Political Risk: An Internal Auditor Perspective

What Are Geopolitical Risks?

Geopolitical risks refer to the potential for political, economic, and social instability or conflict that can impact countries, regions, or the global community. Many CEOs view these risks as a major threat to business operations. According to Verisk Maplecroft’s Political Risk Index, 99 countries have experienced a significant rise in risk over the past three years. In 2024, leadership changes in many of these nations have further reshaped the global political landscape, influencing business risks. As a result, geopolitical risk is increasingly a priority for audit leaders, with 30% of global CAEs ranking it among their top five concerns.

These risks include:

Heightened geopolitical competition and social unrest can significantly disrupt business operations and supply chains. These disruptions can arise from political instability, protests, and conflicts that affect the flow of goods and services.

Geopolitical tensions can lead to increased cyberattacks targeting critical infrastructure, financial systems, and corporate networks. These cyber threats can compromise sensitive data, disrupt operations, and cause financial losses.

Political decisions and changes in government policies can result in abrupt regulatory changes. These changes can impact industries differently, creating compliance challenges and operational disruptions. Companies must stay vigilant and adapt to new regulations to maintain compliance.

Conflicts such as the Russia-Ukraine war and tensions in the South China Sea can fuel regional instability and impact global energy and food security. These conflicts can lead to higher prices and increased inflation rates. Additionally, various nations have increased their spending on nuclear weapons, allowing them to expand their arsenals, which further escalates geopolitical risks.

Economic policies and trade conflicts between countries, such as the U.S.-China trade war, can disrupt global trade patterns and affect economic growth. Monetary policies, including interest rates, public spending, and invested infrastructure, directly influence the risks and opportunities of economic growth and stability.

Internal Audits Role and Opportunity

In today’s interconnected world, geopolitical risks pose significant challenges to business operations and supply chains. Internal audit’s role regarding these risks is to identify, assess, and monitor potential impacts of political instability, regulatory changes, and international conflicts on a company’s operations, finances, and compliance. Some of the best practices for internal auditors include:

Evaluating geopolitical risks requires analyzing factors like political instability, sanctions, currency fluctuations, trade barriers, and regional conflicts. For example, instability may disrupt supply chains, sanctions can restrict resources, and currency shifts impact trade costs. Scenario planning helps anticipate and mitigate these risks.

Regularly monitoring geopolitical developments involves tracking global events, regulatory changes, and emerging risks through news, government reports, and industry publications. This ensures compliance and timely risk management adjustments. A robust reporting system facilitates prompt communication to management for proactive decision-making.

Geopolitical risks often intersect with economic and cyber risks. Internal audit teams should account for these connections to create more comprehensive risk assessments and mitigation strategies.

The only thing that is certain, is that the geopolitical landscape is here to stay and will continue to evolve. These shifts create opportunities for agile companies that can adapt to the changing political landscape. Success requires recognizing, navigating, and capitalizing on these changes.

For internal auditors, the evolving geopolitical landscape presents significant potential. By understanding geopolitical dynamics and incorporating them into audit plans, they enhance risk mitigation and identify growth opportunities, becoming key enablers of geopolitical risk adaptation and strategic growth.

About Schneider Downs IT Risk Advisory

Schneider Downs’ team of experienced risk advisory professionals focus on collaborating with your organization to identify and effectively mitigate risks. Our goal is to understand not only the risks related to potential loss to the organization, but to drive solutions that add value to your organization and advise on opportunities to ensure minimal disruption to your business.

To learn more, visit our dedicated IT Risk Advisory page.