Chief Internal Auditor Conference 2017 Building Trust. Making an Impact. 6 January 2017
Welcome Peter Astley EMEA Internal Audit Lead Risk Advisory 2
Deloitte s Global Chief Audit Executive Survey Evolution or irrelevance? Responses from more than 1,200 Chief Audit Executives (CAEs) spanning over 29 countries and a wide range of industries. Key findings from the survey: Internal Audit needs more impact and influence. CAEs recognize the need for change. Stable Internal Audit budgets may present challenges. Gaps in skills must be addressed. Use of alternative resourcing models will expand. Analytics presents major opportunities. Innovation is important too. Dynamic reporting is poised to increase. Reviews of strategic planning and risk management will increase. Advisory services will expand. 3
Internal Audit needs more impact and influence A minority of CAEs believe they have the ability to exert influence over the board of directors, executive team, and other key personnel and make a significant impact within their organisations. Some even believe they have little to no influence or impact. Yet CAEs also believe, correctly, that it will be important to have both in the years ahead. Current impact & influence of Internal Audit 28% 55% 16% 1% Strong Some Little to none Not sure Importance of having impact & influence over the next 3 to 5 years 64% 31% 3% 2% Very important Somewhat important Not important Not sure 4
Gaps in skills must be addressed Internal Audit needs to strengthen its skillset if it is to increase its impact and influence within the organisation. CAEs are clearly aware of this: Relatively few are fully satisfied that their groups have the skills and expertise to deliver on stakeholders expectations. Current satisfaction with Internal Audit s capabilities?? 41% 32% 25% 2% Satisfied Somewhat satisfied Not satisfied Not sure 5
Innovation is important too To make changes in its approaches and activities, Internal Audit should embrace an innovative mind-set, as well as actual innovations. However, the function is not known for active innovation. Key innovative developments expected to impact Internal Audit: No innovation expected Transformation digital Increasing size of the talent pool Shared IA service Strengthening the bench and succession planning Ability to audit news domains (eg. Quality of Services) Cognitive technologies Collaborative assurance provision in partnership with management Data analytics Culture more specialism Strategic auditing and business impact Predictive analytics Risk anticipation Review of Agile Programs New talent models (describe) Digitization Improving the position of Internal Audit so that it is recognized as a developer of risk management talents for the entire organization Predictive analytics Synergy and integration Expanding assurance activities to HSEC space Strategic co-sourcing Deep subject matter specialists Visualisation 6
Deloitte s Global Chief Audit Executive Survey Evolution or irrelevance? 7
Global Economic Outlook 2017 Ian Stewart Chief Economist 8
2017: Key questions Will global growth accelerate/decelerate? How great are the risks to the global economy? Are inflation and interest rates heading up? Is public-sector austerity over in advanced economies? Where next for globalisation? Economics & Markets, Deloitte LLP, London 9
Global growth outlook Real GDP growth (% YoY)* Pre-Crisis Post-Crisis 2016 2017 2018 World 4.2 3.3 3.1 3.4 3.6 Advanced 2.8 1.0 1.6 1.8 1.8 Emerging 5.9 5.2 4.2 4.6 4.8 *Pre-crisis = 1998-2007, Post-crisis = 2008-15, Forecasts for 2016-18 Source: IMF World Economic Outlook, October 2016 10
Accelerating vs. decelerating economies Change in forecast GDP growth rates between 2016-17* Accelerating Little/No change Decelerating Brazil Japan Germany Nigeria France China Russia India United Kingdom Ethiopia Belgium Spain United States Netherlands Ireland *Selected economies Source: IMF World Economic Outlook, October 2016 11
Corporates awash in cash Economics & Markets Team 12
The future doesn t always turn out as exactly we expect Three big risks in 2016 Risks Brexit vote Near term impact vs. expectations More muted Trump election Positive response from markets Renzi s referendum More muted Economics & Markets, Deloitte LLP, London 13
Leading indicators look positive 1 Economics & Markets, Deloitte LLP, London 14
Leading indicators look positive 2 Economics & Markets, Deloitte LLP, London 15
Trump effect: equities rally, bonds sell off Economics & Markets Team 16
Trump has set ambitious goals for growth US real GDP growth (% YoY) 6 5 1995-99 the previous 4.0% growth period Mr Trump 15 th September 2016: I believe it s time to establish a national goal of reaching 4.0% national growth and my great economists don t want me to say this, but I think we can do better than that. 4 Trump 4.0% target 3 L-term average 2.6% 2 1 Forecasts 0-1 -2-3 -4 Source: IMF World Economic Outlook, October 2016 17
Market view: Trump upsides > Trump risks Markets focussed on Trump upside: S&P 500 up 6.5%, Treasuries down 4.9% and US dollar up 5.2% * Market data as of 5 th January 2017 Political risks The good news Potentially pro-growth policies: Fiscal easing Deregulation Tax cuts Risks to the market view: Protectionism Congress stalling policy Geopolitics Chinese retaliation Russian aggression in E. Europe Iran, North Korea Negative effect on EMs Higher rates 18
US fiscal policy: more borrowing, more spending? Economics & Markets Team, Deloitte LLP, London, 2016 19
Is this the end of austerity? Governments in advanced economies pull back on budget cuts, invest more 20
US economic and foreign policy under Trump Possible policy actions and flashpoints Policy area Domestic economy Trade/Protectionism/China Foreign policy towards Russia A more accommodative stance? Possible policy action/flashpoints Trump fiscal stimulus to boost growth Tax cuts for corporates Rebound after lousy 2016? Deem China currency manipulator Start diplomatic relations with Taiwan Impose tariffs on imports from China Allow Russia to gain some influence over geopolitics in the middle east and central Asia Economics & Markets, Deloitte LLP, London 21
Globalisation losing steam Economics & Markets Team, Deloitte LLP, London, 2016 22
Euro area: recovering, at different rates Economics & Markets, Deloitte LLP, London 23
Rise of insurgent parties in Europe Deloitte Economics & Markets Team 24
The 2017 elections to watch for political risk Date Election Current Odds* Risk 15 th March Dutch General Election Geert Wilders 2/1 (33%) Wilders has called for a Dutch referendum on leaving the EU, closing the country s borders and de- Islamizing the West. April - May French Presidential Election Marine Le Pen 5/2 (29%) Front National supports Le Pen s calls to close borders, deport non-french citizens and exit the EU. May 7 th & 14th German Regional Elections n/a An important indicator of momentum ahead of Parliamentary elections; between Merkel s CDU, the rival Social Democrats and the far-right AfD. September German Parliamentary Elections Next Chancellor to be Angela Merkel 8/11 (58%) CDU and Social Democrats may need support of minor parties, such as the AfD to form a grand coalition. *Odds from Ladbrokes, 5 th January 2017 25
Where is the EU heading European Federation Ever closer union achieved: Federal Europe Crisis drives deeper political and economic integration European Union Alliance Land No longer proceeding as one: multi/bilateral relationships between like-minded member states Nation- State Land EU breakup Back a pre-eu Europe of nation states Economics & Markets, Deloitte LLP, London 26
China Transitioning to from export, invest-led growth to consumption-led growth Ageing population: 15% fewer workers by 2040 Credit: total outstanding debt at 236% of GDP Asset prices: house prices doubled since 2010 Costs: Chinese wages up 215% since 2008 Xi Jinping: a more central control Economics & Markets Research, Deloitte LLP, London 27 27
Other selected emerging markets Forecast GDP growth (%YoY) for 2017 and key economic drivers 2017 forecast GDP growth (%YoY) Key growth drivers 2017 India Ethiopia Ghana Bangladesh Philippines Vietnam China Kenya Rwanda Uganda Thailand Turkey Mexico Russia South Africa Nigeria Brazil Zimbabwe -2.5 0.8 0.6 0.5 1.1 2.3 3.3 3.0 7.6 7.5 7.4 6.9 6.7 6.2 6.2 6.1 6.0 5.5 Consumption, trade Population, Gvt. Reforms Trade, investment Investment, trade, Gvt. Investment, Gvt. Trade, China, investment Gvt., consumption, trade Investment, trade, tourism Investment, trade Gvt., investment Investment, trade, tourism Gvt., tourism Trade, tourism Oil, consumption Consumption, investment Oil, Gvt. Commodities, trade Gvt. -4.0-2.0 0.0 2.0 4.0 6.0 8.0 10.0 Source: IMF WEO, October 2016 & EIU Country Profiles 2017 28
Brexit effects Factors that will influence UK growth Positives Negatives Weak pound boost to manufacturing Easier fiscal policy Loose monetary policy Pro-business measures by the government Weak pound raises inflation lowering consumer disposable incomes High levels of economic and policy uncertainty Corporates respond with cost control and squeeze on capex Economics & Markets, Deloitte LLP, London 29
UK: business optimism up, risk appetite restrained Business investment growth: Actual & forecast 2016 2017 1.1% -0.3% Economics & Markets, Deloitte LLP, London 30
Weaker = rising inflation = income squeeze Forecast for 2017 Economics & Markets, Deloitte LLP, London 31
Another way of thinking about the long-term impact of Brexit Consensus forecasts for real GDP growth (%YoY), 2020-26 and 2016-30 for post- Brexit UK 2020-26 US 2.2 UK post-brexit 2.2 to 1.8 Canada 1.9 France 1.3 Germany 1.2 Italy 1.2 Japan 0.8 Source: Consensus Economics, various independent forecasts 32
Long-term growth why the pessimism? Consensus GDP growth forecasts, rate 6-10 years ahead (% YoY) 3.5 Pre-dot-com bubble euphoria Long boom Post-financialcrisis normal 3.0 2.5 2.0 US; 2.2% UK; 2.1% 1.5 1.0 0.5 1996 2001 2007 2014 2016 Germany; 1.2% Japan; 0.8% 33
Creative destruction drives prosperity Economics & Markets, Deloitte LLP, London 34
Working long hours doesn t make you productive or rich GDP per head Hours worked per year Economics & Markets, Deloitte LLP, London 35
For a fresh view on economics subscribe to the Deloitte Monday Briefing just Google us or visit: blogs.deloitte.co.uk/mondaybriefing/ Economics & Markets, Deloitte LLP, London 36 36
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