A highly valued internal audit function, providing insightful assurance and advice, understands its organisation and the environment in which it operates. Effective audit leaders are more than skilled professionals in governance, risk management, and internal control; they are also consultants, analysts and economists.
Having a basic understanding of economics is intrinsic to identifying and managing risk; never more so than in challenging times. Even before COVID-19 became a stark reality, the global economy was slowing down in 2019. On average the business/credit cycle of prosperity through to recession lasts about seven years; the financial crisis was 2008.
Macroeconomics is the study of the behaviour of the economy as a whole. This is different from microeconomics, which concentrates more on individuals and how they make economic decisions. While microeconomics looks at single factors that affect individual decisions, macroeconomics studies general economic factors. It is about the characteristics, trends or conditions that apply across all sectors rather than specific segments.
This short piece of thought leadership aims to demystify the complex macroeconomic levers that decision-makers contend with in the boardroom.
Economic cycles and events
The start point for audit leaders is listening to a variety of commentators and reading quality journalism to recognise where a country is in the generic economic cycle and what stage is most likely to be next. Major events such as the financial crisis and coronavirus pandemic disrupt normal cycles; often pushing global economies rapidly into recession. Recoveries can be U, V or L shaped depending on the nature of the recession; some economists are predicting a quick V shape post-coronavirus, others a longer U shape. You may also be interested in our thought leadership on the role of internal audit at the start of a recession.
There are different pressures on the board during each phase,…