A decade of unprecedented loose monetary policy designed to stimulate global has been godsend for businesses. Cheap financing has allowed companies to invest in growth and reward shareholders with share buybacks, pushing stock markets to record highs. Recent years have been good to CEOs.
Meanwhile, increasingly sophisticated automation and a belief that financial risks were relatively well-understood, compared with some emerging audit areas, mean that many internal audit functions had put financial risk on a back burner. But accommodating financial conditions also have allowed risks to build. "In advanced economies, corporate debt and financial risk-taking have increased, the creditworthiness of borrowers has deteriorated, and so-called leveraged loans to highly indebted borrowers continue to be of particular concern," Tobias Adrian, financial counselor of the International Monetary Fund, told an audience in April 2019 at the launch of the most recent Global Financial Stability Report.
It is hardly surprising then that financial risk has moved back toward the top of the list of business risks cited by chief audit executives in the Risk in Focus 2020 report, a collaboration among ILA institutes in Belgium, France, Germany, Italy, the Netherlands, Spain, Sweden, and the United Kingdom and Ireland. Nearly one-third of respondents listed it in their top five risks. As news headlines highlight a plethora of concerning indicators--anti-globalist trade policy, weak manufacturing data, the inversion of the yield curve on various government bonds, decelerating global growth, and other recessionary signals--boards and audit committees are increasingly likely to seek assurances that financial risk is being mitigated effectively.
COMING FULL CIRCLE
The management of financial risk on a day-to-day level lies ultimately with the finance function. Called the treasury in many countries, the finance function manages the business' liquidity and monitors cash inflows and outflows, current and projected, to ensure sufficient funds are available to support the company's operations and excess cash is invested effectively. Although finance is fundamental to the success of the business, it's useful for internal auditors to remember that some board members may have blind spots in their knowledge and awareness of the basics, particularly when it comes to the company's balance sheet.
"Nonfinance directors tend to be less familiar with the balance sheet and the cash...