Are You Managing Your Risks From Social Media?

Many organizations aren’t fully aware of the risks posed by social media or taking enough steps to minimize them.

Social media platforms are invaluable for connecting companies with their customers, the financial community, and the media. Sharing information on social media can reduce the information asymmetry between companies and their stakeholders in a timely manner. However, several factors, including a lack of planning, controls, and training, combined with the unpredictability of online behavior, can expose companies to considerable risk. Our research found that company managers and internal auditors lack sufficient awareness of these risks and should take a more active role in regulating and monitoring social media activity.

Ill-advised social media posts and lax oversight can cause serious damage to a company’s reputation, trigger investigations by regulators, damage long-term relationships, and introduce cybersecurity threats. Of course, companies and individuals can try to be selective about the disclosures they make on social media and avoid tweeting negative information. But even positive and well-meaning posts can lead to negative outcomes. In 2012, for example, the U.S. Securities and Exchange Commission (SEC) came down on Netflix CEO Reed Hastings for posting information on his personal Facebook account about the company’s impressive video streaming numbers. The day after Hastings’s post, Netflix saw a 700% increase in trading volume and a 20% jump in its share price. Although the information Reed posted on Facebook proved accurate, investors who didn’t follow him missed out. In response, the SEC issued new guidelines for social media use: Companies are now required to notify investors in advance about which information channels they plan to use to distribute important information.

Despite increased scrutiny, risky online behavior continues to be a big issue. In 2018, for example, Tesla CEO Elon Musk tweeted that the electric car company (whose stock had been performing poorly) was in talks to go private. The market response was swift: By the next day, Tesla’s share price had shot up 11%. The SEC proceeded to charge Musk withmaking false and misleading statements, which resulted in a 14% drop in the share price. Several shareholders sued Tesla and Musk for intentional stock price manipulation.

Given the inherent risks, companies need to become more disciplined about their social media activities and monitor them more closely. In a survey we conducted through regional chapters of a professional organization for internal auditors in the United States, we found that many organizations aren’t fully cognizant of the risks or adequately prepared to manage them. In this article, we examine the current practices of internal auditing in assessing and monitoring social media risk, paying particular attention to the challenges auditors face in monitoring social media and how they can adapt and take on more responsibility.