In today's hyper-connected world, a cyberattack on one company can ripple outwards, impacting its entire ecosystem. While the initial target feels the brunt of the attack, the aftershocks can be equally damaging for its suppliers. A recent study by University of South Florida's Tom Smith and Montana State University's Yimei Zhang reveals a surprising cost – a potential 6% increase in auditing fees for suppliers whose key customers experience a cyberattack, even if the supplier itself remains unscathed.
This seemingly illogical consequence stems from the heightened scrutiny auditors place on companies operating in a compromised supply chain. Public company auditors are obligated to assess supply chain risks, and a cyberattack at a customer raises red flags. To fully understand the financial impact on the supplier, auditors may require additional time and resources, translating to higher audit fees.
The financial woes don't stop there. Smith, who is also the associate director at the University of South Florida's Lynn Pippenger School of Accountancy, warns of potential downstream effects like:
Earnings Slump: A customer cyberattack can disrupt business continuity, impacting your ability to deliver goods or services. This can lead to lost sales and a significant drop in your earnings.
Inventory Overload: Delayed deliveries or disruptions in production due to the customer's cyberattack can leave you with excess inventory, further straining your cash flow.
Cash Flow Crunch: Delays in payments from the compromised customer can exacerbate cash flow issues, hindering your ability to meet debt obligations.
These hidden costs paint a grim picture, highlighting the interconnectedness of the modern business landscape. Previous studies have shown that companies operating in the same industry as a cyberattack victim often experience a 5% increase in audit fees – a chilling testament to the contagious nature of cyber risk.
Why the Audit Fee Hike?
So, why do auditors become extra cautious after a customer cyberattack? Here's a breakdown of the key factors:
Supply Chain Risk Assessment: Public company auditors are mandated to assess vulnerabilities within the supplier network. A cyberattack at a customer signifies a potential breach in the supply chain's security posture, prompting more rigorous scrutiny.
Increased Audit Workload: Auditors may need to dedicate additional personnel or time to delve deeper into the potential financial impact of the customer cyberattack on your company's financial statements.
Litigation and Reputational Risk: Auditing a company within a compromised supply chain exposes auditors to potential legal and reputational risks. Increased scrutiny can help mitigate these risks.
The Barometer Effect: Audit Fees as a Risk Indicator
Smith suggests viewing higher audit fees as a "barometer" of changing corporate risks. These fees often reflect the perceived level of risk associated with a company. In simpler terms, the bigger the fee hike, the greater the perceived risk.
The Path to Resilience: Building a Secure Supply Chain
The study's findings serve as a wake-up call for suppliers, urging them to prioritize supply chain security. Here are some actionable steps you can take:
Open Communication with Customers: Engage in proactive dialogue with your customers. Inquire about their cybersecurity measures and how they protect your data. This fosters transparency and builds trust within the supply chain.
Supplier Risk Management: Implement a robust supplier risk management program to assess and mitigate security vulnerabilities throughout your supply chain.
Cybersecurity Awareness Training: Educate your employees on cyber threats and best practices to safeguard your systems and data.
By adopting these steps, companies can build a more resilient supply chain, minimizing the financial and operational disruptions caused by customer cyberattacks. Remember, cybersecurity is a shared responsibility. In today's interconnected business environment, your success is intricately linked to the security posture of your entire supply chain ecosystem.
