Risk Trends in 2024 and Beyond: Economic and Financial Adversity

How has the economy impacted your business model?

The Canadian economy remains in uncertain waters through 2023 as rising interest rates have struggled to cool stubbornly high inflation. While consumer spending has so far been resilient, there are growing fears the rising costs of food, fuel, and housing will push more households to the financial margins.

Businesses are also feeling the side effects of economic turbulence, with many choosing to hold fast until they have a better idea of whether a recession is coming and/or how severe it might be.

Capital management is a particular concern. Organizations are understandably reticent to hire, take on debt, or invest in infrastructure projects for fear of limiting cash flow if the economy contracts. On the other end, a tight labour market is keeping up the pressure to retain key employees, which includes demands to help them keep up with the rising cost of living.

Just as there are consequences to making the wrong decisions (e.g., expanding into new markets right before a downturn, downsizing just before the economy improves), doing nothing is not a better option.

Instead, organizations should be using this opportunity to pressure test business models to ensure they are resilient to any economic scenario that may arise in 2024. Where are the inefficiencies? What areas are underperforming?

How will trends, technologies, and consumer behaviours shift in the next three to five years? This process can help to overcome decision-making paralysis by identifying inefficiencies, opportunities, and core risk areas.

Investing in the right areas now will not only make the business more resilient to a potential recession but also put it in a position to thrive when the economy starts growing again.

Key questions to ask

• How has the economy and decreased disposable income impacted your business model?
• Are there early signs and risk trends that you should be preparing for?
• Is your business model resilient enough to withstand ongoing economic challenges?
• Are you monitoring specific success and risk metrics?
• How are you managing your cash flow to ensure adequate funds to cover off obligations?

Red Flags

• Shrinking margins
• Low cash flow
• Decreasing customer demand

Internal Audit Project Opportunities

Financial Risk Management Audit

This audit assesses the organization's financial risk exposure, including liquidity risk, market risk, credit risk, and operational risk. It evaluates risk management practices to identify vulnerabilities during adverse economic conditions.

Business Continuity and Disaster Recovery Audit

This audit examines the organization's plans and preparedness to continue critical operations during economic and financial crises, ensuring that business continuity and disaster recovery plans are robust.

Stress Testing Audit

This audit reviews the organization's stress testing methodologies and scenarios to assess how the company's financial position would be affected under adverse economic conditions.

Expense Management Audit

This audit evaluates the organization's expense management practices to identify opportunities for cost reduction and efficiency improvements during economic challenges.

Financial Reporting Integrity Audit

This audit ensures the accuracy and integrity of financial reporting during economic adversity, helping to maintain transparency and confidence in the organization's financial statements.

Debt and Credit Management Audit

This audit assesses the organization's debt and credit management practices to identify potential risks related to debt levels and credit exposures during economic downturns.

Revenue Recognition Audit

This audit reviews the organization's revenue recognition policies and practices to ensure they align with accounting standards and accurately reflect revenue during economic challenges.

Supply Chain and Vendor Risk Audit

This audit examines the organization's supply chain and vendor relationships to identify potential risks and vulnerabilities related to disruptions in the supply chain.

Working Capital Management Audit

This audit evaluates the organization's working capital management practices, including inventory management, accounts receivable, and accounts payable, to optimize liquidity during economic adversity.

Investment Management Audit

This audit reviews the organization's investment portfolio and management practices to assess risks and potential impacts on investment values during economic downturns.

Cost of Capital Audit

This audit assesses the organization's cost of capital and capital structure to ensure it remains sustainable during economic challenges.

Credit Underwriting and Monitoring Audit

For financial institutions, this audit examines credit underwriting and monitoring processes to identify potential credit risks and assess the quality of the loan portfolio.

Credit Loss Provisioning Audit

This audit reviews the organization's credit loss provisioning practices to ensure they are in line with regulatory requirements and reflect the economic conditions accurately.

Regulatory Compliance Audit

This broader audit assesses the organization's compliance with relevant financial and economic regulations, ensuring the company meets its obligations during challenging economic times.