation or interest rates at these levels.
We’re moving from an era of growing revenue to maintaining profitability, which means audit committees will need to look below the top line and pay more attention to gross margins, costs, and profits. Faced with so many challenges, many management teams and boards are busy putting out fires and attempting to appease every stakeholder. But they need to step back, carefully choose the most important stakeholders to satisfy and formulate a strategy to get through this period and come out of it stronger in the longer term.
As organisations prepare for a recession, it’s important that audit committees move their discussions toward what they need to hear and not what management thinks they want to hear. Audit committees should be adamant that their management report anything that’s a concern and ask for a ‘no surprise’ approach to running the business.
Some of the actions that can be undertaken include:
Watch your cash flow
The cash flow statement is the most important statement in this environment. Management and boards must closely monitor cash flow; discussions of adjusted EBITDA need to be replaced with discussions of cash management. Cash flow is the simplest model for measuring the business and an indicator of emerging problems. A company either has cash or it doesn’t; it’s either flowing in from somewhere or out to somewhere and can signal that an organisation’s liabilities outweighs its assets.
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