CFOs are often tempted to cut back on internal audit and compliance during economic downturns, but perceived short-term savings can carry long-term consequences:
In this environment, every line item is under scrutiny, with intense pressure to reduce expenses. Many CFOs are being asked to walk what seems like a tightrope, cutting costs while regulators, boards and investors simultaneously demand stronger insight and controls. With economic uncertainty rising, CFOs are facing margin pressure from rising costs, shrinking consumer spending, supply chain volatility and interest rate concerns.
Because functions perceived as non-revenue generating are often the first on the chopping block, internal audit and compliance departments may be in the crosshairs. However, internal audit isn’t a luxury that can be scaled back when times get tough. It is a critical safeguard that becomes even more essential when resources are constrained and pressure grows.
Cutting internal audit and compliance staff doesn’t save costs; it magnifies risk. Companies that maintain oversight and controls during economic downturns are the ones that emerge stronger when conditions improve.
Many industries are in a period of significant uncertainty and shrinking margins. Over the past year, tariff concerns and instability have led to supply chain disruptions and increasing pricing volatility. Labor disputes have threatened to impede operations, while interest rates are a growing concern for companies carrying debt or planning expansions. Meanwhile, costs continue to rise, and economic data from Fall 2025 indicates consumer confidence is on the decline.
Across much of the economy, the focus has shifted from expansion to preservation. IPOs have been put on pause and CFOs across industries are looking to internal departments to determine what they can cut and which functions are essential.
Internal audit and compliance departments are often early targets for cutbacks because they are seen as necessary evils rather than value drivers. Unlike product development or sales teams, audit and compliance teams don’t directly generate revenue. And when leadership asks how the department contributes to the bottom line, there isn’t an immediate answer in dollars.
Some CFOs also believe they have adequate visibility by reviewing financial statements. Meanwhile, if a high-performing audit team has solid controls and uncovers few problems, the CFO may question if the department can perform just as well with fewer auditors.
Cutbacks in audit and compliance functions typically come in the form of headcount reductions. However, fewer auditors on staff typically reduces audit coverage and frequency. Risk areas that are typically reviewed monthly may be scaled back to every few months, while annual reviews may slip to 18 months. Audit requirements remain the same, but the team has fewer resources to cover them.
Chief audit executives are also facing pressure to maintain the same level of assurance with fewer staff and resources. This can have immediate operational effects, leading to difficult decisions about what to prioritize and what to defer. For example, reconciliations that are supposed to occur monthly may be skipped, while reviews of procurement processes or disbursements may receive less scrutiny.
When making cutbacks in audit and compliance, CFOs often convince themselves that financial analysis offers sufficient oversight. They may see fluctuations and develop explanations for them when the numbers appear to tell a reasonable story.
However, they’re only seeing part of the picture. Financials alone don’t always show the fraud risk lurking beneath, and CFOs may rationalize trends without understanding what is truly driving them.
Economic downturns can change people’s behaviors in predictable ways and open the door to fraud. As financial pressures mount, otherwise honest individuals can be tempted to cut corners, engage in small fraudulent acts, or make decisions that seem justifiable at the time. When people are pushed into tight financial corners, ethics can become negotiable.
When the husband of a bank’s head teller was injured in a car accident during an economic downturn, the teller suddenly became the sole income provider. In an act of desperation, this teller took $500 from the bank’s ATM to make a car payment, promising herself she’d pay it back the next month.
The head teller was solely responsible for the daily balancing of the ATM, which included replenishing cash. In this case, there was a lack of segregation of duties and dual control over ATM balancing, which meant it was easy for the teller to continue to take the money.
Due to the lack of segregation of duties and dual control she was able to take money without being detected for an extended period of time. It took some time before the missing money was discovered. The head teller had her employment terminated and agreed to repay the total amount, plus interest.
Cutting back on compliance can also lead to lawsuits, regulatory penalties and reputational damage. In many cases, the potential penalties and losses can far exceed the cost savings from cutting headcount on an audit team.
Lawsuits: When a major regional hospital cut back on internal audits during an economic downturn, it missed fraudulent billing practices. The resulting lawsuit and multi-million-dollar settlement dwarfed the “savings” the company expected from reducing compliance functions.
Regulatory penalties: A mid-sized bank reduced compliance staffing to manage costs. In doing so, it failed to file the required and regulatory-mandated suspicious activity reports, triggering penalties that far exceeded the savings.
Reputational damage: The 2010 Deepwater Horizon oil spill was the most dramatic example of what can happen when oversight is cut. The company had scaled back on operational audits of its drilling platforms. When the disaster struck, the financial cost exceeded $61 billion, and the reputational damage was incalculable.
Additionally, internal audit isn’t just about finding fraud and ensuring compliance; it’s about understanding and preparing for current and emerging risks and opportunities. And when companies cut junior internal audit staff, they also risk limiting their future talent pipeline.
CFOs must remember that risk doesn’t shrink when budgets do. In fact, risk grows in times like these. Reducing oversight doesn’t make problems go away; it only makes it less likely the company will see them coming. And as industries, transactions and finances become more complex, the need for internal audit excellence only increases.
What may seem like a nonessential cost cut today could quickly become a million-dollar loss, or even worse, a catastrophic operational failure, regulatory penalty or regulatory crisis. Every industry faces risk:
Retail: Retailers are looking at every possible cost savings measure as they get pinched by economic conditions. However, reduced internal audit oversight can lead to undetected inventory shrinkage, vendor fraud and data privacy breaches.
Technology: SaaS and tech companies face unique risks around intellectual property and licensing. When a SaaS provider reduced compliance spending and failed to detect unauthorized use of third-party code in its product, the resulting lawsuit was devastating.
Manufacturing: Manufacturers face numerous risks throughout the supply chain, and fraud in procurement, process violations and theft can all escalate when oversight decreases. The complexity of manufacturing means there are many points where problems can go undetected without proper oversight.
Financial services: Even as they face margin pressure, banks cannot skimp on regulatory requirements, as the consequences of non-compliance are severe. The challenge many banks face is maintaining compliance while demonstrating value beyond mere regulatory box-checking.
Healthcare: Hospitals, physicians and healthcare organizations must navigate HIPAA requirements, billing accuracy and proper coding. Mistakes in any of these areas can result in regulatory settlements, fines and reputational damage. Billing errors can lead to multi-million-dollar settlements.
Insurance companies: Even though insurers operate in a heavily regulated environment, they still face questions about value add from their internal audit functions.
CFOs must remember that reducing oversight doesn’t make problems go away; it only makes it less likely they won’t see them coming. What may seem like a non-essential cost cut today could quickly become a company crisis or liability tomorrow. In uncertain times, internal audit offers clarity, visibility and assurance.
Companies facing economic pressures sometimes pursue short-term cost savings that can lead to longer-term exposure and consequences. Companies that maintain oversight in economic downturns are positioned to come out stronger when conditions improve. Learn how Armanino’s internal audit experts can reduce your risks and help you prepare for emerging opportunities.
Stop spinning your wheels. Download our 11-step guide to uncover risks, improve processes and take clear next steps forward.
