Why Internal Audit Needs to Focus on Cost Pressure & Expense Control in 2026

Key Takeaways

• Cost Pressure Multiplies Risk: Sustained cost pressure amplifies existing control weaknesses and reduces effective oversight.
• Expense Controls Are High Risk: Lean operations increase the likelihood of errors, waste, and fraud in expense management.
• Fraud and Override Increase: Cost constraints heighten fraud risk, normalize overrides, and strain ethical culture.
• Internal Audit’s Forward-Looking Role: IA identifies emerging control gaps and protects control integrity during transformation.

As organizations enter 2026, cost pressure has become a permanent operating reality, not a temporary economic cycle. Persistent inflationary volatility, higher financing costs, margin compression, and ongoing efficiency mandates are forcing management teams to continuously reduce or tightly control expenditure.

While cost discipline is necessary, sustained cost pressure materially elevates risk across the control environment. For Internal Audit (IA), this creates a clear imperative: cost pressure and expense control must be treated not simply as financial management issues, but as leading indicators of control failure, fraud risk, and cultural erosion.

Cost Pressure as a Risk Multiplier

Cost pressure rarely introduces new risks on its own. Instead, it amplifies existing vulnerabilities within processes, systems, and behaviors. Controls designed for stable or growth-oriented environments are stretched when organizations operate continuously in “lean mode.”

Common responses to cost pressure include:

• Reduced headcount and role consolidation
• Fewer layers of review and oversight
• Increased reliance on judgment-based decisions
• Acceptance of policy exceptions as “temporary”

These responses weaken the conditions under which controls function effectively – often long before any formal control is removed.

Expense Controls: Inherently Vulnerable Under Pressure

Expense management processes are particularly exposed in 2026. Despite advances in automation, expense controls remain:

• High-volume and decentralized
• Highly judgment-based
• Dependent on consistent policy enforcement
• Prone to management override

Travel and entertainment, professional services, procurement cards, discretionary operating spend, and expense classification decisions are frequent entry points for error, waste, and misconduct. Under sustained cost pressure, these processes are often expected to “do more with less,” increasing the likelihood of breakdowns.

Elevated Fraud and Misconduct Risk

Cost pressure directly strengthens all three elements of the fraud triangle:

1. Pressure: Performance targets, job insecurity, and reduced compensation flexibility
2. Opportunity: Weakened preventive controls, reduced oversight, and staffing gaps
3. Rationalization: A belief that shortcuts are justified to meet cost targets

Historically, periods of aggressive cost management have preceded increases in expense abuse, procurement fraud, and management override of controls. In 2026, lean operating models and increased third-party reliance further heighten this risk.

Management Override Becomes Normalized

One of the most significant risks during sustained cost pressure is the normalization of management override. Approval thresholds are raised, exceptions become routine, and controls intended to challenge decisions lose their effectiveness.

What begins as pragmatic flexibility can quickly evolve into:

• Poor documentation of decisions
• Inconsistent application of policy
• Reduced transparency to senior management and the Board
• Increased financial reporting risk

IA plays a critical role in identifying when override becomes the rule rather than the exception.

Cost Transformation Creates Hidden Control Gaps

Ongoing cost transformation initiatives in 2026 – such as outsourcing, shared services, vendor consolidation, automation, and workforce reductions – reshape the control environment. However, controls are often carried forward unchanged, despite fundamentally altered processes.

This creates gaps between:

• Documented controls and actual practices
• Accountability and execution
• Risk ownership and decision authority

IA is uniquely positioned to assess whether expense and cost controls have been redesigned to match the new operating model, rather than assumed to remain effective.

Deferred Spend and Future Resilience Risk

To meet short-term cost targets, organizations are increasingly deferring:

• Technology upgrades
• Cybersecurity investment
• Training and oversight
• Preventive maintenance

While these actions may protect short-term margins, they often introduce latent risk that surfaces later as operational disruption, cyber incidents, or compliance failures. IA helps ensure these trade-offs are visible, deliberate, and aligned with risk appetite.

Culture and Ethics Are Tested Under Sustained Pressure

Cost pressure sends powerful signals to employees about what the organization truly values. When expense policies are inconsistently enforced or exceptions go unchallenged, employees notice.

Over time, this can:

• Normalize control bypasses
• Reduce challenge by approvers
• Undermine tone in the middle
• Weaken ethical decision-making

IA provides insight into whether expense controls continue to reinforce accountability and integrity under pressure.

Why Internal Audit Must Act Now

Expense controls are one of the highest-value areas for modern, data-driven audit. High-volume transaction data enables early detection of anomalies, trends, and emerging risk indicators – allowing IA to identify control erosion before it results in loss, fraud, or regulatory scrutiny.

In 2026, focusing on cost pressure and expense control allows IA to:

• Provide forward-looking assurance
• Protect control integrity during transformation
• Support ethical culture under pressure
• Deliver insight that management and Boards cannot easily obtain elsewhere

Cost pressure in 2026 is not simply a financial challenge – it is a systemic risk driver. When sustained, it increases the likelihood of control failure, fraud, compliance breaches, and cultural erosion.

Internal Audit’s role is not to challenge the need for cost discipline, but to ensure that discipline does not come at the expense of control, integrity, or resilience. By focusing on cost pressure and expense control, Internal Audit delivers assurance and insight precisely where organizations are most vulnerable.

To learn more about McKonly & Asbury’s Internal Audit services, contact Dave Hammarberg, Partner, or Victor Kong, Senior Manager, who have been providing internal audit services for over twenty years. We would love to discuss how we can assist you with your challenges.

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