On the Frontlines: Geopolitical Disruption
Blogs David O'Regan, CIA, LittD May 11, 2022
Geopolitical considerations have always been with us. But two incompatible global trends have exacerbated risks in recent years — they clash and collide like active tectonic plates in the planet's lithosphere, throwing up challenges ranging from trade tensions to war. One of these trends, globalism, promotes the international movement of trade, capital, manufacturing, services, currencies, and people. Advocates of globalism point to its scope for opportunity, at both the individual and institutional levels, and its facilitation of cost-cutting.
The other trend is nationalism. Globalism is opposed by nationalists, who aim (or claim) to protect local communities and cultures. The globalists accuse nationalists of nativism and cultural prejudice. The nationalists accuse globalists of exploiting foreign labor, as well as domestically weakening social and cultural cohesion by sacrificing individuals and communities in a continuous quest for the lowest costs.
The political passions arising from this conflict of visions are powerful and sometimes extreme. There are two main reasons for this. First, the two visions appear to be irreconcilable. Second, the stakes are high, economically and socially. The unprecedented acrimony surrounding Brexit (the United Kingdom's independence from the European Union), the Trump movement in the United States, and the Le Pen movement in France are all local instances of the worldwide clash between globalization and nationalism.
Political Clashes Create Further Disruption
The risks arising from this clash of political philosophy intensify the risks already inherent in geopolitics. At the extreme end of the spectrum, there is of course the catastrophe of war. Yet lesser risks can also have calamitous consequences for organizations. We may take cybercrime as an example. Cyberattacks are a feature of modern warfare and terrorism, but they can also derive from economic and political rivalries. On the eve of the Brexit referendum in 2016, the British government's voter registration website suffered a cyberattack which crashed the website; the registration period had to be extended by a day.
Cybercrime has become almost routine, to the extent that we should guard against becoming desensitized to the risks. Phishing attacks, for example, which use deceptive messages and emails to acquire sensitive information, are so common that there is a danger of us becoming nonchalant about them. But they can have devastating consequences.
The economic and logistical dislocation arising from geopolitical risks include supply chain disruption, inflation, fluctuations in currency exchange rates, tariffs and other protectionist measures, and sanctions against individuals, organizations, and countries. These measures can close down markets on the supply side and in the revenue cycle, which can threaten an organization's survival.
The Organization's Reputation at Stake
More broadly, geopolitical discourse can heighten reputational risks. For example, the disclosure of the excesses of global capitalism in the form of child labor and other exploitative working practices in outsourced manufacturing can damage organizations' reputations. We have seen how the visibility given to impoverished children in South Asia hand-stitching soccer balls in appalling conditions embarrassed large sportswear manufacturers into revamping the integrity of their supply chains.
The Challenge to Internal Auditors
As internal auditors address geopolitical risks through the conduct of audit assignments, and in their advisory capacity, there are three important considerations to bear in mind. These include: (1) the interrelations between risks, (2) the velocity with which risks and their impact can crystallize, and (3) the emergence of new areas of risk.
(1) Few geopolitical risks are standalone items, and it is demanding to achieve a holistic overview of interconnected opportunities and threats. For example, a corporation that unintentionally violates sanctions can suffer punitive financial penalties, and reputational damage can lead to the loss of customers and suppliers. Another example: Supply chain disruption can lead to inflationary pressures as the timely availability of raw materials falls short of demand, and inflation in turn can lead to increases in bank lending rates, making debt more expensive to service. This can be catastrophic for highly leveraged corporations.
(2) The rapidity of risk "movement" is a major challenge to organizations. Some risks can be calmly assessed over long-term horizons. Other, more volatile risks can suddenly overwhelm an unsuspecting organization. Flexible risk mitigation practices are essential to confront such dangers.
(3) New geopolitical risks in the areas of ethics and accountability, sustainability and environmental issues, and (in the broadest sense) power dynamics and matters of equity are emerging. Some of these topics are "soft" in the sense of defying neat quantification and involving elusive variables.
Internal auditors will need to be on their toes, so to speak, to avoid being caught off-guard by these considerations. In all likelihood, geopolitical disruption is likely to become more complex and challenging. Although it has become something of a cliché, the acronym VUCA (short for volatility, uncertainty, complexity, and ambiguity) fits perfectly here. The internal auditor of tomorrow will need to be well-versed in VUCA concepts.