Macroeconomic uncertainty through the audit lens: How Middle East tensions are reshaping business risk

In summary

• Geopolitical tension is increasing uncertainty and, even without direct regional exposure, most UK businesses will feel the knock‑on effects through energy costs, supply chains and inflationary pressure
• Auditors are tightening scrutiny of key assumptions, with forecasts relating to going concern or impairment reviews now requiring even more sensitivities, clear evidence and realistic scenario planning
• Businesses resilience has increased, but risk registers, continuity plans and forecasting models all needing updates to reflect the latest market conditions rather than relying on past crisis responses.
• Transparent narrative reporting is becoming a differentiator, helping stakeholders understand uncertainty, challenge assumptions and assess organisational stability in a volatile environment

While the degree of exposure varies considerably between sectors, the ripple effects of geopolitical tension influence supply chains, cost bases, investor expectations and, importantly, the judgements and estimates that underpin financial reporting across the economy.

Economic volatility is not new for UK businesses. As S&W Partner, Chetan Mistry, explains, companies have long operated in environments shaped by forces beyond their control: “No one has a crystal ball. Businesses are always exposed to external forces they can’t control.”

However, volatility has been heightened in recent years, with economic and geopolitical shocks seemingly a new normal, and both businesses and auditors have needed to respond.

“Our role is helping businesses connect the present with the future, and not just look backwards,” says Mistry.

Although audits are often perceived as retrospective, Mistry highlights that the true value lies in bridging backward‑looking evidence with forward‑looking resilience. This becomes especially relevant during geopolitical tensions, when understanding how an organisation’s risks, people and operations may be affected is just as important as analysing year‑end balances.

Importantly, many businesses have built some resilience following recent experience. Covid, the Ukraine war and volatile energy markets forced boards to rethink continuity and strengthen their understanding of global exposure.

As Britney Barnett, S&W Director, notes, this experience puts organisations on a stronger footing, but there is more to do: “Many businesses have already strengthened their resilience because of Covid. That muscle memory helps, but boards still need to revisit their risk profiling with fresh eyes.”

While the Middle East tensions have global reach, the level and speed of impact vary between businesses. Mistry describes exposure as unfolding in three layers.

Businesses with people, assets or direct operations in or near affected regions feel the most immediate shock. Those connected through supply chains face a secondary impact as upstream or downstream disruption filters through. Further away from the centre, organisations experience tertiary effects driven by broader macroeconomic movements, such as energy price volatility, inflationary pressure, shifting demand patterns or higher financing costs.

Even organisations with no international footprint are not immune. Barnett observes that UK‑only businesses may still face higher operating costs as suppliers pass through their own pressures. Some companies, meanwhile, may even benefit. Professional services and data providers operating in the energy or infrastructure sectors, for example, often see heightened demand during periods of instability.

Across industries, cost bases are being reassessed. Alex Adkins, Audit Director, stresses the importance of understanding how input volatility interacts with margins: “Sensitivity around cost bases is critical, especially where energy or oil‑related inputs drive your margins. Businesses can’t assume stability.”

Going concern remains one of the most judgement‑heavy areas of audit, and geopolitical uncertainty only heightens the scrutiny. Auditors expect management teams to revisit their forecasts with an updated view of cost inflation, customer behaviour, supply chain resilience and financing availability. Sensitivity analysis must move beyond generic downside cases and instead consider specific, plausible scenarios linked to the organisation’s exposure.

Barnett notes that mitigation plans are also under greater challenge. It is no longer sufficient to assert that funding could be raised or that costs could be reduced. Auditors examine whether such actions are realistically achievable in the current environment.

The point at which geopolitical events crystallise plays a significant role in impairment assessments. For organisations with March year‑ends, the economic implications of the Middle East tensions are likely to fall squarely within the measurement date, meaning assumptions will need adjusting.

For December year‑ends, the conflict may be treated as a non‑adjusting event, but disclosures will still be expected where it provides relevant context to readers. Adkins notes that this distinction matters: “Companies need to evidence how they determined whether a condition existed at the balance sheet date.”

Geopolitical uncertainty feeds directly into the auditor’s risk assessment under ISA 315. Understanding the business model, its people, supply chain, strategy and competitive environment become essential in identifying where judgement or estimation uncertainty is most acute.

This may influence areas such as provisions, expected credit losses, net realisable value, long‑term contract margins or fair value calculations.

Transparency becomes increasingly important when external uncertainty rises. Disclosures must allow readers to understand how sensitive key assumptions are to changes in market conditions.

Materiality is also viewed differently: What is material to a lender may not be material to a regulator or to HMRC, and auditors assess disclosures through the lens of a broader range of stakeholders.

There is growing evidence that organisations are approaching uncertainty from a stronger starting point than during the early days of the pandemic. Barnett believes that Covid  gave businesses a renewed sense of what it means to operate under pressure: “The shock of the pandemic pushed businesses to strengthen resilience. Many are now better prepared to respond quickly when uncertainty emerges again.”

Yet Mistry stresses this preparedness cannot be taken for granted: “Risk registers must be revisited, continuity plans updated, and assumptions refreshed – even if only a small part of the business appears exposed.”

Being proactive, not reactive, remains the differentiator between resilience and vulnerability.

At this stage, Mistry believes it is too early to see a definitive pattern of distressed acquisitions or urgent restructuring triggered by the current geopolitical landscape: “Boards appear to be taking measured steps, monitoring events and reviewing strategy without committing to major structural change”

Where organisations do begin to consider significant shifts, auditors will expect a clear rationale supported by early engagement with advisors, along with transparent reporting of any exceptional costs.

Strong governance requires a renewed focus on uncertainty. Boards should ensure risk registers reflect their true exposure across people, supply chains and operations, and that continuity plans remain up to date.

Forecasts should incorporate realistic sensitivities, and management should begin discussions with auditors early to avoid last‑minute pressure. Enhancing narrative reporting also plays a role in building stakeholder confidence; transparent explanation of assumptions and uncertainties helps investors and lenders form their own view of the organisation’s resilience.

Geopolitical events – whether in the Middle East, Eastern Europe or elsewhere – will continue to influence global markets. Unpredictability, essentially, is unavoidable. What matters is how prepared businesses are to respond.

For UK organisations prioritising strong governance, the focus should be on staying alert, staying adaptive and treating audit as a tool for clarity, not just compliance.