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Audit partners see economic challenges in 2023 as new risks emerge, CAQ survey shows

 Jan. 9, 2023

The latest Audit Partner Pulse report has highlighted the changing priorities of business leaders as they adapt to a global economy that is undergoing the biggest upheaval since the financial crisis.

The second edition of the biannual survey of audit partners carried out by the Center for Audit Quality (CAQ) shows that corporations are taking action to remediate the deepening impacts of rising inflation, labor shortages and supply chain disruptions. It also highlights some of the headwinds they see coming down the line, including resource scarcity and global warming and the potential effects of climate change on business operations.

“Due to the nature of their work, auditors obtain unique insights across a broad spectrum of industries,” said Julie Bell Lindsay, Chief Executive Officer, CAQ. “These surveys provide valuable, independent observations on the state of the economy and how business leaders are adjusting their strategies to mitigate any negative impacts due to ongoing inflation and the threat of a recession.”

As individuals, public company auditors have a deep understanding of the companies they work with and the sector they work in. They are the boots on the ground equipped with first-hand knowledge. As a group, their collective insight provides valuable data on today’s macro business trends.

Candid conversations with auditors are an invaluable way to shine light onto facets of the economy where the sun doesn’t usually shine, providing insight into the thoughts and motives behind the companies that play the biggest roles in shaping it.

“At EY, we focus on equipping our auditors with the industry expertise and depth to deliver high-quality audits, supported by a strong methodology and data analytics capabilities, to meet our clients’ needs in the face of today’s challenging business environment,” said Bill Strait, EY Americas Deputy Vice Chair, Assurance. “With greater visibility into their operations and a view of risks that may be around the corner, companies can be better prepared to make business decisions.”

Gloomy outlook
The latest survey results foretell a gloomy narrative for the U.S. economy in the coming months. Business leaders, who were focused on growth strategies like mergers and acquisitions (M&A) and hiring new talent in the spring, have since shifted strategies to save money, including more layoffs and investing in existing talent.

The survey found that 57% of audit partners are either pessimistic or very pessimistic about the prospects for the U.S. economy in the next 12 months, representing a 13 percentage-point jump from the spring report. Three-quarters identified inflation as the biggest economic risk to public companies, the new leading concern of business leaders, as they continue to wrestle with labor shortages and supply-chain challenges.

In response, public companies have shifted their priorities, with M&A activity declining in the six months since the last survey, coupled with spending cuts and re-evaluated budgets, according to audit partners. Instead, executives are homing in on cash flow and liquidity while lowering revenue and growth forecasts.

The continued labor squeeze prompted more companies to invest in talent already on payroll, rather than hiring new recruits. Nevertheless, the survey revealed that a fifth of companies are now considering – or have carried out – reductions in headcount, a rise of 14 percentage points.

“These results mirror what we see in the market – executives see businesses facing risks on multiple fronts, chiefly, inflation, labor shortages and supply chain issues,” said Bill Strait. “As boards and executives look ahead to 2023, it will be especially important that they have the right controls in place and that their operating plans are designed for resiliency.”

Emerging risks are playing more heavily on the minds of business leaders, too. Resource scarcity, emerging technologies like blockchain and climate change all feature prominently in their list of top economic risks.

Although audit partners remain pessimistic, a higher number reported seeing an end in sight for the current inflationary cycle, with 28% forecasting price rises to slow within six-to12 months, compared with 22% in the spring survey.

Bird’s-eye view
The Audit Partner Pulse report is based on a survey of hundreds of audit partners at top audit firms in the U.S. Collectively these firms audit U.S.-listed companies with almost $50 trillion in market capitalization.

Survey participants work with small-cap companies with a valuation of less than $700 million to large-cap companies valued at more than $50 billion. The industries these audit partners serve – such as mining and manufacturing, consumer products and retail, health care, technology, financial services and oil and gas – represent virtually every industry sector and geography of the U.S. economy.

“The results of these surveys always provide us with a bird’s-eye view of the current state of our economy that only public company auditors can offer,” said Bell Lindsay. “While we weren’t surprised to see that business leaders are adjusting their strategies, the ways in which they are adjusting, including scaling back on mergers and acquisitions and pausing new hires, stood out to us and suggest that cost savings is key. We look forward to seeing if these trends will continue in our spring 2023 survey.”

[CFO Dive]